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Skyworks Solutions (NASDAQ:SWKS)

Q4 2012 Earnings Call

November 01, 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

T. Michael Walkley - Canaccord Genuity, Research Division

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

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

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

Blayne Curtis - Barclays Capital, Research Division

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

Edward F. Snyder - Charter Equity Research

Vivek Arya - BofA Merrill Lynch, Research Division

Alex Gauna - JMP Securities LLC, Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

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

Quinn Bolton - Needham & Company, LLC, Research Division

James E. Faucette - Pacific Crest Securities, Inc., Research Division

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

Ian Ing - Lazard Capital Markets LLC, Research Division

Operator

Ladies and gentlemen, good afternoon and welcome to the Skyworks Solutions Fourth Quarter Fiscal Year 2012 Earnings Conference Call. This call is being recorded. At this time, I would like to turn the conference over to Mr. Steve Ferranti, Senior Director of Investor Relations for Skyworks. Mr. Ferranti, please go ahead.

Stephen Ferranti

Thanks, Tom. Good afternoon, everyone, and welcome to Skyworks fourth fiscal quarter 2012 conference call. Joining me today are Dave Aldrich, Don Palette and Liam Griffin. Dave will begin today's call with a business overview followed by Don's financial review and outlook. We will then open the lines for your questions. Please note that our comments today will include statements relating to future results that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties including, but not limited to, those noted in our earnings release and those detailed from time to time in our SEC filings.

I 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.

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

David J. Aldrich

Thanks, Steve, and welcome, everyone. I'm pleased to report a strong finish to our 2012 fiscal year with fourth quarter results exceeding our prior expectations. As we enter fiscal 2013, our market drivers remain strong and we're capturing more content than ever before within our existing mobile and diversified analog markets. On top of this, we are rapidly expanding our footprint in complementary new verticals like automotive, like medical and the connected home.

Our competitive positioning continues to strengthen. With this design momentum and new product pipeline we have in place today, the stage set for us to outpace our addressable markets in 2013.

Now turning to the fourth quarter results. We posted revenue of $421 million. That's up 8% sequentially and slightly above our previously updated guidance of $420 million. We produced fourth quarter operating income of $103.6 million with operating margins of 24.6% and that's up 100 basis points sequentially. We earned $0.53 in diluted earnings per share, and that's a $0.01 better than our updated guidance. And we're guiding to 14% year-over-year revenue growth in the December quarter with expanding margins.

So it was another strong performance for Skyworks. For a more detailed commentary on the quarter, I'll turn it over to Don now for his financial review and outlook.

Donald W. Palette

Thanks, Dave and thanks again for joining us, everyone. I'll first provide a more in-depth review of our fourth quarter results and then outline our business outlook for the first quarter of fiscal 2013.

Revenue for the fourth quarter was $421 million, up more than 8% sequentially. Gross profit was $180.7 million or 42.9% of revenue. Operating expenses were $77.1 million, consisting of R&D expense of $49.2 million and SG&A expense of $27.9 million, yielding $103.6 million of operating income and a 24.6% operating margin. Our cash tax rate ended the year at 4.8%, down from 6.3% in 2011, primarily driven by our successful implementation of multiple business restructuring initiatives. And as a result, we paid no cash taxes in Q4 based on favorable year-end adjustments to our annual tax rate. Net income was $103.5 million or $0.53 of diluted earnings per share, $0.01 better than our updated guidance range.

Now turning to our fourth quarter balance sheet and cash flow statement. We generated $50 million in cash flow from operations, bringing our fiscal 2012 total to $285 million. Exited the quarter with $307 million in cash and no debt. Invested $31 million in capital expenditures during the fourth quarter with depreciation of $17 million.

Now for our first quarter 2013 business outlook. With our new platform wins and design momentum, we expect Q1 revenue to be up 14% year-over-year and 7% sequentially. Assuming a revenue level of $450 million, we suggest modeling gross margin to be up slightly to around 43%.

Looking ahead, we see opportunity for further gross margin enhancement as we realize the benefits of our current capital investments and ramp up margin accretive products like SkyOne, SkyHi and our portfolio of a high-performance analog products. We expect fourth quarter operating expense to be approximately $80 million, resulting in operating margins just north of 25%.

Below the line, we anticipate $100,000 in expenses from interest income and other expenses and a cash tax rate of around 7.5%. We expect our cash tax rate to remain at these levels for the remainder of our 2013 fiscal year, and that's better than our prior expectations of around 10%. As a result, we expect Q4 EPS at $0.54 using a base of 195 million shares. And as Dave will discuss, the drivers are in place today for Skyworks to outpace market growth, putting us on a path to achieving our midterm business model of 30% operating margins at quarterly revenue level of $550 million which, as a reminder, produces around $3.00 in annualized earnings per share.

Now with that I'll turn the call back over to Dave for his comments on our business drivers. Dave?

David J. Aldrich

Thank you, Don. Now for the remainder of the call, I'd like to highlight 4 key elements of our strategy that underpin our growth and expectations. First, we are levered to high-growth markets. Second, we are broadly diversified across customers, product set and end markets. Third, our competitive differentiation provides a sustainable advantage in the market. And fourth, our unique business model enables us to efficiently convert strong top line growth into superior operating results.

