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Edited Transcript of SWKS earnings conference call or presentation 27-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Skyworks Solutions Inc Earnings Call

WOBURN May 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Skyworks Solutions Inc earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kris Sennesael

Skyworks Solutions, Inc. - CFO and SVP

* Liam K. Griffin

Skyworks Solutions, Inc. - CEO, President and Director

* Mitchell J. Haws

Skyworks Solutions, Inc. - VP of IR

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Conference Call Participants

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* Cody Grant Acree

Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst

* Craig Andrew Ellis

B. Riley & Co., LLC, Research Division - Senior MD and Director of Research

* Craig Matthew Hettenbach

Morgan Stanley, Research Division - VP

* Edward Francis Snyder

Charter Equity Research - MD and Principal Analyst

* Harsh V. Kumar

Stephens Inc., Research Division - MD

* Michael Austin Burton

Longbow Research LLC - Senior Analyst

* Richard Ewing Schafer

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Vijay Raghavan Rakesh

Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst

* William Chapman Peterson

JP Morgan Chase & Co, Research Division - Analyst

* Yi Zhang

Cowen and Company, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good afternoon, and welcome to Skyworks Solutions' Second Quarter Fiscal Year 2017 Earnings Call. This call is being recorded.

At this time, I will turn the call over to Mitch Haws, Vice President of Investor Relations for Skyworks. Mr. Haws, please go ahead.

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Mitchell J. Haws, Skyworks Solutions, Inc. - VP of IR [2]

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Thank you, operator. Good afternoon, everyone, and welcome to Skyworks' Second Fiscal Quarter 2017 Conference Call. With me on the call today are Liam Griffin, our President and Chief Executive Officer; 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 discussed today include non-GAAP financial measures, consistent with our past practice. Please refer to our press release at the Investor Relations section of our website for a complete reconciliation to GAAP.

With that, I'll turn the call over to Liam.

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [3]

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Thanks, Mitch, and welcome, everyone.

The Skyworks team produced another quarter of strong results in fiscal Q2. Let me begin with a few highlights.

We delivered revenue of $852 million, up 10% year-over-year and above consensus, with gross margin of 50.4% and operating margin of 36.7%. We achieved earnings per share of $1.45, up 16% year-over-year and $0.05 better than consensus. And we continue to generate strong cash flow. Our operating cash flow in the first half of fiscal '17 reached $732 million, up 46% as compared to the same period last year. In addition to our financial performance, we are aggressively expanding our design win pipeline.

In Mobile, we are extending our reach across all premiere smartphone OEMs. Specifically, we enabled Huawei's P10 and P10+ models with low-, mid- and high-band SkyOne solutions, along with antenna tuners, carrier aggregation switching and power management devices.

We powered Samsung's Galaxy S8 platform with proprietary DRx and SkyOne solutions as well as GPS and DC-to-DC converters. And we secured reference design sockets across MediaTek's next-generation architecture.

In IoT, we supported Cisco's enterprise-grade MIMO gateways, delivered analog control ICs across Nintendo's gaming platforms, including the recently introduced Switch console; ramped audio solutions for Sonos' high-fidelity wireless speaker; captured WiFi mesh networking wins at Google and Plume; deployed high-power smart meter devices for Itron; and we launched custom solutions for Fitbit, Garmin and LG.

Finally, we secured strategic design wins at 3 leading automotive manufacturers, leveraging our advanced LTE modules, supporting high-reliability connectivity, GPS and data transport capabilities. As our results demonstrate, Skyworks is capitalizing on powerful macro trends, diversifying across new markets and advancing our technology leadership.

We support fast-growing Mobile and IoT ecosystems which are becoming increasingly more profitable.

The stakeholders in these ecosystems are monetizing vast flows of data while fostering entirely new wireless-centric business models. This dynamic is creating a new trillion dollar economy, underpinned by e-commerce, mobile advertising, social media and cloud-based services.

High-speed, reliable, always-on connectivity is at the heart of this secular trend, with connected platforms requiring scores of complex devices working across dozens of frequency bands in an increasingly crowded spectrum. Skyworks addresses this complexity with a collaborative systems level approach, working closely with customers to create streamlined architectures. This demands technology breadth and depth, along with flexibility and configurability, ensuring the highest levels of performance.

