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Executives

David J. Aldrich- President and Chief Executive Officer

Donald W. Palette- Vice resident and Chief Financial Officer

Liam K. Griffin- Senior Vice President, Sales and Marketing

Thomas S. Shiller- Vice President, Corporate Development

Analysts

Bern Laux- CAI Cheuvreux

Ed Snyder- Charter Equity Research

Craig Ellis- Citi

Aalok Shah- D.A. Davidson

Suji De Silva- Lehman Brothers

Srini Pajurri- Merril Lynch

Aaron Husock- Morgan Stanley

Ittai Kdron- Oppenheimer

James Faucette- Pacific Crest Securities

Stephen Ferranti- Stephens, Inc.

Cody Acree- Stifel Nicolaus

Skyworks Solutions, Inc. (SWKS) F2Q08 Earnings Call April 22, 2008 5:00 PM ET

Operator

Welcome to the Skyworks Solutions earnings call. (Operator Instructions).

Thomas Schiller

Joining me today are Dave Aldridge, our President and Chief Executive Officer, Don Palette, our Chief Financial Officer, and Liam Griffin, our Senior Vice President of Sales and Marketing.

Dave will begin today’s call with a business overview followed by Don’s financial review and outlook. We will then open the lines for your questions. Please note that our comments today will include statements relating to future results that are forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties including but not limited to those noted in our earnings release and those detailed from time to time in our SEC filings. I would also like to remind everyone that the results and guidance we will discuss today are from our non-GAAP income statement, consistent with the format we have used in the past. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. I will now turn the call over to Dave for his comments on the quarter.

Dave Aldrich

Thanks Tom, and welcome everyone. Today we announced our second fiscal quarter 2008 results and I am pleased to report that the Skyworks team posted solid performance highlighted by increasing diversification by market share gains and dollar content coupled with strong operational execution. Now specifically during the quarter we delivered $202 Million in revenue. This is ahead of our guidance and substantially better than market seasonality. We expanded our gross margins to $40.3 %. This is a 200 basis point increase year over year and our fourth consecutive quarter of improvement. We increased our net income by 52% from $16.7 Million last year to $25.3 Million in Q2. At the same time we delivered earnings per share of $.16. This was a penny ahead of consensus and a 60% growth on a year over year basis. We generated $40 million of cash flow from operations. This set of improving fundamentals reflects the strength of our new business model and is particularly important given the current market environment. In many respect Skyworks has entered a new and exciting phase, and by way of background throughout 2006 and 2007 we increased our focus and investment in our core linear products business, leveraging analog and mixed-signal technologies in support of a very broad set of adjacent markets. Now in parallel we directed our handset efforts squarely on the top tier OEMs and on the top base-band providers. With clear and measureable for share gains through each and every customer. As a result today we are poised to deliver sustainable above-market growth and improving profitability without the headwinds of a low-return base band business or reliance on one or two customers. Our confidence is based on several key strategies which I first outlined as you recall last quarter. I would like to spend some time today providing an update on our progress along each of these four initiatives.

The first being that we are diversifying Skyworks. We are leveraging our catalogue business and our world-wide distribution network. We are expanding into a broader set of end markets. These end-markets include broadband, industrial, medical, computing, wireless networking, cellular infrastructure. Keep in mind today that we support nearly one thousand customers and over 2,500 product SKUs. This list continues to grow with each new customer engagement and is back by an expanding product pipeline.

And to get a little bit more granular, more specifically during the quarter we added a new suite of low-power RF solutions targeting ISM or Industrial Scientific and Medical applications. We ramped production of an integrated RF system which Samsungs award-winning FEMTO cell based stations. We launched programmable solutions for Harris’ Metropolitan point-to point infrastructure. We introduced custom control ICs to a leading supplier of automotive entertainment and navigation appliances. We also won designs at CISCO with wireless LAN access solutions leveraging our switch and filter capabilities. We ramped game block amplifier for intelligent energy management deployments and we increased shipments of RF subsystems and Siemens in support of remote maintenance traffic systems vending management applications; telemetry, basically.

And speaking of Siemens, our Transtek subsidiary providing advanced ceramic materials in support of their gas turbine power business for low-cost energy. Now in parallel to these examples of analog market growth we are aggressively also diversifying in our handset business. Now as you may recall in 2005 our revenues were heavily concentrated with three of the top five OEMs, whereas today we are shipping both highly specialized 2G front end modules, or merging market fends, as well as higher value added Edge or CDMA fends to the world leading handset suppliers. I think of particular note- we believe that we are the only PAFEM supplier in high volume production across all T01 Handset OEMs as well as the two leading Smartphone suppliers.

