Skyworks Solutions, Inc. (NASDAQ:SWKS) Q2 2023 Earnings Call Transcript May 8, 2023

Skyworks Solutions, Inc. reports earnings inline with expectations. Reported EPS is $2.02 EPS, expectations were $2.02.

Operator: Good afternoon, and welcome to the Skyworks Solutions Second Quarter Fiscal Year 2023 Earnings Call. This call is being recorded. At this time, I will turn the call over to Mitch Haws, Investor Relations for Skyworks. Mr. Haws, please go ahead.

Mitch Haws: Thank you, (ph). Good afternoon, everyone, and welcome to Skyworks’ second fiscal quarter 2023 conference call. With me today are Liam Griffin, our Chairman, Chief Executive Officer and President; and Kris Sennesael, our Chief Financial Officer. 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, Mitch, and welcome everyone. The Skyworks team executed well in a challenging market environment, delivering second quarter revenue above consensus estimates with solid profitability and strong cash flow generation. Looking at Q2 in more detail, we delivered revenue of $1.153 billion. We drove gross margin of 50%, and operating margin of 33.5%. We posted earnings per share of $2.02 and we generated $412 million of operating cash flow. In addition to the financial results, we expanded our design-win pipeline, reflecting our success in diversifying our customer base and product portfolio. Across mobile and IoT, we delivered Sky5 platforms for Samsung’s newly released smartphones, we launched WiFi 6E and WiFi 7 gateways for CommScope and ASUS, and we secured 5G content with a mobile computing leader.

Across infrastructure and industrial, we enable small-cell deployments with the Japanese telecommunications company. We provided enhanced Power-over-Ethernet functionality to Cisco for their enterprise networks. We shipped programmable timing solutions to the top U.S. satellite provider and leveraged our expanding industrial product suite with the leader in smart meter technology. In automotive, we continue to post year-over-year revenue growth, while capturing EV onboard charging content with a top European supplier, and ramping digital radio products with a leading Korean OEM. These engagements highlight the increasingly diverse and expansive nature of our business, supporting the broadest array of customers and applications in our history.

Several key market trends underscore the growth potential of advanced connectivity in the rapidly evolving EV industry. For example, WiFi continues to expand globally as the world’s most affordable method of connecting the unconnected. Cisco forecast that number of hotspots worldwide to reach 600 million this year. And as a market leader, Skyworks is uniquely positioned to benefit as deployments expand and the shift to WiFi 7 drives increasing complexity. In addition, the average U.S. household today has more than 10 wirelessly connected devices. Each of these devices requires fast connections, low latency and efficient battery life. All enabled by our integrated solutions. Further, the market for electric vehicles is expected to expand four-fold by 2027, leveraging our power isolation platforms, which are becoming a leading choice for global EV manufacturers.

Skyworks’ success in enabling these major technology transitions is underpinned by increasing demand for our leading-edge systems solutions, differentiated by performance, integration, and most importantly, customer value. Moving forward, Skyworks is strategically equipped to capitalize on the rapidly changing connectivity landscape with an expanding set of customer relationships built over more than two decades, global scale and world class manufacturing capabilities, a seasoned and talented workforce with a proven record of execution across multiple semiconductor cycles, and an efficient cash flow engine that funds innovation while providing consistent cash return. With that, I will turn the call over to Kris for a discussion of last quarter’s performance and our outlook for Q3.

Kris Sennesael: Thanks, Liam. Skyworks’ revenue for the second fiscal quarter of 2023 was $1.153 billion, exceeding consensus estimates. Mobile was approximately 60% of total revenue with year-over-year revenue growth at our largest customer, reflecting growth content gains across their product portfolio. This revenue growth was offset by weakness in demand from the Android ecosystem as it continues to destock inventory. Broad markets reached 40% of total revenue for the first time, with a strong contribution from the automotive, infrastructure and industrial markets. Gross profit was $577 million, resulting in a gross margin of 50%. Operating expenses of $190 million declined on a sequential and year-over-year basis, given our focus on managing discretionary expense.

We generated $386 million of operating income, translating into an operating margin of 33.5%. We incurred $13 million of other expense and our effective tax rate was 13.4%, driving net income of $323 million and diluted earnings per share of $2.02, in line with the guidance that we provided during the last earnings call. Now turning to cash flow. Skyworks’ business model continues to deliver very strong cash generation. Second fiscal quarter cash flow from operations was $412 million and capital expenditures were $45 million, resulting in a free cash flow of $366 million and cash flow margin of 32%. Through the first half of the fiscal year, we’ve generated record free cash flow of $1.1 billion and 43% free cash flow margin. Given our consistent level of profitability and lower CapEx spending, we expect free cash flow margin to remain well above our target of 30% for the fiscal year.

