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Skyworks (SWKS) Revises Outlook for Q3 on Huawei Headwinds

Zacks Equity Research

Skyworks Solutions Inc. SWKS recently provided an update on third-quarter fiscal 2019 outlook.

On May 16, 2019, the Bureau of Industry and Security (BIS) added Huawei Technologies Co., Ltd. and 68 of its affiliates to the “Entity List” maintained by U.S. Department of Commerce.

This decision bars Skyworks from supplying products to Huawei and its affiliates, which compelled the company to trim revenue guidance.

Notably, Huawei is one of the most prominent customers of Skyworks’s mobile and wireless infrastructure solutions. In the first six months of fiscal 2019, the company notes that Huawei and its affiliates contributed approximately 15% of total revenues.

This dependence on Huawei is anticipated to weigh on the company’s performance in the days ahead.

Following the news, shares of the company went up around 2%, yesterday. Notably, shares of Skyworks have returned 1.4% year to date, underperforming the industry’s rally of 4.4%.

Updated Guidance

Skyworksnow anticipates third-quarter fiscal 2019 revenues to be in the band of $755 million to $775 million (mid-point of $765 million), down from its prior range of $815-$835 million (mid-point of $825 million). It suggests a decline of 7.3% considering the mid-point.

The Zacks Consensus Estimate is pegged at $825.5 million.

Non-GAAP earnings per share have been forecast to be $1.34 per share at the mid-point, down from the previous guidance of $1.50 per share. The Zacks Consensus Estimate is pegged at $1.50 per share.

However, gross margin is remains unchanged from the prior range of 50.5-51%. Operating expenses continues to be projected to be roughly $137 million.

Skyworks refrained from issuing fiscal 2019 guidance owing to the uncertainty as to when the company will resume supply of its products to Huawei.

Q2 Results Sneak-Peak

Skyworks reported mixed second-quarter results, where in the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. The near-term softness in Chinese market remains a headwind. Moreover, unit decline across mobile business impacted the second-quarter results.

Bleak Broader Market Insights

Imposition of tariff owing to trade war between the United States and China has been plaguing the chipmakers for quite some time now. Notably, China happens to be one of the biggest markets for semiconductors, while the United States is the biggest semiconductor manufacturing country.

In fact, per IDC, semiconductor revenue is anticipated to decline 7.2% to reach $440 billion in 2019 globally, from $474 billion reported in 2018, owing to tough trade relations and high inventory levels. The decline comes "after three years of consecutive growth." The recent blacklisting of Huawei is likely to aggravate the issue.

On May 20, 2019, Lumentum Holdings LITE, which supplies optical communications products to Huawei, lowered fourth-quarter fiscal 2019 revenue guidance. Notably, the company generated 11% of total revenues in fiscal 2018, ended Jun 30, 2018, from Huawei.

Inphi Corporation IPHI earned 14% of total revenues in 2018 from Huawei. Moreover, Keysight KEYS has been recently downgraded by an analyst citing dependence on Huawei to impact the company’s performance.

Broadly, this move doesn’t seem to go down well for semiconductor players with exposure to Huawei. Intel, Micron, AMD and Qualcomm remain other U.S. semiconductor companies likely to be impacted by blacklisting of Huawei.

Bottom Line

Skyworks faces stiff competition from the likes of Broadcom and Qorvo, among others, which exposes it to significant pricing pressures. The company is also plagued with customer concentration woes.

Reportedly, the company’s power-amplifier chips enable Apple’s iPhones to transmit data at elevated speeds. Notably, lesser-than-expected demand of latest iPhones remains a headwind.

However, the company is gaining from its portfolio strength, particularly in the 5G applications and IoT market. The lifting of ban on ZTE by the United States is positive, although the contribution from the Chinese original equipment manufacturer (OEM) is expected to be minimal in the near term.

Currently, Skyworks has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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