Now secondly we are delivering higher margin product. With the development and introduction of a host of new, highly customized solutions we have created a product portfolio that is characterized not only by product life cycles and almost annuity like revenue profiles, but also a higher contribution margin. The transition is occurring on multiple levels including again our standard catalogue products and custom analog and RF solutions in new markets while on the handset side with front end modules for System on a chip or SOC applications where there is an emerging requirement for higher integration. This is a result of some base band petitioning trends. And finally multi-mode front end modules. Now across the board both our handset and our new linear products customers place high value on our architectures that reduced size, that reduced billed materials complexity, that improved reliability and enhanced performance, while enabling competitive cost structures. Our customer place as very high premium on these functions and its at the intersection of what we believe we do very well.

Our third initiative is that we are capitalizing on the increase in handset front end module content. The migration to 3G multi-mode, that is Edge, Wedge, wide band CDMA from voice centric phones is happening. Further during the quarter we introduced the industries first front end module for long-term evolution or LTE 3.9G applications. With this trend the complexity of the front end module significantly increases expanding our addressable content by threefold. The reason frankly is that the phones have a need for backward compatibility with installed networks. There’s a requirement to manage multiple standards and frequency within the same device and the inclusion of broad-band functionality allowing music, data and video. The integration of these various bands for reliable high-speed access requires complex modules which must remain physically small, power efficient and cost effective. This complexity is creating an incremental RF market opportunity measured in the billions of dollars. Now at the same time while we are talking about WEDGE and wide band CDMA and all, and this might be a little bit counter-intuitive, the emerging market is moving aggressively toward low-cost system on chip solutions but this SOC migration is placing a higher burden on the front end given the digital functionality that is being merged into the digital base band device. In other words our addressable opportunity increases with the move to SOC on the low end.

So with ramps in various stages of progress across all tier one handset OEMs Skyworks is positioned to gain further share in the FEM products segment. The competitive landscape is narrowing with fewer and fewer suppliers able to support both the technical requirements and the manufacturing scale required by the leading handset OEMs. This dynamic has the very real side benefit of stabilizing the industries pricing environment. I guess I would encourage you to think of it this way. If by increasing the functionality at the front end Skyworks adds more value while at the same time saving our customers development time and lowering their overall costs, a true win-win scenario.

Fourth and finally, we are executing operationally. Our world-wide operations team is intensely focused on continuing improvements in yields, in equipment efficiency, in cycle times and return on investment capital. We are extremely metrics driven within our Newberry Park, Mexicali and Woburn factories and have effectively implemented a hybrid manufacturing model leveraging multiple external foundries and partnerships. Now this unique approach allows us to maintain high internal capacity utilization by creating second sources for high-fixed cost services like foundry and like assembly. This model provides us with supply chain flexibility, lower overall capital investment, as well as the ability to meet upside demand. The benefits of this out-sourcing approach now three years in the making are beginning to show in our improving performance and the crossing of the 40% gross margin threshold last quarter, a key step to reaching our long-term profitability targets. So to recap, our second quarter performance demonstrates progress in our four initiatives. One, we are diversifying our company as we penetrate new adjacent markets and add new handset customers. Two, we are delivering higher margin products. Three we are capitalizing on the increase in front end module content and four we are executing operationally. I will now turn the call over to Don for his review.

Donald Palette

Thank you Dave. Revenue for the second fiscal quarter was $201.7 Million, up 12% year over year ahead of our guidance of $200 Million dollars and better than market seasonality. Gross profits for the quarter were $81.4 Million, or 40.3% of revenue, a 200 basis point year over year expansion, 50 basis point improvement sequentially, and better than our guidance for sequentially flat gross margin on a percentage basis. This performance is a testament to our focus on margin improvement. Our continuous expansion over the last four quarters reflects higher equipment and labor efficiencies at all of our factories; progress on yield improvement initiatives; double digit year over year material costs reductions. Operating expenses were $55.5 Million of which R&D expenses total $34 Million and SG&A costs were $21.5 Million. As a result, our operating income for the quarter was $25.9 Million up 47% year over year and representing a 13% operating margin. Our net interest income and other income for the quarter was $114,000, while taxes were $696,000 at approximately our 3% cash tax rate. Net income was $25.3 Million, yielding $.16 of earnings-per-share, 1 penny ahead of our consensus estimates. Now turning to the balance sheet.

We exited the quarter with cash and cash equivalents of $228.5 Million. During the quarter we recorded $11.1 Million of depreciation, generated $40.4 Million in cash flow from operations, and invested $17.5 Million in demand driven capital expenditures. Primarily for FAB and assembly and test capacity. Successfully converting our improved earnings profile and business fundamentals into cash flow continues to be an area of emphasis for the Skyworks management team. As a result over the past three quarters alone we have generated $126 Million of cash flow from operations. Now to our business outlook for the third fiscal quarter.