So starting with our market opportunities. We are fortunate to be a participant in many of the highest growth markets within the technology space today. By every measure, the mobile broadband phenomenon continues to advance on a global basis, slowly displacing traditional computing. Internet stalwarts like Google, Amazon and Microsoft, who historically have not participated in mobile devices, today see mobility as a critical component of their long-term strategies. This has spurred a race to provide the next generation of leading-edge smartphones and tablets as a gateway for eCommerce, for on-demand content, location-based advertising, mobile apps, cloud-based services and social networks.

In emerging markets like China, the mobile broadband adoption rate is just beginning. Among China's top carriers, 3G still comprises less than 20% of the total subscriber base, creating a significant growth driver over the next 3 to 5 years as 2G subscribers upgrade. And in fact, a recent report from Barclays estimates that in China alone, 1.2 billion smartphones will be shipped throughout 2015. As a benchmark, around 300 million will be shipped throughout 2012.

As this technology revolution is by no means limited to mobile, wireless connectivity is becoming pervasive throughout a growing array of applications in consumer products, machine-to-machine, home automation, even spanning automotive and medical applications. According to ABI Research, the number of Wi-Fi enabled devices shipped is expected to surpass 1.5 billion this year. This is more than twice the number shipped just 2 years ago.

Second, we are broadly diversified, enabling stronger and more consistent financial results. Now as a reminder, there are 3 elements to our diversification strategy: diversification across our OEM customers, within our product offering and across a broad array of end markets. The result is that today, we are the supplier of choice with a leading share position at every mobile device OEM and baseband partner, helping to insulate us somewhat from customer share shifts.

We address more RF and analog content today than ever before, beyond traditional power amplifiers and RF front ends into power management, Wi-Fi, GPS, switch modules, filters and tuners. We're addressing a broader set of end markets. Increasingly, we are seeing new opportunities in consumer products, home automation, automotive, medical and military.

Third, complementing our diversification, we have well-defined and long-established competitive differentiators. We're experts in RF and analog system design, leveraging a global force of system and applications engineers. We offer an unmatched technology portfolio that includes deep expertise in SOI, CMOS, GaAs, BiFET and silicon germanium, along with a library of nearly 1,000 patents.

We have leading capabilities in advanced integration, including proprietary shielding, 3D die stacking, flip chip and others. And we are the lowest cost producer based on our global scale and our integration capabilities.

These differentiators allow us to produce the highest performing devices with the highest levels of integration. And SkyOne is a great example of this. Our customers are placing higher value on total solutions. And there's a clear premium placed on performance, supplier reliability and application support, which further reinforces our leadership position.

And fourth, by leveraging these competitive advantages, along with our industry-leading scale, integration capabilities and hybrid manufacturing models, we've assembled an engine that efficiently converts above market growth into best-in-class returns. We are firmly committed to achieving our target operating model of 30%, which puts Skyworks among the top of the class within the semiconductor space. And we believe these 4 strategic pillars provide us with a clear competitive edge in the market.

Now looking ahead to the year ahead -- now looking to a new year ahead, we have some very specific growth drivers in place that provide us a high level of confidence in our growth trajectory over the course of 2013.

First, LTE. We're already engaged in developing activities supporting several major 2013 phone models that incorporate entirely new LTE bands like 9 and 10; 18, 19 and 38, 41, in support of deployments in Europe and Asia, resulting in more addressable content.

Second growth driver are the emerging market smartphones. We have significant design momentum in leading smartphone reference designs within the China market, where we see our RF content opportunity more than doubling. On top of this, even the most basic smartphone provides new addressable analog opportunities that further expand our content. In total, it's not uncommon for us to be pursuing up to $3.00 or more in addressable RF and analog content in these applications.

Third, is the growing adoption of tablets. The recent introduction of smaller screen sizes and lower price points is expected to dramatically increase adoption rates over the course of 2013. In fact, analyst forecasts predict that tablet shipments could reach more than 350 million units within the next 3 years. This market segment is clearly performance driven. And based on the strength of our technology offerings, Skyworks has established a leading share position with strong incumbency advantages.

And finally, an explosion in mobile connectivity. Over the course of 2013, we expect to see a wave of 802.11ac enabled notebooks, tablets and smartphones enter the market with higher addressable dollar content for Skyworks. We already have significant traction in the 802.11ac market and have been designed into some of the first ultrabooks and smartphones to incorporate this technology.

In total, as we look at the year ahead, we see these trends providing a mid-teens TAM growth opportunity, representing a powerful tailwind for Skyworks.

So in closing, our fourth fiscal quarter marked another strong performance for Skyworks. And we're very optimistic about our prospects for 2013. 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.

This concludes our prepared comments. Operator, let's open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to the line of Craig Ellis representing Caris & Company.

Unknown Analyst

This is Brett Perry here for Craig. Could you just give some granularity on the segments in the quarter and the outlook between cellular and linear products where the growth was coming from?

Donald W. Palette

Well, the actual revenue breakdown, Brett, for the quarter was 40% high performance analog and 60% handsets, smartphones.