Our scale, innovative designs, robust quality and world-class supply chain provide us with significant competitive advantages. Within the mobile market, we facilitate the data creation and storage that allow today's smartphones to transmit and receive immense amounts of content, supporting multimedia streaming, social networking, gaming and virtual reality. We create highly integrated solutions, leveraging our skills in amplification, filtering, tuning, power management and packaging to continuously drive better performance.

For example, our SkyOne and DRx platforms are getting significant design traction, seamlessly delivering uplink and downlink carrier aggregation and global roaming capabilities. In addition to mobile, connectivity is proliferating into an adjacent set of IoT markets.

Industry projections model IoT volumes to expand fivefold, reaching 75 billion units by 2025. With significant growth in areas such as connected home, smart grid, factory automation, wearables and virtual assistance.

Skyworks' broad capabilities, spanning all major wireless protocols, including WiFi, GPS, LTE, Bluetooth and ZigBee, uniquely positioned us to capitalize in this immense opportunity.

Looking ahead, we continue to address a growing set of vibrant end markets across developed and emerging economies, covering both Mobile and IoT. At the same time, we are preparing for a significant 5G upgrade cycle, yet another catalyst fueling our business while leveraging our technology depth and systems expertise.

As these powerful market forces accelerate, we are playing a leadership role in unwiring the planet, extending our reach across new markets and enabling billions of connected devices.

With that, I will turn the call over to Kris for an overview of our Q2 financials and outlook for Q3.

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [4]

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Thanks, Liam. Revenue for the second fiscal quarter was $852 million, exceeding our guidance and consensus estimates. Revenue grew 10% compared to Q2 of last year. Gross profit was $429 million or 50.4% of revenue with operating expenses of $116 million. As a result, we generated $313 million of operating income translating into an operating margin of 36.7%. Our tax rate was 13%, driving net income of $272 million or $1.45 of diluted earnings per share, exceeding our guidance by $0.05.

Turning to the balance sheet and cash flow. Cash flow from operations was $236 million, an increase of 53% year-over-year. Capital expenditures were $55 million, roughly 6% of sales. Dividends paid in the quarter were $52 million, and we repurchased 1 million shares of our common stock for a total of $95 million.

And finally, we ended the second quarter with a cash balance of $1.4 billion and no debt.

Now moving to our outlook for fiscal Q3. For the third fiscal quarter of 2017, we anticipate our revenue to be $890 million. At this revenue level, we expect gross margin expansion within a range of 50.5% to 51%, with operating expenses of $122 million as we continue to invest and grow initiatives, including our IoT business.

Below the line, we anticipate roughly $0.5 million in other expense and a tax rate of 14%. We expect our share count to be approximately 186 million shares. Accordingly, at the midpoint of our gross margin guidance, we plan to generate earnings per share of $1.52.

With that, I'll turn the call back over to Liam.

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [5]

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Thanks, Kris. In summary, as our second quarter results and guidance illustrate, Skyworks is gaining momentum. Our outlook for Q3 reflects accelerating performance with 18% revenue growth and 23% earnings-per-share growth on a year-over-year basis. We are clearly capitalizing on a highly profitable wireless ecosystem, underpinned by explosive growth in the new connected economy.

Skyworks is leveraging these powerful macro trends, pushing the technology envelope and extending our product reach to enable the world's most exciting communications platform.

In closing, we are well positioned to create shareholder value while executing on our ambitious vision of connecting everyone and everything all the time.

That concludes our prepared remarks.

Operator, let's open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Rick Schafer with Oppenheimer.

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Richard Ewing Schafer, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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I guess, my first question, maybe I'll just go right to China. What trends are you guys seeing there with the handset guys? Is there any sense of maybe any impact that you guys are not seeing from any excess inventory there? And then maybe part of that answer, if you could talk about sort of what you're looking for in terms of the content gains there, sort of in aggregate with your Chinese OEM customers?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [3]

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Sure. Yes, I mean, in the Q2 period, we did see the market demonstrate some weakness, specifically -- again, in China, specifically in the Tier 2, Tier 3 guys. So we did see some of that. We had forecasted much of that in our plan and, at the same time, with the second- and third-tier guys falling down a bit, we saw some real strength with higher end players, Huawei being at the top of the pack, with some great content where we're now adding multiple bands of SkyOne, DRx technology, DC-to-DC technology and platforms that are -- that approach $8 to $10 in value.

And then the mid-tier players like Oppo and Vivo did okay as well. So the lower end of China was weak, the higher end was strong, a little bit of a correction there that we are able to model and come through and we see that market getting better here as we go into the second half.

