Skyworks Solutions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2023

There are 13 speakers on the call.

Operator

Afternoon, and welcome to the Skyworks Solutions First 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.

Speaker 1

Thank you, JP. Good afternoon, everyone, and welcome to Skyworks' 1st fiscal quarter 2023 conference call. With me today are Liam Griffin, our Chairman, CEO and President And Chris Senestahl, 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 ks for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward looking statements made today.

Speaker 1

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 over to Liam. Thanks, Mitch,

Speaker 2

and welcome, everyone. Skyworks delivered solid 1st fiscal quarter results with revenue exceeding consensus estimates, strong profitability and record cash flow performance. Looking at Q1 in more detail, we delivered revenue of $1,329,000,000 drove gross margin of 51.5 percent And operating margin of 37%. We posted earnings per share of $2.59 And we generated $773,000,000 of operating cash flow, a quarterly record for Skyworks. In addition to the solid financial results, we expanded our design win pipeline in several emerging high growth segments.

Speaker 2

In IoT, we extended our broadening technology portfolio across a growing customer base. We partnered with AT and T to launch their first Wi Fi 6 gateways, unveiled the industry's First, Wi Fi 7 networking system with TP Link and leveraged our advanced connectivity portfolio to support 6 gigahertz Fixed wireless access points at Cambium Networks. Across infrastructure and industrial markets, We integrated power over Ethernet functionality in Cisco Modular Switches for enterprise networks. We ramped timing platforms to meet high precision and speed requirements for the leading data centers. And we delivered frequency generation and clock distribution technology for 5 gs massive MIMO deployments.

Speaker 2

In automotive, we achieved our 6th consecutive quarter of record revenue, Strengthening our EV design win pipeline with onboard charger content at a Japanese automotive supplier Mobile network traffic, advances in cloud and edge computing, IoT and the electrification of vehicles Our major trends that drive complexity and demand for our highly integrated and customized solutions. A few highlights underscore these remarks. Wireless connections continue to proliferate with mobile network traffic doubling over the past 2 years. Market estimates project over 25,000,000,000 IoT devices to be installed by 2027. The automotive industry is undergoing a revolutionary shift towards electrification of autonomous vehicles With EVs projected to make up over 30% of the U.

Speaker 2

S. Market by 2,030. Skyworks is well positioned to capture growth Upon these opportunities in transformative markets, leveraging key technologies, human capital and significant scale, Collaborating with our partners and customers, we are leveraging key technologies from TC SAW to high performance bulk acoustic wave filtering, Gallium arsenide and state of the art packaging. These skills and capabilities position Skyworks to play a leading role in this fast evolving rapidly growing landscape. With that, I will now turn the call over to Chris for a discussion of last quarter's performance and our outlook for Q2.

Speaker 3

Thanks, Liam. Skyworks' revenue for the first Fiscal quarter of 2023 was $1,329,000,000 exceeding consensus estimates. Mobile was approximately 65% of total revenue with weakness in Android as customers work down their inventory levels. Broad markets was approximately 35% of revenue with a strong contribution from automotive, infrastructure, industrial And the global shift to WiFi 6E and 7. Gross profit was €684,000,000 Resulting in a gross margin of 51.5 percent, up 30 basis points year over year and up 20 basis points sequentially.

Speaker 3

Operating expenses were $193,000,000 or 14.5 percent of revenue. We generated $491,000,000 of operating income, translating into an operating margin of 37%. We incurred $16,000,000 of other expense, And our effective tax rate was 12.8 percent, driving net income of EUR 415,000,000 And diluted earnings per share of $2.59 Turning to the cash flow. 1st fiscal quarter cash flow from operations This was an all time record of $773,000,000 Capital expenditures were $64,000,000 resulting in a record free cash flow of $709,000,000 and a free cash flow margin of 53%. We paid $99,000,000 in dividends and repurchased approximately 1,800,000 shares of our common stock for a total of $166,000,000 in the quarter.

Speaker 3

On a trailing 12 month basis, we have returned $1,200,000,000 to shareholders through dividends and buybacks. Also today, we announced that our Board of Directors has approved A new $2,000,000,000 stock repurchase program, highlighting their confidence in our business and its ability to continue generating strong free cash flow. Now let's move on to our outlook for Q2 of fiscal 2023. We anticipate revenue between $1,125,000,000 and $1,175,000,000 Gross margin is projected to be in the range of 50% to 50.5%. We expect operating expenses of approximately €189,000,000 €191,000,000 Below the line, we anticipate roughly €19,000,000 in other expense And an effective tax rate of 12.5% to 13%.

Speaker 3

We expect our diluted share count to be approximately 159 point 5,000,000 shares. Accordingly, at the midpoint of the revenue range of $1,150,000,000 We intend to deliver diluted earnings per share of $2.02

Speaker 2

And with that, I'll turn the call back over to Liam. Thanks, Chris. Skyworks delivered solid first quarter results demonstrating strong profitability and record free cash flow generation. Importantly, our technology centric operational scale and expanding set of innovative solutions are fueling a robust design win pipeline, Positioning Skyworks to continue to outperform. Despite a challenging macro environment, Skyworks remains well positioned With the most diverse customer and solution set in our history, a technically seasoned and talented workforce, A strong balance sheet and predictable cash generation underpinning our ability to fund future opportunities while returning cash to our shareholders.