David J. Aldrich

And I think from a segment standpoint, from a market standpoint, we expect strong growth in smartphones and tablets. We also expect strong growth in mobile connectivity. And we expect to see some ongoing softness in areas like smart energy and infrastructure.

Unknown Analyst

Okay, thanks. And then on your intermediate term financial model, what's your confidence in reaching that in 4 to 6 quarters? And I guess, given that the revenue target on that is 20% above current levels, is that really needed to hit your 30% operating margin? Just maybe some gives and takes within the model.

Donald W. Palette

Sure. I mean, well first of all, I think you have to look back to the track record. At various points in the last 3 or 4 years, we put together mid-term models and we've had a very high success rate at hitting those every time and, if you think about that 550, it is about 22% growth. But if you look at what we've been talking about, as far as the market opportunity, without even gaining any share, we see 2013 as a 15% kind of growth opportunity. So that kind of hangs with the 4 to 6 quarters that we've talked about. So we clearly see that opportunity in that 6-quarter horizon, within that horizon. And the volume is critical to hitting the 30%. You do need revenue level to leverage the OpEx as well as to continue to enhance and generate margin improvements. So you do need that kind of level to hit the 30%.

Operator

Our next question comes from the lines of Mike Walkley with Canaccord Genuity.

T. Michael Walkley - Canaccord Genuity, Research Division

Dave, just a little bit of -- clarifying that, just for Q4, do you expect stronger mix of smartphones? Can you maybe just a bit on the macro environment? Certainly looks like on some high-volume smartphones you had strong content share, so can you maybe discuss if you might be losing short-term share in other customers or if it's still the macro backdrop has different customers struggling?

David J. Aldrich

Sure. Okay. First, we're quite pleased with our second-half performance. If you look -- include our guidance, that puts us up about 15% in the second half versus the first half. So we're pleased with that, that's higher than the growth rate of the market. We are a very broadly diversified supplier. We ship to everyone. Therefore we are a bit of a proxy. And we continue to take share among the leaders while diversifying. So we're growing faster than the market. And I think that our sequential guidance this quarter being up 7% in the market, it's probably up in the mid-single digits range, is consistent with that.

T. Michael Walkley - Canaccord Genuity, Research Division

Okay, thanks. And Don, can you just share with us, the 10% customers in the quarter, and the 2G and 3G mix within the wireless?

Donald W. Palette

Sure, Mike. The 10% for the quarter were Foxconn, Samsung. And 2G was roughly 20% of the revenue for the quarter.

Operator

Our next question comes from the line of Aalok Shah with D.A. Davidson.

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

Just a couple of quick questions. In terms of the pricing environment, is there anything we should make note of as to what might be going on in, particularly, in the smartphones space this quarter and maybe next quarter?

Liam K. Griffin

Yes, Aalok. This is Liam. We certainly see some pricing activity, some pressure in some of the lower end markets, the 2G markets in China. In the smartphone space, however, we see this market driven by performance and value, and our technology there has led us to a number of new design wins and that's given us pretty defensible position with respect to pricing.

Donald W. Palette

And Aalok, just like to add to that, if you look at our historical ASP erosion, and we do it part by part, year-over-year. I mean, it's a metric that we look at very closely. We are well within the historical ranges. We see a little bit of a bump in the open market 2G pricing maybe a little higher discounting than we see in the past, but other than that, it's right within historical ranges for the rest of the portfolio.

T. Michael Walkley - Canaccord Genuity, Research Division

And, Liam, in terms of kind of how you see the next few quarters, I guess this question's more meant you, you had a good ramp with Samsung on their flagship platform. Are you guys seeing some softness maybe at that customer, maybe going into this quarter? Or is there anything else we can make note of as to how you're progressing with that customer in the near-term?

Liam K. Griffin

Sure. What I can tell you, in general, that with the leading smartphone accounts, one of the things that we're quite pleased about, and Dave alluded to this is that we are -- we're gaining additional content here. We're gaining share but we are also adding new products to our mix. For example, I think, when you look out over the next several quarters, you'll start to see an increasing attachment with embedded Wi-Fi devices from Skyworks, 2GB, 4GB and 5GB, oftentimes 11ac. And we're one of the first to market with that technology. You going to see an increasing attachment with the GPS LNA suite of highly customized devices, higher margin, very high performance. You're starting to see antenna switch modules now become part of our story. So those are some of the themes here, as well as power management by the way, not only camera flash but also RF power when we move into voltage regulators and soon, DC to DC converters. So there's really a real upswing here in new products that we're bringing to market that complement our existing high share position in front-end solutions.

Operator

Next we'll go to the line of Tavis McCourt representing Raymond James.

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

I was wondering if you could talk about kind of the flexibility in the operating plan if, for some reason, economic conditions or something else happens that makes that 15% TAM growth increasingly unlikely next year, how quickly can you kind of scale up or how much do you have to forward invest on the operating cost in a situation like that?