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Richard Ewing Schafer, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Okay. And then maybe as a follow-up, if you could talk just a minute about Mexicali, sort of what the level of revenue that Mexicali can support for you guys today? Basically what capacity, I guess, is today? And what kind of investments you guys have planned there to stay ahead of your top line growth?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [5]

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Yes, we're running our back-end operation pretty much at full capacity but we have an ongoing CapEx investments to extend the capacity there in that facility. As you know, our CapEx is running on or about 7%, 8% of total revenue, and the vast majority of that CapEx flows into that back-end facility.

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [6]

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Yes. And one other thing to add, Rick, is that what we are seeing here in our strategy is driving us, is that we're selling more and more and building more and more integrated solutions. So what was up a unit in Mexicali 5 years ago may have been a discreet PA, and now we're dealing with very complex integrated devices, whether it's SkyOne or DRx. It's actually net-net more favorable for us. We can control that production, we can control the actual build of those complex devices. It changes the dynamic a little bit on CapEx, but it's been definitely favorable for us.

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Operator [7]

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Our next question is from Craig Ellis with B. Riley.

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Craig Andrew Ellis, B. Riley & Co., LLC, Research Division - Senior MD and Director of Research [8]

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The first question is just a clarification on the quarter. Nice to see the upside strength in revenues. Guys, where was the business a little bit stronger than you expected? And Kris, can you give us the typical breakdown in segment revenues across the 3 businesses?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [9]

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Sure, Craig, I'll start with the Q2 puts and takes. Generally, a strong quarter for us. Seasonal down period, but we're happy with our ability to upside our results. We saw some really good strength in our broad markets, let me start there. The broad market business on a year-over-year basis is up about 18%. That portfolio now is getting near a $1 billion run rate annually, so we're a little pleased with that. We saw some nice uptake in some of our other Mobile customers, specifically Samsung and Huawei, very good. China, we talked about, open market China, a little bit soft on the balance of the business, in good shape. So the big drivers were really broad markets and then Samsung and Huawei as primaries.

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [10]

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Yes, and there's also the breakout was, broad market was slightly above 25%. As Liam just said, we continue to see nice sequential growth in the high single digits as well as really nice year-over-year growth in the high double digits. And so on the flipside, of course, Mobile, which include integrated mobile in our PA business was slightly below 75% of total revenue.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [11]

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All right, that's helpful. And then the second question is more of a longer-term question, Liam. It's nice to see the business essentially back to double-digit top line growth. Can you talk about the visibility you have into sustainable levels of double-digit growth which was the company's hallmark for many years? And as we look at the longer-term potential, can you just frame for us how do you look at seasonality in the calendar third and calendar fourth quarter for the business as it now runs?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [12]

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Sure. Well, I'll start with the high-level theme and then we'll hit the second half of the year. So we are absolutely convinced and have a great deal of visibility into the trends around Mobile and IoT and where the markets are going. And I think it starts with this ecosystem that we talked about, with -- a tremendous cast of major, major players that thrive on a mobile economy, right? You look at the results from Amazon today as an example. So we continue to see rich content, very complex architectures, road maps from our leading accounts that require more and more of the kind of stuff that Skyworks does well. More integration, more creative designs, all about performance, all about performance. So we see that continuing. It's not a 2017 or 2018, this is a secular theme. At the same time, we're seeing IoT proliferate and we're seeing our WiFi portfolio, our Bluetooth portfolio, our ZigBee portfolio move into more and more end markets and expand our customer set. So that is all real good and it's all macro and we're looking forward to continuing to capitalize. More to the near term, in terms of the calendar year and the seasonality, we just went through our ballpoint in the quarter in Q2 with good results. We guided up here in Q3, but the real big part of our year is the second half of the calendar, right? So Q4, Q1, we expect those numbers to continue to be up meaningfully, double digits into the mid-teens on both quarters and getting into Q1 should be again a really strong quarter for us. So we're well positioned for that. Our Q3 guidance reflects some of that but as you start to look out over the next couple of quarters, we see accelerating growth.

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Operator [13]

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We'll go next to Harsh Kumar with Stephens.

