Thanks Chris for the clarification
It’s embarrassing to admit that I’m one of the folks hesitant to start a position in SWKS due to price anchoring. (Thought I already ‘missed the bus’) After review of the posts here and couple of financials/CCs, I can’t deny that SWKS has much higher upside potential than downside risks, and decided to get into this powertrain. Thanks everyone again for your insights.
Hex
2 Likes
That’s it Rob. Some companies will show the Cash Flow on the press release but if they don’t, like you said, go to the 10Q/K and look at the cash flow statement.
Andy
1 Like
So I just have to chime in on this fascinating discussion. I’ll begin by quoting from the above comments - - -
For technology adoption the “S” can be divided into three equal parts: 1/3 slow initial adoption up to around 15% market penetration, 1/3 fast growth until around 85% market penetration and the last third until the end of the technology. If the above scenario is true, you wait until “the curve in the hockey stick” to start buying. You buy even at high P/E ratios until about 50% market penetration. Then you start selling off because the P/E contraction is coming. Denny, post 8269
First there’s an explosion in complexity, and it’s driving our robust growth in our served markets and a consolidation of market share. Across the board, we see more content opportunities in each successive generation of device, and integrated solutions displacing conventional discrete components. As this happens, a host of component providers, who lack our technology, our integration capabilities and system expertise, are simply unable to keep pace. Saul, post 8313
With regard to the S-Curve, there’s an underlying assumption that the item which is being adopted is essentially the same thing at the end of the adoption cycle as it was at the beginning. If the item being adopted is constantly undergoing significant improvement (not just marketing hype NEW! IMPROVED!!!, but actual, fundamental change, then it is near impossible to assert where the item resides with respect to adoption rate. But it is safe to assume that the adoption is shifted towards the first half rather than progressing to the second half. The net effect is to stretch the center point of the S indefinitely. The normal progression of the S-Curve adoption comes into play only after the point at which the improvement changes no longer provide benefit to the end-point consumer of the product supply and consumption chain.
Combine this effect with the fact that Skyworks’ products reside at an early and critical supply point in the chain of numerous end-item products in a variety of different industries. In fact, they participate during the design phase, long prior to supplying hardware components. This puts them in a virtually unassailable position within a broad spectrum of consumables with varying product life-cycles ranging from around a year (consumer electronics) to 25 years or more (aerospace).
And as if the elastic adoption cycle were insufficient insulation protecting Skyworks’ products from market deterioration, they are also irrevocably bound to the highlighted point raised by Saul’s post. That point being complexity.
Before I retired I held the title of Enterprise Architect at a great big aerospace company. In this position it became abundantly clear to me that all systems have an inherent amount of complexity. Expanding the definition of the system by bringing more processes within the boundaries of the system definition increases the degree of complexity. Inherent complexity can not be eliminated or designed out of the system, but it can be relocated. From an IT perspective it was the general goal to move the complexities of the business process from the human component to the information technology software and hardware.
Skyworks is doing exactly the same thing. By absorbing the complexities of the analog component blocks of the end item product into their system on a chip (SOC). The embedded SOC internalizes the complexity of the non-digital components. This relocation of complexity relieves the developers of the predominantly digital devices from having to deal with the vital analog functions upon which these devices depend.
We, the consumer, tend to think of these devices as the product of coders, which is just another way of calling them digital computers. We generally don’t even consider the fact that humans are analog devices and all the human interface must be analog. Aside from the human demands for analog functions, certain aspects of communications necessitate analog operations. Finally, the digital functions must be supported by voltage regulation, shielding, filtering, amplification, etc., in other words a host of analog functions which interact with one another and with the digital components.
The words of the Skyworks CEO that Saul quoted, “. . . there’s an explosion in complexity” should not be taken lightly. From the perspective of an investor, they have a moat surrounding a walled citadel.
5 Likes
They are mostly commodities to whatever extent the value is added via hardware vs via software and thus a complete “Answer” to mobile phone makers needs.
But I certainly agree that suppliers have a hard road, they must sell bacon on the caloric count not the smell, taste, and sizzle. Better to be an Apple, dealing with consumers, than a commodity supplier dealing with Apple.
1 Like
With regard to the S-Curve, there’s an underlying assumption that the item which is being adopted is essentially the same thing at the end of the adoption cycle as it was at the beginning. If the item being adopted is constantly undergoing significant improvement (not just marketing hype NEW! IMPROVED!!!, but actual, fundamental change, then it is near impossible to assert where the item resides with respect to adoption rate.