Speaker 2

That concludes our prepared remarks.

Speaker 1

Operator, can we begin the question and answer session?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from the line of Ambrish Srivastava from BMO Capital Markets. Your line is now open.

Speaker 4

Thank you very much. Thanks for taking my question. That was very, for prepared remarks, Liam and Chris, always appreciated. But I just wanted to get a little bit Your thoughts on excess inventory, Qorvo has talked about maybe a whole year before component inventory Back in Czech MediaTek has talked about finished goods inventory and overall 3.5 months, if I remember correctly, Winding down to 2 months, so what's your take on the inventory excuse me, your inventory as well as on the channel? And then a quick follow-up on your own balance sheet inventory was up quite a bit.

Speaker 4

How should we think about it going forward, Chris? Thank you. Sure.

Speaker 2

Yes, this is Liam. Of course, at Skyworks, we're a very operational centric and technology company together. And a lot of our products the lion's share of our products are done in house in our own fabs and our own assembly and test locations. So we have really good Eyes and ears on the balances here, whether it be inventory on our sites or even with our partners. So We are very, very careful to ensure that we are aligning our revenue with natural demand.

Speaker 2

We always want to be Right on step with our customers. I think our teams have done an incredible job. There are markets today right now that there has been some And we're just we're letting that bleed down. And our exposure there is extremely small. Some of the markets in China are a little bit more Volatile, but in those cases, we have very little exposure.

Speaker 2

So I think it's important to note that we can control our ship and our products, Working with the best customers out there, lots of great communication with our customers as well. So everybody's on the same page, and we feel really good about that. And I think it's something we'll continue to work through and be well positioned for the back half of the year.

Speaker 3

Yes. And Ambrisa, as it relates to The inventory on our balance sheet, it's definitely somewhat at an elevated level, but I'm very comfortable with the level of inventory that we have right now. You have to take into account that we came out of a period where supply chains were challenged. We definitely wanted to make sure we support all the customer demand. We've been increasing some of the buffer stocks.

Speaker 3

And now more recently, of course, we have seen some softness due to some macroeconomic challenges, and we have been adjusting Our wafer starts and factory loadings accordingly, we've been doing that for a couple of quarters now proactively. Having said that, again, it's a little bit elevated. So but you have to keep in mind that we are level loading our factories. And we do expect, based on known design wins, the business to bounce back, especially in the second half of calendar year twenty twenty three. And so we will continue to level out to support those big ramps based on known design wins with many of our customers.

Speaker 3

We also do expect some of the Android based business in Korea and China to bounce back in the second half of the year. And so we will continue to make adjustments. I do expect that the days of inventory will come down Back to more normalized level in the second half of the calendar year.

Speaker 4

Got it. Thank you.

Operator

Your next question comes from the line of Blayne Curtis from Barclays. Your line is now open.

Speaker 5

Hey, good afternoon. Thanks for taking my question. I had 2. And obviously, it's a tough mobile backdrop. I think these are pretty good results.

Speaker 5

I'm just curious, if you could level set us for December, I don't know if you're willing to give how much your largest customer was. But then in the March guidance, if you could just talk through how you're thinking about the iOS versus Android there. I mean, does Android Bottom in December or March? And any thoughts on the recovery for Android?

Speaker 3

Yes. So as it relates to the large customer Revenue at that large customer was approximately 68% of total revenue. That clearly demonstrates great execution by the team, Supporting that large customer in the ramp of their new phone lineup, we have some great content In that phone, some really high performance complex devices, many of those devices leveraging our bulk acoustic wave Filtering, and so I think we did really well in the December quarter despite the fact that, as you know, the large customer talked about that, They were somewhat supply constrained due to some COVID related issues in China, but the team here executed really well In December with that customer.

Speaker 2

Yes. And Blayne, just to follow-up, we are starting to get back on the saddle here with the Android portfolio. And as you know, We've actually been holding back because there was some inventory in that channel. I think there still is, but it's been bleeding. And the opportunity for us to have incremental gains there is very high, given the fact that we kind of stayed on the sidelines until these inventory levels got to More normalized position.

Speaker 2

It's not about the product. The products are ready to roll. We've got everything we need to drive that business, but we just want to be careful as the markets move forward. So but we have the design win momentum for sure.

Speaker 5

And then I wanted to ask you on broad markets, Whether you think that business would be up in March as part of the guidance? And then I know you had a record INA quarter in September. Just kind of curious how that business is doing trajectory wise?

Speaker 3

Yes. So in the broad markets, as we said, was in December roughly 35 of our overall revenue, it was slightly down on a year over year basis as We see similar things that some of our peers and competitors are seeing in that market due to some microeconomic headwinds. There's a little bit of a softer demand, but on the flip side, we definitely saw strength for Skyworks Solutions In the automotive segment, some parts of the infrastructure and industrial segments. And as we said as well, we see some really good traction In the upgrade to WiFi 6E, which is a big step up in content as well as some early design wins that are being turned revenue for WiFi 7. As it relates to the March quarter, We do expect group markets to be slightly down sequentially, somewhat in line with normal seasonality.