As Dave has underscored, based on new product ramps and leading handset customers and continued end-market diversification we are experiencing healthy demand and accelerating growth through continued crisp execution to our operating plan we expect to further expand both gross and operating margins. Assuming revenue of $210 Million which is incidentally a20% growth on a year over year basis we suggest modeling a gross margin of 40.5% and operating expenses slightly above $57 Million. Below the line we suggest modeling interest expense and income from offsetting one another, and $700,000 for taxes. In turn we intend to deliver $.17 of diluted earnings per share off a base of 163 million shares, a 55% year over year improvement in bottom line performance. To put our proved performance in better context it’s worth noting that in fiscal 2006 we reported $.21 of diluted earnings per share; in fiscal 2007 we posted $.48 for the entire year; and for the first six months of fiscal 2008 we’ve already delivered $.33 and by virtue of our guidance for $.17 cents this quarter we are now on a $.68 annual IDPS run rate. With further improvements in store during the back half of 2008 and into 2009 by every measure 2008 is off to an excellent start. That completes our prepared comments. Operator, please open the lines for the question and answer session.

Question –and- Answer Session

Operator

Our first question will come from Ator Swandberg with Thomas Weisel. Actually we’ve opened up Aalok Shah.

Aalok Shah- D.A. Davidson

Hi guys, can you hear me? Just a quick question for you. First on the margin front. You’ve hit the 40% kind of goal. Where do you think the stretch is now and where do you think we can end up by the end of the year?

David Aldrich

We’ve hit 40.3% and we think the margins will pick up again in the June quarter, and we would expect as we continue to ship these higher margin, higher value-added products both in our handset and diversified linear products you will see some accretion in gross margin. So they will improve as we move throughout 2007. We have been encouraging you to think about a business that runs in the 42% gross margin range and about $250 Million in revenue and with an OperEx profile that grows much more slowly than revenue. We think that would get us into the very high teens in operating income as a percentage of sales.

Aalok-Shah - D.A.Davidson

Thanks, Dave. And just a quick question on the front end module front, kind of tell us where you’re at, what the landscape looks like for you guys and where do you think you’re taking some shares? Is it mostly 3G side of things, I know you mentioned some SOC designs as well. Can you kind of share what’s going on in that space?

David Aldrich

Liam and I will kind of answer that question in tandem. First I would say the general trend that we outlined in the prepared comments is that we are learning as we engage our base band partners over a longer period of time that the SOC is driving some interesting specs and opportunity for more integrated front end modules on the low end. That’s a function of the base band integration with analog and essentially a CMOS process. On the higher end it is all about multiple frequencies and the challenge of filtering, switching, and amplifying across several bands if not many bands. So the general trend is higher Asps on the mid-to-high end, but an interesting emerging trend on the low end as well is a front end module not a simple, cheap, discreet PA.

Liam Griffin

Right, and the diversity comment that Dave outlines is very important. We are shipping now to all the top tier OEMS and are in a great position to capture any of the share shifts that you may see across that market.

Aalok Shah- D.A. Davidson

And are the BAW filters that you are shipping into these, or are these

Liam Griffin

Well actually we have BAW, the majority of the products we have today in the FPM category are gallium arsenide products coupled with PHEMP switching. We are now folding in the internal BAW capabilities particularly in some of the WCDMA devices that you’ll see shipping this quarter and throughout the year.

David Aldrich

And that’s particularly on the high end or the high band we find Bulk acoustic is a small and elegantly simple way to effectively filter at a low cost and high performance.

Operator

Our next question will come from Ittai Kidron with Oppenheimer.

Ittai Kidron- Oppenheimer

Congratulations on good results. Dave, wanted to look a little bit closer at the sequential trends both from a historical going from a quarter back and also for your guidance going a quarter forward. With regards to the June guidance $210 Million- that’s only an eigth and change millionth sequential improvement. I am assuming that one or two million out of that is your linear business that continues with the step ups. Nokia keeps on ramping, another one to the very least. Is it fair to say that most of the other businesses you are expecting kind of flat? Can you go a little bit more color by the OEMs by which ones you expect to be a little bit more positive for you contributing in June versus where you are a little bit more cautious?

David Aldrich

I would say that it is our intent to be conservative incredible in our guidance, and so we attempt to that each and every quarter. So having said that as a back drop we are a little unique as we mentioned in the prepared comments we do think we are the only company today in high-volume production across all the OEM;s and most of the second tiers including some emerging Smartphone suppliers. So we didn’t decline as much in March, as you know we declined much less in our handset business than the market seasonality and this diversification is allowing us to actually be in a unique position where we clearly see and are no immune from OEM share-shifts. We see some OEMs are down, some OEMs are up, some OEMs are flat or right on target. The net effect though is that we seen and OEM lose a share, chances are at this point we are actually beginning to see a pick-up with another OEM. I think the general comment would be a combination of wanting to be prudent in our guidance in a choppy market, of being confidant in growth, of having high visibility to that guidance, and being quite diversified in the overall handset space.

Ittai Kidron- Oppenheimer

Very good. So let me drill a little bit into that. Are you as optimistic as you’ve been a quarter ago about your ramp with Nokia, just considering the make-shift that they have suggested on their last earnings call with they see a little bit more of the low end being much more stronger and some softness on the high end where you guys have most of your design activity, correct me if I’m wrong.