Not necessarily so. One beautiful example is the adoption of hard disk drives. The “constantly undergoing significant improvement” was punctuated by the progressively decreasing size of the disk: 14 inches, 8 inches, 5.25 inches, 3.5 inches, 2.5 inches, 1.8 inches, 1 inch (I might have missed some) making progress easy to track. Disk drives were one of the subjects of Clayton Christensen’s book The Innovator’s Dilemma. He shows how each new version disrupted the previous one (there was one size that he didn’t consider disruptive). Each new size found a new home: mainframe, minicomputer, PC, laptop, etc. Each one has its own “S” curve. In my opinion the same thing is happening at Apple with the user interface. It has migrated from the desktop, to the laptop, to the tablet, to the iPhone and now the iWatch. When you look at the stock chart of a company producing successive generations of a product, the “S” curves overlap and are no longer discernible.
But your conclusion is correct, Skyworks could have a succession of RF products many years into the future.
Denny Schlesinger
The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business by Clayton M. Christensen (Author)
http://www.amazon.com/Innovators-Dilemma-Revolutionary-Chang…
1 Like
Hello Chris,
I say they will not get squeezed for the foreseeable future (at least 2 years).
I don’t have any data to dispute this. But imagine a scenario where QCOM gains traction on their RF 360 initiative. Let’s say they integrate their RF solution with their Snapdragon baseband processor and win the slot in the Apple…8 or 9 and the Samsung 7…9. In order to do that they will have already picked off much of the lower-priced LTE and CDMA phones on their way. Now QCOM has gained serious traction in RF. They haven’t commenced shipments to Apple or Samsung, but it is known they have secured slots. I would posit that SWKS may already be experiencing margin compression with more to follow when the next super
smart phones are produced with less SWKS content.
In this scenario, where I have no way of determining a probability of likelihood, SWKS could have its growth disappearing, its margins declining. What might happen to the PE?
I am not predicting gloom and doom here, but trying to counter the thesis that SWKS has less risk than other companies with great growth because it has a lower PE. Denny has tried to make a similar thesis but has been shouted down because he has not studied SWKS in depth. I see a well-managed RF company facing great competition at a point in the cycle where more investors are more sanguine about its prospects than usual. To me, this is a signal that risk has increased substantially.
I think that the I of T may well be a good investment thesis. Like every other investment thesis, however, it will matter how much is paid to build a position. If someone held a gun to my head and said that I must buy SWKS or sell it short at this level, it would be an easy decision to buy. However, as Denny has mentioned, there are many investment alternatives available. If I were to commit to owning any RF company, it would be after the next cycle has approached a bottom and I could believe the price is right.
Best regards,
Mike
7 Likes
1) for existing products like the iPhone 6 and Samsung GS6, it would be almost impossible to switch vendors. It would mean be a redesign of the phone.
Possibly, but if the APPL wants a second supplier, QRVO would redesign their chips to fit in the socket. My feeling is that APPL will probably line up somebody for the next iPhone just so that they can get better pricing from SWKS.
They have done this with INVN, which I think provided the gyroscopes for the iphone: http://www.fool.com/investing/general/2015/03/04/how-bad-was…
but APPL went with STMicro for the iWatch
BTW, AVGO also supplies to APPL and Samsung, just different components:
http://www.thestreet.com/story/13059471/1/apple-supplier-sky…
http://www.marketwatch.com/story/apple-supplier-avago-earnin…
I say they will not get squeezed for the foreseeable future (at least 2 years)
2 years is too long a time frame for asic companies, I would say a year is how far you can be sure about.
3 Likes
2 years is too long a time frame for asic companies, I would say a year is how far you can be sure about.
This is generally true, but not true for SWKS. The reason is that their customer’s are not just buying chips, they are partnering with them during design cycles. This gives them at least 2 years of commitment, maybe more.
I could be wrong, my experience is with big, metal/composite tubes that fly with lot’s of people inside them, but just the same when a producer invites a supplier into the game during the design phase your in a whole different ballpark than simply buying parts or even letting contracts to make custom components.
If the supplier is a participant to the product design it says that the producer is saying, “Hey, you guys know a lot more about this space with respect to design and cost effective manufacturing than we do. We need your expertise in order to bring a successful product to market.”