Speaker 5

Thanks, Chris.

Operator

Your next question comes from the line of Gary Mobley from Wells Fargo. Your line is now open.

Speaker 6

Hey guys, thanks for taking my question. There have been some teardown reports out there that have highlighted your content Associated with the satellite link, I guess, in particular with your largest customer, somewhere in the order of 4 or 5 Specific sockets for you guys. Can you speak to the content opportunity for you, not only the iOS world, but as well the Android world?

Speaker 2

Yes. I think we are engaged with all of the relative and meaningful And I think if you're referring to Satcom, is that right?

Speaker 3

That's right.

Speaker 2

Yes, sure. Absolutely. So we have The technology, the IP and kind of the building blocks to make that work. It's an early it's still early in the global market, but it's definitely An opportunity to bring more scale to units. And so we definitely are we're engaged, we're involved, we have the technologies To make some of these work, we also have the partnerships with the companies that can do some of the kind of the groundwork to have that network evolve.

Speaker 2

And it would be a great opportunity for a company like Skyworks. We have many of the building blocks. We understand the radio frequency space deeply And in the Satcom world as well. So it's an evolving opportunity. It will definitely be at the table we are today, but more upside to come as the markets evolve.

Speaker 3

Okay. As my follow-up,

Speaker 6

I wanted to ask about utilization of your supply. It sounds like you won't have any underutilization charges associated with internal supply, at least not for the intermediate term, but maybe if you can speak to external supply, Purchase commitments there and your ability to fully utilize those without taking any sort of reserve?

Speaker 3

Yes, Gary, as indicated before, we have been managing this proactively for many quarters right now. And we are adjusting our factory loadings all the time depending on the demand that we see. And of course, the earlier you do that, the more attractive you are, The more you can take the time to, of course, accordingly adjust your cost structure, taking out Costs were needed, while at the same time, of course, continue to work on operational efficiencies, yield improvements And so on. We've done that with our internal factories. We've done that with our 3rd party Purchasers and vendors as well, having an open dialogue, making sure we have, On one hand, enough capacity in place, but at the same time, not overcommitting as well.

Speaker 3

And I think the team has executed pretty well on that. Thanks, Chris and Liam. Appreciate it.

Speaker 2

Sure.

Operator

Your next question Comes from the line of Toshiya Hari from Goldman Sachs. Your line is now open.

Speaker 7

Hey, thanks so much for taking the question. Liam, I was hoping you could provide a little bit more context, a little bit more color around your broad markets business. I think you talked about record revenue in your automotive business and strength across comms and the industrial end market as well. Specifically, I was hoping you could size those individual buckets within broad markets in calendar 2022, where you landed from a revenue Downpoint across those key end markets and how you're thinking about the forward. And on the forward, I guess, The commentary on automotive from most of your peers continues to be pretty bullish and pretty positive, but there are signs of moderation in comps and industrial.

Speaker 7

So I was hoping to hear What you're seeing in those markets as well?

Speaker 2

Sure. Well, we put a lot of energy into those markets and we're getting great returns. And the size of the opportunity there is substantial. And some of those products and markets that were not really the purview of Skyworks 2, 3, 4 years ago, but they are now. So the automotive opportunity for Skyworks has been incredible, leveraging some of the IP that We brought in with the slab INA deal coupled with our own internal developments and design wins and technology partners.

Speaker 2

We've got a business now that is in the 100 of 1,000,000 of dollars a year, really at a time where EV and electrification of vehicles is really just starting. So I think this is going to be an incredible piece for us, one of the markets that will drive our broad markets portfolio. The other thing is the IoT space generally is really clicking now for us. And you've heard for years that if we think about Our solutions, they're not just handsets. We leverage the handset because it's a great opportunity to demonstrate what benefits we could have as a user.

Speaker 2

But we're starting to drive the same types of technologies in IoT, things like Wi Fi, for example, GPS, Many, many other sensor technologies that we can populate with our solutions. So some of that core wireless engines don't have to be specific to smartphones, But that technology, that know how, that scale and the ability for Skyworks to uniquely develop end market solutions, I think It's quite a differentiator and we're really just getting the wheels turning on those opportunities, but there's definitely quite a large Opportunity set for us over the next 4 to 5 years.

Speaker 7

Got it. Thank you. And then as a quick follow-up one for Chris on gross margin. In the December quarter, your margins came in line. They were up a little bit both sequentially and year over year despite revenue declining both sequentially and year over year.

Speaker 7

So curious what were some of the positive offsets in December? And then more importantly for the March quarter, you're guiding gross margins Down, I guess, roughly 100 basis points, give or take. Is that primarily revenue or something else going on? Thank you.

Speaker 3

Yes. First of all, I'm pleased with the fact that in December, we did 51.5% gross margins, up 30 basis points year over year, Up 20 basis points sequentially despite the challenging macroeconomic environment. And I think, again, kudos to the team who continue to drive operational efficiencies into our factories With great execution there, and that's really, I think, the main driver there, how we are able to Keep up the margins where they are, again, despite some of the adjustments that we make in terms of factory loadings. As it relates to March, You have a little bit of a mix that comes into play. And Some of those headwinds, right, the revenue, as you indicated, that translate into the adjustments we make on the factory loadings.

