Skyworks Solutions' Management Presents at Bank of America Merrill Lynch 2012 Global Technology Conference (Transcript)

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Skyworks Solutions, Inc. (NASDAQ:SWKS) Bank of America Merrill Lynch 2012 Global Technology Conference Call May 8, 2012 12:30 PM ET


Liam K. Griffin – Executive Vice President & General Manager of High Performance Analog


Vivek Arya – Bank of America Merrill Lynch

Vivek Arya – Bank of America Merrill Lynch

Good morning, everyone. We’re going to get started with this session. I’m Vivek Arya, Senior Semiconductor Analyst here at Bank of America Merrill Lynch. I’d like to welcome you to our morning track on semiconductors. And before I introduce our guest speaker, I just wanted to mention that we have a couple of things for you.

There is a model book in the back of the room that has all the P&L models, the detailed segment models if you would like to take a copy. And then we also have some in-depth industry reports on the RF semiconductor sector that we will talk about in a little more detail here and on the Intel’s Romley server and its impact on the tech ecosystem. And they’re out there along with the other industry reports.

So with that, it’s my great pleasure to introduce Skyworks. We have Liam Griffin, who is the Executive Vice President and General Manager of the High Performance Analog Division at Skyworks. And he’s joined by Steve Ferranti, Head of Investor Relations at Skyworks. And what we plan to do is Liam will go through some introductory material and slides and then we will jump into Q&A.

So with that, Liam?

Liam K. Griffin

Okay. Thank you, Vivek, and thank you all for joining me today. What I’ll do this morning is provide a brief update, Skyworks business and then really highlight some of the macro drivers that are fueling demand and kind of underpinning our outlook. And just to give you a preview here, there is three themes that we’re seeing right now in the space that we believe we can take advantage of, we have the catalyst to drive

One is share gains in our core RF TAM. We’re going to gain share in that business, and I’m going to show you how the actual TAM values expanding quite dramatically. Second we’re strategically expanding our portfolio to effectively increase our addressable content. So we are adding strategic new product lines that allow us to expand our footprint in some of our current applications and forward-looking applications.

And then third we’re identifying and penetrating new vertical markets. You’ve heard us talk about that before in our conference calls. I’ll give you some more color in the presentation today. But we really are truly looking at new market opportunities, identifying those, focusing on opportunities where we can leverage the margin strength, leverage our integration capabilities and move forward. So we’ll talk about each one of these in the presentation.

So, first of all, the mission at Skyworks, and again, this is something you’ve heard from our CEO, is our strategy is to capitalize on high-growth market opportunities, leverage our technology and scale advantages. We spend a great deal of investment in R&D. We’ve got a world-class team developing cutting-edge products. We’re also a vertically integrated manufacturer at Skyworks, so we can deliver lowest cost of goods in terms of production. And also generate superior financial returns, so we’ll give you some highlights on what we mean by that.

So the strategy in the markets that we penetrate here, there’s basically three specific areas. One is the mobile internet and there’s a tremendous amount of macro drivers here to support, demand and opportunity there. I’ll touch on that. Then we have a broad catalog components business that allows us to get into number of different markets with high margin products and then targeted verticals where we go into a market, let’s say cellular infrastructure, and we vertically drive deep to develop customized, highly integrated, margin rich solutions.

Markets like smart energy and there is some other new ones that we’ll talk about later in the presentation. So there’s really -- the strategy is a blend of mobile internet capitalizing on high demand and smartphones, tablets, moving the catalog components where we have a distribution and representative manufacturing play, and then looking at targeted verticals where there’s a great deal of margin, but we need to leverage, again, our core competency in integration.

And one of the things that all of this really means for us is that we are an enabler of the mobile broadband revolution, and we’ll talk about that through the presentation. But clearly there’s ubiquitous need now for wireless connectivity and many different forms. There is opportunity for consumers today to attach to the internet or attach through wireless LAN solution in many different forms and variations, and we’ll go through all of that.