Also, during fiscal Q2, we paid $99 million in dividends, repurchase $9 million of Skyworks stock and repaid $200 million of our variable-rate term loans. In addition, we increased our cash and investment balance to almost $1.1 billion to provide sufficient liquidity to repay $500 million of bonds that will reach maturity during fiscal Q3. Now let’s move on to our outlook for Q3 of fiscal 2023. Taking into account the ongoing challenging macroeconomic environment and a slower than expected recovery and inventory destocking, especially in the Android ecosystem, we anticipate revenue for our third fiscal quarter between $1.50 billion and $1.90 billion. Gross margin is projected to be in the range of 47% to 48%, reflecting the cyclical impact of lower factory utilization, while we are reducing our internal inventory levels.

We expect operating expenses of approximately $183 million to $187 million, down sequentially and year-over-year as we are optimizing operating efficiencies. We will continue to make the necessary investments in technology and product development to further enhance our leadership position in mobile and drive diversification and growth in our broad markets business. Below the line, we anticipate roughly $13 million in other expense and an effective tax rate of 13.5% to 14%. We expect our diluted share count to be approximately 160 million shares, accordingly at the midpoint of the revenue range of $1.70 billion, we intend to deliver diluted earnings per share of $1.67. And with that, I’ll turn the call back over to Liam.

Liam Griffin: Thanks, Kris. Skyworks has delivered solid results through the first half of our fiscal year, demonstrating strong profitability and record free cash flow generation. With deep customer engagements, underpinned by decades of technology investments in scale, Skyworks is well-equipped to lead and continue to outperform. Moving forward, the Skyworks team remains focused on driving operational efficiency while leveraging leading-edge technologies to capture opportunities across a dynamic market for connectivity. That concludes our prepared remarks. Operator, please open the line for questions.

Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. One moment please for your first question. Your first question comes from Ambrish Srivastava with BMO. Please go ahead.

Ambrish Srivastava: Hi, thank you very much. Excuse me, Kris and Liam, you guys have spoiled us. I’ve to go back — I don’t know, eight, 10 years to see a four-handle on gross margin, and you have navigated through many quarters of sequential decline, even I’m going back 10 plus, 15, 20 and you have still been able to hold margins. So my first question is, what’s going on on the margin front? Is it pricing, is it something structurally different this time versus now going back to last eight, 10 years?

Kris Sennesael: Yes. Ambrish, well I will take that question of you. And so, first of all, Q2 we delivered 50% gross margin, which was within our guidance range. But we started already seeing some of the underutilization charges hitting our income statement in the second quarter. For Q3 — fiscal Q3, we guided 47% to 48% as we are experiencing 400 basis points to 500 basis points of underutilization charges, which are partially offset by ongoing cost reductions and operational efficiencies that we’re driving. And the reason for the underutilization charges is a slower than expected recovery in the Android smartphone markets. As they continue to work down inventory, their internal inventory in a somewhat soft-demand environment.

And initially, we were anticipating a stronger second half of the fiscal year and calendar year, but we do see some signs of recovery, although I would say later and slower than initially anticipated. As a result of that, we are adjusting our factory utilizations across all our factories, that’s resulting in those 400 basis points to 500 basis points of under-utilization charges. And I would like to note that, unfortunately, those underutilization charges are having a negative impact on the gross margin, but they do not have a negative impact on our cash flow. And we will continue to generate strong cash flow. And maybe last, we have been operating our business at a slightly elevated level of inventory, in anticipation of a stronger recovery in the back half.

Now that the recovery is going to be slower than expected, we are also going to adjust our internal inventory levels and right-size that. Again that doesn’t help our gross margin, but it will further bolster our strong cash generation.

Ambrish Srivastava: And my — just my follow-up is on the gross margin side — inventory you’re sitting at 185 days. And target level is 85, if I remember correctly, two years ago or three years ago, you had given that to us. So, if it has to come back to that level, then that headwind could sustain for more than a quarter, it could be a couple of quarters before inventory at least two, three quarters before it normalizes. Am I thinking about it the right way?