Donald W. Palette

Yes, the first we'll -- I think the first and most importantly talk about the hybrid manufacturing model, I mean, we -- I think we're extremely well positioned to handle any revenue volatility, whether it's upside or downside, with the combination of internal sourcing and external sourcing, so from a margin standpoint, we think that positions us for best-in-class margins regardless of what happens to the top line. So that's very positive. And from an operating expense standpoint, I mean, we have some flexibility. There's variable costs on the line. But at $80 million, we think we are sized appropriately. And we wouldn't expect to change that dramatically. But I do think from the margin standpoint, we will produce the best results, given any revenue condition.

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

And then a follow-up on the balance sheet. How much of that cash is in the U.S. and unencumbered? And as we get close to the cash levels you were before the acquisitions just a couple quarters, how should we think about cash...

Donald W. Palette

The lion's share, that's in the U.S. It's probably 80% -- at 85%. And the amounts that aren't onshore can be invested in some investments we're making in some of the new business structures, so it can be utilized very effectively.

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

And in terms of cash usage, as we watch the cash grow now back to pre-acquisition levels?

Donald W. Palette

It's the same for us at all times. We're interested in using the cash as a competitive weapon and to generate shareholder value. So we're going to continue to look at the right M&A opportunities, where we can grow and accrete not only EPS but operating margin. We'd look at share buybacks at times. And so anything that we believe is going to add shareholder value would be a possibility for the company.

Operator

And we'll go to the line of Ittai Kidron with Oppenheimer.

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

I wanted to drill into the OpEx, just wanted to understand why it is that you're guiding to such a significant quarter-over-quarter increase in OpEx?

Donald W. Palette

It's really when you look at where we ended up, Ittai, for Q4, the $77 million, we're guiding up to $80 million, and it's really there's some targeted headcount adds that we're doing both from an R&D and field application support standpoint. And we've got some variable R&D expenses that are tied to key programs. All these investments if -- we're very confident shareholders are going to be pleased because we see some significant return opportunities down the road for these investments.

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

Can you be then a little bit more maybe forward-looking in commenting on how should we think about OpEx growing from that December quarter level moving forward? I mean, is this a one-time kind of jump up and then it lands up somewhat?

Donald W. Palette

I wouldn't be expecting it to go from 80 back down the 77. That isn't that -- I don't think that's what you should...

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

No, can it stay flat? Or I mean, I'm just trying to -- it really seems unusual and I look at your increase last year also, and last year your OpEx was flat moving from September to December. So there wasn't anything seasonal to it. I'm just trying to understand again how do I get my hands around this?

Donald W. Palette

Well, yes. Exactly, exactly. My comments weren't seasonal at all. Hopefully that didn't confuse you about what I said. I was talking about program investments, they weren't seasonal at all. But yes, you can expect the 80 to be flat certainly into -- through the March quarter. We have pay raises midyear that start June 1 so that there's a -- there can be a slight increase with that. So there will be some increases beyond that. But they are really immaterial in the scope of things when you look at the amount we are investing.

David J. Aldrich

I think this is, Ittai, that these were variable expenses more than anything else. So we have a high masked charge, for example, this quarter, as we are ramping and transferring a lot of designs into production. So it's pretty simple. It's as simple as that.

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

Okay. But this still leaves you comfortable that, with this increase, you can reach that 30% operating margin target at that specific revenue level?

Donald W. Palette

Absolutely. Because again, we're going get there as a two-pronged approach, as we always do. So our goal is both margin expansion and leveraging at 550, whether the OpEx is $81 million, $81.5 million a quarter. That's well within the range of what we can do to deliver the 30%. So yes, we are totally confident in that.

Operator

Our next question comes from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Don, I just wanted to follow up with the mix of your business between RF and analog. I thought you said the mix was 60 40. Last quarter was 65 35. I know it's not perfect math but obviously, there's some rounding in there, but it would suggest the RF business really didn't grow quarter to quarter, if you get the math to work. I'm just wondering if you could give any clarity as to if that's the right math? And then conversely, what's driving the growth in analog?

Donald W. Palette

Well, Blayne, just to clarify, we're 40% high performance analog this quarter and 60% handset. And last quarter, 65% handset and 40% -- or 35% high performance analog. Correct? I just want to make sure your comments were tied...

Blayne Curtis - Barclays Capital, Research Division

Right. Then the mix of handsets just declined but yet your revenue went up. So I'm just trying to understand the moving pieces. It would suggest the handset portion hasn't grown that much but yet the analog portion is.

Liam K. Griffin

Yes, we have seen some improvement growth on the high performance analog piece. Again, you have to take into account that we have some acquisitions that have come in, that we've been able to lever up with share gains. We've been able to take, for example, a high performing WiLAN portfolio and drive it into numerous customers. Not only handsets but also routers, we're enjoying an 11ac ramp, the GPS technology is launching and looking very strong for us. And then if you look at some of our antenna switch products and advanced antenna tuning products, we are starting to see some momentum there. So we've had benefits as well on the high performance analog side. That have -- that propelled the growth here in the last quarter.

Donald W. Palette

If you look at the Teardown and think of it this way, if you look at the Teardown reports and these numbers, 35% to 40%, we're kind of rounding a little bit, it's a little bit less than 5% sequentially, but be that -- but having said that, if you look at the Teardown reports and then listen to our commentary, we're seeing a lot of smartphone growth, for example in GPS LNA power management devices, camera flash drivers, antenna switch modules and Wi-Fi devices versus a traditional PA. So when you look at those products as being non PA-based or high performance analog, that explains parts of it. So think of it in those terms. Where we got your PA business, it'd be up slightly and bolt-on products that are up more dramatically because those are new growth drivers for the company.