Fortunately for us, we have a portfolio of products, as you see in the outside here, that can address these applications in integrated form, in discrete form and really focus on customer diverse needs. So some of the key business drivers that we talked about, number one, mobile internet. It really is today the place where you want to be, there is tremendous demand for connectivity everyday, real time, all the time. It’s a part of our daily life whether it’s social media, whether it’s a data, whether it’s a cloud computing. This is a major theme. And as much as we see it everywhere today, there’s a tremendous room for us to grow.

If you look at some stats here, mobile broadband connections, so in 2010 we’re about $0.5 billion mobile broadband connections. And from 2010 to 2014, that number is going to grow by about 5x. And remember that, in many parts of the world, the first entrée to the internet is through is a smartphone or through a tablet.

It’s not going home to a DSL or a cable network. So we’re seeing much of this growth from 2010 to 2014 has been in developed markets, but if you were to go out further, you’d see continued strength in emerging markets where, again, the smartphone could be your own entrée to the mobile internet, so really excited about that.

We’re also seeing a real move now where content in the cloud, in many cases, is really driving superior requirements and performance demands on the end device. So what people want to do today with their smartphone and their tablet is really access the internet in many different ways. In some cases it’s personal work, it’s pictures and media. In many cases, it’s corporate data or enterprise level cloud computing. So that’s a big theme. We think we’re at the early stages of that right now.

This slide gives you a little bit more color on what’s happening, but if you think about it, this is a market today, that I think is led by the consumer. The average consumer using a typical smartphone is operating with social media, looking at data, looking at music, and it’s more of a consumer play. The enterprise space is really set to explode. And when that happens, we think the requirements are going to become more stringent, the demand on our product will increase, and the opportunity for us to differentiate will further distance us from our competition.

So if you look at this, some of this is obvious to you the kind of technologies and the kind of content that customers are accessing, but if you look at it from a technical point of view and from a product perspective, if you think about cloud computing and the need to connect, there’s a high degree of demand and requirement on the connectivity itself, whether it’s a 3G or 4G connection, right. The connectivity is vital. You have your device. You want to connect to a high-speed application.

The second issue that’s really critical is the power efficiency. So when you think about our technology and our products, even in the RFPA space, there is a lot of discussion about efficiency and power consumption. With the advent of our recent acquisition of Advanced Analogic Technology, we bring an element of power efficiency to our portfolio. So this is a portfolio that focuses on power conversion, power regulation and power efficiency.

Coupling that with the products that we use to amplify power and amplify signals, you get a really compelling combination and you can see this when you’re looking at a cloud application, for example. And then again I mentioned this before, but wireless really is ubiquitous today. You can see wireless technologies deployed in a range of applications, and each one of these applications may use a different topology.

You could have short-range wireless technologies like ZigBee that are used in smart home and automation applications, higher power, more bandwidth-rich applications, like LTE or HSPA and then if you look at the wireless WAN space where you have traditional 802.11a, b, g and then 11n, that space has been doing quite well and in the back half of 2012 and into 2013 we see a significant move up with the new topology called 802.11ac, which is really gigabit speeds brought to the wireless LAN universe. That’s going to be a big driver.

And you can see the number of end applications that will be deployed here as a result of these different topologies, and we support every one of these. And I mentioned at the beginning the TAM. So we’re going to start with the available market in our core RF amplifier space and this is the majority share of our revenue today. So one of the things that we’re seeing and this is really important is that over the last few years the market has moved sharply from a feature phone, kind of low-end 2G space with the addressable content per phone within the dollar range, maybe less than $1 or $1.20 or $1.50. And you’d have a couple of amplifiers perhaps per phone.

And recall on this space, this is a voice only market. This is a market where you are really communicating with voice. There’s not a lot of cloud computing going on. You’re not sending high-definition pictures around. Basically, it’s a voice only market. That market today has become quite competitive. There are a number of players there. TAM’s come down a little bit and the number of sources in any given phone could be quite high. But what’s happened in the last few years is the advent of the smartphone. We’ve moved to an entry-level smartphone with the opportunity to be $3 or $4 per device with multiple bands. You could have a 2.1 Gig band-one WCDMA device, a 1,900 megahertz device, an Edge FEM with switch, maybe even LTE as you move forward.