David Aldrich

Yeah, we appreciate the question. We really can’t get into the specific question about the customer that you outline but that’s our commitment to that company. But I will tell you that we are very bullish about the programs that we outlined last quarter, we continue to see share gains as we move throughout the year and we don’t see anything really that will impact our success as we’ve outlined in the past.

Operator

Our next question is from Cody Acree with Stifel Nicolaus.

Cody Acree- Stifel Nicolaus

Hey guys, and congratulations. I know there is only a limited amount that you can say about Nokia, but obviously this has been the topic of conversation lately with not just yourselves but several larger players. Can you talk about where you’re making in-roads, whether it be 2G, 2.5G, 3G, is it across the board, do you have any geographic comments you can make there with Nokia?

Donald Palette

I think that without getting into customer specifics, where as we mentioned we have to honor those client confidentiality agreements, we are seeing strength in 2G and in Edge, we are seeing strength with our SOC-based bandwidth suppliers, and with the front-end modules, they are some pretty slick devices, both from a size footprint as well in overall performance and functionality. So we are seeing strength in the low end. Edge Wedge we did see a shift in the last quarter with a bit more of the mid-to-low end, a bit less of the high end, so we did see that occurrence in the market. But in general where we are seeing growth is in reference designs, with base-band companies like QUALCOMM, in markets where they in the past have been using perhaps somebody else’s wide- band CMA device, a competitors device, maybe they had a discreet quad-band Edge implementation, where now we’re offering a more complete RF Front End Systems so we’re seeing strength there. We’re seeing strength again at the very top tier OEMs as they migrate to their new highly customized multi-mode architectures while at the same time getting a little closer to the base band folks on the mid-to-low end where we’re kind of partnering into our R&D activities. So it’s bifurcating between a high-end and highly customized OEM driven front end for Wedge, and a system that’s custom designed with an SOC partner for the mid-to-low end. And that’s where we’re seeing the growth.

Cody Acree- Stifel Nicolaus

Great, and then maybe staying at that high level, do you have obviously your gain share and obviously you’re having a lot of things that are ramping that are coloring your optimistic view. Can you take a step back and look at the wireless industry as a whole outside of maybe just what you are seeing and hearing maybe what your customers are saying, and comment on inventory health, demand trend health, and just the kind of backdrop you are participating in?

David Aldrich

Cody, I think that if you think about the market this way, our crystal ball is no better than our customers, obviously not as good, but we dial in around a 10% maybe better year over year overall unit growth. Typically that means maybe 10%012% or maybe 13% down in March. Now we were down less than that for some of those reasons we just cited, and then June maybe you get a half of that back, a few points back, and then September is usually a very strong quarter and December is obviously the very strongest quarter. We don’t see anything altering our view of that trend. We don’t see inventory issues out there that are worth mentioning, that are moving the dial at all. We do see OEM share-shifts and we have seen some infrastructure softness, we’ve seen some shift to the low end versus the high end, and of course we see that in our business and we factor that into our guidance. So overall I think pretty strong unit growth, but in the end the overall trend is going to be, we think, from a smaller subset of front end suppliers capturing a lot more dollar content simply driven by the need for scale for engineering capability, because these are complicated devices and manufacturing cost structures that allow you to support those road maps. So I think the overall trend will be a lot of top-tier volume being generated across virtually everybody as well as linear products portfolio that continues to grow sequentially.

Donald Pallette

And the other thing to note here is that the emerging market trends are meaningful because they are adding a substantial subscriber base, and so the subscriber base now is well above 3 billion. It will approach 4 billion very soon, and those customers will then upgrade. So when we start to move into 3G in the next several years, the baseline for replacement rates goes way up.

Operator

Our next question is from Edward Snyder with Charter Equity Research.

Edward Snyder- Charter Equity Research

Thank you. Good quarter guys. Several housekeeping questions here. How large was linear on the quarter? I think you were looking at about 30% last quarter. Did we grow on that, or where are we on Linear? And what kind of contribution did you get from your free scale RF business, as well as anything at R.I.M. yet? I know that is following later in the year but how big was R.I.M. if anything, for you?

Donald Palette

Ed, this is Don. Linear Products was up slightly from Q1 to Q2 but it is roughly a quarter of the overall sales of the business which is consistent with what it was in Q1, so I don’t know where you got the 30% number. It’s roughly a quarter of the business.

David Aldrich

If I can add, you asked questions about Freescale, to refresh your memory we acquired Freescale for patents IP as well as some exclusive design rates into Motorola and Research in Motion. We are transitioning our Research in Motion designs from Freescale designs and factories to Skyworks as we speak. The real value is that it does increase our position at Research In Motion which was a real target strategic customer of ours, so we are seeing more business at Research in Motion. We were in a minority position a couple of quarters ago. We expect to be the majority, and across all standards, at Research in Motion by the June/September timeframe.

