Skyworks Solutions, Inc. (NASDAQ:SWKS) Barclays Global Technology, Media and Telecommunications Conference December 7, 2022 4:55 PM ET
Company Participants
Liam Griffin – President, Chief Executive Officer, and Chairman
Conference Call Participants
Blayne Curtis – Barclays
Blayne Curtis
Yes. Thanks for joining. I’m Blayne Curtis, happy to have with me Liam Griffin. He’s the President, CEO, and Chairman of Skyworks. Welcome. Thanks for joining. I thought maybe just start off, I mean, we’ll obviously get in the supply chain part of it, but I wanted to talk on just the overall handset market, right?
So this was one of the markets that we – a year and a half ago for various reasons, we’re entering the fifth year of 5G, so we’re all getting older and so is 5G, so I’m kind of just curious your perspective outside of any inventory adjustments, what’s your feeling on the market, market growth, areas of 5G adoption beyond what we’ve seen today. And you have the U.S., you have China kind of fully penetrated. Where are you looking to for further growth?
Liam Griffin
Sure. Well, overall, I think the opportunity for growth is still very much in [indiscernible] The technology and the burden of technology is never been higher now. So we continue to see more complexity in the device. Obviously, mobile is a big driver for us, but we’re also seeing IoT nodes blossom doing a lot more in the broad markets business and a great setup going into 2023, despite some of the headwinds that we’re seeing across the globe that we all know about.
We’ve never been more diversified. The I&A business that we acquired has been running incredibly well. We’re scaling that. Our Bulk Acoustic Wave technologies are growing right now and capturing more and more technology as well with the larger customers. So we feel really good about it. But the market, of course, is a little bit bumpy.
As you know, we’re a company that does a lot of our work inside. We have our own fabs, our own labs, and we craft our solutions one account at a time. So there’s a lot there. But we feel really good about the opportunity as we go forward.
Blayne Curtis
When you look at the handset market, you took the Android market, particularly the Chinese vendors down quite almost nothing.
Liam Griffin
Yes.
Blayne Curtis
And I think you’ve even seen the crane customer correct as well. So clearly, you’re under shipping the market. When do you think this clears up? When can we look at some sort of rebound back to whatever that normal rate is?
Liam Griffin
Yes, that’s a great question, Blayne, it really is. So for us, we’ve been in this business a long time and obviously the mobile business for us is key. Broad markets is great, but the volatility in mobile you really have to understand the market and the nuances. So what we were seeing and what we call the OBX, OPPO, Vivo, and Xiaomi market within Android.
We started to notice kind of an overbuilt in that market and that segment. And we just de-risked, we de-risked that business over that period. You could even see in our filings that the revenue there was virtually zero. It doesn’t mean that the opportunity is virtually zero, but we just wanted to make sure that there was no inventory builder on – build on us.
So moving away from that, other Android customers still have great opportunity. Samsung portfolios are going to be extremely important as they are now. We think we can do a lot more in content. A company like Google never really played in mobile very much. We have Google design wins that are up to $15 in content with a company that has scale and firepower to do some amazing things.
So I like that the de-risking of China is happened already. So we – there’s no downside for us. It’s only upside from here and that end. And then also continuing to push 5G into other markets. So I like to always tell investors think about 5G as a technology, not a product. It’s a technology that can go into an automobile, it can go into an in order to position, it can go into a mobile phone. And that’s what we want to be able to do and create that usage case, right? And embody usage cases for our customers so that they can do more flexible things.
Blayne Curtis
I wanted to ask you about the content piece billion the storyline in RF was always handset market is going to have some modest growth and RF should grow faster. And clearly 5G helped, but there was, I think this tail after 5G where you’re adding more bands or more capabilities, I think people are now kind of confused is that still true? So how do you think about just the – I understand the other markets will be additive and we’ll get to those, right?
Liam Griffin
Yes.
Blayne Curtis
For just handsets, is it still a handset plus market? And is there anything you can point to as to where that contents coming from?
Liam Griffin
Yes. No, great question. So what we’re seeing is, if you go back three or four years ago, you had spectrum 2.5 gig up to about 3 gig, populating that spectrum in 5G. But – and what’s happening now though is that we’re seeing a much higher demand for quality and technology. And when you want to move up, even though it looks like the same handset, the technology is inside, the performance inside requires unique solutions.
So one of the things that we’ve done over the last few years is move from a standard SAW Surface Acoustic Wave device within filtering, then a temperature compensated device TC-SAW all made in-house. And then after years of work, we were able to unveil Bulk Acoustic Wave at a level that is among the best. And that technology is not only really important because it opens up new spectrum and content and value, but it’s really, really hard to do.
