Skyworks Solutions, Inc. (NASDAQ:SWKS) Q4 2023 Earnings Call Transcript

Skyworks Solutions, Inc. (NASDAQ:SWKS) Q4 2023 Earnings Call Transcript November 2, 2023

Skyworks Solutions, Inc. beats earnings expectations. Reported EPS is $2.2, expectations were $2.1.

Operator: Good afternoon, and welcome to the Skyworks Solutions Fourth Quarter Fiscal Year 2023 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’ fourth fiscal quarter 2023 conference call. With me today are 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. Despite macroeconomic headwinds and volatility, Skyworks executed well during the fourth fiscal quarter. We delivered revenue of $1,219 million, posted earnings per share of $2.20, and generated $366 million of operating cash flow. During fiscal 2023, free cash flow was well above $1.6 billion, which reflects our efficient business model despite a challenging macroenvironment. While excess supply conditions are modestly improving in the Android market, we continue to under ship to natural demand as the industry rebalances. Within broad markets, we see softer demand extending from consumer to certain durable sectors as customers adjust to normalize lead times and reduce excess inventory.

After two years of unprecedented events due to COVID and historical supply chain shortages, the semiconductor industry is returning to a normal supply and demand balance. We are responding to these dynamics by actively managing our inventory levels, making strategic investments in growth areas, and diversifying the reach of our business. We are well positioned to capitalize when demand inflects from a technology and roadmap, manufacturing capacity and financial perspective. Over the medium to long term, we remain bullish on several sectors and trends. In our mobile business and our broad markets businesses, in mobile we see opportunities to expand RF content over the coming years. On the path to 6G, we anticipate RF content increases will be driven by additional bands, enabling satellite connectivity, growing usage of uplink carrier aggregation, further adoption of 4×4 MIMO, and other innovations in RF.

Switching gears to broad markets, which accounted for approximately 37% of our total revenue in fiscal 2023. We expect to benefit from three long-term secular trends. First, the proliferation of intelligent IoT connected devices on the edge. Second, the rapid transition towards electrification and advanced safety in vehicles. And third, high speed connectivity for AI enabled data intensive infrastructure in cloud applications. Within IoT, we are excited about the upgrade cycle with Wi-Fi 6E and 7. Driving additional content as incremental higher frequency bands drive more stringent filter requirements, including the need for BAW. Wi-Fi 7 has several use cases, including 8K video screaming, immersive AR and VR, cloud gaming, industrial IoT and telemedicine.

Shifting to automotive, Skyworks is well positioned to benefit from the electrification and adoption of advanced safety in vehicles. According to internal analysis and third party estimates, we expect RF automotive semiconductor TAM to reach $1 billion. Within automotive, we are focused on high growth segments and content opportunities, including power isolation chips for onboard chargers, powertrains, and battery management systems in EVs. Connectivity, such as cellular engines, Wi-Fi, Bluetooth, and GPS, in-vehicle infotainment systems, driven by digital radios, and lastly, ADAS solutions for autonomous driving. We have the experience and ability to execute at scale with some of the leading brands in the world. In addition, we believe AI can be a catalyst for more efficient wireless communication and could fuel the need for more complex and higher performance wireless solutions.

Over time, we expect high performance smartphones will be a critical platform for advanced AI capabilities, and in turn could spark a major upgrade cycle. Furthermore, over the past two years, we’ve made significant investments in BAW technology and scale, which has led us to competitive differentiation. We’ve expanded our reach within the smartphone market, and today, nearly 50% of our mobile revenue is tied to BAW. That’s more than double from last two years. Our BAW investment has also resulted in key design wins in our broad markets business, which represents more than 10% of our business. Wi-Fi 7 is a perfect example of BAW technology being a critical requirement for the new standard. Now, turning to our quarterly business highlights, we secured 5G design wins for premium Android smartphones, including Google, Samsung, and several models in the VOX ecosystem.

We accelerated design wins in Wi-Fi, including NETGEAR’s Wi-Fi 7 mesh system, Linksys 6E tri-band mesh router and TP-Link’s quad-band Wi-Fi 7 router. We expanded our reach in automotive segments by winning several designs for onboard chargers, battery management systems, and digital broadcast products across the leading brands. And lastly, in emerging IoT, we enabled next-generation smart energy solutions with Trilliant and Samsara. In summary, Skyworks continues to deliver solid results despite a challenging macroenvironment. At the same time, our advanced technology and product roadmaps are aligned to long-term secular trends, further expanding and diversifying our customer base. Our strategic customer engagement, resilient business model, and experience will help us weather through this cycle’s volatility.

With that, I will turn the call over to Chris for discussion of last quarter’s performance and our outlook for Q1 of fiscal 24.

