Skyworks’ quarterly revenue shrinks 5.4% due to Huawei ban

For fiscal third-quarter 2019 (ended 28 June), Skyworks Solutions Inc of Woburn, MA, USA (which manufactures analog and mixed-signal semiconductors) has reported revenue of $767m, down 5.4% on $810.4m last quarter and 14.2% on $894.3m a year ago.

This is below the original guidance of $815-835m, impacted by the US Department of Commerce’s Bureau of Industry and Securities (BIS) on 15 May adding smartphone and telecom network infrastructure maker Huawei Technologies Co Ltd and 68 of its affiliates to its ‘Entity List’ prohibiting the sale to Huawei of products covered by the Export Administration Regulations (EAR) without obtaining an appropriate license. Skyworks subsequently ceased all shipments to Huawei (which had contributed 12% of total revenue in fiscal first-half 2019).

On 4 June Skyworks hence reduced its guidance by $60m to $755-775m. However, fiscal Q3 revenue came in $2m above the midpoint of this. Shipments to Huawei prior to the ban becoming effective still contributed 10% of revenue (although it had been running at 15%, since fiscal Q3 is the stronger seasonal quarter for Huawei).

By market sector, revenue for Mobile (Integrated Mobile Systems and Power Amplifiers) shrank 10% sequentially, falling further from 67% of total revenue last quarter to 63%. Broad Markets revenue was up by low-single digits both sequentially and year-on-year, rising further from 33% of total revenue last quarter to 37%.

During the quarter, Skyworks:

powered Samsung’s Galaxy S10 premium 5G smartphone;
leveraged SkyOne and SkyLiTE across Oppo, Vivo and Xiaomi flagship phones;
shipped 5G circulators, LNAs and controllers to leading European infrastructure manufacturers;
unveiled high-efficiency amplifiers enabling 5G massive MIMO TDD base stations for a tier-one Korean customer;
bolstered its Sky5 portfolio with MIPI ultra-high-linearity antenna tuners;
ramped 802.11ax engines for Cisco’s enterprise platforms;
expanded its automotive footprint with CAT 6 LTE modules for embedded in-vehicle displays;
enabled Facebook’s Oculus virtual reality gaming headsets with highly integrated SkyOne connectivity solutions;
captured content in award-winning wireless earphones designed for Xbox;
launched analog SoCs and cognitive wireless devices for Vizio sound bars and wireless subwoofers; and
introduced proprietary low-k materials for thermal barrier coatings in aerospace applications.

On a non-GAAP basis, gross margin has fallen further, from 50.9% a year ago and 50.7% last quarter to 50.4% (below the 50.5-51% guidance).

Operating expense (OpEx) has been cut further, from $135m last quarter to $134m (better than the expected $137m).

Net income has fallen further, from $299.9m ($1.64 per diluted share) a year ago and $256.6m ($1.47 per diluted share) last quarter to $233.6m ($1.35 per diluted share, below the originally forecasted $1.50 but slightly above the revised guidance of $1.34).

“The core fundamentals of our business remain strong despite current market volatility,” says president & CEO Liam K. Griffin. “The resiliency of our business model allowed us to maintain strong profitability and cash flow.”

Cash flow from operations was $209.3m (down from $258m but up from $192.1m last quarter, contributing to $950m year-to-date). Capital expenditure (CapEx) has been cut further, from $191.5m a year ago and $96.7m last quarter to $87.8m (but still about 12% of revenue).

During the quarter, Skyworks distributed $65.7m in dividends and repurchased 1.2 million shares of common stock for $85.8m (contributing to $710m returned to shareholders via share repurchases and dividends year-to-date, or 112% of the free cash flow generated).

Overall, cash, cash equivalents and marketable securities hence fell from $991m to $970.1m. The firm has no debt.

Inventory was up by $25m (and days of inventory up by 13 days to 139 days). “During our seasonal slowest quarter of the year here, we definitely have been level loading our factories in order to drive efficient usage of our capital equipment,” says senior VP & chief financial officer Kris Sennesael. “All of it of course is in support of the new product ramps that we have with our key customers.”

“Our capital investments have enabled us to build highly specialized vertically integrated supply chains capable of meeting the complex demands of the world’s most innovative customers,” says Griffin. “We continue to advance our filter capabilities, creating leadership positions in surface acoustic wave (SAW) and temperature-compensated surface acoustic wave (TC-SAW) filters, and in Q3 we commenced volume production of bulk acoustic wave (BAW)-enabled Sky5 devices [shipping in fiscal Q4]. Incorporating BAW expands our TAM [total addressable market] in mobile and positions us to support a wider array of customers, markets and applications,” he adds.