Speaker 3

But when you put it all together, I'm guiding margins in the low 50s. On one hand, I'm not happy with it. I wish it was 53,000,000 and we're going to continue to work hard to get it to 53,000,000. But on the other hand, I'm happy with where we are from a margin point of view right now.

Speaker 7

Thank you.

Operator

Your next question comes from the line of Matt Ramsay from Cowen. Your line is now open.

Speaker 8

Yes. Thank you very much. Good afternoon, guys. I wanted to ask about sort of inventory levels. I mean, there's been tons of conversation through this earnings cycle around inventory levels I'm maybe more curious about the broad markets business.

Speaker 8

You guys mentioned a couple of times The obvious macroeconomic things that are going on and maybe affecting that business, having it be down a little bit. How diverse is the inventory situation in the broad markets business? Maybe you can just kind of walk through what business goes direct, what business goes through The channel and how you're seeing inventory levels just for broad markets in the near term? Thanks.

Speaker 2

Sure. Sure. This is Liam. The good news here is the broad market portfolio is very diverse, extremely diverse. And It's leading towards a lot of great opportunity in many different end markets.

Speaker 2

So we have a pretty decent play there. And our teams on the operational side Our highly sophisticated, we have our own supply chains, we do most of our stuff in house. So we have a really good read on inventories are and where they should be. And I think we're managing it quite well. There's certainly some pockets of inventory out there, but really Nothing that's going to impede the progress of the business.

Speaker 2

I think the really cool thing is the number of new customers that we're bringing in. And there's a mix issue when you're Doing kind of the $10,000 $20,000 accounts versus the $1,000,000 accounts that you may have in some of the smartphone space. So a little bit of a different play, But the diversification, the margin profiles are outstanding. And like you know, Skyworks is an operator. We do just about everything in house.

Speaker 2

And the ability to do that Also includes great supply chain management, our sales teams being online, understanding where distribution plays versus Direct, there's a lot of angles there that we can control. It's not easy, but it's the way we work this business. And I think we're starting to really see the benefits there in broad market and We've talked about a few major new segments like automotive. Automotive is really tough. You've got to get certification.

Speaker 2

You've got to prove your Ability to execute in challenging environments is a lot there. We've done all that work. And we've really kind of flexed our muscles in some The tough cases in mobile over the years, but those the efforts there and the knowledge that we built is applicable for so many other markets. So We look forward to it. There's always going to be a couple of bumps and a few wrinkles, but the diversification is playing well.

Speaker 2

The customer set is growing. And the lion's share of our top tier customers are really accounts and companies that matter. So we're looking forward to more as we go forward.

Speaker 9

Thanks

Speaker 8

Chris, just to follow-up on that topic. You had said in your script about The business snapping back in the mobile business in the back half of the calendar year, and I think we're all kind of modeling that as we work our way through the inventory correction in smartphone. But just seasonally or based on the inventory comments that Liam just made, how How do you think about the shape of the year potentially in broad markets? Is that a business that can still grow again for the fiscal year? And just How do we how should we think about the shape of that as it comes back?

Speaker 8

Thanks.

Speaker 3

Yes. No, we our Group Markets business, As you know, it's a $2,000,000,000 on or about $2,000,000,000 business on an annual basis. And Despite some of those microeconomic headwinds and challenges and somewhat softer demand and maybe a little bit of inventory correction that is going on, We do believe that we can grow our broad markets business this year. And I'm not going to repeat what Liam just said, but We have strong design win momentum. We play in some high growth markets with some really key technologies.

Speaker 3

And based on all of that, we do believe we can grow our Broadmox business.

Operator

Your next question comes from the line of Edward Snyder from Charter Equity Research. Your line is now open.

Speaker 10

Thank you. Sounds like you're doing very well at your largest customers and Plan to do well again this year. But real quick question about Samsung. First of all, do they broach 10% Good morning, everybody. More importantly, both in Samsung and in China, you've kind of missed a falling knife there because you don't really participate very much at all.

Speaker 10

I know that Samsung is converting over to modules in the mass tiers, etcetera. What are your prospects for, Let's say revenue growth, because everything is going to be content growth, specifically Samsung this year, Because phone demand is slowing for them. The ASPs in their flagship are way below where they were when they were doing a custom design. I know that the flip side is true for the mass tier, but you don't play bigger than mass tier. So I'm trying to get a better profile of what you think seriously could occur this year, calendar year 2022 At Samsung, given all the different moving parts and the fact that luckily you weren't playing much there at all in the last And then if you maybe you could break that down between flagship and master, what you think about each of those prospects, that would be helpful.

Speaker 10

And then I had a follow-up, please.

Speaker 3

Yes. Just to add, so Samsung was less than a 10% customer. I think it's very well documented. They are going through an inventory Burn off period right now. And again, proactively, we have reduced our shipments To that customer, especially in the December quarter.

Speaker 3

And I'll hand it over to Liam to provide some more color on Samsung.