Multiple devices, each one with its own unique opportunity and the TAM there goes to $3 to $4. This is just the RF space. Okay. There’s going to be other devices as well that we’ll talk about. And then if you move further, you get into the higher-end smartphones today, and these are the phones today that are really catching the eye of the consumer. These are the phones that are driving the market. These are the phones where you see customers lining up to buy the product. In such devices, we see a $1 TAM opportunity that’s approaching $10.

Now you’re bringing in multiple LTE devices, three or four WCDMA bands, again, an Edge FEM typically and in some cases you get into some additional components that we’ll show later, around antenna switch, GPS and WLAN.

But for this slide we’re really talking about our core market, RF cellular amplifier. And you could see how the TAM has moved. The other thing to remember is that the market is moving away from the low-end and towards the high end. Very few new subscribers are going out and buying a 2G phone, okay.

Everybody wants to move up and replace. Those that have not enjoyed Internet access and mobile broadband connectivity want to move to a smartphone where they can get that. So the pendulum is moving to the right here, to my right, and also the content, as I said is going up, but with content increase comes a great deal of complexity. So it’s a case where you’re getting more content, more opportunity, but a great deal of complexity in these devices.

When you get into a cell phone that has six or seven or eight bands the performance requirements and the scrutiny on delivering that power efficiently, making sure that you have isolation in the band that you want to control, make sure that you don’t have leakage in your noise. Make sure that the power efficiency is pristine. All of that comes into play and creates a premium opportunity for Skyworks as we move out along the complexity curve.

And so what that means is if you look at this from a TAM perspective and this is at TAM dollars. This isn’t just a unit TAM. This is the addressable dollars that we see in our space. You can see how smartphones represent the lion share. And the reason why is because, again, they represent the $8 to $10 opportunity per phone. The lower-end market, we’ve dramatically discounted in our outlook. We think that’s a great market to play in opportunistically, but it’s not a big driver for our business today.

And then as you start to look at 4G and LTE, there’s an acceleration in the outer years, and that will continue. And think back about content. With all that great content that’s out there, you’re going to need higher-speed devices to manage and fully capitalize and give the consumer the performance that they’re looking for. So it all works together.

There are media companies that are born just out of the wireless ecosystem, that their entire thesis is on delivering wireless information, whether it’s cloud, whether it’s data, whether it’s software. You’re going to need a device that can handle that speed. And when you move to enterprise, I think the value is going to go way up. The requirements, the security, the performance is going to go up. It will play to our strength. So that’s our core business right here.

In addition to that, beyond that core, we believe we’re going to be very successful in expanding our footprint. This is expanding it in applications we know well with customers we know very well. So here is kind of an illustrative example where you would typically see penetration in the RF front end, that’s our 15% TAM space. We’ll continue to grow there.

What you’re also going to see now as you look at tear downs of recent fall and you’re going to see the addition of wireless LAN content in a handset, 2.4 and 5 Gig WLAN phones provided by Skyworks. You are going to see those devices on the transmit side, and you’re going to see them on the LNA, which is a low-noise amplifier receive side. So that technology is going to see, we are seeing now a great deal of adoption and attachment to smartphones and our share in that space go up.

You’re also going to see new products like GPS, GPS LNA is developed by Skyworks in some of the newer models. GPS technology has been inherent in phones for a while, but now with all the different bands and signals going on in the phone, the requirement to have a very high-level GPS product with a low noise amplifier filtering out noise has gone up we addressed that.

Antenna switch modules, what an antenna switch model does is it really allows you to operate across these multiple bands and multiple modes. It switches across eight or 10 bands very quickly guaranteeing isolation and low loss and also guaranteeing minimum consumption of energy, that’s important.

And then you look at our power management business that we just acquired here in January, previously Advanced Analogic. That portfolio allows us to get into a whole new suite of opportunities in our core markets.