Edward Snyder- Charter Equity Research

I guess maybe a sharper version of the same question, I wasn’t looking at what you acquired from Freescale, but the slots that you won at Motorola and Research In Motion are going to hopefully provide incremental sales opportunities that will generate incremental revenue, and it sounds like Research in Motion is going to be mid-year or later and what about Motorola? I know you had plug-and-play designs because you were second source to Skyworks on a lot of those designs, did any of that show up in this period, or should we just plan for that the second half of the year?

Liam K. Griffin

Right now those designs are still being ramped, so it’s more of a second half of the year impact, specifically with Motorola. They have outlined some of the Research in Motion portfolio and we’re seeing launches more toward the near term.

Donald Palette

Motorola needed to work through some Freescale inventory that was part of the transaction. We didn’t take finished goods, so they have been doing that, and Research In Motion on the other hand was a faster conversion, really dictated by the recertification or requalification of their customers. So we saw some of that in this quarter, some more in June, and more again in September. I hope that answers the question.

Operator

Our next question is from Suji De Silva with Kaufman Brothers. And by accident there, we are returning to Edward Snyder with Charter Equity.

Edward Snyder- Charter Equity Research

Thanks, 10 % customers on the quarter, and Dave you are talking about long-term and much slower growth and effects on revenues that you get in the high double digits, is that 2009 type timeframe or should we start seeing that perhaps in the next quarter or two?

Donald Palette

The top 10% customers were Sony Ericsson, Samsung and Motorola.

David Aldrich

With respect to that target of high teens, we are moving from the low to the mid teens as we speak, that’s a position we will step through here relatively quickly. We haven’t guided out that far Ed as you know, but if the market is going to be up maybe a little more than 10% we will grow faster than the market in 2008. We believe we will grow faster than the market in 2009, and we will continue to see the Linear Products chugging along with incremental and sequential revenues, so I think if you model it that way we expect to see sequential growth each quarter and in both of those businesses at something that’s something pretty materially higher than the overall market growth rate for the trends we have discussed.

Operator

And we will go to Suji De Silva with Kaufman Brothers

Suji De Silva- Kaufman Brothers

Hi guys. Can you hear me now? So, real quick on the mix shift on the industry going from high=end to low-end, Dave how should we think about your content in low-end versus high-end, and particularly as Smart Phones start to wrap up here, maybe your content opportunities there as well?

David Aldrich

Well, I think that the content on the low-end, on the 2G CDMA for example, those parts had been driven to a pretty well fairly low cost structure- well sub-a-dollar. And when we think about the front-end module, they are well over a dollar, they are not two, but they are well over a dollar and when we move into Edge, which is mid and in some markets low-end, it’s in the $2-2.5- or .60, and wide band CDMA, depending on the number of bands. If it’s a band one with and Edge FPM it’s maybe a $3-3.50, and you can add a buck and a quarter or so, a buck thirty-five per band of wide-band CDMA depending upon the implementations. So it runs anywhere from $3.50 or so to as much as $6.

Suji De Silva- Kauman Brothers

And would Smartphone’s be at the higher end there?

David Aldrich

It depends upon the network for the Smartphone. If the Smartphone is an Edge only it would be similar in that $2-3, if it is wide-band CDMA , designed to be a Worldphone it would be on the high end of that range, around $5 or so. It’s really not a lot different for us. It’s the same front end analog functionality, it’s just how many bands, how much filtering, how much switching, and how many bands of amplification are required in the system.

Suji De Silva- Kaufman Brothers.

Ok, that is what I was getting at. And then also, on the mixed analog versus the handset part, where were the gross margins? And if you can’t discuss that quantitatively, what were the trends and what do you think the drivers are for each of the gross margins of the second?

Donald Palette

Well, we don’t disclose the margins segment, as we’ve consistently said the margins in our linear product business are ceded to the overall business, but clearly with 75% of our revenue coming from the handset market a lot of the improvement we are seeing operationally, both product yields, factory efficiencies and material costs all relate to the handset business. So we are seeing movement in both sides of this. It’s not just a mixed shift that’s driving this, its real operational improvement. We can’t move the margins in this direction without getting benefits in handsets as well. There’s really good performance on both sides.

David Aldrich

I’ll give you an example, just as an anecdote. On the very low end, these front end modules have very attractive gross margins, we’ve been able to drive die-size low, we’ve been able to sweep in some analogue functionality, put it in a very small footprint with a low profile, which is very important, size and current consumption, very, very important. And it a misnomer and perhaps counter-intuitive that on the low end of the market that perhaps they would suffer and they would be poor margins. That’s not the case at Skyworks, we’re running a lot of scale, a lot of volume, highly vertically integrated for those particular devices including packaging, assembly and tests, and PHEMPT and AHP and for the margins, the margins are very strong, and we run some of those product yields that are in the high nineties. So we like that low-end, maybe counter-intuitive again, but we like the low-end a lot from a margins standpoint.

Operator

Next question is from Sanjay Devankin with Morgan Stanley.