Operator

And we'll go to the line of Anthony Stoss with Craig-Hallum.

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

As your volume increases, anything you can do on the materials cost side to try and get better pricing from your suppliers? Also, as you're launching new GPS technology and Wi-Fi in the AC side, is that accretive to gross margins? I'd love to hear kind of your view on those 2 pieces and SkyOne ramp and [indiscernible].

Donald W. Palette

Anthony, as far as how we manage our supply base and we absolutely -- I think we're do an excellent job, we have very specific targets year-over-year as far as driving material content out and volume certainly helps with those discussions. But that's something we talk about and execute on every day. So that's clearly part of our ability to expand margins on a go forward basis and has been part of it for the last 3 to 5 years.

David J. Aldrich

I think as you look forward to 2013, the products that you are seeing in the most recent Teardown reports and that we have been highlighting on this call are on balance and, on average, accretive to our company gross margin. That includes SkyHi, it includes SkyOne, it includes Wi-Fi and GPS. Those products are all accretive to our averages. They're relatively new to us and they're ramping now. So as we look at the mix of products moving away from to 2G, more commoditized segments and towards more highly integrated products at which SkyOne is probably the most dramatic example, those products are indeed accretive. And you'll see those playing out through 2013 in improving margins.

Operator

And we'll go to the line of Edward Snyder with Charter Equity.

Edward F. Snyder - Charter Equity Research

Thanks. A couple questions here. It's clear that your analog products are starting to grow here and I guess that's where some of your balance shift towards HPA has been on the quarter. How much of that are your acquiring to hit your target market? Sounds like it's going to be a big growth area for 2013 especially since these new acquisitions, you're leveraging the share gains. So is that a big component, Don, of the target market? And then I know SkyHi was introduced last year, I think it's sampling, now, when is it likely -- are we likely to see that in a Teardown of a production phone? Is it -- are you targeting first half of next year, late next year? Any idea at all?

Donald W. Palette

So Ed, just to clarify your first question, you meant for the target model? You said, market. You mean, model, right?

Edward F. Snyder - Charter Equity Research

Yes, exactly.

Donald W. Palette

And in order to achieve that 30% we are not assuming a big shift in the HPA handset percentage at this point in time. So if that 60 40 goes more towards high performance analog, that's a positive. That actually accelerates margin accretion. But we are not expecting a big movement from that in the model estimate.

David J. Aldrich

And I'm not sure I understand you, did you mean SkyOne? When did we see SkyOne, you said SkyHi.

Edward F. Snyder - Charter Equity Research

.

Yes, I meant, SkyOne.

David J. Aldrich

Okay, just because SkyHi is in production now. SkyOne, we have sampled to multiple customers. We have a lead customer who's putting it through its paces now with an expectation that very early in 2013, you'll be able to buy by a phone with SkyOne incorporated. And just to remind the listeners, SkyOne is a complete multimode PA addressing both 3G and LTE bands. It has all the duplex filtering, all the switching logic and control to extend from the output of the transceiver chipset, right to the antenna and back. It is the most highly integrated product in the market, in the world. In fact, in RF front end and it's accretive to our margins.

Operator

And we'll go to the lines of the Vivek Arya from Bank of America, Merrill Lynch.

Vivek Arya - BofA Merrill Lynch, Research Division

I'm curious, if your analog products are growing faster than some of the handset parts, why are gross margins under some pressure? Is it because of more outsourced parts or is it just that some of these new analog parts are going into a handset also? And if also, the same time, if you could comment on Q1 gross margin outlook, I think the fall through appears to be about 39% or so, which is below your 50% target. So if you could just address the Q4 and Q1 gross margins there, the moving pieces in that.

David J. Aldrich

This is Dave, I'll take the first part of that. First, the smartphone and these higher level mobile devices incorporate both our FVS [ph] products as well as the suite of HPA products. So again, the GPS LNAs, the mobile connectivities, the high throw count switches, the power management devices, LED products, they're high performance analog. So it is a mix.

Donald W. Palette

Yes and as far as the question on the margin, yes, you're right. We've historically -- as we've been generating margin expansion, we've been dropping through in the high 40s. And just to remind everybody when we had our Analyst day, we talked about that going into 2013, when we had recommended modeling 45% to 46% kind of drop going -- and it's really -- in the guidance that we just gave on the 450, the 43% off of what we produced in the fourth quarter is a little over 44% drop. So it's pretty consistent with what we said. And the reason for that is, that we talked about, it's a higher mix of outsourced material with volumes ramping. We've made some CapEx investments, it takes 2 or 3 quarters, we're working through the payback on that. So some of that benefit isn't yet in the numbers. Some of the higher margin segments as we talked about on Analyst day, like infrastructure, still a little sluggish. And we had a little higher in Q4 and Q1, a little higher 2G mix which is, again, has had the most ASP compression, a little bit lower margin. So those are really the reasons. But again for modeling purposes, we would recommend using 45% to 46% going through the balance of the year, as far as contribution.