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Harsh V. Kumar, Stephens Inc., Research Division - MD [14]

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Congratulations on tremendous results. Liam, with your Japanese filter sort of fab and factory completed, and now you're generating tremendous amount of cash flow, have your goals for drop-through margins changed at all? And I think you guys had an $8 long-term earnings goal, is that something you guys are willing to talk about or up it?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [15]

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Sure, Harsh. I'll take that. First of all, when looking at the gross margin, I'm very pleased with the Q2 operational results. Gross margin came in at 50.4%, that was 20 basis points higher than what we expected and guided to. And so looking ahead, as Liam just indicated, we are looking and expecting 3 quarters of strong sequential top line growth here in the June, September and December quarter. And we also expect 3 quarters of sequential gross margin improvements as we benefit from the revenue growth, as we, of course, continue to drive further operational efficiencies and as we continue to benefit from the filter insourcing. So all of that will help us to make further progress towards our target model of 53% gross margin and 40% operating margin. And so we continue to make good progress there.

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Harsh V. Kumar, Stephens Inc., Research Division - MD [16]

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Great. And as my follow-up, perhaps, may I ask you, Liam, you talked a lot about the IoT business. I was wondering if you could size it for us. Perhaps maybe give us some color on what it's growing at? And maybe what your margins are at in this business?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [17]

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So within -- our broad market business is on a run rate, as I indicated, of close to $1 billion, so we're not quite $250 million a quarter but we're getting near there. IoT is about 70% of that revenue, roughly. So it's been a double-digit grower. It continues to be the leading catalyst for us in broad markets. The customers set, as I noted, has expanded. The other thing that's a real benefit and it's early now, but IoT is starting to move up in complexity. It's no longer just drop in a couple of WiFi devices. We're starting to see filtering needs in IoT. We're starting to see LTEs the real cellular engines introduced into IoT. Our GPS technology is proliferating through IoT applications. So it is -- it's actually -- it's modeling content much like cellphone content was in 2002 or 2003. Very basic, kind of lower connectivity. But then as data needs increased, the performance needs within the phone expanded. We're starting to see that in IoT. So today, it's a very long list of customers, provides a great deal of diversification and the content is continuing to creep up, and we're fortunate that our breadth in IoT, with all the different wireless protocols and some of the leverage that we have in our Mobile business, we're in great position to address and capitalize.

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Operator [18]

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Our next question is from Vijay Rakesh with Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [19]

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Just a great quarter here despite all the worries in the China handset side. As you look at the second half, I know you guys mentioned high-teens growth and accelerating, is that sequential growth that you're looking at for the September, December quarters?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [20]

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Yes, we're looking for sequential growth on a year-over-year basis, we're looking at the mid-teen numbers.

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [21]

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Yes. It's on a year-over-year basis.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [22]

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Got it. And as you look at Sony's marquee phones in the back half, do you expect your content share to go up, not just units there's also a content gains story there?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [23]

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Yes, our content story is really at the heart of our business right now. And as I've mentioned, the requirements that are being driven by the leader -- leaders in the market continued to increase and the demands are more and more challenging. The complexity is daunting. And very few companies can resolve it, we're one of them. We also have an advantage of being an incumbent with the leaders and understanding the nuances of calibration and tuning and working shoulder to shoulder with the engineering teams. So our position in the leading phones continues to be very strong. It will be, again, a tailwind for us in the second half of this year and even into the future.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [24]

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Great. And last question, who are the 10% customers on the quarter?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [25]

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So during Q2, we had 3 greater than 10% customers. Obviously, our largest customer, which was slightly below 40% of total revenue, and then Huawei and Samsung. Each of them, which were slightly above 10% of total revenue. As Liam already indicated before, great traction with Huawei, expanding our product reach within multiple of their platforms. And as well with Samsung, Q2 was a great quarter, rebounding from somewhat a disappointing or a low Q1 quarter. But we really saw really nice sequential growth as well as year-over-year growth within that account.

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Operator [26]

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We'll go next to Edward Snyder with Charter Equity Research.

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Edward Francis Snyder, Charter Equity Research - MD and Principal Analyst [27]

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Last year, at your largest customer, you were pretty much exclusive on QUALCOMM platform. Do you see that as reoccurring again this year? Did you ever get some action with Intel? And then if I could, how much of the revenue that you reported this quarter or guided to next quarter was inorganic? I understand, you probably picked up Anadigics' product line from 2 6 when we invested that. So I was curious, how much was organic versus an acquisition?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [28]

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Sure, Ed. With respect to baseband, we -- this isn't the first time we've seen share shifts here or any kind of diversification within the ecosystem. No surprises. And at the same time, we continue to gain great traction with both Intel and QUALCOMM within our largest customer and globally. So for Skyworks, baseband partnerships are really important and we are agnostic to that. The parts may change a little bit. Your calibration tuning and alignment with the chips that could be different phone-to-phone and baseband-to-baseband, but we're in very good position there and we have excellent visibility on where that's going to play out over the next year or so. So we're in good shape. The Anadigics opportunity, we really -- it's minimal, in terms of its impact on the business. So there's nothing significant there. Didn't have much of an effect on our overall performance at all.

