9 February 2023
Skyworks’ quarterly revenue falls during Android-related inventory consumption
For fiscal first-quarter 2023 (to 30 December 2022), Skyworks Solutions Inc of Irvine, CA, USA (which manufactures analog and mixed-signal semiconductors) has reported revenue of $1.329bn, down 5.5% on $1.407bn last quarter and 12% on $1.51bn a year ago, but exceeding consensus estimates.
Skyworks’ largest customer comprised about 68% of total revenue, despite them being supply constrained due to COVID-related issues in China. In contrast, South Korea’s Samsung was less than a 10% customer. “They are going through an inventory burn-off period right now. Proactively, we have reduced our shipments to that customer,” notes senior VP & chief financial officer Kris Sennesael. “We stepped back a bit on Android as the inventory levels were building in the channel,” adds chairman, CEO & president Liam K. Griffin. Similarly, Oppo, Vivo and Xiaomi are also “going through an inventory cycle now”, so China comprised less than 5% of revenue. “That’s because the market didn’t need more than that, and we didn’t want to sell more than that,” says Griffin. “We never built the inventory up. We try to meet the demand as it is.”
Mobile products comprised 65% of total revenue (down from 68% a year ago), with weakness in Android while customers work down their inventory levels.
Broad Markets products comprised 35% of revenue, down year-on-year due to macroeconomic headwinds, but with a strong contribution from automotive (a sixth consecutive quarter of record revenue), infrastructure, industrial, and the global upgrade to Wi-Fi 6E (which presents a big step-up in content) and some early design wins for Wi-Fi 7 that are now being turned into revenue.
“Skyworks delivered solid first quarter results, leveraging our increasingly diverse portfolio of mobile and IoT solutions,” says Griffin. “The rapid expansion of mobile network traffic, advances in cloud and edge computing, IoT, and the electrification of vehicles are major trends that drive complexity and demand for our highly integrated and customized solutions,” he adds. “We expanded our design-win pipeline in several emerging high-growth segments”:
- In IoT, Skyworks extended its technology portfolio across a growing customer base. The firm partnered with AT&T to launch their first Wi-Fi 6 passive optical network (PON) gateways, unveiled the industry’s first Wi-Fi 7 networking system with TP-Link [shipping into their quad-band mesh router systems], and leveraged its advanced connectivity portfolio to support 6GHz fixed-wireless access points at Cambium Networks.
- Across infrastructure and industrial markets, Skyworks integrated Power-over-Ethernet functionality into Cisco’s modular switches for enterprise networks, ramped timing platforms to meet high-precision and -speed requirements for the leading data centers, and delivered frequency-generation and clock distribution technology to a European infrastructure provider for 5G massive MIMO deployments.
- In automotive, Skyworks strengthened its electric vehicle (EV) design-win pipeline with onboard charger content at a Japanese automotive supplier, and secured design wins for digital radio platforms with a top European OEM.”
Despite the decline in revenue, on a non-GAAP basis, gross margin has risen further, from 51.2% a year ago and 51.3% last quarter to 51.5%, due to driving operational efficiencies into the firm’s factories with “great execution” despite adjustments made to factory loadings, aided by Skyworks doing “just about everything” in-house. “The ability to do that also includes great supply chain management,” says Griffin.
Operating expenses were $193m (14.5% of revenue), up from $187m (12.4% of revenue) a year ago but roughly level with $192m last quarter.
Net income has fallen further, from $523m ($3.14 per diluted share) a year ago and $486m ($3.02 per diluted share) last quarter to $415m ($2.59 per diluted share).
Nevertheless, operating cash flow was a quarterly record of $773m (up from $236m last quarter). Capital expenditure has fallen to $64m (from $142m last quarter, as the CapEx rate moderates compared with the 10-12% of revenue over the last five years). Free cash flow was hence a record $709m (a margin of 53% of revenue), up from $486m a year ago.
During the quarter, Skyworks paid $99m in dividends and repurchased about 1.8 million shares of common stock for a total of $166m. On a trailing 12-month basis, the firm has returned $1.2bn to shareholders through dividends and buybacks.
Overall, during the quarter cash, cash equivalents and marketable securities rose from $586.8m to $992.6m.
Since the end of the quarter, Skyworks’ board of directors has declared a cash dividend of $0.62 per share of common stock, payable on 21 March, to stockholders of record at the close of business on 28 February.
“Additionally, our board of directors has approved a new $2bn stock repurchase program, demonstrating their confidence in our business and its ability to continue generating strong free cash flow,” says Sennesael.
For fiscal second-quarter 2023 (to end-March), Skyworks expects revenue to fall to $1.125–1.175bn, with Broad Markets to be slightly down sequentially, somewhat in line with normal seasonality. In Mobile, Android-related business will remain low, especially in China, with Vivo and Xiaomi – and, to a certain extent, Samsung as well – still going through the inventory burn-off process.
Gross margin should fall to 50–50.5%. Despite operating expenses being cut to $189–191m, diluted earnings per share are expected to fall to $2.02.
“Inventory overhang is starting to abate already… We will start seeing some improvements in the June quarter and then, for sure, in the back half of calendar year 2023,” believes Sennesael.
“As we get through this quarter and starting to see toward the second half of the year a more improving macro-environment, we will be very well-positioned to execute. If things change, we can move faster if we need to. But it’s not a technology issue. It’s not an execution issue,” says Griffin.
“Despite some of those macro-economic headwinds and challenges and somewhat softer demand and maybe a little bit of inventory correction that is going on, we do believe that we can grow our Broad Markets business this year,” says Sennesael. “We play in some high-growth markets with some really key technologies… We have strong design-win momentum.”
Over the last five years, Skyworks has put a lot of technology-related investments in place ($500-600m of CapEx annually). “We spent that money over the last four or five years strategically to build up a competency in bulk acoustic wave (BAW) and other filter technology. It’s very, very difficult stuff. It’s not available in the merchant market. So, it was a make versus buy approach. We did the make. So, we developed solutions that are purpose-built for Skyworks and purpose-built for our customers,” says Griffin.
“Now, we have to leverage that capacity. We’re focusing really now on driving operational efficiencies, die shrinks, yield improvements, which gives us a lot more capacity leveraging the installed base of the equipment that we have… without putting more equipment in place,” says Sennesael.
“The vast majority of that CapEx was going into expanding our BAW filter operation where we have – of course, from a small base – doubled and doubled and doubled again the capacity there,” says Sennesael. “Our revenue from devices that has BAW filters in will continue to grow very strongly. We will not hesitate to put more capacity in place if and when needed,” he adds.
“There will be incremental CapEx spend over the next several years, but it won’t be at the level of the last three or four, because now those investments are in-house, at scale, and running,” says Griffin. “It really will help to further improve our strong cash flow that we have already,” notes Sennesael. “We expect further strong cash flow for the remainder of the year, again, based on some moderate CapEx. But we could drive our free cash flow over 30% [of revenue] in this fiscal year.” he adds.
“Skyworks is well positioned to navigate a challenging macro backdrop with its highly profitable business model, leading connectivity technologies and an expanding set of customers across many of the strongest market segments,” concludes Griffin.