We can now address camera flash technology, LED backlighting. We can do buck-boost regulators that are really critical to manage power. You can take a 3-volt signal and boost it to 5. You can take a 5-volt and buck it to 3. These are all techniques now that we can deploy and opportunities that we can address inside of our core account base. That’s happening now. Very little of that is in our revenue stream today. It’s more of a back half of 2012 and much more of a 2013 to 2014 opportunity. But our customers like what we’re doing here. They’re very interested in working with a company that can handle more of the building blocks and try to develop these solutions in concert to optimize efficiency and design for our end users.

So if you look at that, we talked about the 15% core TAM, and I’m showing that here in the slide, but the addition of the opportunities that I mentioned here with WLAN, ASM, GPS and power management take what was about a $3.5 billion TAM and take it up over $6 billion, so significant opportunity.

The other interesting thing here and I think this is a great statement, is that our share in that upper end is actually low. These are relatively new areas for us. We’re gaining our ability to accelerate growth. It’s very high, but our base business there is still quite low. There’s plenty of blue sky for us to grow in those areas above with products that we have today and new products that will develop.

Okay, and the third element that I mentioned was expanding markets, expanding vertical markets and going after some new emerging opportunities. So here we have a portfolio of analog technologies that we called HPA, high-performance analog.

On the top, I’m illustrating markets that we’re in today, we call those our core markets within HPA. Places where we have good relationship. We have good technology. We’re already enjoying growth. One is the smart energy space. So we address smart energy by going after metering companies like Itron and Silver Spring. But we also have a suite of opportunities in home automation security with names like Honeywell for example. That’s a core market there.

Connectivity. Connectivity here means wireless LAN. 802.11n, 802.11ac is going be an incredible upside for the industry in WLAN. We have a great position with the leading chipset providers, Broadcom, for example and the opportunity in 11ac is substantial, it provides gigabit speeds to the user. It also uses a multiple in, multiple out technology, MIMO, which you have two or three or four data screens that duplicate and multiplies the opportunity for us.

And then wireless infrastructure. Wireless infrastructure is a very important space for us, this is an area that’s been a little bit soft over the last couple of quarters, and we think it’s going to pick up substantially in the back half and into 2013. Here we address companies like Huawei, Ericsson Alcatel-Lucent and Nokia-Siemens tends to be your highly customize opportunities there. So those were all the core portfolios today that are kind of in our numbers.

If you look below, these are opportunities in markets that we’re just starting to penetrate that look very attractive and give us an opportunity to continue to leverage integration, leverage customization and gain share from a low base.

Defense markets like automotive, where there’s a quite a few sensors, switching and even some connectivity opportunities there, medical opportunities. We have an optocoupler portfolio that we’ve been selling to the medical market and then also some industrial opportunities across a broad suite of customers and markets.

So quite a bit of diversification here. This portfolio as a whole has been growing quite well. If you look that our last quarter mix, our mix was about 65% mobile Internet and about 35% high performance analog and that’s been coming up. So this is, again, a very different set of opportunities and portfolios in the traditional RF space, but in its own right it is doing quite well. It’s growing and it’s coming off of a low share base.

And then again if you look at the size, this is just kind of a market view of those segments, you can see that there’s quite bit of opportunity in each one. And interestingly enough, the area that we just did our acquisition has probably the most substantial headroom power management. Where there is many, many places you can sell that product. You can sell it in a customized solution. You can sell it in a standalone portfolio as it is today. And I think you’re going to see some great partnership with other Skyworks products leveraging power management and also penetration into our existing accounts.

So the strategy back on the HPA side, there’s many different things that we do to win our business here, but we start with the strategic customer relationships. We’re a company at Skyworks where we really do touch all the major Tier-1 OEMs, in handsets, also in baseband. But we have a broad customer set here in automotive, in industrial, in infrastructure, broad markets and we have outstanding relationships in those spaces.

Our goal is to expand our footprint, so when we are working with an account, we’re thinking holistically, we’re thinking about the complete system in the solution in total and how we can offer as many products and integrated systems as possible to expand our footprint.