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Edward Francis Snyder, Charter Equity Research - MD and Principal Analyst [29]

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Okay. And then, it's clearly going really well across a variety of different technologies, you can see it in some of the teardowns zooming up here. Can you help us understand which of them are making the largest contributions, say year-over-year revenue growth, especially with regard, well second half but also this one. In fact, you got to choose between DRx, PADs, LNAs, WiFi, which of those are going to lead in terms of your year-on-year performance growth? I understand DRx are starting to move into more to mid- and low-end phones, and you got to dominate there but then LNAs were showing up to. Can you help us with the breakdown?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [30]

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Yes, yes. I'll answer it, and I'll kind of give you a little more color on it. The SkyOne portfolio is really important, although on a year-over-year basis, it doesn't have as much of a pop as DRx because SkyOne's been there. But I will tell you what we're doing in that product line is continuing to extend the reach of our frequency band. So we're getting into high band. We've been in mid-band and we've been leading in low band. And now SkyOne is being adopted by more and more accounts. Accounts that, a year ago, may have done a multi-mode PA and had filters on the side, they're integrating. Companies like MediaTek, that are going to create chipsets for Skyworks, we're starting to move those into the SkyOne-like architectures rather than multiple-mode PAs and filters on the side. So that's a theme. The DRx category is very powerful. We have premium technology that's defensible, that's market-leading. We've proven it in the most challenging architectures on the planet and the compares on a year-over-year basis are very strong because the DRx hasn't been around too long. However, the way we do it, the way we craft it with our custom solutions, our ability to bring our own filters in-house, what we even do to craft our LNA technology. And Mexicali, as an integrator of all of this in unique custom packages, is really special. So that product line has a great deal of upside. It has been lightly introduced. Every account that we've worked with for the most part (inaudible) with a win, but there's a lot out there that haven't yet adopted the technology. So there's quite a bit of upside on the DRx family. And that will continue to evolve as that product gets upgraded year-by-year.

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Operator [31]

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Our next question is from Bill Peterson with JPMorgan.

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William Chapman Peterson, JP Morgan Chase & Co, Research Division - Analyst [32]

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Maybe piggybacking that question. With these newer products like LNAs, DRx, GPS, can you help frame the dollar content opportunities for, say premium, mid, and I guess, the lower end, at least what your sort of addressable market is, in terms of dollar content per device?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [33]

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Sure, yes. So when we think about, just to frame it, the DRx category, we kind of created the name DRx in that whole segment. It really is -- it's focused on downlink performance. So what we're trying to do is enhance the download speeds of a device, whether it's a phone or eventually could be an IoT device. So the traditional architectures may have been discreet with a single-chip LNA and maybe a few discreet builders and a few discreet switches. And you'd have quite a bit of loss in your system and you really wouldn't be able to harness or pull through that data fast enough. So we created a new category where we integrated -- although similar to what we did with SkyOne, moving from PA and filter and switch and bringing it in with a single calibrated engine. Similar to what we did in SkyOne, we were able to craft that with our DRx product on the downlink side. So for us, a DRx is a $3, $4, could be $5 worth of content in certain phones. A competitor that may want to play in that area could attempt to work a discrete solution, with lower content, but it just wouldn't get you the performance. And what we're been able to see and really test and measure is that our customers really value that efficiency, that high efficient solution that brings in higher data rate, doesn't have the losses that you and have in a discrete system and Skyworks doing all that calibration and harmonization work to deliver that in a simple solution. So that's kind of how it works out. And we have realized content and flagship products that's over $5 in value.