Speaker 2

Yes. I mean, it's look, Samsung is a major player in the industry, and I think they got banged up a bit here in the cycle as did some other Android players. So we've been working through that Ed and the irony is that we've actually Got some pretty good content in those phones. And so we look forward for the inventory to get cleared and we'll be Up into the right in terms of our business there. But I think some of that is just the volatility that The semiconductor industry and even beyond, I mean, the technology industry is going through and trying to sort through ways to get back on their feet, so to speak.

Speaker 2

And we're very focused on our own inventory and our own Supply chain, so we have eyes and ears. We never want it too hot or too cold. We want to be able to deliver what the customers want. We stepped Back a bit on Android as the inventory levels were building in the channel, we didn't want any part of that. Samsung is a great, great customer.

Speaker 2

Just having some bumps, we're going to work with I mean, and ensure that we can do everything we can to help, not only in the technology side, but even on the fulfillment side. So I think that's a temporary blip. Honestly, I think Samsung is going to continue to do very well. They're a significant company with a lot of technology And the markets in Korea are very dynamic and in cell phones and technologies that we make are vital and viewed as a really Critical asset for a person there. So we think that's going to flow over and we'll start to see more accretive revenue in the second half.

Speaker 10

And if I could, you've done particularly well with your BAW. Actually, it was rather surprising to see you go head to head with some of the leading BAW guys and actually win in that. So I'm trying to get my arms around second half of the year, say content growth. We saw you took the satellite with your own tear down. We got your satellite part.

Speaker 10

I think we illustrated that you got twice as many BAW filters in your TRx your transmit TRx module as last year. And I know it sounds from this call and from what we've picked up that you're pretty optimistic about second half content. Is it going to be a new class? Should we be looking for new classes of parts like you did with satellite or is it going to be more content especially in the BAW side of the business with some of the existing Because we're also obviously hearing Corvid made no sequel the fact that they're going to gain some in areas they hadn't So I'm just trying to get my arms around how competitive the market is going to be in BAW and where you guys think you'll fit in with that Given how well you've done the last couple of years. Thanks.

Speaker 2

Yes. No, that's great. That's great. I mean, you know the business and you know the technology. So the nice thing here I felt like some of the technologies were ready to go, but the market wasn't there, right?

Speaker 2

The appetite, the consumer appetite or the customer appetite Wasn't really jumping all over this technology, but now you're starting to see as we get more and more nodes And we're starting to get more efficient in delivering high speed data. And it's just becoming an opportunity for us now for at a more broad level. And I think you're going to see a small set of players, of which we're going to be 1, of course, That can do what needs to be done with these incredible customers. I mean, the customers today, it's changed so much from a standard Cell phone that needs the requirements, the current consumption, the ability to roam globally, it's becoming more and more complex and we love that. That's exactly what we want to see.

Speaker 2

We want to solve the tough problems. You know from the technology side, Ed, this stuff is not easy, right? When you're bringing in all these disparate Technologies into one simple module, apparently simple, right? It's really hard to do and it's one of the things that our teams here at Skyworks love to do, our technologists, Our operational team all the way to sales. And so we love that opportunity.

Speaker 2

We love that complexity and the more use cases that emerge are great Ross?

Speaker 3

And just to illustrate that point, our revenue from devices that have BAW filters inside It's getting really close to $2,000,000,000 annualized run rate. And so it's definitely a major success story, and we believe that number will continue to go up to the right.

Speaker 10

Great. Thanks.

Operator

Your next question comes from the line of Chris Caso from Credit Suisse. Your line is now open.

Speaker 9

Yes, thank you.

Speaker 4

Good afternoon.

Speaker 6

Question about the Android business in general and how that translates to linearity through the year. And you said last quarter that you thought that the China business would be the low point in December. What did that turn out to be true? Is that true in general for Android either in December or March? And if that business is sort of bottoming out, Does that have any implications for June?

Speaker 6

Do you think that March quarter would be the low point in the year for revenue?

Speaker 3

Yes, I think that's fair. December was low. March will continue to remain low as Especially China, Opdivo, Xiaomi and to a certain extent, Samsung as well are still going through this inventory burn off Process, but then I think we will start seeing some improvements in the June quarter And I'm for sure in the back half of calendar year 2023.

Speaker 6

Got it. That's helpful. Thank you. And maybe a little longer term, as we look at the revenue prospects over the next 2 years or so after we get through This inventory correction that's going on right now, what do you expect to be the relative growth rates between the mobile business and broad markets? I know you've spoken a lot about the content that you expect to get in the mobile business.

Speaker 6

But do you expect that you can grow the mobile I'm sorry, the broad markets business at a faster rate and maybe 2 years out, what do you expect broad markets to be as a percentage of revenue? Yes.

Speaker 2

I would definitely, Chris, we're expecting double digit top line on the broad markets for sure, mid level top line and we should be in the teens, I believe, Given what we can do, what our products look like and obviously when the air gets clean, the markets will be stronger, I think we're going to be in great shape. And then even on the mobile side, there's a lot of invention and unique technologies that are being brought up in mobile that people haven't really seen yet. But the best customers in the world know what they're doing and there's a lot of incredible opportunity for the right types of technologies and the technologies that we make are those So I think we're going to have a nice combination with again our strength in mobile, which is a disciplined approach. We know what we're doing. We're working with the right people.