Kris Sennesael: Yeah. You think about it the right way. Well, first of all, inventory came slightly down already in Q2, but days were up on lower revenue. And so, days will always be elevated in our two slowest seasonal quarters and we’ll improve in our stronger seasonal quarters. But we will bring down inventory in absolute dollars as well as in days of inventory on a normalized level. And that of course will — as a result of that, the gross margin will be on or about the same level for multiple quarters. And then eventually, we’ll — as the business starts improving, margins will get back. And I’ll get back to your first question, right? So this is not a pricing issue or this is not a major cost issue. It is just a temporary underutilization issue.

Operator: Your next question comes from Blayne Curtis with Barclays. Please go ahead.

Blayne Curtis: Hey, guys. Thanks for taking my question. I had two. Maybe I wanted to ask, you highlighted the weakness in Android I think, some other customers have seen some inventory correction to their largest customers. So I was curious, what the percentage was in March and if you also have to work through some inventory at that customer?

Kris Sennesael: So the largest customer in March was approximately 64% of total revenue. And in terms of inventory, they manage their supply chain very well.

Blayne Curtis: Okay. And then a perspective on the guide on broad markets, just kind of curious, it was down a little bit in March, kind of how do you see that trending in June?

Liam Griffin: Yeah. Blayne, I mean, we definitely continue to diversify the broad markets portfolio. It continues to be very strategic for us. We’re capturing new design wins every month. Automotive has been strong, we’ve got a little bit more action going in WiFi 7 and also in some of the infrastructure market. So that business is looking really strong and also the contribution from the I&A portfolio continues to track well. So, still a lot of bright spots there. And the other side of the business, obviously, Kris mentioned, some of the unique headwinds in mobile, but there are also some really dynamic activities going on in the broad market space.

Operator: Your next question comes from Vivek Arya with Bank of America. Please go ahead.

Vivek Arya: Thanks for taking my question. I wanted to go back to where Skyworks is being the inventory issues. Because Liam and Chris, I remember you guys are very early and prudent to recognize the weakness in the China market last year. So, I thought you had already taken care of the Android issue. And any new issues what come with your largest customer. So I just wanted to reconfirm that the weakness you’re seeing right now is still Android and not at your largest customer?

Kris Sennesael: So, Vivek, that is correct. The weakness is at Android. And you are correct, we have proactively managed that as good as we can in terms of our component inventory in the channel. What we cannot control is the inventory level at the customer — at the phone level and that’s where the main culprit is and that we see our customers continue to destock in a soft demand environment.

Vivek Arya: Got it. And finally, a follow-up. The fact that you are reducing factory utilization ahead of what is typically your strongest seasonal quarter, should we also be toning down our expectations of mid-teens plus kind of sequential growth that you usually have in September, given all these macro factors?

Kris Sennesael: So we only guide one quarter at a time here. But sitting here today, we do expect some good sequential growth in September and December. As you know, our largest customer ramps up their new product launches. And as in the past, we will have some really good content in those phones that will ramp up in the back half of the calendar year.

Operator: Your next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: Yes, thank you. I guess, Kris, I wanted to just follow-up on some of the inventory discussions earlier. Obviously, June tends to be the seasonally weakest period of the year for you. But do you think you’re actually shipping in line with sell-through at this point ahead of this seasonal ramp that you normally see in the second half of the year?

Kris Sennesael: So not in the Android ecosystem, we are still shipping below consumption, because they still are burning through excess inventory at the phone level.

Karl Ackerman: Got it, got it, okay. And then I guess, just going back to the margin discussion. When would you anticipate underutilization charges to abate, and I guess as you address that question, are there any risks to inventory obsolescence, if you could just discuss that as well, that would be very helpful. Thank you.

Kris Sennesael: Right. So this is — as I’ve said before, this is a multiple-quarter event because it just takes time to — for those underutilization charges to actually hit the income statement right. It goes through inventory turns until it hits your income statement. But we are seeing the soft demand environment in Android, it’s improving, but slightly slower than expected. We are reducing inventory at the same time. And so, this is a multi-quarter event. In terms of excess and obsolete, we don’t see any major risk, we’ve managed pretty well through that.

Liam Griffin: Yes. And just to jump in here, this is Liam. Obviously, this is kind of a macro cycle that we’re going through. I mean every company has their own nuances here. But I would remind you, the cash returns are very, very solid. We paid our bills on CapEx. Free cash flow margins are going to be sustainable, 30%-plus. So there is a lot of positives around that. And we’ll get through the cycle. We’re very, very much focused on execution, and it has been a little tough from some of our customers and so working with them and getting the inputs that drive our business. But we continue to drive design win penetration in new markets, whether they’re in broad or even some of our mobile players and IoT players. So there is a lot of positives there.