Don’t be duped into the notion of competitive bidding and multi-sourcing of components. This is true for certain components that are either commodity (see earlier discussion) or easy to source from multiple vendors because no special design/manufacturing talent is required. When the opposite is true (as with hyper-complex integrated analog processing) the attitude is more along the lines of forming long-term relationships with single-source suppliers.
It’s true for flying tubes. It’s true for automotive products. I’ll wager it’s true for hand-held computers that pose as telephones/cameras. I’ll wager it’s true for any sophisticated product that must satisfy an abundance of end-user requirements.
Just by way of example, it probably will come as a surprise to most of you to learn that there’s more lines of code in the cabin entertainment system of a modern commercial aircraft than in the flight control avionics package. You don’t swap out vendors willy-nilly due to a 10% price break on something like this.
5 Likes
Mike,
imagine a scenario where QCOM gains traction on their RF 360 initiative
Sure, there are a few strong competitors. If you look at the tear downs of the various phones, you will see components in there from multiple suppliers. SWKS, AVGO, QRVO, QCOM, and others. We will need to monitor things closely quarter by quarter to see if SWKS is losing market share. Have you listened to the earnings conference call? They have been saying that they are gaining marketshare and that they have content in most mobile products.
Let’s say they integrate their RF solution with their Snapdragon baseband processor and win the slot in the Apple…8 or 9 and the Samsung 7…9.
A few weeks ago we learned that Samsung designed out QCOM’s processor while was in the GS5. Samsung decided to design their own processor so QCOM just took a backwards step with this important smartphone vendor.
QCOM has gained serious traction in RF
Do you have specific information that you want to share?
I would posit that SWKS may already be experiencing margin compression with more to follow when the next super
smart phones are produced with less SWKS content
SWKS management said just the exact opposite of what you wrote on their last earnings call a couple of weeks ago. Overall gross margins for the company increased from 46.7% in the Dec quarter to 48% in the Mar quarter. They also said to expect 50% in the Jun quarter. Furthermore, they said that gross margins will be higher for the foreseeable future with new business bringing in gross margins of 55%. They told the analysts to model 55% gross margins for new business. In addition, they said that they are gaining marketshare and are increasing content. In addition, they see total addressable content in mobile increasing from $10-12 in LTE to $15-17 in LTE-Advanced.
In this scenario, where I have no way of determining a probability of likelihood, SWKS could have its growth disappearing, its margins declining. What might happen to the PE?
Well, if they start to lose market share and margins get compressed, and their earnings growth slows too much or turns negative, the P/E would probably go down.
We are seeing no signs of that happening yet. In addition to the statements (above) that management said just about 2 weeks ago, management also said that they have a couple of years of visibility as they are already working with vendors as they design the next generation of products. Therefore, they are either outright lying or they have good visibly into the following for the next 1-2 generations of products: content that they will get, margins that they will get, vendors that they will supply. All of these signs are positive according to what management is saying they are seeing, and I have no reason to believe that SWKS is intentionally misleading investors. So far the numbers that they are putting up match what they have been saying. Note: they are generally prohibited by their customers from disclosing which new products they are working on (and for which customers). They sound upbeat and positive so I take this to mean that we can assume with a high degree of certainty that growth will continue strong for at least 2 years, maybe 3 years (future design is known so if product launch is in 1-1.5 years and product lifecycle is 6 months to a year). Now we were mostly talking about components for mobile which if I remember correctly is just under 50% of SWKS’s revenue. This share is shrinking as their other markets are growing faster, which also makes them, with every passing quarter, less dependent on large customers such as Apple and Samsung. For more information, here is a link to their latest business presentation which contains some interesting market information:
http://www.skyworksinc.com/downloads/about/skyworks_overview…
Anyone who owns a large position in SWKS should really educate themselves on the company and on what’s happening in the market. This discussion has been particularly helpful so far as it challenges us to learn more and identify and explore potential risks. With any fast moving technology it is important to constantly monitor how things are changing.
Chris
13 Likes
Hello Chris,
I was writing in response to the statement that implied that there was less risk going forward in SWKS because they have guided increasing gross margins. I asked you to imagine a hypothetical. I stated that I could not put a probability on the hypothetical situation occurring. Certainly QCOM has not gained RF traction today and they may never reach their goal. QCOM having that goal and having announced RF 360 does impact SWKS’ risk profile. IF the imagined scenario does take place a couple of years down the road, the impact on SWKS stock price will be felt. (and probably discounted ahead of time).