So we were working on this for years behind the curtain at Skyworks, and then when we were ready to go, we stepped out and won some really big programs. And Bulk Acoustic Wave is going to be important in automobiles. It’s certainly going to be important in smartphones. It’ll be important in other vectors across the technology space.
And we really like what we’ve been able to do, a lot of the capital assets that we needed – the capital funding that we needed to make this happen to actually build the fabs. That was really hard and it drove a lot of cash. The upside is that has been peaking now. So we’re kind of at the top of the hill here on that.
So we’ll do better on the cash flow side. We’re going to have a great technology involved. We’re already shipping this and we’re also taking Bulk Acoustic Wave and moving it into other markets as well.
Blayne Curtis
I would say, I mean, was the only one who was a little skeptical when you came into the ball market, whether you’d be successful. I mean, you look now, you shipped I think three different modules at your largest customer. They include some form of BAW within it, right?
Liam Griffin
Yes.
Blayne Curtis
Hundreds of millions of units. So I think one of the struggles, at least from my side, looking at your business has been on the Android side, you don’t find as many customers want to pay for the performance and have as many bands, kind of, you think about leveraging that BAWs at an Android. Are you seeing, you mentioned Google, but I mean, are you seeing anything broader in terms of that higher end capabilities, which would pull you back into some of these customers…
Liam Griffin
Yes, yes, no, that’s a great point. So I think a lot of it Blayne comes out of the coaching. If we can – we do this stuff actually, if we can demonstrate with a customer, literally like in the lab and show this is the difference between this level of performance and this level of performance, and this is what the cost delta will be, and we work with these customers to try to get to the right answer.
And I think what’s very helpful with Skyworks and what’s unique with Skyworks, and you’ve heard us say it before, we really want to make the right choice for each customer. So we don’t have the same recipe for everyone. If you think about the OBX Android portfolio that is right for more content, I mean, it just needs to be, it’s falling way behind.
We’ve already talked about the inventory. We’ve managed that. But the opportunity $2, $3, $4 of incremental opportunity could really make a big difference. And the nice thing there is a lot of units. So you could get a content plus unit gain and that part of the business, we know how to do that right now and then complement that with some of the other factors that we talk to before Samsung, Google, and then obviously continuing to do well with the largest customer.
Blayne Curtis
You mentioned, and I just want to put a finer point on it, in terms of the CapEx that you did spend for BAW, how much was that? And I think is the point you’re making that that CapEx spend can come down and you can – as you’re returning profits or what was the kind of point you’re making in terms of your leveled ball investment and what you’re looking at in the future?
Liam Griffin
Yes. So what we have here is pretty steep investments. And we’re talking about like factories too. I mean, this isn’t just technology, technology investment of course on the R&D side, but physical plant capabilities like real scale to develop – if you think about bulk acoustic wave, it is a vertical structure. It’s different than temperature compensation, which is basically laminate and layers. BAW is a vertical structure really, really hard. And you have to have different equipment and different types of technologies within that fab.
So that was a big, big nugget to go through. And we’re still walking it, but the good news is that funding is paying for itself now with the execution of BAW and the heavy CapEx burdens are behind us right now. We’re going to continue to grow as a company, but on a ratio basis, the heavy CapEx burden is behind us and we’ll have an opportunity from the cash flow side going downhill from here.
Blayne Curtis
I got to ask on your largest customer, you can answer as you may, obviously, it’s always challenging, but in terms of people look at what happened in Android and say, well, why hasn’t it happened with this customer? I think you – when you gave guidance, you kind of gave a high level kind of some conservatism overall. And just how you think about that supply chain. What can you say and obviously there’s been a lot of – in the news about shutdowns and issues in terms of production. I know you can’t probably speak to that, but can you speak to the fact of, I mean, are your parts on like a hub? So they have lines that are down, those parts don’t come through. And how does that mechanics work and kind of what can you say about how you think about that risk over that stuff [ph]
Liam Griffin
Yes. Well, the good news is that we’re kind of battle tested operationally at Skyworks and vertically integrated. So we have very good processes around inventory and execution and being really close to the customer. We don’t – we do everything we can to try to match the real demand, really important for us to do that. We have great relationships with the large customers and the communication is ongoing daily. It’s a really deep collaboration and communication so that no one wants to be out of balance. We all want to grow. We all want to deliver the right level of material and win the business. But we’re also vigilant on what we even with some of the distributors, and we have to be very careful about that.
