Skyworks Solutions, Inc. (NASDAQ:SWKS) Citi 2020 Global Technology Virtual Conference September 8, 2020 4:15 PM ET

Company Participants

Liam Griffin – President and CEO

Conference Call Participants

Atif Mailk – Citi Research

Atif Mailk

Welcome everyone. My name is Atif Mailk. I cover U.S. Semiconductors & Equipment stocks here at Citi. It’s my pleasure to welcome Liam Griffin, President and CEO at Skyworks.

The format of today’s discussion is fireside chat. I will go with my questions first, and then if you have any questions for Liam, please email it to me, that’s atif.malik@citi.com. Welcome Liam.

Liam Griffin

Thank you, Atif.

Atif Mailk

Liam, my first question is on broad smartphone demand trends that you guided to strong 14% sequential growth in the September quarter driven by China and Korea 5G with North America, more of December quarter event based on public news of a delayed flagship launch this year. We are hearing that the demand for the legacy phones like iPhone SE2 is quite good. And what do you see in the market. Does the $200 million 5G phones still sound like a reasonable estimate for this year?

Liam Griffin

Sure. We actually are seeing continued strength in smartphones. There are some incredible 5G products that are in the market right now that are shipping and then there is some incredible solutions that we won’t see for the next month or so. But I will tell you that the common theme is really around incredible performance, very, very high-speed, low latency, higher capacity solutions are underpinned by incredible technology and the kind of things that we do at Skyworks.

So we definitely see the demand profile coming together. I’ll be some of that may be more towards the back end of the calendar year. The technologies that support these mobile devices will be like any – unlike anything that we have seen so far in mobile cycle.

So we’re really excited by that. I’m proud of the work our team has done to position our company to deliver and you know that we’ve been in this industry for years about 20 years working on wireless technologies and it’s taken all of that energy and effort and know how to put us in a position to lead as 5G comes to market.

Atif Mailk

Great. And Liam in terms of your content growth, I think you’re expecting a bigger bump this year. Can you just talk about how you benefit from strong content growth in flagship models and also what’s different I think the team feels like about 5G is that you also getting a nice content bump in Chinese handsets going from 4G to 5G from $1 to $3 to $5 to $7. So can you just talk about the dynamics that what’s different this time you’ve been a growth stock for multiple years, but unfortunately in the last three years because of Huawei restrictions or whatnot, the growth hasn’t really transpired?

Liam Griffin

Yes. So if you look at what’s unique here in this cycle and it is very unique, is that you’ve got an incredible 5G solution that requires unique technologies, right, unique technologies operating in spectrum that we haven’t operated in before. So there is a great deal of complexity in the devices. There is new frequency bands that we have to work on in the filtering side, we have a Sky5 platform that really integrates complex challenging issues within the mobile phone and that consolidates that into a integrated full solution that’s really cool.

We’re also seeing the need for these devices to be smaller and more compact and more efficient. That’s been unique for us right now. The usage cases that we’re seeing that are going to emerge around 5G are going to continue to push the technology envelope. And then also think about the backward compatibility that you have. So you have the new 5G content, which is unique to the spectrum in 5G, but we also have to have backward compatibility to 4G.

So that requires a lot of unique initiatives, size reduction, conservation of current and energy and still be able to deliver that band within – in a price and a form factor that’s desirable to the customer. So there is a lot of interesting things with complexity going way, way up, our knowledge, our know-how and the ability for Skyworks to bring all the individual elements from the RF chip to the mid-band to the high-band to the DRx solutions to GPS, Wi-Fi, all of those devices come together to provide a market-leading 5G phone.

Atif Mailk

Great. And as we look into millimeter wave part, how should we think about your content bump going from sub 6 gigahertz phones right now to millimeter wave bomb?