And yes, we’re enduring a tough cycle, and I think we’re doing the right things here to ensure a better future as we go forward. But the business is still quite solid. Cash returns are robust. We’ve got customer engagements that continue to ramp, and we’re very confident on the outlook.

Operator: Next question comes from Gary Mobley with Wells Fargo. Please go ahead.

Gary Mobley: Hi, guys. Thanks for taking my question. I want to ask about your largest customer. In the first half of the fiscal year, you’ve managed to grow your business for them narrowly. So my question to you is based on the content gains that you may see in the next-generation platform from them and all other things considered, do you think you can grow your revenue with them for the full year or more importantly, second half this year versus last year?

Liam Griffin: Yes. Yes. I mean we can’t give you the specifics, but we absolutely aspire to drive a better position in the second half on continuing to cement new programs that we’ll get into 2023 and 2024.

Gary Mobley: Okay. And on OpEx management, you’re doing a good job with, I guess, tamping things down and if not decreasing your OpEx in this tough time. Is that — does that involve any, I guess, proactive measures on head count or might it in the future?

Kris Sennesael: Yes. So we have been doing that. And you know at Skyworks we have been doing that consistently in the past. We add head count when needed in support of our technology and product road maps. And when things are getting tougher, we adjust. And we’ve made some downward adjustments in that area as well, of course, making sure that we can continue to support our major customers, our major programs. And it’s really focusing on driving operational efficiencies and trying to trim down some discretionary spending. That’s what we focus on.

Operator: Your next question comes from Edward Snyder with Charter Equity Research. Please go ahead.

Edward Snyder: Thanks a lot. I’m a little confused, Liam. Maybe you could clear it up. Do you expect that (ph) to see content up or down or flat in the second half of this year?

Liam Griffin: Ed, I missed the first part, Ed. Can you give…

Edward Snyder: Sorry, I’m just — I’m not looking for revenue guidance at all because I just got all tangled up with macro and units and all that. I’m just looking at content in terms of new model releases year-over-year in the second half. Do you expect your content to be up? Or should we expect it to be flat or down?

Liam Griffin: Yes. I mean we expect it to be up. That’s our game plan. There is a lot of new technologies that emerge in the leaders, and we’re hanging around the hoop on every one of them. We’ve got our teams working with the best customers and fielding the best opportunity. So we’ll have to see how that plays out in the second half, but that’s definitely where we’re headed.

Edward Snyder: So in a fantasy world, the flat units year-over-year, no change at all? You would naturally expect to be higher in revenue to largest customer in the second half of the year?

Liam Griffin: That would be our plan, yes.

Edward Snyder: Perfect. Okay. And then on the Android, I know it’s still kind of a mess. But there are some architectural changes going on at some of the flagship phones, even the low-end phones that are involved. I don’t want to say integration, but more higher density modules that will show up probably in the next year or so. I know Skyworks has kind of avoided some of that competition in the past just because there was ASPs associated with it. But given that it kind of separates you from a lot of the domestic suppliers in China, is it like — is it reasonable to assume that Skyworks would participate more aggressively in the Android food chain, say, in 5G smartphone with their entry or flagship in the next two years?

Liam Griffin: Yes. Ed, I would say yes to that, because now as those models in Asia — and Android become more complex, that’s right up our alley, right? I mean so we — our aperture is more to the mid to the high end, and we want to lift those customers and help them create a better engine and a better solution. So we’re there. And there’s a lot of upside for us in that characteristic because we just — we’ve been a little bit more high-end play. But as the complexity gets more and more embedded, that creates more and more opportunities for us. It’s really — it’s hard to hit the hard pitch, right? We know how to do that, but we also got to take care of the other business as well. So we feel good about it. We definitely have the know-how to make it work, and I think it will be part of the recovery here as we get through the middle of the year.

Operator: Your next question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Harsh Kumar: Yes. Hi, guys. I was curious, Liam, if you could give us a sense of how much excess inventory of complete handsets is in the Chinese end market? In other words, I guess what I’m trying to understand is, I know you’re under-shipping, but curious how long or how many quarters it might take for sell in sellout?