We don’t want any over bills or under bills. And we manage that all the time. We do a great job with our own supply chain. I’ve talked about that before. Again, 75% of our products are made in a Skyworks facility gives us a lot of control. But I think we do a good job on the ups and downs. There’s always going to be volatility in this market, and not just handsets. I mean, you can look at any industry. But I think on the operational side, we’ve got some really good talented people that really understand how to run supply chain in this business. And it’s big. I mean, these are really big dollars that we’re talking about.
Blayne Curtis
It’s a great lead. And I was going to ask you this later, but I’ll ask you now, in terms of the supply chain, clearly, you have your own factories, you do buy externally for some components. And you’ve see now – I think everybody knows that semis were short, but you’re now starting to see like inventory build on everyone’s balance sheet, right? So there must be some catching up that companies are seeing. I mean, how do you think about that balance in terms of like, if you do see further weakness, can you keep these factories and utilizations high and build inventory. Are there any areas that are still tight for you? And I guess, when you look at the inventory going up on your balance sheet. Is that just like different components? Do you still have one should it be tight? Walk us through that.
Liam Griffin
Yes, good question. So there’s a couple things. I mean, obviously, there’s volatility still in supply chain, where there’s some gaps where everything is ready. And then there’s a component over here that’s not available. It may not be our component, but some other thing that can create some headwinds in supply chain. That’s one thing. Behind that, our teams are really, really – we really have a team that is focused on cash execution to a high degree. So we’re very careful with that.
We’re looking at ways to be leaner, but also effective and get the highest returns. And the way we look at our technology nodes and the investments that we have, we – our engineers and our operations team and our finance team, and we talk about what the model’s going to look like if we’re going to go spend more money in a certain zone or expand capacity in a fab, we do our diligence internally to figure out, okay, what’s the right best answer?
And also communicate with our customers who actually want to ride on that wave. And so it isn’t a knee jerk approach, but it’s something that has worked well for Skyworks. And the other part of this is that you kind of build – and these kinds of technologies every year you try to improve the process and move up a level and move up a level. And again, having the know-how, having the in-house capabilities, having the funding to get it done is one of the reasons why we win business with customers right now.
Blayne Curtis
Right. I want to ask you just the competitive landscape. So you’ve had a couple moving pieces. Clearly, Qualcomm did enter the market over the last five years, when particularly 5G attached. I think as the China market moved up to more module approach, maybe some of the domestic suppliers went the other way. I’m kind of curious like where you see you kind of looking forward here, I think just overall the competitive landscape, the domestic China players come back. It’s always been the fear. It’s been the fear since I – as long as I’ve known you.
Liam Griffin
Yes.
Blayne Curtis
Never really amounted that much. And then Qualcomm was the risk, right? They’re run the market. I guess, they’re not going to report it as much, these days going forward. Kind of just level set us as to where you think the biggest risks are and do you think its good that share’s going to move around all that much?
Liam Griffin
Yes, I think the share is going to get tighter. I think that there’ll be three or four companies that are really going to drive this business for good reason. And I think it’s just if you look at the capital intensity in some of these markets, the scale, the intellectual property, there’s a lot there. And I think it’s, and I’m speaking about Skyworks, but to be honest with you, I think about mobile, and mobile, is gets discounted. It just does. And it shouldn’t, but it does. We continue to do, what we need to do.
And mobile has been a tremendous market for us. And I think it will continue to, I think, create amazing things in technology. I mean, we’re talking about things like automotive, of course, data center opportunities, a lot more stuff out there that is just kind of emerging outside of what we have today in our business today. And our business today is really solid. So there’s a lot more going on there that doesn’t always get, I don’t think it gets fully complimented within the valuation of the business.
Blayne Curtis
I want just change gears because I, there is a bunch in broad markets I want to talk about. I wanted to talk about the acquisition of I&A, we’re talking a little about it before, we should recap that conversation, it was quite good. You now have this asset; it was supply constraint when you bought it. Where do you – walk us through the asset a little bit and, kind of talk about where you see opportunities where maybe under the prior ownership they weren’t applying those technologies to the same customer base and markets?
Liam Griffin
Yes, yes, sure. Good question. So as you and I know, and you – we just talked about it, we are a company that we’re not an M&A machine that’s just not really hasn’t been our DNA, right? Doesn’t mean we can’t jump in there every once in a while. But to be honest with you, we’ve looked at a lot of opportunities and we often, we look in the mirror and say, look we can do better ourselves. We could deploy the cash in a different way. Fortunately in this transaction, we were able to carve out a really unique situation with this, the I&A business of Silicon Labs, we paid about $2.75 billion for that. And it has been, believe me, we’re conservative, but it has been, I won’t say a home run, but it’s a triple at least Okay.