Liam Griffin

Yes, so the millimeter wave bomb is kind of an incremental piece of high-band spectrum, right. So it’s typically 6 gig and higher, and that’s a unique area right now that is probably going to be first launched in the U.S. with maybe a subset of phones. We’ve done a really good job of managing and developing solutions that are going to cover all the phones, U.S., Europe, Asia, wherever it may be. So our footprint is extremely broad in terms of technology and the devices that we have to underpin these phones is quite compelling as well.

So it’s a lot of investment that we’ve made in Bulk Acoustic Wave, in mid-band filtering and low-band filtering to try to drive this, and we’re still working with the millimeter wave side as well for today for us, that’s not been a leading part of our story. We will continue to develop on that, but if you look at low mid-high band from transmit to receive, there is an unbelievable amount of complexity that’s brought to market to our customers.

Atif Mailk

Okay. I mean the one trend we’re seeing in the smartphone market, Liam, is that the demand is moving towards kind of mid-to low-tier 5G phones, particularly in China. I mean, how does that trend board for the pricing power or kind of profitability of the component suppliers that play into the smartphone market?

Liam Griffin

Well, it’s all good. I mean it’s very early for 5G, so these phones are really just getting launched now. And however you measure the content, it’s significantly higher than what a 4G device would be, harkening back to what I said earlier there is unique spectrum in 5G that just is not in your 4G phones.

So if you’ve got roughly 5 billion mobile subscribers today on the planet, I would tell you that 99% of them are using 4G or 3G phones, 5G is still really early, and it provides the most compelling uplifted technology and performance that we’ve seen in mobile, and we’re going to use all of our 20 years of experience at Skyworks to make sure that those technologies launch effectively and provide the desired benefit to our customers.

So there will definitely be an incremental content bump with every one of our customers. And I think what’s important, Atif, is the diversity of the Skyworks offering, allows us to come to the table, work with our customers, who also have challenges trying to deliver these very complex phones and have our engineering and our know-how and our choice of technologies. Our choice of technologies made within our own fabs, so that we can craft and configure a unique solution for any one of those accounts, whether it’s a lower end player in China or large flagship player in the U.S.

Atif Mailk

Great. Liam, another effect we’re seeing in this smartphone market is the kind of share shift from Huawei to whether Samsung or other MediaTek modem-based phones in China. How does the demand shift impact you guys. I mean, I assume it’s probably a tailwind at this point because your Huawei sales have been fairly limited in the last 12 months or so. Can you just talk about how does the geopolitical kind of situation with Huawei impacting your numbers both come near term and then longer term too?

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Liam Griffin

Yes, that’s a great question. Fortunately for us, we have been minimizing our exposure to Huawei and basically at this point, there is not a significant revenue loss that we could see despite what occurs here in the trade environment.

Obviously, there is a continued band on certain technologies, and we’re not too surprised by it, and fortunately we’ve managed through this for the most part, and we don’t expect it to be much of a hit at all to our financials. But at the same time, we think that, and we really truly believe that this 5G technology is so vibrant and vital to the world to the economy that whatever handset units are loss with one customer in China perhaps will get redistributed with others, or even redistributed to Korea or back to the U.S.

So, the overall uptake in 5G and units and 5G, although the mix may shift a bit here with Huawei, the total volumes I don’t think are going to change. I think we’ll continue to see the upside and the growth curves that we’ve expected.

Atif Mailk

Right. Liam, Skyworks is a very kind of broad connectivity company in my view, and this whole work from home kind of demand that we’re seeing right now, how are you guys participating in different areas from the work from home effect?

Liam Griffin

Yes, that’s great. I’m glad you asked that question. You know, at a high level, we’re really proud to play a significant role in connecting anyone, everyone all the time. And that’s been our slogan. And that could be from home, it could be at the beach, it could be your office, wherever you may be. And we’ve seen through the challenges of this pandemic, the ability to be connected anywhere really, really matters.

We’ve had an incredibly effective workforce with largely at home workers. But you have to have the right technology and the right technologies are the kind of things that we’ve been working on for years. So we see a tremendous change, an economic change and usage case change that I think is sustainable and could grow. You know look at some of the companies that have benefited companies like Zoom, companies like Peloton, companies like Amazon, with store-to-door delivery, just an incredible amount of new applications, but you and I both know, it’s not just software.

