Skyworks Solutions, Inc. (NASDAQ:SWKS) Barclays Global Technology, Media and Telecommunications Conference Call December 5, 2018 1:00 PM ET
Liam K. Griffin - President, CEO, and Director
Blayne Curtis - Barclays Capital, Inc.
Liam K. Griffin
Thank you, Blayne. Thank you, Barclays Team for hosting us today. I will quickly go over our overview of the company and talk little bit about the market batch up that we're seeing and we'll leave a little bit of time for our questions here.
So if you think about Skyworks at a high level, our ambition is truly about connecting everyone and everything all of the time; it could be a smartphone, it could be a watch, it could be a connected thermostat, security system, drone, infrastructure application, virtual reality application but truly it is a vision about connectivity and all of it's forms, we'll talk a little bit about the protocols that we use to do that in some of the end markets where our devices are populating. Again, it's about capitalizing on wireless ubiquity, it's not just mobile devices, we're seeing a tremendous need for our technology in a global market, we're going to talk a little bit about 5G and the catalyst that are provided with 5G, the new technology that are needed from the handheld to the infrastructure, to even the cloud; and all this is forward-looking for us right now. But clearly, the wireless opportunity, despite some of the challenges in the near-term looks very, very bright.
So more specifically around Skyworks, one of the things that I want to ensure that you understand about our company; our business is really about delivering system levels solutions, we do very little discrete components, we focus on high end premium complex platforms, and we do this with incredible level of integration. So if you look at the slide here, we have our SkyOne solutions, our SkyFive solutions for the new 5G upgrade cycle, power management solutions, the velocity [ph] engines that's greatly improved now and it's been cracked and developed in-house. And then we look at the scale of our business; we are a vertically integrated company, we have significant assets in Japan that deliver upto $15 billion temperature compensated sell-through's that are absolutely necessary in mobile devices today. We have analog technology in our broad markets portfolio; broad markets portfolio for us is about $1.2 billion in revenue a year, growing at about 10%, we have rich IT patents, and then we also have -- at the bottom of the slide we also have all the core technologies that allow us to create very unique configurable solutions for our customers; so we're not just a cellular company, we can deliver cellular and LTE but we can also deliver Wi-Fi and LoRa and ViTB [ph] and other technologies to create that connectivity.
And again, thinking about our customers side here; at the bottom of the slide it's very important that your solutions offering could be configurable and flexible, customers don't want the same thing and our ability to lever our internal capabilities at scale and the breadth of technologies puts us in a great position to support our customer's needs. And here is just an everyday example of what we do at Skyworks and I've picked one of the important points; is that our business is about pushing that content reach, helping our customers deliver premium performance, this is just a slide here that shows you an example of where we are today with a classic customer. It's important to know that we're not just delivering transmit and receive, we have Wi-Fi, we have Bluetooth, we have power management, we have antenna tuning, all of these devices, GPS populated in a classic smartphone. So our offering is not zero sum, it's not win or lose, it's very, very granular in terms of what we do. And each year we aspire to push the reach of the technology, each year we want to develop more and more complex thing to help our customers resolve their challenges, so it's important to note that our socket risk is much lower than I think it's been perceived, if you look at the breadth of what we offer here.
And then we want to extend into new markets; we have a great mobile platform business, it served us well, continues to leave [indiscernible], continues to bring opportunity, but we're also moving into new markets. We're a big player in IoT right now, that's one of our fastest growing businesses within broad markets; again, we use all of those wireless protocols that I mentioned, we're gaining traction in automotive which will be a major catalyst when we move to 5G, the connectivity in automotive is really going to be one of the most vital elements, high speed low latency connectivity that make the autonomous drive really happen.
We had an acquisition recently with Avnera, a private company at Portland, Oregon, with incredible voice technology, audio and voice technology. And we're a believer that voice is going to be one of the key interfaces in communications as we move forward, you start to see that today and it's going to continue to move out. So let's take some of the new markets that we're pursuing right now, we have revenue in each one of these categories. Again, in the call we'll talk a little bit more about it, we're starting to see a lot more momentum around the connected car. I think apparently you look at 5G and you look at the autonomous driving opportunity, the need for connectivity, low latency, highly reliable connectivity is going to be critical. So what we're seeing today is design wins with customers, every logo on here we have a design win with; and a move from today, more of a telematics type opportunity to roadmaps that bring us into real true 5G low latency super high speed driving experience which is going to be critical here over the next 10 years and more. So we're very excited about it. Again, design wins with these companies that we've noted, the technologies that we're showing on that slide as well are what we're delivering within those vehicles.