Operator

Our next question is from the line of Alex Gauna from JMP Securities.

Alex Gauna - JMP Securities LLC, Research Division

I know you don't guide 2 quarters out, but I was wondering if you could give us an idea of what you would consider normal seasonality in this environment? And based on your visibility, if you think you can better than normal seasonality in the March quarter and maybe some of the puts and takes on that.

David J. Aldrich

Yes, thank you. It's a little too early to tell what margin is going to shape up to be. It depends somewhat on holiday season sell-through. I think it's -- given our design status and recent wins, we do expect to outperform whatever the market may be. But honestly, I think we need to see a little bit more the December quarter as we move through October into November, December.

Alex Gauna - JMP Securities LLC, Research Division

Fair enough. And I was wondering, you mentioned some of the opportunities, I think your content doubling in some of your China opportunities. Can you talk about what percentage contribution you think as an end market China is for you today and maybe some insights into your optimism around that?

David J. Aldrich

Well, the end -- the 2G end market China business is mid-single digits as a percentage of revenue. And that's really defined as kind of the indigenous local providers and the products we sell through the likes of MediaTek and others. That's about 5% or 6% of our revenue. And we step forward into 2013, that business kind of hit a trough of unit volume, where the decline in 2G was more than offsetting the uptake in 3G, TD and smartphones in general. We see the crossover point occurring about now certainly into early 2013, where the TAM will begin to expand again as the most heavily commoditized segment of the whole wireless business today is open market 2G China. I think that business gets smaller and smaller and will finally begin to see real increase in smartphone adoption rate in China. So we think China is a great story in 2013 and '14. It hasn't been a great story in the late 2011 and 2012.

Liam K. Griffin

Right. And Alex, this is Liam. As a follow up to that, I think, you're going to see China being a gross margin mover for us, whereas the 2G business today is the lion's share, you're going to see more customized infrastructure solutions to lever to ZTE and Huawei. We're actually starting to deliver some of the Wi-Fi technology that we mentioned to companies like HTC and also Huawei. So I think you're going to see a mixed benefit as well as revenue move in 2013.

David J. Aldrich

Yes, one other thing. It's probably an early indicator is when we're competing now for design win sockets on reference designs, for example, for 3G and so on in that market. We're competing with highly specialized, customized designs for that chipset. In 2G, we're competing with several competitors, many of whom really had no choice but to compete on the basis of price. We do not see that model replicating in the 3G smartphone space. So not only will there be increased content, the products will be far more complex. There'll be more bolt-on capability because there'll be higher Wi-Fi attach rate, there'll be GPS, there'll be other products, there'll be more complex power management needs. We can address those. So it's really -- it's a double whammy. We get the growth in unit volume with higher dollar content driven by complexity and we get to bolt-on a lot of new HPA products as a result of the very nature of those products being more smart than 2G voice only.

Operator

Our next question is from the line of Dale Pfau from Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Dave, may we talk a little bit about connectivity? I know in that's in HPA, are you seeing that grow faster than your overall sort of 15%, 14%-15% year-over-year growth? And can you talk about -- a little bit about how you are seeing that not only in the December quarter but could we see an acceleration of that in the first calendar quarter?

Liam K. Griffin

This is Liam. That is certainly one of the fastest-growing portfolios for us, the whole 802.11 suite. We have 11ac now as the leading driver for growth, but we also have sustainable gains even in 11n. So one of the themes here is just really the attachment into smartphones and tablets, which is relatively new. We see an increased content and margin pop as we move to 11ac, and we are also seeing some of these advanced routers, we referenced a few in our business highlights with NetGear, where the addressable device content for us is 15 to 20 units with MIMO technology, multiple in/multiple out data streams. So that is really an important driver for us. We see that really in it's early innings now. We think 2013 is going to be a big move but we're also going to see more devices be attached 2014, 2015. So we think it's sustainable. We're in the right place right now. Our share position is outstanding but there's many, many accounts that haven't yet turned on the 11ac pump here so there's lots more ahead.

Operator

We go to the line of Vijay Rakesh with Sterne Agee.

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

Just a housekeeping question first. When you look at your antenna tuning and antenna switch products, you guys put that in analog, right? So when people look at analog growing it's probably some of these products going to handset that are growing also, right?

David J. Aldrich

That's correct. I think it may be useful to think of FVS [ph] as front-end solution, which would be power amplifiers, power amplifier duplexers, multimode PAs and the balance of the products that bolt around those on the analog side, being high performance analog.

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

Got it. Now when you look at the December quarter, when you look at the handset overall versus, let's say, core analog only, obviously, analog markets now seem to be [ph] weaker into December. Have you seen -- when you look at that December, again, are you seeing [ph] weakness on analog offset by a little bit stronger -- the handset side growing better? Is that how you look at it?