At the end, there’s hardware, right? There’s hardware to transmit and hardware to receive. So that often gets lost when people talk about tech, and they talk about communications. The things that we do at Skyworks, we actually create that connection, we create that signal to allow all of that usage-case dynamics and the software dynamics that go on under the curtain. So, there’s a lot of interesting things happening.

We’re excited about it. We think that this is a sustainable growing opportunity for Skyworks that wasn’t contemplated three or four years ago, where now we think it’s going to be vital. So we’re excited. It’s also going to allow us to get into more end markets. So we talked a little bit about 5G, but we also have an incredible Wi-Fi 6 portfolio, which is propelling a lot of these applications. We have precision GPS that we’ve designed and honed in for very, very incredibly tight GPS spectrum.

So there’s a lot of stuff that’s coming through, but the underlying theme is connectivity, its connectivity, right? And that’s been the bread and butter of our company for 20 years. So we’re really excited about that. And also excited about our company doing great in handsets, but there is so much more that we can do with the technologies we have.

Atif Mailk

Liam, if I look at 5G in China went to 5G first, 60% to 80% of regions of China already had infrastructure and 5G we’re hearing about gaming becoming a bigger driver for smartphones now because of the refresh rate and other applications that you’ve heard from your customers or customers, customers that can support that beyond speed and access to 5G has a much bigger role to play?

Liam Griffin

Yes, I mean, if you think about AI and virtual reality start even looking at some of the interesting new opportunities, what maybe their drones or autonomous driving all of that type of technology is right in the sweet spot of what we do at Skyworks, it’s the high performance, high reliability, low latency technologies that we can bring to the market. And those markets don’t necessarily need to be a handset. Machine-to-machine applications are going to be very – I think incredibly impactful for the industry over time.

And then in gaming, as you mentioned, we have a incredible business in cognitive radios, which is really a wireless audio type product where we can do both voice synthesizing and also the audio side on the input. And again that’s been a portfolio that came through acquisition of that narrow and has been not doing really well over the last several quarters. And it’s another one of the themes here that goes along with connectivity into kind of a stay-at-home environment. But that’s also been looking good and provides a new revenue stream for us.

Atif Mailk

Great. If you just switch to the broad markets, because I’ve been going to have a pleasant surprise that is quietly grown to one-third of the sales of the company and the strength obviously driven by work from home Wi-FI 6, do you expect any double-digit growth in September, even December quarter auto is still small. How should we think about the growth for this set of business for the next couple of years?

Liam Griffin

Yes, that portfolio, as a standalone is just an incredible business. It’s highly diversified, very low concentration levels, broad set of customers in a broad set of technologies supporting those customers. So it’s a great portfolio of businesses that we’ve grown over time, and I appreciate you noting the magnitude of the revenue.

But as we go forward, we really believe that’s going to become a significant catalyst to our top line. And just think again about the technologies that we have, many of these technologies will start perhaps in a standard mobile device, but they will move towards IoT security, AI, VR, advanced audio, all of those kinds of technologies. And what’s great for us is at the essence, it’s still leveraging core wireless connections, and core wireless IP that we have and leveraging the customization that we can bring in our factories, unique technologies there.

So again, 5G mobile, great, it will spawn into many, many more markets that will be broad market like, and occasionally you step into a market that becomes really significant. And if that happens, that’s great. We’ll continue to put resources and people and investment in that area.

Atif Mailk

Great. And in terms of your M&A strategy to kind of augment growth, are you confident that the mobile and the broad markets that you have are enough for your future growth or you plan to do some tuck-in type acquisition still like Avnera and others.

Liam Griffin

Yes, I mean, we absolutely believe we’ll be able to do both. I will tell you right now, I love the background that we have right now but the demand opportunity is very solid for us. The engagement with customers that we have right now outstanding. We’ve launched Bulk Acoustic Wave technologies, which is really critical in 5G. We did all that in-house. So the organic landscape for Skyworks is very strong, and we’re going to execute to that.

