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Skyworks Solutions Inc (SWKS): Is Sky the Limit? No.

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Skyworks Solutions Inc (NASDAQ:SWKS) is the company that turns complexity into simplicity by offering analog and mixed signal semiconductors, enabling wireless capabilities. Skyworks continues to benefit from the proliferation of Long-Term Evolution (LTE) in Europe, Asia, and North America, as well as the strong growth in tablets. As the company continues to transform its product mix toward highly customized solutions, Skyworks Solutions Inc (NASDAQ:SWKS) continues to diversify and expand into multiple markets.

Recent developments

Skyworks Solutions Inc (NASDAQ:SWKS) delivered a solid Q2 report, where its adjusted earnings of $91.9 million ($0.48 per share) exceeded analysts’ average estimate of $0.47 per share. Revenue of $425.2 million was 16.6% higher as compared to the same quarter in 2012. Skyworks continues to benefit from strong demand for mobile connectivity and high-performance analog solutions. Revenue growth was mainly driven by increased demand for 3G, Switching and WLAN solutions, partially offset by lower GSM/GPRS products due to the contracting 2G market.

Skyworks Solutions Inc (NASDAQ:SWKS)’ high growth was also driven by its expansion into adjacent vertical markets such as automotive and medical. Financially, the cash flow remains strong for Skyworks as it generated $130.2 million of operating cash flow. The company ended Q2 with a strong cash position of $458.8 million and repurchased 1.4 million shares of common stock during Q2.

Despite the growing gross profit, the gross profit margin has been declining since early 2011 as seen from the chart below. Higher unit volumes and lower per unit materials and manufacturing costs are offset by lower average selling prices and unfavorable shift in the mix of products, resulting in lower gross profit margin. While it is consistent with trends in the industry, management expects average selling prices for the established products to decline continuously at a normalized rate of 5%-10% per year. On the positive side, Skyworks Solutions Inc (NASDAQ:SWKS) will continue to benefit from higher contribution margins related to the licensing and/or sales of intellectual properties.

Despite the falling gross profit margin, management continues to make the operation more cost effective by reducing the SG&A cost to 9.3% of net revenue as compared to 11% in Q1 2012. At the same time, management boosted its R&D investment to $56.3 million in Q1 as compared to $53 million last year. Skyworks continues to stay competitive in the fast-changing industry of semiconductors.

Customers and new products

As Skyworks continues to support Samsung‘s Galaxy S4 smartphone with multiple analog and front-end solutions, Skyworks could also potentially benefit from Apple Inc. (NASDAQ:AAPL)‘s upcoming low-cost iPhones. On the other hand, Skyworks continues to innovate by introducing leading RF switching technology that is enabling early adopters to implement carrier aggregation solutions, allowing combined spectrum to deliver enriched data experience.

Competition

Skyworks’ gross profit margin and revenue growth rate will be compared to its competitors, including TriQuint Semiconductor (NASDAQ:TQNT)RF Micro Devices, Inc. (NASDAQ:RFMD), and QUALCOMM, Inc. (NASDAQ:QCOM) in the semiconductor industry.

TriQuint Semiconductor (NASDAQ:TQNT) continues to innovate and recently produced the industry’s first gallium nitride (GaN) transistors using GaN-on-diamond wafers, which substantially reduce semiconductor temperatures while maintaining high RF performance. Earlier, TriQuint also introduced three new high-performance WLAN front-end modules and two advanced WiFi/4G coexistence filters to enable next-generation 802.11ac WiFi. TriQuint had also planned to boost share value by repurchasing $75 million worth of shares.

RF Micro Devices, Inc. (NASDAQ:RFMD) Devices had planned a new Gallium Arsenide (GaAs) sourcing strategy to increase manufacturing flexibility, enhance gross margin, and support rapid growth. RF Micro Devices will be transitioning most GaAs manufacturing to its GaAs HBT manufacturing facility in Greensboro, NC. RF Micro Devices had also been expanding well into LTE as it had been supplying power amplifiers to Samsung for 4G LTE smartphones.

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