Fortunately, the portfolio that we have really is unmatched in our space. It is very, very broad. We got a great deal of R&D and FAE technology in place to kind of augment that. But we’ve done a nice job of maybe getting a design win with one or two parts and a couple of years later; we’ve expanded that footprint substantially and gotten into new areas.

And then also early engagement, we do have a catalogue business that allows us to kind of approach broad diverse markets through distribution in other channels, where we have a tremendous amount of inflow opportunity, inflow that we can follow-up on. So we are often able to catch these market trends early, address those with customers and then expand the footprint and gain share.

So that’s the HPA strategy, it’s a little different than RF where there is a fairly well-known set of players and we’re closely engaged in those areas. We have great relationships in sales and engineering. This is the case where you have to do a little bit more pioneering to identify your opportunities. You identify, you qualify, then you try to expand your portfolio and go deep on technology.

And then here again, this is more a statement on why WLAN is just kind of a subset at HPA. This is a business that’s growing very quickly, very rapidly. There has been a pretty substantial move in WLAN for high-power discrete FEMs, 2.4 and 5 Gig. There had been a market view a few years back that the amplifier space in WLAN was going to get kind of sucked into the chipsets. It’s actually moved the other way, again as data speeds are going up and what people want to do on these devices, on these notebooks, tablets and smartphones continues to increase.

And these are all the different types of products today that we can sell our wireless LAN devices into. So, it’s gaming, it’s LED TV, certainly it is tablets and smartphones. We have design wins in digital cameras. Number of different consumer applications, it’s a very diverse market. It’s a good market for us. As you may have known, we did an acquisition last June of SiGe Semiconductor that was a pure play WLAN company with great IP, great technology, great people.

We brought that into Skyworks. We had an organic business in WLAN and together we become the market leader in this space. This is a high-volume business, the TAM is really looking strong here as well in our customer relationships, OEM and chipset level are outstanding. So we’re looking forward to some real gains here.

And then as I alluded to earlier, the move to 802.11ac, the next click in WLAN is going to start here in the second half of 2012. We think by 2013 and 2014 that we’ll be the dominant topology for wireless LAN connectivity. It brings significant data rates to the user, it expands range, and you can see kind of a depiction of the type of things that you could see deployed with 11ac.

So you should expect access point design wins in the second half of 2012 and then you get into the client side 2013 and 2014. And if you kind of follow the thesis that I outlaid earlier about content and the demands, you could see how a technology like this is going to be readily adopted by consumers. It will be like the LTE once customers get a flavor for the speed, they are not going to be able to live without it and you’ll see more and more devices deployed. We got a really strong position in 11ac, we got a commanding lead here.

And then kind of just to sum up, how we win, why we win, and what it is about Skyworks that kind of drives our business. First of all, we put a high degree of focus on product leadership. We want to lead in products and technology. Operationally, we are an outstanding player. We believe we have the lowest cost structure in the industry. We do the lion’s share of business in-house. We have a first-class assembly and test facility in Mexico, a fab on the West Coast; a fab on the East Coast.

And it’s not just the building of the product. It’s the fact that we can architect our product for our sites, for our shops. We can customize on the fly. We can make quick changes in our design topology and approach, leveraging our fabs, making sure our engineers are on on-site to bring those products to fruition.

Global sales and support, we got a great organization when it comes to sales marketing, and quality in customer support. I think it goes without saying, if you look at the breadth of our portfolio across all the major tier ones and those who have followed our company since inception in 2002 have seen really nice progression in customer diversity.

We’re expanding that beyond handsets of course. We talked about what we are doing now in high performance analogs that’s just another suite of customer opportunities.

Portfolio breadth, portfolio breadth is important. It’s not just that you have a big bag of product. It’s the fact that you can take those products and architect unique solutions. Today when we meet with customers, the problems can be very different account-to-account. There is a great deal of complexity that our major accounts are addressing right now. These things that we call smartphones are like just many super computers in some cases, there is a lot going on.