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William Chapman Peterson, JP Morgan Chase & Co, Research Division - Analyst [34]

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Okay. That's helpful. Maybe switching to broad markets. I guess, if you were to exclude WiFi, gateways and routers and consider design pipeline, how would you rank the next, let's say, fastest growing segments in terms of content and revenue growth opportunities over the next year or so?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [35]

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Yes. There's a real wide list -- a long list of proliferation across connected home applications. We mentioned a few things like Sonos, things like Nintendo, we've got Nest product, Google Nest portfolio, with their drop cam, with high-speed WiFi. It may have a WiFi device but it's a unique product. A whole series of opportunities. They have factory automation end-to-end with our ZigBee portfolio. So there's quite a few. And then if you want to move that into automotive as an adjacent market to IoT, we're starting to see really rich LTE systems that are driving all of what I said, but doing it in both top level of performance to capture the kind of needs that we see in automotive.

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Operator [36]

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We now have a question from Timothy Arcuri with Cowen and Company.

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Yi Zhang, Cowen and Company, LLC, Research Division - Associate [37]

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This is Vivian on behalf of Tim. So my first question is a follow-up, on China, I'm just wondering for CQ1, how much after revenue is from China? And what is assumed for CQ2?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [38]

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Well, it was supposedly 25%.

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Yi Zhang, Cowen and Company, LLC, Research Division - Associate [39]

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For both quarters?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [40]

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Yes, yes. Pretty much.

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Yi Zhang, Cowen and Company, LLC, Research Division - Associate [41]

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Okay. And then my second question is that for BAW, how much will it cost to fully develop or commercialize your captive IP? Should we think probably a few hundred million dollars?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [42]

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For BAW -- could you ask that question one more time?

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Operator [43]

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Just a moment, I'll reopen her line. Okay, your line is open again.

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Yi Zhang, Cowen and Company, LLC, Research Division - Associate [44]

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Okay. So I'm wondering for BAW, how much will it cost to fully develop or commercialize your own capital IP? Should we think in the range of a few hundred dollars? A few hundred million dollars?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [45]

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Yes, I think yes, so bulk acoustic waves filter technology, it's certainly -- it's an area we understand completely. And what we've been doing to address the frequencies that today have been the domain of BAW. It's really about, how do we address higher frequencies so we can do some of that with our TC SAW, we can do some of that by enhancing our TC SAW, and we could also work with partners to deliver bulk acoustic wave technology. And certainly, the ability to do it organically is within our capability as a company. It's difficult to assess what the value would be. One of the things I want to make clear that to all of you is that we can address high-band solutions today in many ways, there's still a number of phones where we deliver high-band PA's and there's filters outside the molecule. I know there's plenty of opportunities. We've outlined a few today, but we have a SkyOne solution that has 4 integrated filter PA systems that we're able to sell and we used some of our foundry partners. So we're not excluded from that. But -- I mean, the opportunity to invest inorganically is always out there on the table. We assess that all the time.

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Operator [46]

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We now have a question from Craig Hettenbach with Morgan Stanley.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [47]

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Just a follow-up question on China. You mentioned it was weak, you had kind of expected that. Any signals or signs you're looking for from customers, in terms of when that might inflect positively again for the China smartphone market?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [48]

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Yes. We're actually seeing it already, Craig. When we talk, I actually, we probably didn't talk about it, but our coverage right now on the quarter is over 90%. We've got our China backlog where we want it to be for the quarter. We are continuing, as I've said, to lead with the higher-end players, Huawei being the top and then go to Oppo and Vivo, that's becoming a bigger part of our revenue. The second- and third-tier white box market, less significant. So we're very confident in recovery because we've already seen it in our orders.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division - VP [49]

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Got it. And then a question for Kris, on kind of inventory levels and how you sync your position, given the expectation for strong growth into the back half of the year? Do you think you'd be in a position of building inventory? Or you work off inventory? How are you managing that?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [50]

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Yes. So we did build a little bit of inventory in the second quarter. Inventory was up $22 million but that's clearly an anticipation of the strong sequential revenue growth that we see in the next 3 quarters, the June quarter, the September quarter and the December quarter. And so we expect to continue to build some further inventory in the current quarter in Q3, all in anticipation, of course, to the peak of -- which is in the December quarter.

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Operator [51]

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Our next question is from Cody Acree with Drexel Hamilton.

