Skyworks Solutions, Inc. (NASDAQ:SWKS) Q3 2023 Earnings Call Transcript

Skyworks Solutions, Inc. (NASDAQ:SWKS) Q3 2023 Earnings Call Transcript August 7, 2023

Operator: Good afternoon, and welcome to Skyworks’ Third Quarter Fiscal 2023 Earnings Call. This call is being recorded. At this time, I will turn the call over to Mr. Kris Sennesael, Chief Financial Officer for Skyworks. Thank you. Please go ahead.

Kris Sennesael : Thank you, Lina. Good afternoon, everyone, and welcome to Skyworks’ third fiscal quarter 2023 conference call. With me today is Liam Griffin, our Chairman, Chief Executive Officer and President. Before we begin, I would like to remind everyone that our discussions 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. And with that, I’ll turn the call over to Liam.

Liam Griffin : Thanks, Kris, and welcome, everyone. The Skyworks team continued to execute well during the third fiscal quarter despite macro headwinds, delivering in line revenue, along with solid profitability and strong cash flow. Specifically, we delivered revenue of $1.071 billion, posted earnings per share of $1.73, and generated $306 million of operating cash flow. During the quarter, we continued to advance our technology roadmap and introduced new high-performance connectivity and analog solutions while supporting product launches at an expanding set of mobile and broad market customers. As a result, we expect double-digit sequential revenue and earnings growth in the September quarter. Turning to our quarterly business highlights.

In mobile and IoT, we secured 5G content for Android smartphones across all tiers. We delivered Sky5 platforms for broadband CPEs of leading North American carriers. We supported Wi-Fi 7 launches, our tri-band routers for NETGEAR and TP-Link and Powered Bell’s Wi-Fi 6E home gateway. In addition, we continue to gain design win momentum with our 5 gigahertz cognitive wireless audio solutions, supporting Samsung’s Q-Symphony soundbars. Across infrastructure and industrial, we enabled 5G small cell deployments with a top North American operator and ramped timing solutions for AI data centers at a leading cloud provider. In automotive, we continue to post double-digit year-over-year revenue growth while capturing design for telematics applications across a broad range of manufacturers.

And we extended our engagements by leveraging our power isolation portfolio with a North American EV supplier. These highlights demonstrate Skyworks’ technology leadership in mobile, while executing on a diversification strategy in high-growth end markets. Additionally, several disruptive market trends are now unleashing new meaningful growth opportunities for Skyworks. For example, generative AI is proliferating on a global scale with rapid adoption, sparking exponential growth in the amount of data accessed from the network edge to the cloud. In turn, this will further drive complexity in wireless infrastructure networks as AI will require higher throughput, more secure connections, lower latency and improved power management. Skyworks is uniquely positioned to benefit from these trends with our advanced integrated solutions, supporting wireless infrastructure, cellular connectivity for mobile devices as well as other leading wireless protocols used in billions of IoT products.

With that, I will turn the call over to Kris for a discussion of last quarter’s performance and our outlook for Q4.

Kris Sennesael : Thanks, Liam. Skyworks’ revenue for the third fiscal quarter of 2023 was $1.071 billion, slightly above the midpoint of our outlook. Mobile was approximately 59% of total revenue with broad content gains across our largest customer product portfolio, offset by ongoing weakness in demand from the Android ecosystem as these OEMs continue to reduce inventories. Broad markets were approximately 41% of total revenue. We have another strong contribution from the automotive, infrastructure and industrial markets. Gross profit was $509 million, resulting in a gross margin of 47.5%, in line with expectations. Gross margin was down 370 basis points year-over-year, mostly driven by temporary factory underutilization as we right-size our inventory levels.

Operating expenses of $182 million declined 4% sequentially and year-over-year, given our ongoing focus on managing discretionary expenses. We generated $327 million of operating income, translating into an operating margin of 30.5%. We incurred $8 million of other expense and our effective tax rate was 13.2%, driving net income of $276 million and diluted earnings per share of $1.73, exceeding 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. Third fiscal quarter cash flow from operations was $306 million and capital expenditures were $31 million, resulting in free cash flow of $274 million. In fact, for the first three quarters of the fiscal year, we’ve generated record free cash flow of $1.350 billion and record free cash flow margin of 38%.