And when you have a portfolio that brings you the RFPA, the switches, the power management, the WLAN technology we can think holistically again and really architect an ideal concept and iterate with our customer to refine that to a solution that wins. So the portfolio breadth, it means more than just selling a lot of different products to a lot of markets, it’s about integration as well.

And then core competencies and system design, that really speaks of the above both. Our knowledge in how a product really works in the system, our ability, we have labs in our facilities that can replicate real phone environments FTE testing so we can understand very early in design how a product is going to work in the hands of the user and that allows us to iterate and make changes. It’s very important, it saves our customers a great deal of work and then integration as I mentioned before.

So there is a number of things beyond the market growing the market looks really good, we believe in this market, we think it’s going to grow as I outlined, but these are the things that we’re going to do. This is what Skyworks is going to do to capitalize and differentiate. And then customer set here clearly today it’s not good enough to work with the OEM directly. You have to have partnerships with the baseband providers. We do that across the suite from the best-in-class at the high-end to some of the more lower-end players in 2G, but deep relationships across the board in this matrix.

And then we talked about integration. This is just kind of a pictorial of the kind of things that we do. We can go down to a very low level diode to discreet switch, move it up to an MMIC and then to the furthest the long here on the chart, you see a device that would be applicable in infrastructure where we can talk a VCL synthesizer a mixer, a high powered PA some switches and bring a solution to a Huawei or a ZTE that could be $6 to $7 of high margin. So a great deal of customization involved. These are all real-time examples of products that we have sold.

And then a quick few slides on financials. This takes you from 2009 to 2011 fiscal. You can see over that period we grew about 33% compounded, almost the doubling over the timeframe on top line and then an EPS performance that’s commensurate actually accelerating 65% compound growth on EPS over that period. Again, this is full year fiscal gross margin improvements, NOI improvements as well.

So we’re very disciplined about obviously our financials and our performance here. Cash generation has been very strong for us. You can see in 2009, $200 million 2011 $350 or so and then look at the cash position here 2009, 2010, and 2011. And what we’re showing in 2011 is what the cash generation was for the year and then some usages of that cash, so included in that bar you can see an acquisition line and also a share repurchase. So cash flow has been important. Today we got about $307 million, $310 million net cash in the books. We’re debt free and we’ve fully integrated the acquisitions that we made in the last year.

And then return on invested capital. You can see 2010 17%, 23% in 2011 and when you pin that against our weighted average cost of capital. You can see a significant delta. So we’re quite proud of this performance as much as we love the markets we’re in, we love the products that we’re in. We’re also very disciplined financially and want to make sure that we live up to our shareholders expectations and we outperform those expectations.

So just to wrap up, we’re gaining share on the right markets and those markets are growing. So we’re gaining share but we also see the markets actually expanding. Execution is important, that is something that’s really in the blood of Skyworks. It’s in our DNA. We really work hard at delivering, making these products work. Our engineering teams are first class, very intensive, always thinking about customers.

And then the superior returns and results really are kind of the summation of the – you address the right markets, you pick markets that are growing, you execute, you work with the right accounts and the operating performance and the discipline that we bring forth should show up in our final numbers.

Okay. That’s all I have for the prepared comments. Vivek, I’ll turn it over to you.

Question-and-Answer Session

Vivek Arya – Bank of America Merrill Lynch

So I’ll open it up, open it up to the audience for any questions. And before someone raises their hand, I’ll maybe start with a question. So, Liam, one thing about the RF space, I think people understand the growth opportunity in smartphones and tablets, mobile devices.

I think you give us a very good outline of the non-handset market, the high-performance analog market. But one thing we hear again and again from investors is that they’re concerned that of the commoditization element of the space. Potentially you have three or four large handset players.

You also have three or four RF vendors. So how do you look at that element of commoditization where these large players are exerting a lot of end wins on design, but then you do have competitors who may not have executed well -- as well as Skyworks, but who are at excess capacity. Do you see pricing playing an element in these negotiations?