Kris Sennesael: Right. Harsh, we don’t have a specific number on the number of excess inventory on the handset level. But it is a couple of quarters, right? And initially, we anticipated it to be a couple of quarters, but now it might be a couple of quarters more. And that’s what we — that’s the feedback we are getting from the customers. That’s the feedback that — and remarks that we see by our peers and competitors.

Harsh Kumar: That’s fair, guys. And then, for my follow-up, if I can ask you, if you could help us out with broadband. Do you think that broadband might be up in the June quarter on a sequential basis or a year-over-year basis? Any color would be great.

Kris Sennesael: Right. So our broad markets business will be slightly down on a sequential basis into the June quarter. Again, it’s — as Liam already talked about that, right, we see certain areas of strength in automotive, some of our industrial markets. But there is some inventory overhang in some of the more consumer enterprise-oriented markets, again, very similar to what has been mentioned by peers and competitors that play in this field.

Harsh Kumar: Fair enough, guys. Thank you.

Operator: Your next question comes from Ruben Roy with Stifel. Please go ahead.

Ruben Roy: Thanks you. Thanks for letting me as a question. Harsh asked the essence of my question, Liam. But I guess specifically on auto, was it up in the March quarter? And do you expect auto to continue to remain strong as you sort of characterized? And the reason I’m asking that is, obviously, there were some long lead times and that type of thing in auto components. I’m wondering how lead times look. Are they coming in and what the inventory assessment is in that market specifically as you think about the rest of the year? Thank you.

Liam Griffin: Yes. Sure. Great question. As you know, we actually hadn’t done much in automotive two, three years ago, and we’re now really making great progress. So the good news there, there’s a tremendous amount of new territory that we can cover in automotive. We’ve already won a number of platforms and programs with key OEMs, EV players, et cetera. The partnership with our I&A business has been a real catalyst there as well for us. So it’s a fast-growing part of our portfolio. It has tremendous upside. We have low share relative to the pie. And that’s going to make for pretty dynamic opportunities as we go forward. And it’s definitely a grower for us this year. Despite all this inventory stuff we talked about, the auto market will definitely grow.

Ruben Roy: That’s helpful. Thanks, Liam. And then just a quick follow-up on Ed’s question earlier. Sort of thinking through design activity for next year, maybe in Android, how would you characterize that? It seems like there are a lot of in services moving to single module right now. Do you — would you characterize design activity as strong right now, ahead of sort of those ramps? Or do you think that’s still something on the that you guys will be participating in in later this year? What’s the timing on that, I guess, is the question.

Liam Griffin: Yes. Well, I mean, as you know, we’ve been focusing more high end, mid-tier, et cetera. But obviously, now the good news is that our customers want better performance. So we had been a little bit more cautious in engaging in some of the lower-end markets, but some of those products now and the appetite for connectivity is raised, which makes it much more profitable and more in the kind of down the alley for Skyworks. So you’re going to see more opportunities for us emerge in the Android cycle. Samsung is doing a lot better. Google is a player now for us. We’re doing a lot there, and obviously, the players in China. China has been a little tough, but I think that, that will come back and that will be another catalyst for us.

So we know how to make all that stuff and the stuff is not new at all. We know exactly how to handle it. Automotive, again, is a new market that we’re doing very well on. And I think we get through some of these macro headwinds, we’ll be able to really kind of shine a light on some of these strategic design wins that we have.

Operator: Your next question comes from Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur: Good afternoon. Thanks for taking my question. On broad markets, I think 90 days ago, you guys had anticipated driving full year growth in this segment. But as you just mentioned, you’ve got dynamics in the consumer IoT market. I think even data center enterprise, telco markets have continued to soften a bit here. So does the team still believe that they can drive full year growth in broad markets?

Kris Sennesael: Yes. I think — Harlan, I think that’s going to be a challenge, right? So we — what we said is that, we were expecting some modest year-over-year growth on a calendar year basis. But given some of the macroeconomic challenges that we have seen with high inflation and increased interest rates and the impact it has on consumer and enterprise spending, I think this is going to be challenging. Having said that, I mean now I’m looking beyond calendar year 2023 into fiscal 2024, we do expect our broad markets business to grow in fiscal 2024 over fiscal 2023.

Harlan Sur: Perfect. And then the team has done a great job proliferating your filter technology. I think last year, I think the team drove about 45% BAW filter attached to your mobile revenues, right? Given the design win pipeline for this year on new model launches in the second half, where do you see that attach rate moving to?