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Cody Grant Acree, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [52]

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Congratulations on the progress. Liam, back to the many BAW filters or maybe your TC SAW products. With some of the high-band wins you've been getting, are you addressing most of those wins with TC SAW? Or are these BAW-based products, I guess, just what's the trend and what's your expectation?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [53]

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That's a great question, there's a lot of detail behind that. There's a couple of ways to go. On one hand, we have the ability to deliver high-frequency products that don't have filters at all. There's still a market where we're selling multimode, multiband PAs that are high-frequency, up to 5 gig. So to be clear, that continues to be available and filters could be outside of that. Then we have our integrated solutions, our SkyOne solutions. We can deliver our SkyOne to some customers by taking TC SAW and enhancing that a little bit with tuning and getting to performance levels with good filtering and good PA technology, which again, we have in-house. We have our own gallium arsenide fabs in-house, we can craft our recipe device-by-device. We're able to deliver that to certain parts of the market. Higher end, or higher performing needs with certain OEMs will have to bring in BAW potentially from a third party, a foundry partner that we've already engaged with, and have a relationship with. So we've been doing that in some of our (inaudible). There's a number of ways to go. But another thing to think about here, as we move out into 5G, we talked about this in the last call. There is some technical changes in the way mobile systems will work. And in 5G, we see it move to time division duplexing, from currently frequency division, FDD, FDD which is more or less the standard today, does require BAW duplexes at higher frequencies. If you go to TDD, time division, you can actually deliver that performance with high-end TC SAW. You don't necessarily need a duplexer. So a TC SAW filter can be effective. So there's some changes there that we're moving the favor of our current portfolio, but at the same time we are not precluded from addressing high band. We're doing it today. We have a number of paths to do it and we're selling systems, not just filters. So that's really our story.

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Cody Grant Acree, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [54]

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And Kris, your guidance for OpEx, it's been a little higher than I would've expected. You mentioned IoT investment. Is that the kind of the new base to work for forward? Or just what are your thoughts in the next few quarters?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [55]

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Yes. So OpEx for Q2 came in at $160 million which was 13.7% to revenue. And we are continuing to make the necessary investments to grow the business. Grow the business in Mobile, grow the business in IoT, especially in IoT, we are adding some resources from an R&D point of view as well as a sales and marketing point of view to address that diverse market segments. But the way to think about OpEx is that we target 13% of OpEx to revenue on a full year basis. There will always be some seasonal situations where it's slightly higher and slightly lower, but on a full year basis, the OpEx envelope is on or about 13% to revenue. And we are tracking very well within that envelope.

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Operator [56]

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Our next question is from Mike Burton with Longbow Research.

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Michael Austin Burton, Longbow Research LLC - Senior Analyst [57]

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Just wanted to drill into a little bit on the June guide. Your current customer obviously is a big ramp for you in Q1. They talked about some weaker unit trends in their June quarter on the low mid-end. And then stronger high end. I'm just wondering if you're expecting that ramp in the high end to continue for you. Are we still looking for more sequential growth out of that customer?

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [58]

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Sure, Mike. We actually, for us, the content gains that we're able to drive with Samsung are still sustainable. And we still see some room here and they will be up in Q3. Huawei is another one that we see nice sequential momentum here going into Q3 and broad markets again will be up. So those will be some of the major drivers. Obviously, our largest customer -- we're in a period now with our largest customer, we're really readying for a pretty powerful second half ramp with their units in our content position. So those are kind of the puts and takes here. I think the big impacts here for Q3 and the upside in guidance is really relative to the big content moves that we have with Huawei and Samsung.

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Michael Austin Burton, Longbow Research LLC - Senior Analyst [59]

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That's helpful. And then also on, Kris, how should we be thinking about gross margins versus revenue growth in the second half of the calendar year? Any puts and takes on mix? Or how should we think about that from a contribution margin basis?

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Kris Sennesael, Skyworks Solutions, Inc. - CFO and SVP [60]

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So as I stated, before, we do expect 3 quarters of strong sequential revenue growth and we also expect 3 quarters of gross margin improvements benefiting from that revenue growth as well, of course, as all the other operational efficiencies that we continued to drive there. From a mix point of view, there's always some minor changes that work against us or in favor of us. Obviously, we continue to add more value, add more complexity. We continue to grow our IoT business, which had slightly above average gross margin. And so from a mix point of view, there is not a lot of movement there.

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Operator [61]

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Ladies and gentlemen, that does conclude our question-and-answer session. I'll now turn the call back over to Mr. Griffin for any closing remarks.

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Liam K. Griffin, Skyworks Solutions, Inc. - CEO, President and Director [62]

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Thank you all for participating today. We look forward to seeing you at our upcoming investor conferences and other events during the quarter. Thank you.

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Operator [63]

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Thank you. And ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.