Sanjay Devankin- Morgan Stanley

Hi guys, thank you for taking my question. Congratulations on the quarter. Just a quick question first off, specifically on the Asian handset market, I was just wondering if you could provide us some color on how your relationship is with the incumbent suppliers and media techs from Asia. I know you have a garbled so if you could provide any color there I would really appreciate it.

David Aldrich

Yes, absolutely. First of all we’re very focused on the impact market of China and also Taiwan, our relationship with MediaTek is also quite strong, we’ve developed a portfolio of low-end products much like Dave outlined, and include now for the most part, FPM’s that are gallium- arsenide products with a switch, ASP’s have come a bit on that, but their value has come up. We think the market for China is still going to be very strong this year, there was some volatility toward the end of December and into the early part of March, but the outlook looks very strong for the rest of the year. Spreadtrum is a smaller player as you know, doing more TD-SCDMA, we are working with them, the revenues are a bit smaller than MediaTek but also important an account to stay focused on, so we are bullish in that market that we think, as we mentioned, that the emerging segment is critical for the industry, and we’re well-positioned to capitalize.

Sanjay Devankin – Morgan Stanley

Just a quick follow-up, if I may. On your linear products business, how should we view that long-term in terms of long-term growth? How do you view that just for modeling purposes. What kind of growth do you expect from that, year on year, or what is reasonable to expect from that business?

David Aldrich

That is a great question. That business has all been grown organically, we really began an intensified focus moving from what has been a wireless infrastructure business primarily into a more diversified set of end-markets, first with catalog standards and then into some identified adjacent markets, we’ve mentioned a few in our prepared comments. And back in early 2006 we were a little over $20 Million a quarter as I recall, 2007 we intersected $30 Million, late 2007 to early 2008 we exceeded $40 Million of revenue per quarter, and I think that by the time we get to the end of 2008 or early 2009 we will be intersecting with $50 Million a quarter, or a $200 Million run rate. So that’s the way we’re thinking about that business. It’s a lot of singles and doubles, not the $20 Million orders you get in the handset, but the life cycles are just so long and the margins are so good, no particular socket has a great deal of competition when you designed it in, there’s no incentive to design you out of product life-cycle, so that’s the way these analog franchises grow revenue, is that you add new markets and new customers with very little concentration either on the customer side or on the product side. That’s exactly what our linear products business looks like today. I hope that is helpful.

Operator

And our next question is from Stephen Ferranti with Stephens, Inc.

Stephen Ferranti

Hey guys, this is Neil for Steve. Gross margins were impressive in the quarter. How would you weight the impact of factors driving improvement in gross margins for the quarter?

Donald Palette

The primary driver, as we said, has really been our ability to continue to execute operationally. We’ve got a pretty nice progression four quarters in a row of margin improvement and if you step back and look at it, it’s really been our ability to continue to focus on improving yields, focus on driving – we typically drive about double digit material cost reductions year over year, that’s continued to go very well. And we continue to focus on our efficiencies in our factories, all those things are continuing to pay dividends. That’s really, that drew the lion share of the increase in the quarter, the focus in that area. Now we also get into a nice benefit, Dave’s comments talked about that, the hybrid manufacturing model, and one of the things that provides us flexibility, that provides us upside ability to ramp with having those partners on the outside, but what it really also does is it keep our factory utilization very, very high. And that’s another way for us to continue to drive margin improvement in the company. So, it’s really operational execution. That’s what drove it.

Stephen Ferranti with Stephens, Inc.

Ok, there’s one more quick follow-up. You guys talked a little bit about the transition into the six-inch Wafer, can you talk about how we can expect that transition to impact profitability going forward?

David Aldrich

We are well on the way, the transition will be completed sometime in 2009. We have in fact, you’ll notice that Don talked about the $126 Million of cash flow from operations and increasing net cash in the last few quarters, we’ve been doing that while paying for the six inch Wafer equipment, so much of that is in and is being installed as we speak. So the extent that it has a margin impact, it is having a margin impact now. And that would be as measured by the need to create room for space and the cost associated with beginning to ramp those processes. So we’ve factored that into our model and so I don’t think you will see a reduction in gross margin driven by the six inch. Now when we come out of the other in of six inch we will have lowered our die costs by a little bit over 20%. And we’ll get a step functional capacity and with that hybrid model that means we will be able to pull in volumes so that we can increase our utilization in line with that increase in capacity while at the same time keeping our foundry partners healthy, so that’s the goal. You are seeing the impact now, and you’ll see the benefit in mid 2009 or so.

Operator

Our next question is from James Faucette with Pacific Crest.

James Faucette- Pacific Crest

Thanks very much. I just wanted to go back to your 10% customers as a group etc. Obviously there has been a little bit of movement there particularly since Samsung is coming in now as a 10% customer. How should we think about the opportunities over the course of the rest of this year into 2009? Do you think we will see new names among those 10% customer lists, or some movement there, or I guess I am trying to get a feel for your opportunities for new customers to be significant contributors?