Liam Griffin: Yes. That attach rate continues to move higher and higher and there is multiple nodes in bulk acoustic wave. So it’s not one that fits all. There’s a lot of innovation. There’s a tremendous amount of R&D. And one of the other things that we talked about a little bit is our capital intensity. That’s a plus for us as well. We’ve already gone through a pretty significant cycle in raising the capability and technology nodes with BAW. We have a lot of capacity right now that we’re ready to roll on. And it’s a strategic technology. Not many companies know how to do it. And it can go beyond the smartphone as well. So the applications certainly today are in handsets, but there’s a broader set of opportunities where BAW filter is a meaningful part of the strategy and a meaningful part of the performance. So you’ll be able to see that more as we go through this year and following years.

Operator: Your next question comes from Kevin Cassidy with Rosenblatt Securities. Please go ahead.

Kevin Cassidy: Yes. Thanks for taking my question. And just to understand too, as you cut back on utilization, what’s the shape of being able to bring that back up again? I guess if it — your lead times start to stretch out and that’s when you build your utilization back up again? Just kind of what’s the strategy as business starts to come back?

Kris Sennesael: Yes. So a lot of it will depend on how strong the business will bounce back. And once we start seeing — we already see it, right, some of recovery in the Android market. Once that gets stronger in combination then, of course, will continue to grow our broad markets business, as we just indicated, and doing well with our largest customer, we will start ramping up the factory utilizations. But as I said earlier, it’s a couple of quarters and then that will bounce back.

Kevin Cassidy: Okay. But to bring utilization back up, it’s just a matter of rehiring people? Like it doesn’t mean new equipment, you’ve just turned the equipment off?

Liam Griffin: No. The equipment is there. I mean, we basically — we know how to handle that, the capital, the scale, all that’s ready to go. This is just more of a demand issue, but we know how to handle it. And there’s going to be a tremendous amount of activity that will go through those cycles and go through those factories leveraging that capital, which is in great position and has a tremendous opportunity over the next several years to populate not only smartphones, as we said, but other bulk acoustic wave type of engine.

Operator: Your last question comes from Matt Ramsay with TD Cowen. Please go ahead.

Matt Ramsay: Thank you very much, guys. Good afternoon. I guess for my first question, some of your peer companies that also have some pretty high revenue exposure to your largest customer talked about a dynamic of maybe them buying a bit more early in this calendar year, pulling in some of their own inventory purchases and leaving a bit of air pocket before things ramp in the back half. Are you guys — is some of the stuff reflected in the guidance that type of dynamic? Or am I — or is it more lean toward Android as you’ve mentioned in some of your prepared comments? Thanks.

Liam Griffin: Yes. It’s more towards the Android side at that point the way we go here. And so I think that’s maybe what you’re saying. But — and there, again, I mean, we know how to manage through it.

Matt Ramsay: Got it. I guess, Kris, I wanted to ask a longer-term thing as my follow-up, and it’s on free cash flow. You mentioned that some of the utilization charge, things that are going to happen in the short term with the factories are not cash flow hits. But given the dynamics in the business, could you talk a little bit about how — are there any specific floors of free cash flow that you’re managing to in terms of a free cash flow percentage? And just how do you think you plan to manage the business over the next two, three years on a cash flow basis? I think that would be helpful. Thanks.

Kris Sennesael: Yes. No, that’s a great question. And so our target model is a free cash flow margin of 30%. And last couple of years, we have been operating the business in the mid to high 20s. And the reason why we were not at 30% is, as Liam just explained, we have made major investments in our technology, in our manufacturing assets, building out very high-class manufacturing capabilities. And — but looking forward over the next couple of years, instead of running CapEx at 10% or 12% to revenue, we believe that in the next couple of years, we can run the business at mid-single digits as a percent of revenue for CapEx. In addition to that, of course, we will continue to grow the business and run the business at high profit levels.

And when you combine that with good working capital management, we believe we will be able to sustainably run this business at 30%, 30-plus percent free cash flow margin. And again, just in the first six months of the year here, we’ve already generated more cash than we did last year, right, with $1.1 billion of free cash flow at 43% free cash flow margin. But again, sustainably well above 30% for the remainder of — or the total of the fiscal year.

Operator: There are no further questions at this time. Please proceed.

Mitch Haws: Thanks for participating in today’s call. We look forward to talking to you at upcoming investor conferences during the quarter. Thank you.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.