Skyworks Solutions, Inc. (NASDAQ:SWKS) Q1 2024 Earnings Call Transcript

Skyworks Solutions, Inc. (NASDAQ:SWKS) Q1 2024 Earnings Call Transcript January 30, 2024

Skyworks Solutions, Inc. beats earnings expectations. Reported EPS is $1.97, expectations were $1.95. Skyworks Solutions, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to Skyworks Solutions First Quarter Fiscal Year 2024 Earnings Call. This call is being recorded. At this time, I will turn the call over to Raji Gill, Vice President, Investor Relations for Skyworks. Mr. Gill, please go ahead.

Raji Gill: Thank you, operator. Good afternoon, everyone, and welcome to Skyworks’ first fiscal quarter 2024 conference call. With me today is Liam Griffin, our Chairman, Chief Executive Officer, and President; and Kris Sennesael, Chief Financial Officer for Skyworks. This call is being broadcast live over the web and can be accessed from the Investor Relation section of the company website at skyworksinc.com. In addition, the company’s prepared remarks will be made available on our website promptly after the conclusion during the call. Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking statements.

Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, the results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I’ll turn the call to Liam.

Liam Griffin: Thanks, Raji, and welcome everyone. Skyworks continued to execute well during the first fiscal quarter of 2024 despite a volatile macroeconomic environment. We delivered revenue of $1.202 billion. We posted earnings per share of a $1.97, and generated $775 million of operating cash flow. Free cash flow was also a record at $753 million or a 63% free cash flow margin, which reflects strong working capital management and moderating CapEx intensity. Let’s review both near and long-term secular trends in our end markets. After two challenging years across Android ecosystems, we see signs that the industry is stabilizing. Excess supply conditions are abating and inventory levels in the distribution channel and at the OEM level are normalizing.

Customers are starting to restock inventory, albeit gradually as supply and demand dynamics improve and new phones are introduced into the market. Moreover, we’ve made strategic investments in product development, positioning us to compete for design wins and share gains focusing on highly integrated platforms for the leading mobile OEMs. We are pleased with our competitive positioning and technology roadmap and are poised to return to growth when the markets recover. Within broad markets, we see crosscurrents, but many factors are moving in the right direction. In consumer IoT, we believe that we are past the bottom, as inventory levels in the channel have normalized and demand signals are improving. Furthermore, we are executing on the upgrade cycle to WiFi 6E and 7.

We see significant design win momentum across our retail, carrier, and enterprise channels. These systems carry substantially higher dollar content, because of the addition of the new 6 gigahertz band and the inclusion of BAW filtering technology. We expect wireless infrastructure and traditional data center will remain a headwind throughout 2024, as OEMs continue to digest excess inventory. Despite this, we remain bullish on several new product cycles, including major design wins in ethernet for high bandwidth networks and 400-gig and 800-gig optical module upgrades. Lastly, automotive and industrial markets are experiencing a near-term inventory correction. However, we see opportunities for growth in our automotive business driven by higher adoption rates of connectivity in the vehicle, along with growing EV penetration, driving demand for our power isolation products.

Taken together, we anticipate December quarter represents the bottom in the broad markets business. There are several long-term secular growth dynamics that leverage our differentiated technology, including the proliferation of intelligent edge connected IoT devices, automotive, electrification and advanced safety systems, and AI enabled workloads, driving cloud and data center upgrades. Each of these trends require intricate connectivity engines underlying the need for speed, ultra reliable low latency performance. In addition, 5G technology is expanding beyond the smartphone into more use cases in broad markets, including private cellular networks in factories and stadiums, customer premise equipment supporting Verizon and T-Mobile and multi-band, automotive, telematics, and wearables to name a few.

We also remain bullish on the long-term RF content story in smartphones, coupled with growing 5G penetration, we see increasing levels of complexity and content with each new generation. For example, 5G Advanced is driving higher RF content, including the addition of satellite bands 4×4 MIMO on the downlink and uplink, higher bandwidth, more carrier aggregation, upgrades to WiFi and GPS and other innovations. Lastly, we are energized about the prospect of generative AI migrating to the smartphone, sparking a potential major upgrade cycle, as the performance bar rises every year to support AI enabled phones, the complexity requirements of RF will continue to increase driving the need for more integration, lower power consumption, smaller footprint, and spectral efficiency.

