Skyworks and RF Micro Rewarded with Ratings Upgrades

Includes: QRVO, SWKS
by: Eric Savitz
Skyworks Solutions (NASDAQ:SWKS) shares flew into the stratosphere yesterday, after the company’s announcement last night of plans to exit its baseband operations, which provided reference designs, including digital signal processors and software, to third-tier cell phone manufacturers. “This initiative was complex, research and development intensive and generated substantial operating losses,” Skyworks said in its announcement. “As tier-one OEMs have increasingly dominated the landscape, the addressable market for the company’s baseband solutions has significantly contracts.”

The company said it is eliminating $70 million in annual costs, through narrowing product development, closing some design centers and cutting 425 jobs, or about 10% of its workforce. The company said it would take between $85 million and $95 million in charges, more than two thirds of that non cash, with most of the hit in the fiscal fourth quarter ended Sept. 29. The company affirmed its fourth quarter guidance of $197 million to $200 million in revenue, and pro forma earnings of five cents a share.

For fiscal 2007, the company expects revenue of $820 million to $840 million (after excluding the baseband business), up “nearly 15% year-over-year.” The company expects pro forma earnings for the year of 55 cents to 60 cents a share, which as Skyworks points out is about twice the old First Call consensus view of 29 cents a share. So you can see why this situation might appeal to the Street.

Here’s a quick rundown on some of the commentary about the new, streamlined Skyworks:

  • Satya Chillara, Pacific Growth: Upgrading to Buy from Neutral…based on corporate restructuring and updated guidance….It had been our opinion that the baseband business was a drag on the company, and we thought it had been confusing investors as to why SWKS was trying to maintain this weak segment of their business…Fair market value should be in the range of $9.
  • Cody Acree, Stifel Nicolaus: The company is making a solid step toward addressing the largest ongoing concern of investors, which we believe to be its lack of sustainable and meaningful profitability…Combining this move with our expectation of Skyworks’ ramping several new radio designs to tier-one customers in early 2007, we are increasing our rating from Hold to Buy, and setting a $10 target price.
  • Jeff Loff, Credit Suisse: We are upgrading shares of Skyworks to Neutral from Underperform, since even absent this announcement we were incrementally more optimistic on the company’s prospects…the company is benefitting from resolution of [calendar third quarter] weakness…increasing EDGE transceiver shipments to Samsung and LG…a pending ramp on the low-cost MOTOFONE in the March quarter…a growing mix of higher margin linear products and…a longer-term tailwind from 3G handset growth. Two factors, however, drive caution: SWKS stands to lose some GSM share at Motorola as RFMD (RF Micro Devices) grows its GPRS transceivers there and SWKS positioning with Samsung and LG is less favorable than RFMD’s with NOK (Nokia) and MOT (Motorola). Target price to $9.50, from $4.50.
  • Daniel Amir, W.R. Hambrecht: Recommend investors build positions in Skyworks shares as we believe the company is likely poised for strong earnings growth in FY 07 given its recent decision to cease its baseband-related infrastructure operations and refocus on its high growth and profitable analog and RF core businesses where we believe Skyworks has a significant competitive advantage. Rating: Buy. Price target: $7.
  • Mark Heller, Merrill Lynch: We applaud Skyworks’ decision to exit the baseband business and we give credit to management for its cost cutting actions. While expect the stock to trade up, given the nature of the wireless IC industry, secular trends in the company’s end markets, and Skyworks’ operating history, we see risk to management’s ‘07 outlook. We’re therefore maintaining our Neutral rating.…Small would-be baseband competitors such as Broadcom (BRCM), Marvell (NASDAQ:MRVL), Silicon Labs (NASDAQ:SLAB), Analog Devices (NASDAQ:ADI), Infineon and Agere (NYSE:AGR) still face serious viability challenges, and cannot all succeed in our view.
  • Skyworks shares today have jumped $1.94, or more than 38%, to $7.

    And Skyworks isn’t the only cell phone component stock on the rise. Jeff Loff, of Credit Suisse, upgraded his rating on RF Micro Devices (RFMD) yesterday to Outperform from Neutral.

    Loff says he expects December quarter growth to be above expectations. He sees the company gaining market share and increased revenue from Motorola (MOT); he also expects increasing demand for its transceivers from Nokia (NYSE:NOK).

    Loff says investors who fear that RF will lose market share in Motorola’s EDGE phones are missing “a bigger point: RFMD will grow its overall share and revenue from Motorola in [the third quarter, the fourth quarter and calendar 2007].”

    Loff lifted his December quarter revenue estimate to $270 million, from $260 million. For fiscal 2008, he goes to $1.12 billion and 39 cents a share, from $1.07 billion and 32 cents.

    Loff raised his price target on the stock to $9, from $6.40. RF shares today have gained 26 cents to $7.66.

    SWKS vs. RFMD 1-yr chart:

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