Now I'll pause for a minute and talk about one of the most important catalyst here that we have coming in the next year or so and that is the move towards 5G. I think we've all been looking for this technology, quite frankly, the 4G market has been little bit long in the two, and the need for the upgrade and the momentum around this upgrade is really coming forward. So SkyFive for us is a unifying platform, a unifying brand under which all of our 5G technologies will be delivered and we'll talk a little bit about what that means. So to start, the world that we're in right now is the 2G, 3G, 4G world; all of our smartphones that are in our pockets, in our bags are 4G, 3G or 2G. 5G technology is not on the market yet, and if you look at the crowded nature of the spectrum today, spectrum that we're using today between 700 meg and let's say 2.5 gig to 3 gig, that's our 4G technology. I mean, there is a tremendous amount of opportunity there, we've been enjoying that with our low-band pad and our DRX solutions, Wi-Fi, all these other great things as we're at action between 700 meg and 3 gig, lot of hard stuff. But 5G is all incremental, so when we move to 5G, this is not going to be a granular move, this is going to be a step function move in smartphones to deliver that technology in a 5G spectrum.
And if you look at the chart, 3 gig in a PUF [ph] is 5G spec and this is new spectrum and it requires incremental technology hardware, it also requires the ability to be backward compatible to 4G and 3G for example. So you're going to have new technologies in your smartphone. Those technology are also going to have an incredible need for efficiency, to interact away with backward compatible, and there is going to be new applications and so we'll be empowered with 5G speed improvement, latency improvement and capacity improvement; so that's really the thesis there. And again, the important part is the 5G opportunity has not happened and it will be a big catalyst, it's also a corollary infrastructure opportunity, I will have a slide for that today but we're playing well in the infrastructure space as well, the other side of the trade within 5G, so it's important to note that and we've been waiting, and the market has been waiting but it will happen, this is a matter of when, not a matter of if.
And so what that means and why that's important to Skyworks is, if you look at this chart, this is the real chart about what content has looked like over successive generations of smartphones. And if you go back to 2G and 3G, we never really anticipated the demand that the network has today, the wireless network has today with streaming media, e-commerce, e-payment and just think about the companies that live and breathe on a wireless pipe [ph], we provide that technology to make it happen. If you look at 3G to 4G, a big incremental move in content and opportunity. And if you look at our revenue at that point, we moved from $2.3 billion to $3.3 billion in one year in that step once it happened. If you move to 5G you have all of our technology in 4G, it needs to be more efficient, needs to be tightened up, needs to be more compact and then you are levering up those new frequencies, new technologies in 5G as an overlike. So that's really exciting stuff and if you look back at what the market gave between the inflection in 2G to 3G and 3G to 4G, you can see that the opportunity for players like Skyworks is really strong, and so we are early now in getting ourselves positioned to make that 5G reality happen.
In some of the new usage cases that we haven't really developed yet, machine learning, new technologies and infrastructure that include millimeter wave which is another very advanced technology we have in-house, VR and AR, industrial IoT, very hardened technology and highly liability industrial IoT, nothing what we have to bring in 5G to that. And then of course, the autonomous vehicle that we've spoken about which could be incredible opportunity for semiconductors in general but in my perspective, what's most unique is the connectivity core that's required to have a fully autonomous vehicle.
And then just kind of quite shop through some of our financials; despite we're all market size today, I think in general, with the overall market in semi's has been even macro, a little bit bumpy but if you look at Skyworks, we've grown our business for 9 years successively, 9 successive years of top line growth, and if you go back to some of these points, you can see that 50 is kind of numbers where the inflections that we had from 3G to 4G; and we expect from here another inflection as we built to 5G. But along that goal we've been growing earnings by 27% CAGR, we've been growing our topline, we've been investing in technology, we've been diversifying our business in broad markets, and we'll continue to do that.
So our playing model is to be growing above the market growth rate and the market growth rate has moved around, certainly there has been some volatility of that. Our operating margins have been moving up, our gross margins have been moving up, and you can see what our goal is from a fundamental P&L view, and you've been through two or three cash flow with 30% target. Also note that, during the last year we returned over 100% of our free cash flow to shareholders with dividends and buybacks, we'll continue to do that.
And then here I just want to give you a longer look at what we're thinking about from a strategic perspective. So if you look at these charts, it's representing kind of the pools of opportunity where we play. Solely today, mobile is our biggest business, it has a growth rate that's probably in the 6% to 8% depending on where we go, when we get to 5G, that could likely move up. IoT in the middle has been a double-digit grower and this is a market where unlike mobile where the TAM is relatively well defined, we know who are customers are, the opportunities that continues to move, IoT has a TAM that continues to expand. Every year we see new applications join kind of the connectivity [indiscernible] and clearing opportunity for us, so we're really excited. And then further out to the right, you start to see the emerging opportunities that are not yet in a revenue stream; 5G, AI, machine learning, all of these things that will require high speed low latency connectivity, highly reliable connectivity to make those markets work. So that's what we're thinking about beyond 2018-2019.
