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Skyworks Solutions Takes a Hit From the Trade War

Nicholas Rossolillo, The Motley Fool

Chipmaker Skyworks Solutions (NASDAQ: SWKS) is having a forgettable year. It's not that shares are in the red (they're surprisingly up 14.5% year-to-date as of this writing) or that new product development for 5G mobile network infrastructure and connected device development is stalling out. Rather, the company is suffering collateral damage from the trade disputes between the U.S. and China, putting a serious cap on sales and profitability.

The good news is that the 2019 fiscal year is now almost over, and Skyworks will start lapping the dismal results in the next few quarters. It's been a painful run, but growth may be in the cards again soon.

Three-quarters of the way to the finish

Skyworks reported fiscal third-quarter results this month in line with its updated guidance, provided after the White House placed a restriction on sales to Chinese telecom giant Huawei. Revenues fell 14% year over year to $767 million, and resulting earnings per share were down 47%. Yikes.  

Skyworks is not having a good time in the 2019 fiscal year to date, adding to a weak turnout in 2018 due to slowing smartphone sales.

Metric

Nine Months Ended June 28, 2019

Nine Months Ended June 29, 2018

Change (YOY)

Revenue

$2.55 billion

$2.86 billion

(11%)

Adjusted gross profit margin

50.7%

51%

(0.3 pp)

Adjusted earnings per share

$4.65

$5.29

(12%)

Data source: Skyworks Solutions. YOY = year over year. Pp = percentage point.

However, on an adjusted basis (backing out one-time items that affect comparability), things are faring OK given the situation. Part of the reason is that Skyworks keeps purchasing its own stock, thus keeping earnings propped up, relatively speaking. Plus, while not being able to ship product to Huawei certainly dragged down results this go-round, other end markets are doing well for Skyworks -- and management is expecting a sequential increase to close out the year. 

Common everyday objects displayed in cells, signifying an embedded chip and internet connection.

Image source: Getty Images.

Real catalysts or just adjustment to bad news?

The buildout of the new 5G mobile network is only just beginning, so it's hard to say how big a revenue stream this could eventually be for Skyworks. However, the company is in the mix for the moment. CEO Liam Griffin had this to say on the earnings call:

Looking forward, our design win pipeline is expanding as we capitalize on the ramp of 5G in wireless infrastructure, smartphones, and across IoT. For example, in wireless infrastructure, Skyworks is now supporting a number of global 5G deployments. Our solutions address both 5G macro base stations and small cell radios, and we are ramping today with leading European and Japanese infrastructure OEMs. In addition, Skyworks is enabling 5G massive MIMO base stations for a leading Korean customer.  

Besides mobile solutions -- which accounted for nearly two-thirds of revenue in the last quarter -- Skyworks has been building out a portfolio of other connected chips the last few years. Recent design wins include parts for Facebook's (NASDAQ: FB) Oculus VR headsets, wireless soundbars for TV entertainment systems, wearable devices like smartwatches, and factory automation equipment, to name just a few. The ex-wireless network segment has been growing an average of 16% a year since 2013, according to management.

At the midpoint of guidance, Skyworks expects revenue of $825 million to finish out its fiscal year. That's a big 18% drop from a year ago, with much of the weakness attributable to the loss of Huawei for the time being. It is an 8% sequential improvement over Q3, though. Additionally, speaking to the strength of the product portfolio overall, revenue is expected to grow 20% sequentially when Huawei is removed completely from the equation.

There's no telling when the trade situation will be rectified, but at the very least Skyworks is showing signs of turning some sort of corner. With 2019 nearly in the books and the company getting ready to start lapping the last year's forgettable results, it's starting to look as if 2020 will be the year for a rebound.


Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Facebook and Skyworks Solutions. The Motley Fool owns shares of and recommends Facebook and Skyworks Solutions. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com