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But at the same time, our balance sheet, the financial powder that we bring, our free cash flow margins give us a great opportunity if the right M&A prospect comes about. So we will definitely we have been continuing to monitor that and if the right play works for us, we’ll jump on it.

Atif Mailk

And then just you mentioned that the BAW technology. I mean, I think the knock-on Skyworks historically has been that you guys are more of a SAW player or in the low-to mid-end bands. But with the BAW that now you’re offering a full spectrum. Can you just talk about where you are in terms of your BAW technology noticed a big volume number that you guys shared a few weeks ago, but we’ve been arguing in terms of having an a full-proof BAW filter?

Liam Griffin

Yes. So I’m just going to give a little bit of background on this. So if you go back a few years ago, six or seven years ago, we would buy filters from the merchant market. We were actually just a purchaser of filters. We didn’t do it ourselves. And as the technologies increased, and the number of filters within a handset increased, we decided we needed to own the technology. And so we did an acquisition with Panasonic in Japan, and we brought that technology in-house. We invested in the technology. We crafted the technology. We grew the scale, and we now have 8 billion units per year, TC-SAW capability.

So temperature compensated SAW filters, incredibly necessary and populated through all of these phones, 3G, 4G and 5G. So that’s one big slice and we did it ourselves. Similarly, with Bulk Acoustic Wave, our team was able to develop, invest and craft, the kinds of solutions with Bulk Acoustic Wave that are winners with our customer.

Are we number one in that space? Not yet, but we have ambitions to be much stronger than we are today. We’ve shipped over 150 million BAW-enabled devices. It actually probably more like 180 by the time we’re done with the quarter, so it continues to be an important part of our business. And it opens up a number of new opportunities for us within the handset and in other areas.

So it was a necessary element to bring under our roof and I’m really proud of our team that we’re able to get this done organically.

Atif Mailk

Great, Liam. Liam, I’m receiving a few questions from clients on the same topic, and also, let’s say on this topic. They’re asking can you ask Skyworks to compare or contrast their BAW or TC-SAW to the Q SAW technology Qualcomm is ramping. Qualcomm is talking about performance gains that could allow them to attack the low band, are they right or what is your approach here?

Liam Griffin

Yes, I mean look, everyone is trying to win, right? I mean, we love the portfolio that we have and our company we’ve been at this for 20 years. These technologies are not easy. We can put slogans and all kinds of marketing out there, but ultimately, the crafting and development of these devices is really difficult, takes years and years.

We started with SAW, we went to TC-SAW much higher performance level. We built our own factory to make it happen. Similar with Bulk Acoustic Wave, we crafted it our way. These are solutions. If you could buy them in the merchant market, people would do it. The challenge is to craft these solutions in such a way that they are easily assimilated by your customer, but also high performing, right, and really doing the necessary work that a filter is intended to do.

We have a incredible flagship position and low band, TC-SAW technologies. And if you look at a typical phone, there is more low-band, TC-SAW and any other filter out there. They’re incredibly necessary. They cover a broad range of spectrum. And they’re very, very hard to make.

So we have that. And then we have our BAW technology, and then we have mid-band technology. So we have a portfolio that provides choice to the customer. And that’s how we work with our engagement.

We can get better and every one of those products, every one of those products we can improve on and we’ll continue to do that every year. But I think what differentiates us at Skyworks is portfolio, the palette of technologies that we can bring to each and every customer, and we really do that, and we can bring technologies that are baseband-agnostic. They can work with Qualcomm, they can work with MediaTek. They could work with HiSilicon, Samsung LSI, they can work with different solutions. And it requires the unique technologies that people know-how, and also the manufacturing that we do in-house, whether it’s packaging, assembly and test, all that done in-house also provides some unique opportunities.

