Skyworks Solutions: Cloudy Skies Continue, But Tailwinds Might Be Coming

Summary

• Strong Android tailwinds might drive Skyworks' revenue higher during 2023.
• The company is generating hoards of cash even setting a record in the December quarter.
• Future undisclosed ASP growth opportunities seem to exist, but we aren't sure exactly from where or when.

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Skyworks Solutions (NASDAQ:SWKS) finds itself caught in macro-purgatory, similar to many other companies tied heavy into consumer markets. Adding meaning to Skyworks' future becomes even more difficult with its deep relationship with Apple (AAPL). With Apple, key suppliers are not allowed to speak about developments until Apple formally releases the product. Strong macro-winds vigorously blow making assessments even more difficult. We hope to cut through the windy effects and provide meaningful updates for the next few quarters. Skyworks, along with other companies with significant dependence on Apple, are more than worth following. If you wear hats, strap them on; bring an umbrella with forecasts of rain and head out.

The Quarter

Perhaps the best means to begin is simply with this quote from Liam Griffin, CEO, at the call:

Looking at Q1 in more detail. We delivered revenue of $1.329 billion, drove gross margin of 51.5% and operating margin of 37%. We posted earnings per share of $2.59 and we generated $773 million of operating cash flow, a quarterly record for Skyworks.

This short distinct quote summarizes nicely the company's performance especially, when investors consider that the $1.329 billion in revenues isn't a record, not even close to the record $1.5 billion revenue generated in last year's December quarter. Clearly, management managed its costs and business during a softer period.

A bullet summary for important results follows:

• Revenue of $1.33 billion with $2.60 in earnings.
• Record cash from operations of $709 million.
• Gross margins of 51.5%.
• Tax rate of 12.5%.
• Mobile revenue only comprised 65% of the total. (Android weakness continues.)
• Apple represented approximately 68%.
• Broad market revenue made up 35% with strong contribution "from automotive, infrastructure, industrial and the global shift to WiFi 6E and 7."
• Another record, unspecified amount, for automotive revenue.
• Repurchased $166 million in stock.
• Guided March at $1.125 - $1.175 billion and $2.00 earnings.

Continuing with product and. marketing developments:

• Assisted in launching AT&T's (T) first WiFi 6 gateway.
• New products with Cisco (CSCO).
• Unveiled WiFi-7 networking.
• Supporting 6 gigahertz fixed wireless access points.
• Delivered technology for 5G massive MIMO deployments.
• BAW filters getting really close to a $2 billion annualized run rate.

Additional comments from the call include elevated inventories at $1.27 billion vs. $0.83 billion in December of 2021 exist, but management expects new design wins to chop that excess back to normal in the back half of the year. The record cash flow was a result of three synergistic factors, 37% operating margin, strong collections and low CapEx.

A couple of interesting observations follow. The percentage of Apple revenue exceeded the Mobile revenue strongly indicating a fair amount of Apple revenue for Skyworks is broad market. Second, $400 + million in excess elevated inventories suggests that management is expecting significant year-over-year revenue increases in 2023, perhaps equaling $400 - $500 million.

Skyworks' Marketplace

Skyworks' management always seems to discuss the positive forecasts for its business niches. A summary of this for investors is included:

• Mobile network traffic expected to double in two years.
• Over 25 billion IoT devices installed by 2027.
• Electrification of autonomous vehicles with EVs projected to be 30% of the total. (In our view, this is both unrealistic and overstates grossly what actual results will be.)

Skyworks targets fast growing markets, but actual results almost always differ from forecasts. Sometimes, they are significantly lower.

The Environment

Last year, the business environment experienced high inventories levels within China, thus, exposure toward Android and China collapsed. Management continues to pound the table, we have very little exposure to China as we held inventory in tight control. But, going forward into 2023, Skyworks expects this circumstance to once again return to growth. We suspect that a significant part of the expected inventory drop will come from this positive change. Again, it might equal $400 - $500 million in revenue increases year-over-year.

Kris Sennesael, company CFO, answered a question from Blayne Curtis of Barclays, concerning broad markets. That sector experienced softness last year in general, but management opined that expectations were for significant growth in EVs. The overall growth might translate into mid-teens for 2023. Sennesael, also, opined, "And as we said as well, we see some really good traction in the upgrade to WiFi 6E, which is a big step-up in content as well as some early design wins that are being turned into revenue for WiFi 7."

Management offered little with respect to mobile business growth except that China/Samsung was, in their view, returning.

Summary

Skyworks, with its exposure in mobile devices, depends heavily upon consumer attitudes similar to other companies also heavily involved. We couldn't find hints for increased content in Apple during the second half of 2023. What we found was revenue increases are highly likely in Android, again and perhaps more than $400 million in size during the September and December quarters. This isn't small. Also, significant growth in its general market business should grow adding hundreds of millions of dollars.

It is also clear that although Skyworks isn't willing to openly share the size of the automotive results, it is growing, at least for now, fast. We caution investors about the reliance on EVs for growth. The future of this business is rich with structural challenges including: key sources of minerals used in batteries lie outside U.S. Jurisdiction; battery life, both charge life (number of miles between charges) and use life are challenged; cost of the vehicles (higher than most of us can swallow) and others. We don't expect EVs to achieve anything close to the projections. Yes, we could be wrong.

Management in other conferences has opined with enthusiasm ASP growth inside Apple and other smart phone brands. Thus far, we found little evidence that major changes with Apple is slated for this year. It could be that management can't. What is coming is a return to growth and a more normalcy inside Android. But, in all fairness, Skyworks never plays its hand openly, yet, growth happens. Earnings for just December and March are targeted at almost $5 per share. Again, the revenue of $2 billion a year for BAW filters is impressive, really impressive. Buying Skyworks on market weakness seems like the best and most valid approach. So, what is market weakness, $110, $100, $90? A level of technical support exists at $100. The 200 SMA is at $100 and strong support exist in the $90 - $100 range. It is a hard question to answer.

Risks

The Federal Reserve increased rates by a 0.25% again on the 22nd, stating inflation is slowing, but not yet by enough. This won't bode well for businesses and consumers going forward. This represents one risk. It is also rumored that Qorvo won key sockets from Skyworks in new Samsung phones. The size of the wins isn't small. This is another risk. On the flip side, what "Skyworks" attacks in its market approach are fast growing targets, build products that match specs and business appears. It's the build it and they will come approach. More important, the company is generating earnings and cash, something close to $10 a share yearly. Yet, in soft economic climates, we suspect that something near $100 - $110 will evidently come giving investors better entry values. Again, we might be wrong. Clearly, growth is coming in 2023 at least for returning Android business toward a level of normalcy. We aren't expecting unit growth with Apple going forward. Challenges for Apple have been, thus far, minimal. Investors might use a level of patience in this environment of spiking interest rates.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CRUS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.