5G is the ideal standard for on-device AI applications as it takes advantage of lower latency, faster transmission speeds and higher frequency ranges. In addition, AI enabled workloads are driving demand for high speed connectivity for data intensive infrastructure and cloud upgrades, accelerating the demand for our high precision timing products. Turning to our quarterly business highlights, we secured several design wins in infrastructure, including optical transport products with a major operator in India, and timing devices for 5G small cells for private networks. We expanded the WiFi design pipeline with Cisco’s enterprise access points, Linksys tri-band mesh router, and TP-link’s tri-band gaming router. We increased design win momentum in automotive, including telematics, infotainment systems, and onboard chargers across the leading OEMs. Lastly, in emerging IoT, we delivered next-generation smart energy solutions with Google’s Nest temperature sensors and introns residential gas meters.

In summary, Skyworks delivered solid financial results despite a challenging macro environment. Our strong balance sheet, record cash flow and profitability reflect our resilient business model, diverse customer base, and technology scale. With that, I will turn the call over to Kris for discussion of last quarter’s performance and our outlook for Q2 of fiscal 2024.

Kris Sennesael : Thanks, Liam. Skyworks’ revenue for the first fiscal quarter of 2024 was $1.202 billion, slightly above the midpoint of our outlook. Mobile was approximately 71% of total revenue, an increase of 7% sequentially, as we supported the ramp of new high-performance solutions at our largest customer. Android-related revenue with Google, Samsung and the Chinese OEMs grew modestly sequentially. Broad markets were approximately 29% of total revenue, down 18% sequentially, mostly driven by some specific inventory corrections in wireless infrastructure, automotive and industrial. Gross profit was $557 million, with gross margin at 46.4%, in line with expectations. Gross margin was down 70 basis points sequentially, driven by an unfavorable mix shift, resulting from lower broad markets revenue.

Also, during Q1, we reduced our internal inventory by $193 million to $927 million, well below our target of $1 billion. Operating expenses were $191 million, below the low end of the guidance range, given our ongoing focus on managing discretionary expenses, while continuing to invest in our technology and product roadmaps. We generated $366 million of operating income, translating into an operating margin of 30.4%. We incurred $7 million of other expense, and our effective tax rate was 11.7%, driving net income of $317 million and diluted earnings per share of $1.97, which is $0.02 above the guidance that we provided during the last earnings call. Skyworks’ business model continues to generate very strong cash flow. First fiscal quarter cash flow from operations increased to an all-time record of $775 million.

Capital expenditures were reduced to $22 million or less than 2% of revenue, resulting in an all-time record free cash flow of $753 million or 63% free cash flow margin. Strong profitability, combined with great working capital management and lowering the CapEx intensity of the business, drove the record cash flow numbers. Also, during fiscal Q1, we paid $109 million in dividends, and repaid the remaining $300 million on our term loan. We ended the quarter with over $1 billion in cash and investments, and $1 billion in debt, creating a net positive cash position, and an optimal capital structure, providing us with superior flexibility and optionality. Now, let’s move on to our outlook for Q2 of fiscal 2024. We anticipate revenue between $1.020 billion to $1.070 billion.

We expect our mobile business to be seasonally down, consistent with historical patterns, while in broad markets, we anticipate modest growth off the December bottom, as inventory levels are normalizing in certain end markets. Gross margin is projected to be in the range of 45% to 46%, reflecting our seasonally weakest period of the year. We anticipate margin expansion during the remainder of 2024, benefiting from our disciplined management of our manufacturing and operational cost structure, both internal and external, along with higher factory utilization rates. We will also benefit from a favorable mix shift as our broad markets business recovers and accelerates. We expect operating expenses in the range of $193 million to $197 million as we continue to make strategic investments in mobile and broad markets to drive share gains and increased diversification.

Below the line, we anticipate roughly $4 million in other expense and an effective tax rate of 11.5% and a diluted share count of approximately 161 million shares. Accordingly, at the midpoint of the revenue range of $1.045 billion, we intend to deliver diluted earnings per share of $1.52. Operator, let’s open the line for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question coming from the line of Matt Ramsey with TD Cowen.

Matt Ramsay: Liam, I wanted to ask a bit about the broad markets trends and it’s obviously as the name implies, a diverse business. I was pleasantly, but I was a little bit surprised at the commentary that you had visibility for that business to be up so quickly, I guess, in March, it’s been an inventory correction that’s lasted a bit longer. And some of your peers and in other companies, and we’ve seen industrial maybe get a little bit worse. So I mean, if you could maybe expand — I know you did some in the prepared script, but if you could expand a little bit on maybe some of the individual end market trends you’re seeing in broad markets. And maybe what the pace of this potential recovery starting from March and through the rest of the year could look like coming off the bottom?