Liam K. Griffin

Sure, actually what I’m seeing in the space and kind of is outlined in the presentation is the market is actually moving away from commoditization, and there’s been a premium of value placed on performance. Your ability to deliver to the higher end.

Now, there is a market, a 2G market that I would tell you it’s been kind of stagnant and again it’s a voice-only market with a product that’s kind of stayed the same for too long. In that space, low-end China, low-end 2G, there’ been more of a frenetic competitive play, and you can see some pricing dynamics that are worse than corporate average. That’s okay.

It’s a small part of our business, but what we are seeing and where the money is today in this industry, where the dollars are flowing and where the winners are winning, it’s in the higher end, and it’s where performance is really the driver. And we’re fortunate that the R&D investments that we’ve made over the last several years, the IP that we have in our Company, and some of the newer technologies that we brought forth allows us really to capitalize to a greater extent when the market gets more challenging.

Vivek Arya – Bank of America Merrill Lynch

Is there a way to think of what the annual industry sort of price decline has been over the last four or five years? And how do see than over the next few years? Do you see that -- these changing in any way, or is it going to be roughly the same base that we have seen over the last few years?

Liam K. Griffin

Yeah. Well, I look at it this way, if you look at price decline, you’ve got to think of kind of like same-store sales, right, or part-to-part. Part A, Year 1, Year 2. That might be 8% to 10% roughly. But what we are seeing is as we get new design wins and we refresh our portfolio, the next click, isn’t Part A, it’s Part AA.

Is it higher value engine. So the blended ASPs are going up. The blended ASPs are going up in the market, and they’re going up for us, if you think about content opportunity. Part-to-part you have some erosion, but the erosion for us has not been anything that’s beyond typical, beyond norm. But what has changed is that the ability to kind of ante up on the newer platforms, that’s been moving forward for us in the right direction.

Vivek Arya – Bank of America Merrill Lynch

Okay, I’ll continue with the questions. As I look at the top two players, the top two handset customers in this space, Apple and Samsung, I was struck to see the statistics that in Q1 they accounted for over 30% of smartphone units over 70% of smartphone sales volume, and I’m getting over 100% of smartphone profitability. So how do you look at that environment where you have two very large customers who will go through product transitions obviously that causes volatility, not just for you, right, for all the other vendors in the space? How do you view that in the context of running your business and smoothing out some of these issues?

Liam K. Griffin

Yes, certainly. Well, one of the things that we see today is that the consumer is putting again, as I said earlier, they’re putting a high degree of the buyer mindshare and the decision making on higher- performing products. Okay. Without getting into the details, the companies that you mentioned tend to play at the higher end of the market. They tend to put more complexity into the market with tremendous amount of application and content opportunities to the customer.

So I believe that the players that are kind of to the left of the top two that you mentioned are to the lower share. I think the entire market is going to start moving in that direction. We are – having said all of that, we’re quite diversified in our customer engagements. We have design teams and sales teams with all the major players in the handset OEM space. But another way to capitalize on that is to work with the baseband partners.

So if we’re able to partner up with the leading chipset providers and engage there, it really doesn’t matter to us. With those devices and reference designs end up from a physical hardware point of view, as long as we’ve cemented our architecture correctly with the baseband provider and allow the baseband provider to go and deliver that to multiple OEMs. That’s the way we play it.

But the real – I think the secret to the comment that you made that I take away and I think the audience should be recognizes that, the companies that are winning are winning for a reason. And if we step back and do a little analysis on who is winning and why it’s a statements that’s great. It’s a statement that says companies that are putting a lot of value in the connectivity, whether it’s WLAN, whether it’s cellular, companies are investing in the user experience, they’re winning. And it’s not a – this is not a market where lowest cost wins. This is a market where performance wins. It wins in the RF space and it wins in the minds of the customer.

Vivek Arya – Bank of America Merrill Lynch

And then there is a – yes please.

Unidentified Analyst

I was wondering if you can highlight some of the, in one of your slides you actually address other markets you’re targeting, like the medical and industrial. I was wondering if you could touch a little bit more on that, where you are now, where you planned to do and where you want to be in the next three to five years with those industries.