Speaker 2

It's not easy. We've made great steps in capital. A lot of our CapEx is behind us right now. It's another key point. We talked about the free cash flow in the call already.

Speaker 2

And then the diversification theme, Chris, is really playing nicely. You heard questions about satellite, for example, you look at the broad markets, think about our 100 of 1,000,000 of dollars of automotive revenue that we didn't have 3 or 4 years ago. So We are we have really core technologies that we can take across a broad set of mobile and connected devices, but this is An extrapolation now of new applications that is really driving the business and you're going to see more and more of that It's unfortunate right now that the market is just we're all in kind of a bit of a slowdown here as we're emerging, but we've got great Stock that's ready to go and design wins that have been cemented, and those will roll out in the second half of the year for sure.

Speaker 6

Got it. Thank you.

Operator

Your next question comes from the line of Karl Ackerman from N. P. Paribas, your line is now open.

Speaker 6

Yes. Hey, thanks gentlemen. Two questions if I may. First, I know you have little exposure to China Android right now, but one of the investor concerns is that you may have lost content And so perhaps you won't receive as much of a snapback as some of your peers when China demand eventually recovers. I was hoping you could address why those concerns Might not be warranted.

Speaker 6

I have a follow-up.

Speaker 2

Yes. I mean, I'm glad you asked the question. We're ready to roll with Android. We have the We have the products, but we're not going to fill the channels, right? I mean, there was a bit of an overhang there.

Speaker 2

We want to run discipline in our business, but I will say that inventory overhang is going to is starting to abate already. We see it. We have product ready to go, high quality, top of line technology that we can move in. And that's just I can't tell you exactly when that but it's definitely happening and we're ready. So It's an upside in our pocket that we haven't really rolled out, but we've had years and years of great position in China, OBX specifically, Oppo, Vivo, Xiaomi and then Samsung on its own vector, which is a huge company.

Speaker 2

And it's just unfortunate that those markets Got banged up. They're going through an inventory cycle now. But on our end, we never built the inventory We were trying we try to meet the demand as it is. We don't want to get ahead of it. And our teams were very disciplined.

Speaker 2

And you could see even in the last quarter, we About China revenues below 5%. That's because the market didn't need more than that and we didn't want to sell more than that. So I do think as we get through this quarter and starting to see towards the second half of the year, a more improving macro environment, We will be very well positioned to execute. And if things change, we can move faster if we need to. But it's not a technology issue, it's Not an execution issue, it's really just trying to manage the business in the appropriate way for our shareholders.

Speaker 6

Very clear, Liam. Chris, If I may, a question for you, more of a simple one, I suppose, but what's driving the big step down in CapEx in December. And I'm curious if

Speaker 11

this implies anything for content as

Speaker 6

we think about calendar 2023. Thank

Speaker 4

you. Yes.

Speaker 3

Now as it relates to CapEx, we definitely expect our CapEx trend to moderate Compared to what we have been doing over the last 5 years, just as a reminder, the last 5 years, we were in the 10% to 12% of revenue. We've put a lot of capacity in place. We've put a lot of technology related investments in place, especially as it relates to Boca And now we have to leverage that capacity. We are focusing on yield improvements. We are focusing on die shrinks.

Speaker 3

We can create more capacity without putting more equipment in place. And as a result of that, you will see a little bit of a more moderate, less Capital intense CapEx in the next couple of years here. But again, we feel good about the investments that we made, and it really will help to further Improve our strong cash flow that we have already. We started the year very strong. We expect Further strong cash flow the remainder of the year, again, based on some moderate CapEx, but we could drive our Free cash flow over 30% in this fiscal year.

Speaker 2

Yes. And just to reiterate that, The capital base that we have, okay, is it took a long time to get to this scale. We did tremendous amount of work brick and mortar, site level in our own facilities, and it positions us now for kind of a downhill run From CapEx, we still have great technology, great equipment, but it's brand new, right? So we spent that money over the last 4 or 5 years strategically to build up A competency in bulk acoustic wave and other filter activity filter technology is very, very difficult stuff. It's not available in the merchant market.

Speaker 2

So it was a make versus buy approach. We did the make. And so we developed solutions that are purpose built for Skyworks and purpose built for our customers. The great news is the capital is up and running. It's humming along.

Speaker 2

And sure, there'll be incremental CapEx spend over the next several years, but it won't be at level that you look back in the last 3 or 4 because now those investments are in house at scale and running.

Speaker 6

Very clear. Thank you.

Speaker 1

Sure.

Operator

Your next question comes from the line of Brett Simpson from Arete Research. Your line is

Speaker 12

Now open. Yes. Thanks very much. Liam, I wanted to get your perspective on GPP Release 17 and also Wi Fi 7 using 6 gigahertz. And when it comes to these upgrades, When do you think they're going to ramp more broadly, particularly in smartphones and consumer devices?

Speaker 12

And then just maybe from a business perspective, How should we think about the overall RF content when you start to scale up WiFi 7 and release 17 5 gs Versus today's devices seems to be quite big architecture changes. So I was just curious how you think about this and the extent to which Skyworks could benefit. Thank you.