And then just to wrap it up again, just remember, we're executing across these memo [indiscernible] highly advanced technology that differentiates ourselves from our peers and we're building lot of that in-house leveraging performance to not just increase content but to expand the reach to create categories, focusing on financial returns and really positioning ourselves extremely to capitalize on the impending 5G upgrade cycle.
That's all of our prepared remarks.
To move on, you said in your slide that 17% CAGR, I think it was longer realized and you had very impacted results. I think when people look at the way this year ended, kind of looks like 16%; your largest customer at Android are probably flat-to-down. I think as you look into next year, you're not clearly -- I want get into the 5G as a catalyst, then I think you -- maybe that's more to 2020 storyline? With respective on the market, I think [indiscernible] said it's a 10% CAGR, I think you said single-digit for mobile. What is that right number on our longer horizon next three years for growth in the mobile 10?
Liam K. Griffin
That's a great question and I would say that, it ever suits the combination of units and then the content within those units. But the way I look at it from our perspective is, our job is to maximize the opportunity in front of us, and for that it's extending the reach, bringing great technology to our customers, creating new technologies, DRX is an example of a category that we created really with the benefit of having insight with customer architectures, the prime wins [ph] that our customers were facing and then getting into our labs and spinning that into a product. I said the growth rate is really a combination of the units, obviously and then the content reach that we can put for. Today, the mobile market on the unit basis has been a little bit softer than we expected, we've continued to move our content opportunity up, not just with the largest customers but also through some of the players in Asia.
Going forward, I do think we can resume to a 10% CAGR overtime, leverage 5G with it's significant step function, but I also think that -- you know, that's the TAM; but our opportunity could be higher because I think as we move into 5G, the complexity, the IP, the challenges, and the need to actually construct these devices, you can't -- these are not foundry like devices, to construct that it's going to really differentiate aroundst a few players; so we think the opportunity for us to outperform in 5G is very high and that could take the rollout even higher.
Maybe I'll add to that; you've seen the couple of announcements caught on how the event NOI is talked about, you know, those are some really early stage 5G phones that you will see next year. What's that real inflection point? Is it setting up in 2020 or when do you see 5G is really contributing?
Liam K. Griffin
Yes, absolutely. So we certainly have customers that are laying out platforms and prototypes that will include 5G like devices and technology in; as you noted, it's all about web frequency in it, we getting above that 3 gig, where you're putting your product, what carriers are going to support it. So in my view of it, you may have somebody very early to put a flag out there and say we've got 5G in a prototype device but real market-ready technology is more of a mid-2020 event in my opinion.
And then, I think -- we're not going to unclear the story as your lack of [indiscernible] technology and we'll get into that, you have a plan.
But as you look at 5G, and you're adding that 3 gigahertz to 6 gigahertz range, is that going to be an area -- you do think high frequency must be bar, we're waiting for that opportunity, not additional frequency.
Liam K. Griffin
So first of all, just to get, make it kind of little less on where the technology is, low is low and high is high but doesn't high is extraordinary and low is bad, okay. So for example, we have a low band pat [ph] that is one of the most complex challenging devices that could be made, and they have 10 duplexers and a very compact form factor with lots of unique technology in the most crowded space and that's all on FDD, frequency division duplexing, very tough. When you get to 5G, the filtering opportunities change; much of the 5G spectrum is in TVD, which is time division duplexing, which is basically transmit pause received, you're like this; FDD are on the same frequency, fill it harder. So the filtering requirements for those are different, the spacing of the bands are also wider; so due to some technical changes in the way 5G architecture is looking to ploy it actually is favorable to technology that are not necessarily built acoustic wave, you can leverage some of the acoustic technology.
At the same time, we are advancing our filter technology in-house; we have best-in-class key SAW capability, we certainly have SAW capability, but we have been working on those, we talked about on last earnings call. So we're looking forward to getting into that game in a real way, we've got technology right now that we're developing, we're sampling, that we're getting great feedback from customers; so more to follow on that but we'll be right.
In the buyer landscape you had two major suppliers and they've drawn cross license IP and they talked a lot it being this big [indiscernible], you are thoroughly well and I'm sure you know where their position is from IP perspective; so you haven't -- you talked a little bit about your buyer product, I'm sure you'll talk one of the -- after more of those deal from IP perspective and manufacturability to another challenge through bar [ph], I mean what's your confidence level that you can actually be acquired?