David J. Aldrich

Yes, but let me clarify. Yes, the short answer is yes. We're seeing smartphones, very strong. We are seeing tablets, very strong. We are seeing mobile connectivity, Wi-Fi, very strong. 11ac routers initial ramp plus a lot of home connectivity devices, Wi-Fi devices, attach rates into tablets and the like. So we're seeing those markets very, very strong. We are seeing kind of the broad catalog of analog products not being so great, flattish. Infrastructure remains stubbornly flat. I think that finally starts to see some growth, or our customers are finally beginning to show growth in infrastructure and smart energy, would be, I guess, the third that's showing just flatline here in December. And it is important for us to see that infrastructure -- we are seeing signs of growth in infrastructure, that there clearly isn't enough capacity. Our customers in that space have held off as much as they can, but those products are very accretive to our gross margin. So we really want to see 2G decline, smartphones increase and then a return to growth in the core analog business. We expect to see that in '13, but we don't expect to see it in December.

Operator

Then with the line of Quinn Bolton representing and Needham and Company.

Quinn Bolton - Needham & Company, LLC, Research Division

Dave, just wanted to follow up on that question about the China business you'd referenced in your script, multiple baseband references and targeting the emerging markets, 3G handsets. Can you expand a little bit about that position? And a sort of follow on question, I think you said that 2G was still the dominant mix of your China business. Yes, when do you think you'll see that 3G crossing over the 2G? Is that first half of next year? Is that later in 2013?

David J. Aldrich

I think we see it this year, in the first half of 2013. We're finally starting to see a balancing in that portfolio where the decline in 2G is no longer resulting in a net decline in that business. And we when talk about baseband partnership, it's clearly MediaTek, but we're also lined out very nicely with the chipset providers into Huawei and ZTE and the other foreign OEMs. So we look at Qualcomm, MediaTek and others as being our reference design partners.

Liam K. Griffin

And let me add to that. One of the unique benefits that we bring to the China accounts as they ramp up into 3G and LTE is our architectural experience, our systems knowledge, our application support. It's really critical now as these customers and the OEMs move up in complexity. These are not easy products. I think the Skyworks team is doing a great job of really not only providing product but the architectures and the systems know-how to turn these customers on.

Quinn Bolton - Needham & Company, LLC, Research Division

Can I, just a quick follow on that. Do you include the Huawei and ZTE sort of branded OEM accounts in China in that bucket that you discussed? Or would you exclude those branded OEMs and really just looking at the white box?

Liam K. Griffin

No, we include them, but one point to make, is that the revenue -- the 2G revenue has largely been smaller OEMs. There's Huawei and ZTE but it hasn't been -- the 3G opportunity is going to be much more Huawei and ZTE than it will be some of the smaller white box players.

David J. Aldrich

I think those folks didn't play very big in 2G. They really kind of cut their teeth in data cards and they were 3G enabled or EDGE enabled. And so we do include them and we have a very high growth expectations for them. We did not have a high growth in the 2G space for those customers. They really were indigenous, smaller companies supported by local reference designs.

Operator

And will go to line of James Faucette representing Pacific Crest.

James E. Faucette - Pacific Crest Securities, Inc., Research Division

Just a couple of questions for me. Wanted to once again touch on China and the opportunity for dollar content growth there. As you look at that opportunity, how much do you assign to the ability to capture dollar content from others with your newer products and more complete products, versus how much are you looking at as being an actual step up in the overall RF content within those new phones?

David J. Aldrich

Yes, let me take a stab at that first. One, we do expect to have disproportionately more share as this market converts to 3G and to smartphones because it's where technology differentiates, where the challenges are the greatest. So as there are more brands, as there are more needs for filtering and switching and control, we'll gain more traditional front-end content in that segment than in the 2G where we have a strong product portfolio but frankly the margins are dilutive and there's quite a bit of competition. We do not see that in this space. So that's one element of it. The second area is that we will grow dollar content and grow share in that sort of traditional front-end solution within that market. But we will also see a higher attach rate with GPS, with Wi-Fi and more complex power management needs as an example. More complex switching and ASM requirement simply by virtue of the number of bands and what those phones are going to be required to do. So we'll have a lot more HPA content bolted around that front end, in 3G, where we have, frankly, very little in 2G. There wasn't much we could do in 2G beyond the front end.

Operator

And we'll go to the line of Cody Acree with Williams Financial.

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

If we think about Samsung for a second, I know Samsung usually does kind of an end of year inventory clean up and then there's a myriad of things that you're designed into, do you expect Samsung to grow for you in the December quarter?

Liam K. Griffin

Actually, that's a good -- that's a good question. And right now, our view for Samsung is it's probably flat into the December quarter right now.

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

And I guess could you give me a little bit of color on to how -- is it inventory? Is it specific programs? I guess why the flatness, given Samsung's growth?

David J. Aldrich

I think -- I would at it this way, Cody. It's a great question. We see an OEM shipped in the December quarter where you have a couple of products that are selling so well that other customers will tend to see -- other OEM customers will tend to see less strength in the December quarter. So you do see an offset. And we see that with Samsung and others. However, when I get into the March quarter, there are some new products that have been announced to be released and our content there is very high. And we have really high expectations for those products. So we're very excited about Samsung moving into 2013. But I think you have to realistically expect that when you have a big ramp going on in the December quarter that other OEM customers won't do as well.

Operator

And will go to the line of Ian Ing with Lazard Capital markets.