Speaker 2

Yes. No, that's a great question. Those technologies are just starting to emerge now, and they do add a great Deal of complexity and you mentioned that in your words. The good news here for us is that we've been making In tandem investments and technology, so we've got, of course, the WiFi cycle that's going from 6 to 6E and WiFi 7. And that has its own set of incredible opportunities.

Speaker 2

And kind of on the launch pad there and the complexity in the newest Cycles and the new devices has been incredible for us. So we can definitely hit that. And then back on other connectivity nodes, adjacent connectivity nodes are Going through a similar space and that's more on the IoT line. So those types of technologies, we can deliver To the end market solutions and that would be a big part of our broad market portfolio. And some of the most relevant players in that space, we've already had design wins with them at earlier stages and we have a good trusted partnership.

Speaker 2

So it's definitely further into the year, but definitely an opportunity for us to get into 2023, 2024, 2025 as we look out, but definitely another cycle that we can Leverage and as you said earlier, much more challenging from a technology perspective, but the consumers Benefit there would be amazing. So I think those new technologies, they're hard to do. We've got the IP. We've got the know how, and they can create their own cycles within the next set of IoT devices.

Speaker 12

And is there a meaningful step up in content, Liam, just I mean, Wi Fi 7, for example, adding 6 gigs and quite a lot of changes on the modulation side and the MIMO side. So I'm assuming There should be a fairly healthy step up in IFRS content base. I don't know if there's any numbers you can sort of

Speaker 2

Yes. No, it's hard to handicap the numbers, It's meaningful. It's meaningful. I think you're going through and it's kind of a pretty long step from WiFi 6 to 7. There's a lot of work being done there.

Speaker 2

And so work also means a lot of technology being embedded. So I think we could get a 10% to 15% CAGR on that segment. And then also kind of that's just on content, but then if we get the user count up, you've got a double whammy. So that's kind of what we're looking for and Anything along the way there is going to be incremental.

Speaker 12

And maybe just one quick one for Chris. Just on the BAW filter CapEx moderating, can you talk a bit more about where the capacity for And how should we think about Skyworks addressing 6 gigahertz with your BAW technology? And are you able to address that going forward. Thank

Speaker 3

you. Yes. Again, if you look at the CapEx over the last couple of years in the $500,000,000 $600,000,000 Per year, the vast majority of that CapEx was going into expanding our bulk acoustic wave filter operation Where we have, of course, from a small base doubled and doubled and doubled again the capacity there. Again, we're focusing really now on driving operational efficiencies, die shrinks, Yield improvements, which gives us a lot more capacity leveraging the installed base of the equipment that we have, And we are not done. I mean, we're going to keep expanding that as we see fit.

Speaker 3

And we do believe that our revenue from devices that has bulk acoustic wave filters in We'll continue to grow very strongly, and we're ready for that. And we will not hesitate to put more capacity in place if and when needed.

Operator

Your next question comes from the line of Harsh Kumar from Piper Sandler. Your line is now open.

Speaker 9

Yes. Hey, guys. Very incredible results, to be honest with you, in this turbulent environment. Liam, let me ask you about China. I'm sure you're Hi, Rufid, but I know that this is hopefully the last question on this topic.

Speaker 9

You derisked China completely Last go around, I think the message was that it was very close to 0. But what do you think the China opportunity is? And do you even want this business Given the volatility, the geopolitical nature of it. And if you can remind us at the peak, let's say, how much it got to, let's say, over the last 5 years maximum as a percentage of sales. I just want to gauge where you're playing and what you're really going after?

Speaker 2

Yes. Yes. That's a great question. Well, we've always been we'll work with anybody that It needs our technology. We'll partner with anyone.

Speaker 2

So there really isn't any bias around where we're going to go in our markets. But China has been a challenge, I think, For ourselves and the peers in the U. S. Here and you think about even back to the Huawei situation, with Huawei shutting down, that was A big business for a lot of companies in our space. It's been a volatile market operationally and some of that is COVID and all kinds of things Going on.

Speaker 2

But the technologies and the work that we're doing is applicable for anybody, right? There's no reason why The China opportunity is as good as any opportunity. But unfortunately, there had been some inventory here that we've all talked about, not specific to Skyworks, but just in general, where the markets kind of got out of sync and created a bit of an inventory overhang. And that kind of weighs on the sector, I would say. But turning it back to Skyworks, you've heard us talk about Our operational efficiencies and our know how and labs to fabs approach, it's not those aren't just words.

Speaker 2

That's how we run this business. So we're very keen on what we're doing with our customers. We want to be great partners, but we also want to stay in sync with the market, right? That's really important for us. And this is just a case like that now.

Speaker 2

I think we've got a situation in China where there was an inventory, there were some lock So a lot of things that would impede the natural flow of revenue and engagement. And that's kind of where that market is. So we're Standing ready to step back in, we have the technology it's not a technology issue. It's not even a gross margin issue really. It's about managing inventory and making sure that we're delivering to the right cadence.

Speaker 2

That's what we want to be able to do. So Having said that, long dialogue, I would tell you that, we think things will get better. Things will get better as the market starts to really kind of recover. And the technologies that we have are really good and we can populate just about anything out there with the solution suite that we have. So there's really at this point, the bad news is flushed out for us And the opportunity to grow into those markets and deliver incremental growth is right there.

