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Why Is Skyworks (SWKS) Down 10.6% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Skyworks Solutions (SWKS). Shares have lost about 10.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Skyworks due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Skyworks Beats on Earnings & Revenues in Q1

Skyworks Solutions reported first-quarter fiscal 2020 non-GAAP earnings of $1.68 per share, beating the Zacks Consensus Estimate by 1.82%. The bottom line compares favorably with management’s guidance of $1.65 per share. However, the figure declined 8.2% from the year-ago quarter.

Revenues of $896.1 million outpaced the Zacks Consensus Estimate of $880 million. The figure outpaced the higher-end of the management’s guided range of $870 million to $890 million. However, the top line declined 7.8% from the year-ago quarter.

Management attributes better-than-expected performance to rapid roll out of 5G phones and growing clout of Sky5 product portfolio.

Per management, Mobile contributed 73% to revenues, while the balance came from broad markets.

Deal Wins Remain Noteworthy

During the reported quarter, Skyworks’ Sky5 product portfolio facilitated several 5G launches. The company’s offerings were selected by VIVO, Xiaomi and OPPO for 5G mobile platforms.

In the fiscal first quarter, the company initiated volume production of Wi-Fi 6 connectivity offerings for Belkin/Linksys and ZTE.

Moreover, Skyworks’ LTE-based IoT engines have been deployed by Sierra Wireless across transportation platforms and industrial gateways. The company’s offerings have been implemented by Sonos for indoor/outdoor portable smart speakers.
 
Skyworks also rolled out Bluetooth Low Energy modules to power Proctor & Gamble’s infant monitoring solution.

The company is benefiting from strong demand of its wireless communications engines. Its expanding product portfolio, growing influence in the IoT solutions and 5G markets are key catalysts.

Skyworks is also enabling notable infrastructure customers to enhance 5G small cell architecture.

Operating Details

Non-GAAP gross margin contracted 90 bps on a year-over-year basis to 50.1%.

Huawei’s addition to entity list is likely to have negatively impacted gross margin. During the reported quarter, the company had to incur $5.6 million in non-recurring charge (GAAP), primarily comprising inventory write-downs related to Huawei.

Research & development expenses as percentage of revenues expanded 80 bps on a year-over-year basis to 12%. Moreover, selling, general & administrative expenses expanded 130 bps from the year-ago quarter to 6.2%.

Consequently, non-GAAP operating margin contracted 150 bps on a year-over-year basis to 35.2% in the reported quarter.

Balance Sheet & Cash Flow

As of Dec 27, 2019, cash & cash equivalents were $1.23 billion, up from $1.08 billion reported in the previous quarter.

Cash generated by operating activities was $398.4 million, compared with $417 million in the prior quarter. The company reported free cash flow $287 million, and free cash flow margin of 32%. Capital expenditure was $111.2 million in the reported quarter.

Skyworks repurchased 742,000 shares for a total of $74.2 million and paid out $75.1 million as dividends.

The company declared a quarterly dividend of 44 cents per share payable on Mar 3, 2020, to shareholders as on Feb 11, 2020.

Guidance

Uncertainty pertaining to Huawei is keeping management cautious. For second-quarter fiscal 2020, revenues are expected to be in the range of $800 million to $820 million.

Non-GAAP earnings are anticipated to be $1.46 per share at the mid-point.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Skyworks has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Skyworks has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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