Also during fiscal Q3, we paid $99 million in dividends and repaid $500 million of our 2023 notes at maturity. Now let’s move on to our outlook for Q4 of fiscal 2023. We expect to deliver double-digit sequential revenue and earnings per share growth in the September quarter. Specifically, we anticipate revenue between $1.190 billion and $1.240 billion, at the midpoint of $1.215 billion, revenue for the quarter is expected to increase 13% sequentially. This outlook considers the seasonal impact from major product launches, leveraging our technology leadership, deep customer engagements and world-class in-house manufacturing capabilities. 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 inventories.

We expect operating expenses in the range of $178 million to $182 million, down 6.5% year-over-year at the midpoint as we continue to optimize operating efficiencies while making 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 $8 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 $1.215 billion, we intend to deliver diluted earnings per share of $2.10, an increase of 21% sequentially. Lastly, given our conviction in Skyworks’ long-term strategic outlook and consistent strong cash generation, we announced a 10% increase to our quarterly dividend to $0.68 per share.

And with that, I’ll turn the call back over to Liam.

Liam Griffin: Thanks, Kris. Skyworks continues to deliver solid financial results despite a challenging macro environment. At the same time, we have further advanced our cutting-edge technologies and product road maps, targeting leading market segments that allow us to both expand and diversify our customer base. In addition, we are well positioned to benefit from powerful market trends, including the electrification and automation of vehicles, the expansion of the Internet of Things, the emergence of augmented and virtual reality and the rise of artificial intelligence, just to name a few. Looking ahead, we expect to capitalize on these opportunities and deliver growth in our highly profitable business with sustainable strong cash generation. Operator, let’s open the lines for questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Harsh Kumar from Piper Sandler.

Harsh Kumar : Congratulations, Liam, Kris and the Skyworks team. Solid results and very significant leverage in the September guide. My first question was regarding your largest customer who typically comes out with a new phone in the September time frame, Liam. Can you talk about your content at that new particular phone that might be coming out this time around?

Liam Griffin : Sure, Harsh. Of course, I can’t give you all the granularity here. But obviously, our engagement and our technical vectors here continue to be sharp. We expect to be among the leaders with our largest customer. We’ve got — we have the know-how. We have the breadth of technology. We have the people and the manufacturing capabilities to execute. So we look forward to that, but we really can’t give any further guidance, Harsh, as you know. But we certainly feel like our opportunities with our largest customer continue to be very quite large.

Harsh Kumar : That’s fair enough. Liam, if I can ask about your gross margin, you’re working through some inventory that’s affecting your margins. But if I look — let’s just say I look forward, what would be some of the drivers that you have to improve your gross margins from where they are? Would they be more sort of industry dependent such as Android and sort of handset unit dependent? Or would there more be kind of Skyworks specific actions that would be bigger drivers of your gross margin?

Kris Sennesael : Yes, Harsh, I’ll take that question. So first of all, we delivered 47.5% in the June quarter, in line with expectations. And at the last earnings call, I indicated that gross margins were going to trend sideways for a couple of quarters. And so we just guided September 47% to 48%, which is pretty much in line with what I said during the last earnings call. The main issue why gross margins are temporarily a little bit lower compared to the historical levels, which was in the low 50s is mainly because of the macro headwinds and the softer demand environment, especially, as you indicated, in the Android ecosystem, while those customers are themselves reducing their internal inventory levels. And so as the business over a couple of quarters, will eventually get back and stronger, especially in Android as well as our broad markets business, we will see further improvements in our gross margins.

In addition to this as well, Harsh, as you know, we are also reducing our own inventory levels on the balance sheet. This is probably something Skyworks specific that will take a couple of quarters. That is also contributing to the underutilization. But once we get to the more normalized levels of internal inventory, we will increase factory utilizations and ramp up the gross margins. I do expect the gross margins, again, over time, gradually improve to the low 50s. And then we will continue to work it towards our target model of 53%.

Liam Griffin : Yes. And in addition to that, Harsh, as you may know, on the plus side, if you look at the cash generation that we’re putting forth, very, very strong results. We’re looking at 30% to 35% free cash flow, and that’s sustainable. So you’ve got the margin hit, which is basically underutilization, but all of that has been paid for. And we have now the upside opportunity with free cash flow.

Operator: And your next question comes from the line of Chris Caso from Wolfe Research.

Chris Caso: I guess just to start, a general market question, when we’ve been going through an inventory correction here for a number of quarters. It looks like it be the fourth quarter of double-digit revenue declines on a year-on-year basis. So where do we stand now with that inventory correction at your customers? Are we getting to the point where those customers are getting a bit back to normal? And what does that imply for the next couple of quarters in terms of revenue outlook?