David Aldrich

Yeah James, that is a great question. Let me start by saying we absolutely expect to add 10% names to the list. If you look at our internal view we believe that by the end of the calendar year we should have at least four of the top five OEMs in the 10% counts for Skyworks. Obviously growth is continuing with each and every one of those accounts. We are focused on those. The three that Don mentioned are very important and there are several new ones that we expect to be adding to that list.

Operator

Our next question is from Jeff Kvaal with Lehman.

Jeff Kvaal- Lehman Brothers

Thanks very much guys. I was wondering if you would comment a little bit about the balance sheet? In particular, I would like to ask about inventories, which are off a little bit this quarter?

Donald Palette

Sure Jeff, this is Don. We in our internal forecasts we fully anticipate an inventory build, and it was really based on customer demands for product going into the third quarter, so nothing unusual about it but us ramping opportunities externally.

David Aldrich

And I think as Don pointed out in his guidance we guided for June but we are seeing evidence of visibility for an accelerating growth prospect as we move throughout 2008 as these new customers come on line and some of these new analog products ramp into production. So we are just getting prepared for that.

Jeff Kvaal- Lehman Brothers

Ok, so should we expect for the inventories to come down again in the June quarter, or in the September quarter?

Donald Palette

I would model it relatively flat. I wouldn’t expect a reduction. We are now going into a different revenue profile.

Jeff Kvaal- Lehman Brothers

Ok, so I would expect inventories to be up, but inventory days should stay at this new level?

Donald Palette

Oh yes, we are managing to the same turn number. That’s our job to make sure the turns don’t drop.

Jeff Kvaal- Lehman Brothers

Ok, so inventory turns targeted around six times?

Donald Palette

That’s our internal target.

Jeff Kvaal- Lehman Brothers

Ok. Fantastic. And then, also Dave you talked a little bit about a choppy environment, I was wondering if you wouldn’t mind spending a little bit more time talking about that?

David Aldrich

Sure, we have seen some share-shifts on our customer base, and when we see that, that creates some choppiness. I think that hopefully you are getting the sense that as we increase our penetration across a broader set of customers we are beginning to see pushes and pulls or ups and downs with different customers and I think that our goal is to be as diversified a proxy for wireless handset for that segment of our business as we can. That still means we’ll see choppiness as OEM share shifts. That’s what we mean. We also saw more Edge and 2G product than we expected and a little less of 3G product than we expected, although the visibility is that that is an altered materially over the next several quarters. But that is some of the choppiness to which we were referring.

Operator

Our next question is from [Jeroen Bas] from UBS.

Jeroen Bos- UBS

I just wanted to get more information on the previously answered question. Can you quantify the compilation of , Is it more towards analog, or more towards handset.

Donald Palette

It’s more towards handset.

Jeroen Bos- UBS

Ok thanks. And previously you talked about improvement on your 2G Forex? Just wondering where that it and when do you expect to get to 90+%?

David Aldrich

We’ve been running in our 2G products, the yields are very high, into the nineties, and the 3G products depending on where they are in the ramp. We typically see a learning curve where at early introduction we really hit the center of the design we may launch in the seventies, if not we may launch in the sixties. But we quickly move into the eighties and then through test work and optimization of the design we are able to move it into the nineties and ultimately well into the nineties. So we’ve been pretty predictable I would say in 3G we are firmly in the eighties and in some products we are in the nineties.

Jeroen Bos- UBS

Thank you.

Operator

Our next question is from Nator Swansberg with Thomas Weisel.

Nator Swansberg- Thomas Weisel Partners

For the first question, you talked about some lumpiness due to your end customers and market share shift. How does that relate to your reference partners? Are you seeing some lumpiness there as well, or is that still quite stable?

David Aldrich

Well, with regard to the reference partners those are engagements that are done at kind of a high level, long term relationship and those designs get ported out to multiple OEMs. So I think that from a reference partnership viewpoint things have never looked better for Skyworks. We are doing quite well with TI, QUALCOMM, and MediaTek. We have mentioned before and there are several others that we are working on, so I don’t think the order flow within a given quarter really has much to do with the reference partners. Those are long term engagements. They have never looked brighter and we continue to be a valuable part of their overall solution.

Nator Swansberg- Thomas Weisel Partners

And then on the analog business you mentioned some of the new areas that you are penetrating, but if we look at that business that’s a quarters revenues today what are some of the bigger components of that where we stand today?

David Aldrich

It’s actually becoming more and more diversified every quarter. We do have a core base business in wireless infrastructure. We started adding new markets such as automotive in the last several quarters, and automotive was a meaningful part of our business this last quarter. We started working on engagements with companies that do energy management or meter reading systems. We started working on medical. So it’s a number of new markets that are becoming quite diversified and not any one segment represents more than 20% of the overall portfolio.

Operator

Our next question is from Mark Kellar with Merril Lynch

Mark Kellar- Merril Lynch

Hi, good afternoon guys. I was wondering if you could give me your current mix between in sourced and outsourced manufacturing and what the utilization rate is currently.