Liam K. Griffin
Well, absolute -- 100% I'm confident, we've already gotten great feedback from companies that matter. Clearly, we know how to navigate the IP, I mean one of the reasons why we didn't want to come out with a product that wasn't ready was -- again, we know we have great competition. So in my opinion, being ready means you're able to compete with the best-in-class and some great companies out there right now that we compete with, and be able to do it the way we do it. And there is a different here because if you think about Skyworks and the way we deliver our product; we never sold filters, we don't sell our TC SAW filter to anybody, it's all embedded in modules, there is no working market for it. The same approach will be used with PUF [ph] technology, we will sell an integrated system solution that will include bulk acoustic wave technology, probably some gallium-arsenide, maybe some SOI, and some other things that we craft to deliver. So our intent isn't to come up and be a me-too to the Top 2 players today, it's to do it differently in a way that our customers choose and be able to configure it for each customer; so that's a key element.
Maybe what I feel like, it wouldn't be our effort to have competitive concerns and I think if you look over the last -- at least 3 to 5 years, but actually it hasn't been as bad, post the 3G world, 4G actually -- the share has been a lot more stable and we duly give you credit for it. I think here we're looking at 5G and you've seen a lot of press releases from the Qualcomm, I think they are in one 4G phone, and I think people feel like it's going to get competitive again. You mentioned the capabilities, the module technology as such; I mean when you look at 5G in terms of the competitive mode, you think it's actually even harder for excessive landscape [ph] to be in there and what do you make of all those fresh looks about basement, flyers filling our house and what are you looking to?
Liam K. Griffin
Yes, there is a lot there. So I would say the complexity goes way up. And the companies that have the broadest set of building blocks of any ability of the assets, the factories to actually construct that in a way that makes sense for the customers because this is what -- I'll tell you what, 5G is not, it's not quickie turner [ph], this is not via tech reference designs or this is not what it is, this is very complex, customer-by-customer, carrier-by-carrier; are we putting in millimeter wave, are we doing -- it is a lot of nuance to it. Our ability to capture all of that and come back with interesting solution is going to differentiate, it's always going to be competition. But I think 5G is going to narrow the field to a great degree and I think again, having control and crafting these assets, if you think about -- but one of the challenges is the manufacturing, we mentioned that; very, very complex vertical structure unlike sort of acoustic wave, really difficult. And hats off to those that have been leading that market but we understand it and we know what to do with that technology and how to wrap it around the engines that we have in SkyFive to make it very easy for our customers to digest and put it in our applications.
I do want to ask you that you were -- or part of it is like one of the best operators in health market; you were one of the first to kind of signal, hey, premium my phone cycle, we're seeing the start [indiscernible] actually signaled and have the little guidance than you've seen lot of your competitors seen kind of revised guidance later. You've seen this where you're right ahead of it, what's your confidence that the -- I would say just the whole handset supply chain because their journey hasn't been great either, I think it just started earlier but in terms of the gestation [ph] period here and how clean is going to be the supply chain as we get into next year?
Liam K. Griffin
I think from a macro perspective, I think it's a case where clearly we've seen a little bit of softening coming into the December quarter and typically the seasonality there, the large Tier-1s do very, very well in the December holiday period and then kind of get a better view, China and APAC in the month quarter, that's been a typical signature. Now we know that this current quarter has not been a great quarter for semiconductors even, you could take companies that really big players have no mobile, better down and correlated with companies that are 50% to 60%; so I think it's gone beyond that. But we still have confidence that there is catalyst for improvement and recovery, we feel good about what we've guided, we've put a lot of fight [ph] in that and you're right, we're a company that really takes our numbers down and we've looked at that, we've looked at the inputs from our supply chain and we're going to get through that the right way. Our inventories are really low, I will tell you that if you look at what we have in our supply chain and what we're feeding to our customers, there is a real good kind of real-time delivery spot there; so we feel better about it, we've had downturns before. While I think we were a little bit late to call, I don't feel that way this time.
We only have a few more minutes, I didn't want to lose talk the whole time about mobile and I wanted to ask some broad-based side; you mentioned all these different technologies; as you look to next year, is any particular area you also added in that now? So I kind of seeing where are you most helpful for next year regarding those things?
Liam K. Griffin
Yes, I think the automotive opportunities are really starting to move now and that's a place that you really wouldn't see Skyworks in 3 or 4 years ago and part of it is that the connectivity needs are so important and classical automotive players were not involved in the RF space; so it's opening up the door for us and we're doing a great job with that. Also some upsides and things like 802.11ax, we have an incredible Wi-Fi portfolio that's going through an upgrade cycle, a lot of the connected home applications that we have, companies like Nest [ph] are upgrading and we're seeing really rich content there, some of the streaming applications; and then if you move into infrastructure, 5G is another catalyst that we put in our broad market category, has an mobile ailment [ph] but it's on a whole different curve in terms of margins and scale.
With that, we're out of time. Thank you very much.
Liam K. Griffin
Okay, great. Thank you.
End of Q&A