Liam K. Griffin

Great, great question. Yeah, we are really today those markets represent a small percentage of our overall portfolio, but we see a tremendous opportunity in markets like automotive. We’re involved in Collision and Avoidance System for example, with switching in diodes. We have optocouplers that are sold in the medical market today.

Industrial markets, we use a lot of technology to get involved in many, many markets, whether it’s military defense, heavy industry. But what we haven’t done is we haven’t done the work that we have in other markets where we step back and think vertically how do we go beyond selling a component or a few parts to developing a solution?

So our teams are working that today. Our marketing teams are working on it now. We think automotive is really unique now when you look at the hybrid move, the amount of semiconductor content and a car goes up a lot. That’s an opportunity that we could address. We’re thinking about it. We think we have the right kind of product. In many cases the power management portfolio that we brought in could be a very powerful way to engage. But that’s a great question, you should expect more from us there. We are already moving the dial, but we’re moving it from a low base, but we want to create some substances as well in those bases.

Unidentified Analyst


Liam K. Griffin

Yeah, it shouldn’t take that long. I mean, I would say within one to three years, we should be able to put up some substantial numbers there. If you look at markets like smart energy, few years back we didn’t have that business at all and it became within the HPA portfolio, pretty significant driver for us after doing some research, understanding how that market work, developing ISM Band products for the metering companies like Itron and then working on ZigBee topology for in-home and home automation.

And it was a case study where we did the homework, did the diligence on identifying a vertical, then penetrated the vertical and enjoyed the benefits. So we know how to do it, I think it’s a case where we’re just going to start moving some resources in that direction.

Unidentified Analyst

Yes, the key is it’s leveraging technology to be developed from handset applications, the mobile applications, typically with a customer who is already buying our product through catalogs purchase and then we engage with them and a field application engineer, and that’s how we did that sort of vertical knowledge if you will (inaudible)

Vivek Arya – Bank of America Merrill Lynch

May be I’ll ask just one last question. Liam, how would you compare the Wi-Fi transition? So we met Broadcom recently and they are very excited about the move to 802.11ac standards. If you look back and you saw the move from the ABG standards towards the end standard, how would you compare and contrast that move versus what we are seeing now, the move from to move from N to AC. Is there a difference?

Liam K. Griffin

Yeah, that’s a great question. This is I’m sure is the Broadcom team mentioned, this is a significant step up. This is more revolutionary than evolutionary. 11n content may be, for us, $2, $4, plus, $5, might be worth $1, combined $1.20. When you get to AC, you bring multiple in, multiple out. You bring higher modulation densities, 256 modulation versus 64 [QAM].

You bring a gigabit speed to wireless LAN, which has not been seen before and it will be there. So the value goes up a lot for us I mean, it is a 3x, in some cases, access point; it’s more like 4x TAM opportunity. It’s a big deal.

I also think that and as you probably discussed with Broadcom, this could create some entirely new applications. If you imagine having that kind of data rate in an environment that literally is mobile, what that could do for TV, what it could do for tablets. It’s a lot of great applications that could now ride on the back of that high-speed WLAN process. So we are extremely bullish. Fortunately we are very close with Broadcom on this. We’ve done the work with them on reference designs. We’re amazed by what we can do together there. So we’re really excited about it.

Vivek Arya – Bank of America Merrill Lynch

And do you expect this, the ramp to be a second-half 2012 opportunity or is it more 2013?

Liam K. Griffin

There will be initial ramp 2012, but that won’t be the big volume. The initial ramp will be more in the access-point side and the router side, trying to get that ecosystem to the customer. And then we you get into the outer years, 2013, 2014, you start to see the client side expand. So it should be substantial by that time.

Vivek Arya – Bank of America Merrill Lynch

Great. With that, I think we are almost out of time. Thank you very much Liam.

Liam K. Griffin

Okay. Thank you all. Appreciate everybody coming.

Vivek Arya – Bank of America Merrill Lynch

Thanks everyone.

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