Really, really good results. We’re really happy about it. Great people, great people, smart people, a ready now team. There were no synergies by the way. This was not a deal where we came in, broke the windows that take the goods. This was a transaction, very unusual, a transaction where we kept just about everybody. We added people, we co-mingled, human capital from Skyworks in Newbury Park and Irvine and in Texas to create a really good new business. And it has been going really well.
Now, the cool thing about it where you have like kind of the opposites where the core Skyworks were big game hunters. That’s just the way it is. And we, and that’s been the way it’s been forever. I mean, you go back to the Nokia days, right? Before we were dealing with our friends in the north here, but we’ve always been going after the big game. That was our thing. When we got into the deal with Silicon Labs, it was kind of just a different, it was like a right brain, left brain kind of thing. Different mindsets, but on the slab side, great technology. But the scale was low. And the thing about these businesses, once you get the part – once you have a part that really works, you can take it anywhere. But our view was we weren’t seeing in the transaction the ability to take those really good parts and bring them to the bigger accounts. That’s what the Skyworks team was able to unlock.
So the Silicon Labs team created really high performance, unique technologies, but those technologies hadn’t really blossomed in the scale and the dollars that we would want that’s now changing. And so we’re collaborating where we can take great stuff that they have already, and we can take those technologies and bring them to the customers that we have, not just the mobile guys. The relationships that we have in broad markets, in our $2 billion broad market business. We take that $2 billion plus the I&A business, bring them together, and it’s been really working well.
And again, from that team, they were used to doing great work, but it was at a low level of revenue. But that was fine and that business. But when you go into a $5.5 billion Skyworks, you got to put some dollars out there. And so that’s what happened. We were able to cultivate the sweet spot within I&A, bring it to customers that we already know and trust, or they trust us to drive more and more revenue in different markets. So that’s kind of the overview of that.
Blayne Curtis
You’ll see you just had record revenue right, in I&A business. So you’re looking, wow, we’re talking about corrections, and that was record revenue. So do you think this stuff you’re talking about, is that in as part of this record revenue? Or was it, is the reason that you’re at record revenue on wins that they had even before the deal, and you just were able to get supply or whatever and everything you’re talking about is additional to it. Like, walk us through this timeline and how we’re sitting here at record revenue.
Liam Griffin
Yes, no, exactly. So a couple things. We, I think look, we had, we got the business at a certain level. We put a lot of people, a lot of bodies, a lot of smart people from the core Skyworks business to get in there and work. There were a lot of supply chain issues that were just globally. And they were hitting the I&A portion pretty significantly as well. Just not as many people and resources on that. So we were able to kind of get in there and drive that really hard to kind of unlock some of the capacity. That was one thing. That helped revenue.
Adjacent to that, the I&A team on their own had some really, really, really good technologies, but they, again difficulty with supply chain that helped, that hurt. And also kind of a bit of a lack of the big accounts. So what we were able to do was help mitigate some of the supply chain constraints with our relationships with some of the companies that we don’t, things that we don’t make inside. I mean, some things, we had to negotiate with TSMC or another, another outside fab occasionally most of the stuff done in house.
So we were able to drive that and open that up a little bit to give them a little bit more room, get some more product through. And then our supply chain teams at Skyworks are awesome. I mean, we’ve got great people and operations. So, we were able to not only leverage the relationship, but actually, we had people that would go down in Austin and just drive the solutions together now. So with more scale. And then the next part of it is, has the design when execution, I mean, we talk about the numbers right now, the business, we haven’t had this business that long. So to have the numbers move this quickly is a real testament of the customer demand more than anything else. And so we’re really excited about it.
And M&A is always hard and you’re always kind of, you’re second guessing, and maybe this is just me, but you’re thinking about, you have a good business, and like well, do we want to dilute this? This has been a transaction that, we had our own bar internally, and it has been absolutely, an execution right now. We’ve jumped over that bar. And it’s also, it gives our team, a sense that we really can do more on the M&A side as well, given what we’ve gone through. And it’s carve-outs are harder than straight up acquisitions, right? It’s really hard to do that. So team’s done a great job, exceeding the numbers that we expected. Again, we got to continue to do it. It’s still, it’s a good size business, but we want it to be bigger. But it’s a great for us, it was a great litmus test and execution around diversification and M&A.