Kris Sennesael: Thanks, Liam. Skyworks revenue for the fourth fiscal quarter of 2023 was $1,219 million, up 14% sequentially and slightly above the midpoint of our outlook. Mobile was approximately 65% of total revenue, an increase of 25% sequentially, as we supported the ramp of new high-performance solutions at our largest customer. Broad markets were approximately 35% of total revenue, down 3% sequentially. We continue to see inventory digestion within broad markets, including consumer IoT, enterprise, and telecom infrastructure. Grosso profit was $575 million, resulting in a gross margin of 47.1%. Gross margin continued to be impacted by temporary factory underutilization as we right-sized our inventory levels. During Q4, we reduced our internal inventory by $116 million to $1,120 million.

And we are on track to further reduce it below $1 billion by the end of the December quarter. Operating expense of $177 million was down 3% sequentially and down 8% year-over-year, given our ongoing focus on managing discretionary expenses. We generated $398 million of operating income, translating into an operating margin of 32.6%. We incurred $7 million of other expense. And our effective tax rate was 9.7%, driving net income of $353 million and diluted earnings per share of $2.20. EPS was $0.10 above the guidance that we provided during the last earnings call. Now turning to cash flow, Skyworks business model continues to deliver robust cash generation. Fourth fiscal quarter cash flow from operations was $366 million and capital expenditures were $70 million, resulting in free cash flow of $296 million.

For the full fiscal year, we generated $1,856 million of cash flow from operations. Capital expenditures were $210 million or 4% of revenue. As a result, we delivered a record $1,646 million of free cash flow, an increase of 76% year-over-year, driving a record free cash flow margin of 34.5% and translating into approximately $10.30 of free cash flow per share and a free cash flow yield of approximately 12%. In fiscal 2023, we significantly reduced our capital expenditures in line with our business model. After major investments during prior years to expand our manufacturing footprint, including bar filtering, we expect our capital intensity to moderate. We focus on driving operational efficiencies through yield improvements, dice rings and test time reductions, creating additional available capacity.

We believe we are currently well positioned from an equipment and tooling standpoint to support a demand to recovery. Also, during fiscal Q4, we paid $108 million in dividends and repaid $200 million of our term loan. In early October, we repaid $150 million of outstanding borrowings under the term loan, and we intend to pay off the remaining $150 million by yearend. Entering calendar year 2024, we are comfortable with our capital structure and debt levels of $1 billion, which provide us with superior flexibility and optionality. Now, let’s move on to our outlook for Q1 of fiscal 2024. We anticipate revenue between $1,175 million and $1,225 million. We expect our mobile business to demonstrate momentum, while in broad markets, we expect to continue digesting excess inventory affecting our revenue outlook.

Gross margin is projected to be in the range of 46% to 47%, reflecting the ongoing cyclical impact of lower factory utilization, reduction of internal inventory, and an unfavorable mix shift given the lower proportion of broad markets as a percentage of total revenue. 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 increase decertification. Below the line, we anticipate roughly $6 million in other expense and an effective tax rate of 12% for Q1, as well as full fiscal year 2024. We expect our diluted share count to be approximately 161 million shares. Accordingly, at the midpoint of the revenue range of $1,200 million, we intend to deliver diluted earnings for share of $1.95.

Operator, let’s open the line for questions.

See also 30 Most Stressful Jobs in the US and 12 Countries with Most Prisoners Per Capita.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Chris Caso with Wolfe Research.

Chris Caso: Yes, thank you. Good evening. I guess for the first question, if you could give some color with regard to the December quarter guidance, the prepared remark suggested that the incremental weakness was still coming from broad markets if you can give some more granular detail about what you expect from mobile and broad markets in the December quarter.

Kris Sennesael : Yes, Chris. So you have it right. We do expect in the December quarter our mobile business to be up sequentially as we continue to execute to ramp with our largest customer and as we will continue to see some further modest improvement in the Android mobile part of the business as well. On the flip side, we have our broad market business which we expect to be down sequentially as we will continue the digestion of access inventory in the channel as well as at the end customer level.

Chris Caso: That’s helpful. As a follow-up, and obviously we’ve been going through this for a bit of a while in the mobile space, burning off inventory and I guess broad markets was affected a little bit later. Where do you think we are with regard to the inventory correction in each one of those markets particularly as we look into the March and June quarters? What’s the prospect for when we can get some bottoming out here and we go back to shipping to actual real consumption?

Liam Griffin: Sure Chris, this is Liam. There’s actually kind of like two dynamics there. In the mobile business we absolutely know where the dollars are and where the opportunities are and we have eyes on all that and we’ll continue to drive that portfolio very strong. On the other side, the broad markets business is still a wonderful opportunity for us but unfortunately going through the semiconductor cycle and the inventory issues that we just mentioned on the call here have been a bit of a problem. Now we know how to fix it. These products are all solid but they just slow down through the channel and I think in some cases, levels of distribution and another layer between the buy and sell position can sometimes mute some of the results.