Speaker 2

So we're looking forward to making that happen. And I think things are starting to warm up a little bit already. So we feel good about that as we exit.

Speaker 9

Okay. Liam, can I just ask maybe the Similar question in a different way? Is it fair to say that you mostly look to sell standard products in China, so it doesn't it's not a lot of work For you outside of what you already do and then you look to sort of service those customers while leveraging your own facilities. Is that a fair way to think about it without too much effort?

Speaker 2

Yes. I mean, sure. We can take the business and the technologies. I mean, every market has its own flavor and Different technology nodes, higher to lower to more complex, and we're able to scale through all of it. So I would say that over time, The markets are going to get the markets are actually going to embrace higher levels of technology.

Speaker 2

I think a lot of the stuff that we're talking about right now 2, 3 years Today, it's going to be much harder, much more difficult. And companies like Skyworks, I think, will have an incremental advantage. So I think you've got A China market that stalled some macro things that weren't specific to mobile, but as we wake up here and the markets start to recover, the technologies have not Sat, sat by on the sidelines. The technologies have gotten more complex and more challenging and more powerful for the users. So The one thing I would say is in the China market, have they been able to catch up with that technology?

Speaker 2

I'm not quite sure it's there. But I know that we can do that with the partners. So it's not a technology gap with us. It's not a revenue issue. It's really getting the China market to get back on their feet And then be it get that partnership where it should be, where it's in a natural supply and demand And I think we can do that.

Speaker 2

And we'll we have no reason why we wouldn't want to do more business in China. But all those things that I mentioned need to kind of clear up a little bit before the markets And the opportunity for us is what we want to see.

Speaker 9

Got it. And for my follow-up, it's March. You probably know the content for the year, Because these wins happen about a year before, units are going to be pretty depressed. I was curious if you could give us a sense of what To the extent that you can, a sense of content this year and also maybe a sense of 5 gs units, Whether you expect 5 units to be up this year? And then one for you, Chris, the 53% free cash flow number, that's a Monster number, to put it bluntly.

Speaker 9

Is there something one time out here? You talked about CapEx going down? Or is this something sustainable for Skyworks?

Speaker 3

So Hartwig, I'll take the cash flow question first and then I'll turn it back to Liam. Very happy with the very strong Cash flow and free cash flow, obviously, in December. I would say three elements, right? Our world class profitability level, 37% operating margin, not a lot of companies in tax base doing that. Secondly, yes, great working capital management, Although a good guy and a bad guy, right, inventory is still somewhat elevated.

Speaker 3

We will work it down over time. But we definitely had strong collections in the December quarter, which is a little bit of a onetime item. And then thirdly, as we discussed earlier, some moderate CapEx in December and going forward, and the combination of those 3, delivers strong cash flow and will continue to deliver strong cash flow. I'll turn it to Liam on the other question.

Speaker 2

Yes. So Hart. Yes, the content. Yes, exactly. So yes, when we think about content, it's the way we're seeing it now with the customers that we're working with now, Especially at the high end.

Speaker 2

It's not more of the same thing. It's not, hey, we had 2 devices now that there's 3 devices. It's really about what's going on inside. We're seeing a lot of innovation and performance in the new suite of Technologies now, I'm not going to give you the timeline on this because this is kind of a cycle of improvement. So stay with me on that.

Speaker 2

But there's no question that if you look at where a high end smartphone is today and the content that is available versus what we see 1, 2, 3, 4, 5 years out is going to be dramatically different. We really believe it. We have great engagement with customers and we they're all kind of in the same spot. Everyone has a different way to get there. So The units, I think, are going to continue to be where they are.

Speaker 2

There'll be more growth, but the content and the usage cases I'm going to expand and I say usage cases because that doesn't mean just a mobile phone. If you think about technologies like 5 gs, They're technology vectors. They connect things wirelessly. It could be an automobile. It could be connected to a data center, Hi Fi, Wi Fi solution, there's so many different applications with the right Use cases.

Speaker 2

And I think if you think about Skyworks, it's not just about mobile. Mobile is an important vector, but all the other technology vectors that we can work through IoT and other markets We'll continue to grow. And the other thing that's great about that is they're on their own Cyclical path. It doesn't go through the same kind of annual cycle that we do see in mobile, which is fine. But the opportunity to have an uncorrelated path in technologies that are not in a mobile phone, And I think we're going to see that more and more things like automobiles and data centers and some of these other really interesting IoT devices.

Speaker 2

So Keep that in the back of your mind because that part of the business is really moving. Mobile is doing great. We have super technologies. We're going to continue to do well. But the other side of the field is an incredible opportunity for our investors and the opportunity for Skyworks to Deliver world class solutions.

Speaker 2

So I'll leave you with that, Harish. Thanks.

Speaker 9

Appreciate it, guys. Thank you so much.

Operator

Ladies and gentlemen, that concludes today's question and answer session. I'll now turn the call back over to Mr. Griffin for any closing comments.

Speaker 2

Great. Thank you all. Appreciate your participation in today's call. Look forward to seeing you in upcoming conferences. Take care.

Operator

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now

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Earnings Conference Call
Skyworks Solutions Q1 2023
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