Blayne Curtis
And I was ask you this later, but I’ll see you now because it’s a good lead in, I mean, in terms of, I mean, I’m sure you’re not happy with the multiple of your stock trades at, and I had welcome CFO sitting right where you are. And, there multiples quite surprised as well. So clearly mobile, has this burden. I think even beyond some of the supply chain issues, people really, just subscribe a lower multiple on that, right? So when you look at M&A, obviously there’s the financial benefits and you’ve passed on a ton of deals. But then there’s, Qualcomm’s talking about diversification and what percentage could be outside of mobile. How do you think about that?
Do you, does that matter to you? Do you want to see the business, 50-50, in a decade or more, or is it not really? Because when I first had you here, I had to check the dates, so I’m losing my mind in the old age, but it was 2016 and you said, I got enough on my plate with mobile. It was kind of, you actually walked away at the time for some deals that could have been done. Is it different now, or you look at it still the same lens that you have enough in mobile and something comes along like this great deal, fine, but it’s not a priority?
Liam Griffin
No, that’s a great question. And I would say to you at that time we had a full plate of opportunities that were ready now that needed to be addressed. And if you look at the revenue, I mean, you go back, we haven’t talked about revenue here, but if you go back and just think about where we were a few years ago, even go back to like 2020, we were at one point we grew our business a $1 billion in one year. I mean, we put up some unbelievable growth and we were, that was kind of the priority we had. We had opportunity in front of us, so we just, we went after it. And that propelled the company from, going from a $3.1 billion going through COVID to get to $5 billion, and now we’re at $5.5 billion with an $11.24 EPS for the year, which is unbelievable.
And if you look back at what the market expected from us two, three years ago, look back at analyst reports, they would, they had nowhere near an $11 EPS for us, when our stock was at $1.50 [ph], $1.60, $1.70 the EPS was much, much lower, and yet the valuation is where it was so frustrating. But it’s the reality, right? The flip side of it is, it’s a great opportunity right now given where we are. And so we’re going to continue to work on that. And when it comes to deals, the nice thing with the, I&A business that was cash, was at all cash deal, we’re a generator of cash. Skyworks has always been that way. But to do something more, substantial, it’s absolutely within the card.
So, I would say to you, there’s no hard and fast rule that we’re going to go this way or we’re going to go that way. But we definitely do know from the investors that, diversification is an important vector for us and important element in the strategy. So we hear that and we’re, we – you should expect more of that tone going forward. Again, I&A was one example but that’s just one.
Blayne Curtis
And we’re only have like time for more questions, so I’ll wrap two into one, but it just, when you look at the rest of the broad markets, we spent all time talking about I&A, wireless LAN as learned timing has seen some corrections along the way. That’s a big part of that, within broad markets, wireless LAN is a big part of the revenue stream. You talked about that supply chain, but I really want to know kind of where else do you point to, you’ve mentioned particularly in the intro, things like autos and IoT and edge and all that. Kind of just, what’s a quick answer too? Like what are you most excited about within broad markets?
Liam Griffin
Automotive, and this is another really tip of the hat to the guys at slab. We’re going to be, 200, 250 in automotive revenue within the next 12 months. I mean, that wasn’t, you wouldn’t have that at Skyworks two, three years ago. So it’s not all slab, but they actually have good relationships there. The technologies that you’re going to, you start to see now with EV, ADAS these kind of technologies require the things that we do well, you can, we can call it whatever we want to call it. We won’t call it mobile, but the technology vector to connect these vehicles is right in the sweet spot of what we do. So we think that market, we know that market is going to add significantly to us, and we’re going to invest more in that area.
IoT broadly, lot more opportunity. I mean, WiFi, WiFi has going through its own cycle, but as we go into WiFi 6E, the performance levels there, the data rates, the speed is going to be a real driver for the consumer. And if you look at what’s happening right now, even simple things like, just look at streaming as just one little thing, right? That everyone’s going to be having a streaming TV set, that’s going to be done. It’s like, it’s not going to be five years from now, it’s happening now, it’s going to turn over markets and those kind of things. When the performance levels are good enough, you can unwire, you can just completely unwire all this stuff, right? It creates a great opportunity for the customer and the consumer, and it can create a unique cycle the way we had in 5G, but doing in a different market and WiFi.
Blayne Curtis
All right. Always a pleasure, Liam. Thank you.
Liam Griffin
All right. Good to see you, my friend. Thank you.
Blayne Curtis
Bye.
Question-and-Answer Session
Q –
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