“Four or five years ago, we were making none of the filters in-house. We were purchasing them all from third parties, and maybe two years ago we got to roughly 50% of the filters in-house. Now, we are getting close to 95% of the filters in-house,” says Sennesael. “That is obviously driving some higher levels of inventory. But again inventory is fully in line with what we expected [fluctuating between 110 days to 140 days - slightly higher than historical levels], and days of inventory will come down in the September and December quarter [as Skyworks consumes some inventory].”

“After an in-depth review of the Export Administration Regulations and the scope of the Entity List restrictions, we ultimately determined that we could lawfully resume shipping certain products, which we did start in early July,” notes Sennesael. “However, we expect the business with Huawei to remain well below historical level into the current quarter,” he adds.

“Skyworks is on track to deliver sequential revenue and earnings growth in the September quarter as we execute on strategic product ramps,” says Sennesael.

For fiscal fourth-quarter 2019 (to end-September), Skyworks expects revenue to grow 8% sequentially to $815-835m, despite revenue from Huawei probably falling below $10m. “We can legally ship certain products, but the demand signal that we get from Huawei is actually very low,” says Sennesael. “The revenue outlook assumes Huawei revenue remains at nominal levels, given the uncertainty associated with ongoing trade related issues,” he adds. “Excluding Huawei in the June and September quarters, we expect our revenue to increase 20% sequentially, reflecting strong seasonal ramps at our large customers as we demonstrate our expanding reach and ability to deliver complex and highly integrated solutions.”

Gross margin should be flat to only slightly down at 50-50.5% in fiscal Q4, despite the lower factory utilization from the reduced demand from Huawei. OpEx is targeted to remain low, at $135m. Diluted earnings per share should be $1.50. CapEx may trend to below 12% of revenue, believes Sennesael.

“If we net out the effects of Huawei, in the fiscal Q1/2020 December quarter, we see sequential growth coming again,” notes Griffin.

“Our design-win pipeline is expanding, as we capitalize on the ramp of 5G and wireless infrastructure, smartphones and across IoT,” says Griffin. “For example, in wireless infrastructure Skyworks is now supporting a number of global 5G deployments. Our solutions address both 5G macro base stations and small-cell radios. And we are ramping today with leading European and Japanese infrastructure OEMs. In addition, Skyworks is enabling 5G massive MIMO base stations for a leading Korean customer,” he adds. “Across the IoT space, we are gaining share in new emerging categories, with recent wins at Facebook for their Oculus VR headset and with Vizio for their sound bars, leveraging our analog SOCs and cognitive wireless radios. We also secured low-power LTE CAT M design wins with the leading module providers, including Telit, Gemalto, U-Blox and Sierra Wireless. And we are expanding our reach in the wearables market, where we are populating devices that combine our cellular and Wi-Fi technology.”

“We’ve also extended our Wi-Fi leadership with several signature design wins in the last quarter, including Cisco with their Wi-Fi 6 solutions, DirectTV for over-the-top (OTT) streaming devices, as well as design wins with industry leaders such as Amazon, Nest and Netgear,” Griffin says.

“In mobile, for the coming wave of 5G phones, we’ve deepened our engagements with key customers, leveraging our unique suite of solutions to support launches at Samsung, LG, Oppo, Vivo and others.”

“As these opportunities demonstrate, the demand for advanced connectivity and the expansive nature of 5G are creating real-time opportunities for architectures that facilitate high-speed data, near-zero latency and exceptional reliability,” says Griffin. “We are leveraging our Sky5 platform and systems expertise to enable billions of connections across a vast set of diverse end markets, providing the foundation for an entirely new ecosystem. With 5G now launched on four continents, operators are seeing the compelling economics that 5G services can bring. We expect momentum to continue building into 2020 and beyond.”

“In addition to 5G, our capabilities in Broad Markets have grown as we now serve an expanded set of global customers, including companies like Ford, Continental and LG, along with factory automation leaders such as Bosch, Honeywell, Siemens and GE,” continues Griffin. “Today we generate nearly $1.1bn in annual revenues from our Broad Market portfolio. That’s a compound annual growth rate (CAGR) of 16% since 2013.”

“Given our confidence in Skyworks’ strategic outlook and strong cash flow generation, we are announcing a substantial raise to our quarterly dividend.” Skyworks’ board of directors has declared a cash dividend of $0.44 per share of common stock (payable on 17 September, to stockholders of record at the close of business on 27 August), representing a 16% increase from the prior quarterly dividend of $0.38 per share.

See related items:

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