Ian Ing - Lazard Capital Markets LLC, Research Division

Sounds like you're still pretty committed to the 2, 2.5G China open market while 3G grows. So perhaps you can explain if there's scenarios where that gets more benign? I know you got CMOS PAs, there were a lot of startup CMOS PAs in that market, vendors. Or perhaps as a larger vendor, you're better able to fill some [indiscernible] patterns.

David J. Aldrich

I'm sorry, is the question related to supply? Or just how we're playing that market in terms of...

Ian Ing - Lazard Capital Markets LLC, Research Division

Just how you -- you sound committed to that market still so how are you going to play that market and...

David J. Aldrich

Okay. Well, the 2G market is in steep decline in China. Our position there has remained 40%-ish, we think. Hard to -- I say we think because it's hard to calculate. There is a big sort of gray market, if you will. It's hard to really quantify but we sell a lot of product. And so, near as we can tell, we're about 40% share, maybe it's slightly, may be a couple points less than that. We're committed to the extent that we have products, we have a very low cost structure. We have a tiered structure of products, everything from low-cost, relatively low performance CMOS designs to low-cost higher performance GaAs-based designs as well as front-end solutions that are very high performance, and the price changes accordingly. So we are committed to it. It is, however, dilutive. It is where ASP decline has been the most intense because it is by far the most commoditized section of our business. So I'm not disappointed to see that it is getting smaller. And while we are committed to it, we're also delighted that there'll be an upgrade cycle because we're going to make a whole lot more money in China in the 2013 and 2014 than we did in '11 and '12.

Ian Ing - Lazard Capital Markets LLC, Research Division

And for a follow-up, I know it's early to talk about the impact of Hurricane Sandy but any impacts on internal and outsourced manufacturing? I think for RF, people source pHEMT and silicon and insulator wafers from Massachusetts and New York, any impacts on delivery of materials and cost of that delivery?

Donald W. Palette

No. No, not at all.

Operator

And we'll go to the line of Edward Snyder with Charter Equity.

Edward F. Snyder - Charter Equity Research

Yes, this is a quick follow. Dave, it sounds like -- I mean, you've done so well in the handset side of the business, it's your own show, you're kind of preeminent position in both iPhone and in Samsung, you've done well. And then I know that you got a good position in a lot of other OEMs even if they're shipping. Doesn't this speak to 2013 that more of your growth is going to have to come from the linear side of the business? And I don't necessarily mean organically. You have not been afraid of acquisitions in the past. Your cash probably will start to move up again. I know, having talked to everybody in the space, on the CEO [ph] side that everybody would like to do tuck-in acquisitions on the linear side. Can it reasonably expected that we could see Skyworks' mix, whether through growth, organically or acquisitions, to start moving more towards the linear side and mimic something more like an HPA company, TI or something like that?

David J. Aldrich

I think, Ed, we are committed to continuing to diversify, but that, by no means, implies -- I don't think you implied this, that we are backing away or shying away from the mobile sector. In fact, to the contrary, what we really expect -- I expect our mobile business to grow very strong in 2013. And there'll be components of traditional products there, like front-end modules, we had a long discussion about China, we think we'll get more PA and front-end module dollar content. It will be equally as strong as we bolt more technology that we work very hard to address, that becomes this bundling in system level sell is becoming increasingly important because these products are quite problematic for most of our customers. So we can solve those problems for them and get paid for it. So yes, it will be -- it will be RF ES business, it will also be more analog and, as Don mentioned earlier, we're always looking for opportunities to expand into new verticals and add to our technology and our market footprint. We'll do more of that in '13.

Edward F. Snyder - Charter Equity Research

So if we just take, say, the non-wireless business off the table for a minute, just look at the core GaAs, AM [ph], filter, switch-type business, is it fair to assume that more of your growth is going to come -- not come from that? You got great share everywhere but to increase content it almost seems like you'd have to branch off into power control and a number of the things that you got through ATI and like SiGe, for example, SiGe, the entire group is in your HPA side of the business today, correct?

David J. Aldrich

Yes, well, yes. The TAM growth in the front-end will be double digits, we believe in 2013. So the core front-end business driven by the conversion of 2G to smartphone, the increase in content with LTE, the increased switching content, we expect that to go up maybe double the unit volume increase. So if volumes are up 7%, you would expect a 14% to 15%. We probably are adding more TAM, a bigger target to high performance analog products. So over time, I think you will see the business balance more between diversified analog and our traditional FVS [ph].

Liam K. Griffin

Yes, Ed, this is Liam. I think if you look at the individual market opportunities between Wi-Fi, I mean, power management, which is a $5 billion market, GPS, ASM and some of the other organic products that we're developing, mixers, VCL synthesizers, INQ mods, that are traditionally non-cellular go into infrastructure. Those markets, in aggregate, present a very significant TAM for the HPA team. And we've gained a lot of share this year but there's a tremendous amount of room for us to grow in 2013 and 2014. We've seen great momentum in a few of these categories but infrastructure and some of these other markets, we're well-positioned. We get a little tailwind there and you're going to see some upside.

Operator

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

David J. Aldrich

Okay. Well, thank you, everyone for participating tonight and we look forward to seeing you at upcoming conferences. Good night.

Operator

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

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