So we understand it. Some of that stuff we can just handle ourselves directly and also drive more and more opportunities broadly in those markets. There’s a lot of opportunity, Chris. I mean it goes way beyond what you see today. Portfolio that we’ve been driving with I&A business, the automotive gains. We’re in data center today just a really whole different set of broad markets opportunities, but we certainly have our teams working hard to execute and demonstrate that success.

Operator: Our next question comes from Karl Ackerman with BNP Paribas.

Karl Ackerman: Yes, thank you. I have two questions, please. First and foremost, if I could just narrow down on your Android opportunity. Media Tech earlier suggested that 5G units should grow double digits next year, certainly above overall smartphone unit expectations of maybe flat to up low singles next year. And I’m just curious to hear about some of the expanding opportunities you have with China Android OEMs. I mean, you kind of mentioned how that is picking up in the December quarter and I think going forward for you. So at the same time, Huawei I think is also coming back in the market. So I wanted to hear your perspective on what is your opportunity in China Android near-term, both in the summer quarter and then, secondarily, how does Huawei impact your TAM opportunity for the China Android ecosystem, both near-term and perhaps in calendar ‘24? Thank you.

Liam Griffin: Yes, sure. A little bit to unpack here. Clearly, we know the players. We know the landscape in China. Very familiar with the VOX ecosystem and great opportunities for us to continue to grow. Although, we’ve been conservative in that area because of the risks of inventory glut. And as you know, we’ve been running really lean. So there’s no downside there. As we start to go further. You have opportunities that can continue to grow. A lot of these handsets in China have a lot of upside ability to drive more content and more benefits for the user. Those products are still sub-scaled vis-à-vis a US-type product. So the appetite for the China consumers to get more technology, to have higher speeds and data rates and more efficiency in their solution.

So that can come through VOX, of course. But don’t forget big players like Google and Samsung, really strong Android players that create a nice buffer from us with our larger customers. So it’s a really good mix and as you know about our business, we’re very flexible. We don’t sell one part to everyone. It’s very, very unique engagements. I think that’s a signature for Skyworks. But always room to grow from here and we are starting to see, I think, light in the tunnel I would say in the VOX channel. And with Huawei, I don’t think that that’s a big issue. We can certainly deliver product that’s better than Huawei right now, but it’s not really where we want to be as a company. And I think the technology is really lagged for Huawei to reengage.

But we’ve got a lot of opportunity in front of us that we can execute and deliver.

Karl Ackerman: Yes. Thanks, Liam. Kris, perhaps a question for you. You talked about the significant amount of free cash with the generation that you had just this upcoming this most recent quarter. Are you taking a step back? How are you and the management team thinking about M&A, longer term, just given the fact that valuations have come down across the space, in areas within your broad markets business. Just any commentary on that would be helpful as well. Thank you.

Kris Sennesael : Yes, Karl, first of all, you’re absolutely right. I mean, we have very strong free cash flow. The good news there is that it’s sustainable. So for many years to come, we target a free cash flow well above 30%. In addition to that, we have a clean balance sheet, right? By year end, the debt will be on or about $1 billion with on or about $1 billion of cash. And so we have a clean balance sheet. We continue to generate a ton of free cash flow. That gives us a ton of optionality, right. And so on one hand, of course, we will continue to invest in our organic business, making sure we invest in our technology and product roadmaps. But we also have optionality to further diversify the business. As you know, we’ve done a very successful transaction in 2021. We’re very happy with that transaction. And so there is definitely optionality there.

Operator: Our next question comes from Ruben Roy with Stifel.

Ruben Roy: Yes. Hi. Thank you for letting me ask a question. Kris or Liam, I want to go back to the broad market and I think in the prepared commentary in terms of the, kind of the areas of weakness you were seeing, consumer obviously has been weak for a while and I think you mentioned a couple of other areas that weakness spreads to, but I didn’t hear industrial and automotive. And so can you maybe give us a little bit of detail on what you’re seeing there, what you saw there in the September quarter and how you see that playing out over the next quarter or two. Thank you.

Liam Griffin: Yes, that’s a great question and I’m glad you brought it up. We talked a little bit through the prepared remarks, but our business and automotive is actually really moving well. We’re growing the portfolio. We hadn’t really been in that market at all two, three, four years ago. This is another kind of nod to the Silicon Labs transaction because they were significant in that piece. We continue to do very, very well. We rattled off a number of the brands and a number of the names that are in the industry and we have design wins. We’re investing aggressively. We see that as an incredible opportunity for Skyworks and we’re underweight. We have the technology to win, but we’re not big enough yet and so we’re continuing to grow.