David Aldrich

Roughly 80/20 in our foundries. In our assembly it is perhaps a little bit less than 20% is out-sourced and our utilization is running in the eighties in PHEMP. In HBT it is fluctuating a little bit. It is impacted by the six inch conversion that we have been talking about. We like to run in the 90% range as long as we’ve got a fully qualified copy-exact partner for those processes. That is our goal. We are not there in PHEMPT, we are closer than that in HBT. And we are there in assembly and testing.

Mark Kellar- Merril Lynch

And any change to your tax rate at this point? Still running in the 2-3% range on a non-GAAP basis? Any change to that going forward?

Donald Palette

We talked a little more in detail about this in the last call. With the tax valuation allowance in the books the rules require us to look at every quarter. There is no change at this point and time. We are going to continue to look at that. WE have about $185 Million of NOLs on the books, so for modeling purposes this year and next year we continue to use about 3% cash tax rate.

Operator

Our next question is from Craig Ellis with Citi

Craig Ellis- Citi

Just a couple of questions as far as the pricing environment. First of all can you talk a little bit about the pricing trend in the March quarter? And your expectations going forward in the June quarter relative to the norm?

David Aldrich

With respect to pricing it really is a difficult question to answer. The portfolio has so many components and there’s blended ASPs. But basically we are seeing the pricing environment stabilizing a little bit here as we exited March and we entered into the back half of the year, and for Skyworks specifically we have a few unique advantages in bringing in some of our technology such as PHEMPT and BAW Filter to create a blended solution that is quite differentiated and offers very high value to the customer. I think that it is the increase in value that is doing the most for us in terms of stabilizing pricing.

Craig Ellis- Citi

Ok, so just to follow up on that, given the diversification programs you have talked about in your prepared remarks, and also your comment on the Asian market, could you give us a sense of your pricing outlook for calendar 2008 relative to 2007 which I believe was down in the single digits?

David Aldrich

This is a handset centered question versus linear products, I take it?

Craig Ellis- Citi

Let’s start with handset.

David Aldrich

Ok, let me try and give you a little bit of color. Before the move to some of the low-end phones that began to adopt the front end module technology the ASP erosion had been about 15% a year. I would say that was the case in 2005and 2006. The shift began to occur in 2007, thus in 2007 you saw single digit, in some cases low single digit ASP erosion. It was a combination of the front end modules just declined less. That blended with some of the older designs in 2G. As we are going through 2008 and 2009, the actual ASPs are quite healthy in these new multi-mode designs and they are stabilizing on the low end by virtue of these more complicated PHEMS. So I think the blended ASP for us on product-to-product basis again will be in the single digits, if you look at it product to product, it will be in the single digits, perhaps the mid-single digits. But at the end of the day we are actually seeing an increase in our overall average ASP as we shift more PHEMs, more linear products and less of the older simplified 2G solutions. So that’s what we mean by a more stable pricing environment.

Operator

And our final question will be a follow up from Ittai Kidron with Oppenheimer.

Ittai Kidron- Oppenheimer

Just a little bit more focus on cash. Don, can you talk a little bit about your CapEx plan for the year? And Dave, you are starting to have a different problem of lots of cash, has the thought of a buy-back ever crossed your mind? Or how close are we to doing an M&A deal that expands your linear business?

Donald Palette

As you know we spend almost $20 million in Q1 in capital, $17.5 this quarter. We would expect capital spending to be roughly in line, maybe down a little bit, to what you just saw in Q2 and Q3. And then a little bit of a drop into Q4. So remember we are continuing to invest in six inch, we are investing in.. the CapEx that we invest in assembly and testing in Mexicali because you have square footage available pays for itself in a relatively short period of time and it’s a real nice lever to continue to margin improvements. So hopefully that gives you a view of CapEx. And you’re right, what we’re really doing a good job of here is the improved business model effectively converting that to cash. And you are right the balance sheet’s getting a lot stronger. We believe our currency is significantly undervalued. We are looking at a stock buy-back but we haven’t committed to do that yet but it is something we are continuing to look at. And I think Dave wants to address the M&A question.

David Aldrich

I think the M&A, if you live long enough and you do enough deals you know just how perilous they can be. So I must say that we would only even consider an M&A deal that was so overwhelmingly creating shareholder value and low risk that our hurdle is so high that we have nothing on the horizon, but clearly it is an option for us but we are really quite conservative on the M& A front.

Ittai Kidron- Oppenheimer

Ok. We’ll take it as buy-back then.

Operator

This concludes today’s question and answer session. I would like to turn return the call to Dave Aldrich for any additional closing comments.

David Aldrich

Thank you so much for participating and on behalf of the entire Skyworks team, thank you and we look forward to updating you next quarter.

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Source: Skyworks Solutions, Inc. F2Q08 (Qtr End 3/31/08) Earnings Call Transcript
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