Atif Mailk

Great. Liam a question I get – asked frequently is Huawei, when they got restricted, they started moving to some discrete components, and is there a future for discrete components? And if you can also talk about the other handset makers in China what is their approach longer term that they want to use discrete solutions and not like Oppo, Vivo, Xiaomi?

Liam Griffin

Yes, I mean, it’s clear that the integrated solutions are the most desirable solutions. Now with that comes a more of a premium on the product. But ultimately the performance benefit and the user experience in a highly integrated solution like a Sky5 that we provide our platform. In the end is a great trade for the customer. And we’ve seen it.

And if you look at the Huawei situation, it’s a perfect case study, because Huawei was certainly embracing integrated solutions, a lot of those solutions from us. And when some of the trade barriers went down, it was more of a discrete implementation. But that was done more or less through the trade restrictions, not because the discrete solutions were better, it’s where the discrete solutions were available.

And if you look at the mid-to-high end phones today, you very rarely see discrete components. You see integration, highly integrated crafted customized products with our Sky5 platform and others really kind of leading the charge with that.

So we believe the customer, it’s all about customer choice, and the customers that we work with now prefer to see a more integrated solution more efficient, less scattering of chips on a board. I mean, 5G is complex enough, you’ve got to deal with unique spectrum, unique slices of technology, add back your 4G compatibility, integrate all of that together. It’s not easy.

If you can find a partner like Skyworks we go in, we work with the customer. We understand where they want to roam, what regions they’re going to be in, what their current budgets going to be. And we craft a unique technology for them. And I think that has been a differentiator for us and it’s been great for the end customer.

Atif Mailk

Great. Another question in terms of the advantage of having your own manufacturing versus some of the players who are using foundries or other entities to make the front ends, whatever advantage in terms of having your own manufacturing know-how?

Liam Griffin

Yes, really important. Glad you mentioned it because manufacturing isn’t just, you know, kind of the tail end of the process for us, it starts at inception, its technology from day one. When you have your own factories, you know exactly how you are going to build and leverage that technology in your own sites.

And so one of the other things that, I think that our peer group would agree with me is that the technology turnover in some of these mobile devices is pretty rapid. If you don’t have your own hands at the wheel operationally, there can be a lot of difficulties, you can miss cycles, you could be late to market.

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We’re able to do all that in-house. And it’s been incredibly strategic. When a customer gets an upside of 10 or 15 million units and we’re able to step up and deliver that and you multiply that with a hefty ASP, it’s a big deal. And the ability to execute operationally has always been critically important for us.

So ever year, it’s not just building more, getting – we had five machines, now we have 10. No, it’s not. It’s all about new technology and crafting and crafting the devices, leveraging state-of-the-art work, investing in capital, investing in people operationally as well to make it all work.

So it’s an important part of our strategy. Not everybody does it this way. There is a lot of companies in semiconductors and other adjacent markets that do it all fabulous, but that’s not our play. Our play is to own the technology, craft the technology, invest annually at driving what our customers need and we’re able to do that and still deliver a great cash story as well.

Atif Mailk

Liam, we talked about BAW. Can you talk about your position in the GaN in Massive MIMO parts of the market with respect to the growth potential?

Liam Griffin

Sure. Yes. So if you think about Massive MIMO, we have solutions there that we’re working on right now largely in infrastructure. It could be GaN, it could be gallium arsenide. There is lots of different technology flavors that we could bring to market. But you are an seeing infrastructure, some unique opportunities with MIMO and Massive MIMO, high performance switching, and then slightly off that grid. We also have, as I said some real strength now in GPS that’s been popping up and becoming more important too.

So there is some unique technologies there. We think over time, there could be a little bit more opportunity in GaN, we’re looking at that. But we still have flagship gallium arsenide technologies, both with our leading fabs in Boston and out here in California. So we have unique technologies that we can bring to market and provide a pretty substantial offer to a variety of customers not just in the mobile side.

Atif Mailk

Great. And what has been the most exciting part of Avnera acquisition, how is that gone in terms of using the technology?