I have listened to SWKS calls and do not believe management is lying.
Best regards,
Mike
Chris,
thanks for your helpful analysis and suggestions
andy (who has a big position in SWKS)
I was writing in response to the statement that implied that there was less risk going forward in SWKS because they have guided increasing gross margins. I asked you to imagine a hypothetical. I stated that I could not put a probability on the hypothetical situation occurring. Certainly QCOM has not gained RF traction today and they may never reach their goal.
Thanks you for posting your thoughts about the hypothetical. It was helpful even though there seems to be no evidence yet that SWKS’s business is slowing or that they are losing market share. Nevertheless, your post got me thinking (and investigating) more about QCOM which I had not done so much before. It was beneficial to me. Also, you have now educated yourself a bit more by listening to the last SWKS conf call. If we better understand the companies that we invest in, their competitors, and the market dynamics then we will be able to make better investing decisions. That’s one reason why we are here and sharing information, thoughts, and analysis. Thank you for contributing to this discussion. I think it’s helping anyone who read it to better understand SWKS.
Chris
2 Likes
Don’t be duped into the notion of competitive bidding and multi-sourcing of components. This is true for certain components that are either commodity (see earlier discussion) or easy to source from multiple vendors because no special design/manufacturing talent is required. When the opposite is true (as with hyper-complex integrated analog processing) the attitude is more along the lines of forming long-term relationships with single-source suppliers.
True but also do not be duped that when things go sour, things can change very quickly.
From a few personally experiences.
-
Having worked for a supplier that was the key component in cell phones back in the late 2000’s, we had 100% of the volume for those phones that were won during the design phase. While it was very difficult to get replaced for those products that were won in the design phase, it was very easy to get locked out of future bids due to issues that happened. Even those won in design phase could get outsourced if it made economical sense to make a change mid-product cycle.
-
Supporting a business now that OEM’s a key technology to many different companies, most of the sales happen by winning the design phase in the product. Those sales usually happen over a 1 to 2 year period for the particular product. But if you lose the next phase, you are also locked out for the next couple of years. Often these can go back and forth between your competition.
The technology advantage can switch or the pricing and margins can get cut and soon you are also locked out.
Being the long-term, single source vendor is great when times are great for those product cycles. But if a deal is lost, you can also be locked out for a whole product cycle as well.
5 Likes
For anyone who enjoyed The Innovator’s Delimma I would also highly recommend How Will You Measure Your Life by the same author. He takes all of the lessons learned in industry and very adroitly applies them to individuals and families. I found it quite thought provoking and it’s changed my thinking and behavior in several areas.
FWIW
Fletch
2 Likes
Hello Chris,
Thanks you for posting your thoughts about the hypothetical. It was helpful even though there seems to be no evidence yet that SWKS’s business is slowing or that they are losing market share.
Thanks right back at you. Your posts here are greatly appreciated!
As far as keeping an eye on QCOM, I certainly agree that is wise. The buzz is that RF 360 will not roll out until 2H 15 and it will initially appear in the low-end phones and QCOM will attack the RF market from the bottom up. I would estimate that there will be at least 3 quarters before there is any noticeable impact on SWKS share and even that may be disguised by overall market growth. The reason to be vigilant is that the investment thesis that Saul and you (and many others) have grasped for SWKS–
namely the margin and stickiness improvement in their business plan from functional integration–could be eventually disrupted by QCOM because of their dominance in modems (or baseband processors).QCOM is facing competition in processors from MediaTek, Marvell, and Intel on the low end, and internal production from Apple and Samsung on the high end. Hence their quest for growth takes them into RF. They intend to take the functional integration past the ability of SWKS or QRVO to compete. It is the thing which makes technology so intriguing-will they succeed fast enough or will some better mousetrap come along?
Another thing to watch for, I believe, is the likely deceleration in the phenomenal revenue growth of SWKS. For fiscal 2016 management is guiding EPS to $7.00 and gross margins of a little better than 50%. I think that would imply slower revenue growth than the past 6 quarters. I realize that $7 eps bogey is hopefully subject to upward revision, just another item to watch.
Best regards,
Mike
5 Likes