Liam Griffin : Sure. Sure. Absolutely. One of the interesting things here with our broad markets business is that there’s so many opportunities that we haven’t yet scaled. So if we look at the business unlike some of the other mobile markets that are well defined and there’s still great opportunities. We look at the broad markets as more of an open-ended play for us. We’re leveraging the technologies that we know how to work with. We have a great set of customers and that continues to grow and expand. But yes, I mean, the team has done a really good job. This has been a tough year across the landscape across semis. We’re happy to deliver some positive results here today, and we do think there’s a turn. Again, in that portfolio, it’s very diverse.

And mobile is a part of it, but the lion’s share is really diversified products. With some really great names as well. And most of those broad market companies, we have low share. There’s still a tremendous amount of room to grow within those accounts. So I think those are some of the themes. We’ve been working on this for quite a while. And finally putting up some meaningful top line, leveraging that broad markets business. The other thing, we continue to remind our customers and even the investors, a lot of the stuff we do in-house. So we’re able to craft and curate specialty products. We have our own fabs. We do things a little bit differently, and I think that helps our outcome.

Matt Ramsay: Got it. I guess, as my follow-up, and this is going to be a thematic that we talk about in the PC market maybe this year and then into next year in the smartphone market, as you alluded to, sort of AI making its way into these products and potentially catalyzing a bit of an upgrade cycle. So I guess my question is, I mean, it’s pretty straightforward for us to envision if you get air interface upgrades from 4G to 5G to what comes next, that can expand the RF TAM pretty meaningfully for your smartphone business. Are you anticipating the growth potential from AI and smartphones to be primarily a unit driver for the market and therefore, for your company? Or are there things that you guys can do in AI-enabled phones that could meaningfully change the content? Or are we sort of waiting for the next air interface before the content could possibly inflect for the TAM again?

Liam Griffin : Yes, I think it’s a secular opportunity. This is a really unique period for us and in the industry. The way we look at it, you look at AI and a lot of that is really intense servers data center, and that’s extremely important. Then you take it down kind of to the middle ground and then you’re kind of in a different position. But getting that to mobile is going to be a challenge. It’s going to be a challenge, but it will happen. The consumer wants that. The consumer wants to have that compute power in their hand. And it’s not there yet, but we really believe that it will come. And I think it’s going to set up the industry for a whole range of new opportunities still carrying radio frequency. So really excited about it.

And again, we have the building blocks and the know-how to do really interesting things and do it account by account as well. Not everybody wants the same solution. But we really do believe that heavy compute power has got to get matched up with something in your hand. That handheld device has got to step up. It’s got to grow, it’s going to be more — it’s going to need to be faster, lower latency. And that’s all good because those are problems that we can solve.

Operator: And our next question coming from the line of Chris Caso with Wolfe Research.

Chris Caso: First question is about the Android market right now. It sounds like that market has finally grown for you after several quarters of inventory correction. Can you speak to what your expectations are for that as you go through the year? I suppose at this point, the inventory correction is behind us. What’s your level of optimism of getting back to more normal growth rates in that part of the business?

Liam Griffin : Yes, Chris. Yes, you’re right. It’s been a little bit bumpy through the ecosystem here, but we see green shoots here popping up and Android. We know how to make these products. I think there was a little bit of a soft spot there in the industry. The newer phones are coming up with a little bit more technology. We like that. And we can broaden that base. So we are going to — in the prepared remarks, we commented on that, and you should expect more growth in the Android ecosystem as we go forward. These are products that we can execute to in the pipeline right now and give us continuing strength getting in — going through ’24 and ’25.

Chris Caso: Okay. As a follow-up on gross margins, if you speak to your expectations as we proceed through the year. One thing you mentioned is it sounds like you’re internal inventory was below target. Should we read that to mean utilization starts going higher? And what the effect on that will be on gross margins as we go through the year.

Kris Sennesael: Yes, Chris. So I’m really — when you look at gross margins, right, we did 46.4% in Q1. We’re still impacted there by underutilization, a little bit of a headwind from a mix point of view as well, that continues somewhat in the March quarter that we guided. But then when I look beyond the March quarter, we will see some really nice gross margin uplift in the remainder of the fiscal and the calendar year. Part of that is higher utilization because we will no longer have to focus on a reduction of inventory. That is behind us. We reduced the inventory by almost $200 million in the December quarter. There is maybe still a little bit of opportunity there, but we feel good about the inventory levels where they are right now.

In addition to that, our broad markets business is going to grow faster than the mobile business. And so that gives us a little bit of mix tailwind as well. And then in addition to that, we will really benefit from all the cost reductions that we’ve done over the last 12 months. We really focused on taking out structural parts of the cost structure. We focused on operational efficiencies, driving yield improvements and test time reductions. And in addition to internal cost, we also start seeing some benefit from external cost. And so when you put it all together, we will see some nice gradual gross margin improvement after the March quarter.