China
Here is an excerpt of something I posted over on the Pro boards a few days ago. I didn’t post it here because we’ve already had a lot of discussion about Skyworks and China (including the mentioned MarketWatch article), so I didn’t think it’d add too much. But since the topic has been raised again…
There’s even a MarketWatch article entitled “Top 10 S&P 500 companies most exposed to China” and the winner is … drum roll… Skyworks with 67% of sales!
http://www.marketwatch.com/story/top-10-sp-companies-most-ex…
Well if you’re just looking at the financials with zero context, that’s true. The latest annual report shows, on page 138 under Geographic Information, that net revenue from China is $1,574.4 of 2,291.5 total.
But right underneath that table is this little paragraph:
The Company’s revenues by geography do not necessarily correlate to end market demand by region. For example, if the Company sells a product to a distributor in Taiwan, the sale is reflected within the Taiwan line item above; however, that distributor, in turn, may sell the product to an end customer in a different geography.
So in other words, any device that is made or assembled in China and then exported globally is going to show up as a China sale. So a portion of those sales are not impacted directly by the economy in China at all.
But what about phones sold in China itself? This is what CFO Palette said on the most recent conference call:
Certainly there’s been well-reported choppiness I would say in that market, but most of it has really been 2G and 3G ramp downs as 4G accelerates. And if you look at 4G, that’s the opportunity that we’re excited about. We have a tremendous content gain there. We talked about that already today. But in addition to the content gain, which could be $2, $3, $4 per phone, we’re also seeing units start to look a little bit better through China just in the last month of June. In the full quarter of June, we saw 60 million net adds on the 4G cycle, so we feel good about that continuing through 2015, hopefully hitting about a 250 million unit number. Now, some of that business is won through local brands that we mentioned and some of it we benefit with global tier 1s that sell into China. So that’s working out pretty well for us. A little bit of a slow start but we see it picking up in the second half.
This conference call was just last week, well after the turmoil began in the Chinese equity markets. And management is saying that, while there was some choppiness in the quarter just reported (which was a great quarter) things are going well now and they expect them to continue to improve through the second half of 2015. This lines up pretty well with what Cook said in the Apple conference call (bolding mine):
the stock market participation among Chinese household is fairly narrow. And the stock ownership is very concentrated in a few people who put what appears to be a smaller portion of their wealth in the market than we might. And so I think generally this has been, at least as we see it, maybe it’s not true for other businesses, that this worry is probably overstated. And so we’re not changing anything. We have the pedal to the metal on getting to 40 stores mid next year. As we had talked about before, we’re continuing to expand the indirect channel as well.
As you point out, and I think this is a major point that many people miss, the LTE penetration in China is only at 12%. And China doesn’t possess the level of fiber that some other countries do, and so in order to get the great video performance, et cetera, raising that penetration is really great. I think that really plays to an incredible smartphone future there.
That last paragraph is exactly what SWKS management is talking about: the upgrade cycle to 4G.
Could both companies be terribly wrong? Sure, and we mitigate that risk through sensible allocation. But if there is an impact, it seems likely to be very short-term in nature.
And finally, remember that mobile is just one segment for Skyworks (albeit its largest): it’s rapidly expanding into other verticals. Here’s another quote from CFO Palette (bolding mine):
I’m really thrilled with the development team’s performance in these vertical markets and our ability to put, in many cases, new associates on the street to support our customers’ architectures as we learn what it takes to win in the home, in the automobile, on the factory floor, in the hospital. That business just is doing great and it turns out that the technology footprint we’ve deployed in mobile is exactly what these markets require, and our team is just doing a terrific job I think. Not perfect, but a terrific job of lining those customers up, understanding their system level needs, and then executing.
So not only is SWKS expanding into these verticals, but it’s finding that its expertise and capability that has been so successful in mobile can be directly leveraged to propel it into many of these verticals.
All in all, I think the future looks pretty bright for Skyworks, both in the near term with mobile (perhaps with a little choppiness) and the long-term as it continues to gain traction in these additional verticals and IoT generally.
Just my opinion, of course!
Neil
Long SWKS
