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6 October 2006


Skyworks exits baseband business and focuses on GaAs

Skyworks Solutions Inc of Woburn, MA, USA says it has ceased its silicon-based baseband operations with immediate effect in order to focus more on its high-growth core business encompassing GaAs linear products, power amplifiers, front-end modules and radio solutions.

Skyworks' baseband business developed complete refer-ence designs, incorporating the digital signal processor and software functionality, in support of tier-three handset suppliers. The company says that this initiative was com- plex, R&D intensive and generated substantial operating losses. As tier-one OEMs have increasingly dominated the landscape, the addressable market for its baseband solutions has 'significantly contracted'.

Meanwhile, masked by declining baseband sales (together with the conclusion of a non-strategic assembly and test services contract), Skyworks' core business revenue has grown an average of 17% annually over the past four
years (from $396m at the company's launch in fiscal 2002 to an estimated $730 m in fiscal 2006). This has been driven by the launch of the Linear Products business, gains in power amplifier market share, the ramp of Helios EDGE radios, and capturing increasing dollar content through highly integrated solutions.

Given the diverging profitability and growth profiles of the baseband and core businesses, Skyworks says it has implemented a strategic restructuring to eliminate all baseband-related infrastructure, while strengthening R&D, marketing and sales efforts within the core business.

"We are focusing exclusively on our high-growth and profitable analog and RF core business," says David J. Aldrich, president and CEO. "We will partner with, rather than compete against, leading baseband suppliers such as Texas Instruments, Qualcomm, Freescale and Infineon.

"We began our transition away from developing baseband designs nearly two years ago, but continued to support existing customers with legacy products. Throughout this timeframe, our portfolio of linear products, ultra-compact
power amplifiers, Intera front-end modules and Helios EDGE radios has demonstrated design win momentum and an accelerating growth trajectory," says Aldrich. "Accordingly, we are implementing a strategic restructuring to build upon our leadership franchise and to realize our vision of becoming the global leader in semiconductors enabling mobile connectivity."

Skyworks will eliminate nearly $70m in annual costs through the narrowing of product development, closure of certain international design centers and a reduction in staffing by about 425 (10% of its workforce). However, this
should result in charges of $85-95m for asset impairments, severance and shut-down costs, mostly in the fiscal fourth quarter 2006 (to end-September).

Skyworks says it will consequently enter fiscal 2007 with an intensified focus on its analog, mixed-signal and RF design competencies across three strategic product areas:

  • Innovative Linear Products:
    - New designs supporting medical, automotive, industrial and broadband applications;
    - 802.11n solutions as part of Broadcom reference designs and cellular infrastructure subsystems led by Ericsson, Alcatel, and Nortel;
    - Solid sequential growth and record bookings over the past four quarters.
  • Power amplifiers and front-end modules
    - 42% market share, up from 30% in 2002, support- ing all key worldwide standards;
    - Increasing dollar content through higher levels of integration;
    - Design wins with all tier-one handset OEMs.
  • Highly integrated radio solutions
    - Helios EDGE architecture powering Samsung and LG;
    - DigRF radios for Motorola in 2007;
    - WEDGE and WCDMA multi-mode solutions.

"Skyworks' business transformation is now complete. We've evolved from a system-level baseband supplier targeting new market entrants at the time of our launch, to a developer of highly specialized analog and RF solutions,"
says Aldrich. "Accordingly, we plan to substantially improve our financial performance beginning in the current quarter."

Skyworks has also affirmed its fiscal fourth-quarter 2006 revenue guidance of $197-200m. Excluding restructuring charges, for fiscal first-quarter 2007 Skyworks expects pro-forma earnings per share of $0.12-0.14, with revenue
growth in the core business offsetting the elimination of baseband revenue. It aims to deliver fiscal 2007 revenue of $820-840m, an increase in the core business of nearly 15% year-over-year. On a pro-forma basis, gross margin is
expected to expand to 38-40%, while operating expenses decrease to $215m, yielding operating income in excess of $100m and EBITDA (earnings before interest, taxes, depreciation and amortization) of more than $150m. It also
expects record pro-forma diluted earnings per share of $0.55-0.60, roughly twice the pre-restructuring consensus estimate of $0.29.

* A day after Skyworks announced it was exiting its baseband operations and restructuring, the company's shares rose by about 39% to $7, its largest percentage gain since June 1998.