Liam Griffin

Yes, that’s great. I’m smiling already because it’s a really fun business. And some of the names are on the list are just great. I mean Class A companies, real leaders in the industry. Microsoft, and Samsung and Google really interesting cool companies that haven’t been mobile phone companies, quite frankly, right?

So what’s great about Avnera is as a standalone business, it’s a great business. It’s high performance audio, a lot of that’s going into gaming, some of its going into sound bars, and there is some other unique technologies that are being worked, but it also drives new customers. So when you think about the classic Skyworks customers, who are also customers about Avnera, that’s great, but when I start to see names that we’ve never worked with before, come to the table, what like I said at Google, Microsoft, SteelSeries, Sonos, names like that. It’s great. It’s a new industry for us. We have very strong capabilities in that area. And it’s a great place for us to scale and move further into flagship mobile and other IoT devices. So we’re off to a really good start with that business. And not only has it been growing in the top line, it’s also been bringing new customers actually to Skyworks.

Atif Mailk

And another question on – has your business normalized from COVID-19 disruption, you talked about Mexicali impact on your last earnings call?

Liam Griffin

Yes, I mean, it’s been a difficult year, I think for all of us. And we had some real challenges in the earlier part of the year, our operation – hats off to our operational team to really ironing this out and our customers have patience with their deliveries. But at this stage, we are almost back to even in terms of the supply and demand execution albeit the strength of the top line continues to be solid, as we discussed in our last earnings call. And we’re not losing any revenue on this now, we had a couple of weeks, couple of periods of time that we had a grind through a pretty tough, but we were able to do it and having our own factories again mattered.

But we feel very good about, where we can take that business and the folks in Mexicali have done a phenomenal job of A) staying healthy, staying with their safety protocols, and also executing in a high demand environment. So we’re really proud of the team for that.

Atif Mailk

Great. And this is probably more of an Chris question, but in terms of your gross margins have been very, very stable for the last couple of years. What is the right long-term gross margin number?

Liam Griffin

Yes. So we’ve been around 50, maybe a little bit higher, we definitely think that, we can drive to a 53%, even a 55% model as we go forward. But also remember that, we are uniquely discipline on the OpEx line Atif if you look at that, and so if we look at gross margin of 52% to 53%, and we’re going to still get you to a net margin of closer to 30. And then a free cash flow margin of close to 30.

So I think those are the things that we look at as a company is we want to grow that top line, want to outgrow our peers and provide that financial discipline all the way through to free cash flow.

Atif Mailk

Okay. Another one Wi-FI 6, what are the areas that you get benefit from Wi-Fi 6 and any comments in the market share?

Liam Griffin

Yes, so Wi-Fi 6 is almost like, it’s almost akin to a 4G to 5G mobile cycle right, to go from – to go to the new Wi-Fi 6, think of that as your proxy as your 5G in Wi-Fi. We’ve seen a real surge in demand. When we talked a little bit earlier about the work-from-home stay at home and one of the markets that’s been really strong are markets like tablets where you have most of the children today are working from home or being schooled from home with a device like this, whether it’s a Zoom device, or an iPad, there’s been a lot more volume on local area Wi-Fi connectivity in home.

So we saw and we continue to see some real strength in Wi-Fi 6. We’re executing it very, very well. We have good relationships with our partners. We have some of the customers that we’ve worked on for years that are just now upgrading to Wi-Fi 6. So I think that is going to continue to be a catalyst for us for quite some time and that’s still early. That’s like I said it’s in the first or second inning of the next gen of Wi-Fi, but the dynamics of this pandemic accelerated a lot of Wi-Fi consumption. And I think that continues to move forward and new applications are coming about.

Atif Mailk

Great Liam. I’m getting one more question, which is that your peer Qorvo has positively announced and what are your thoughts? So you don’t have to answer that question. We can wrap it up here. Thank you, Liam, for coming to the Citi conference.

Liam Griffin

All right. Thank you hope next year, we get to talk together personally.

Atif Mailk

Thank you.

Question-and-Answer Session

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