Skyworks at risk from Apple?

http://appleinsider.com/articles/14/04/09/apple-nabs-senior-…

The article relates to Broadcom who probably don’t even have any more content in an iPhone than Skyworks but it could relate to any of the apple chip set suppliers.

Saul - I know you are utterly convinced of Skyworks and do not consider this threat in the way I do but I think it needs watching very closely.

Skyworks could be designed out at an instant with Apple. They could switch to an Avago/Broadcom or Apple could go in house (as they have done for a lot of content).

I have seen this all before with semiconductor and RF companies. They have huge growth with some key design wins. Then they get lots of coverage about how this time they are different and how they have invincible moats. Then the business blows up or at best goes sideways for a decade and shareholders are left wondering what went wrong so suddenly.

I can remember this exact same story with International Rectifier in RF and plenty of other chip set companies with their seeming mega hit businesses.

I would honestly consider the risk in this with Skyworks which I don’t feel has been adequately accepted on this board.

Yes I still hold but the value is getting ever more stretched, the costs to customer greater and the winner takes all risk with the industry consolidation taking place is getting higher also.

Ant

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Saul - I know you are utterly convinced of Skyworks and do not consider this threat in the way I do but I think it needs watching very closely. Skyworks could be designed out at an instant with Apple. They could switch to an Avago/Broadcom or Apple could go in house (as they have done for a lot of content). I have seen this all before with semiconductor and RF companies. They have huge growth with some key design wins. Then they get lots of coverage about how this time they are different and how they have invincible moats. Then the business blows up or at best goes sideways for a decade and shareholders are left wondering what went wrong so suddenly. I can remember this exact same story with International Rectifier in RF and plenty of other chip set companies with their seeming mega hit businesses. I would honestly consider the risk in this with Skyworks which I don’t feel has been adequately accepted on this board. Yes I still hold but the value is getting ever more stretched, the costs to customer greater and the winner takes all risk with the industry consolidation taking place is getting higher also.

Thanks for the warning Ant. I’ll keep a close eye on it. I don’t really see value getting unduly stretched though with a PE of 25 and earnings up 77% last 12 months, and accelerating, so most probably up 50% to 75% at least for full year 2015.

As far as your statement:

Skyworks could be designed out at an instant with Apple. They could switch to an Avago/Broadcom or Apple could go in house (as they have done for a lot of content).

Perhaps you should read their conference calls. They are very explicit about being in the early planning with their customers up to two or three years ahead. They could be phased out maybe three years from now, but the chances of being designed out in an instant seem to be about 0%.

Best,

Saul

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While there is no doubt that Apple has the money to do whatever it wants, there is quite a difference between designing a processor like Apple did and designing chips that do what Skyworks does.

Generally speaking, it totally made sense for Apple to design their own processors based on the technology licensed from ARM. This allowed them to beat EVERYONE when it comes to power consumption, they were able to move to a 64 bit earlier than if they relied on a commercial vendor and add some custom functionality. These are all elements that clearly gave them business advantages.

However, Skyworks operates in a totally different area where a large part of their work relates to the Analog world (radio waves and frequencies) which is a totally different set of skills that digital chip design.

This is akin to asking a Diesel engine maker like Cummins to come up with a jet engine.

No doubt, Apple could build or buy the technology (look for Analog RF Engineer chip design job postings, or such acquisitions) but the question I have to ask is “What would be the business value” of such a move. What significant advantage could be derived vs. the large investment required?

It’s just not a scenario I see materializing in the near term. Now, if Apple could acquire breakthrough technology that allowed them to integrate a Cellular modem/filters/RF stage in a watch with 1/4 the real estate of current technology, then that makes sense. But I doubt they would have the itnernal resources to do this and I’m sure that all the celullar component chain makes are not sitting idle either and are trying to push such boundaries too.

PalmettoDude

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They could be phased out maybe three years from now, but the chances of being designed out in an instant seem to be about 0%.
Actually Saul I don’t agree. Firstly the design out point doesn’t mean sales go to zero immediately but the design in / design out happens at one decision point. Particularly if all of Skyworks content are all tethered to the same chip set. Just because they are collaborating with their customer (as they should) doesn’t mean Apple couldn’t work on alternatives themselves or with other suppliers. In fact whilst they can hold discussions publically with competitors in parallel to put pressure on suppliers; if they went internal - then given how secretive Apple are and how reliant on technical excellence they are, they would never announce an internal alternative until they are absolutely ready to do so at a stroke with no warning. Apple may operate on different upgrade timescales across their product range but you can lose a contract in an instant.

Again the IRF story was an interesting one. Everyone including the company was saying that they had such a strong moat and were immutable from client content and the risk of substitution because they had their engineering teams onsite with clients working client-side. In the end their business still fell out of bed in 1 year.
Ant

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“What would be the business value” of such a move. What significant advantage could be derived vs. the large investment required?

Actually this was my point about Skyworks valuation being stretched - I didn’t mean on a P/E basis I meant on a total market cap basis and revenue basis. They are reaching a point of such high valuation they are becoming their own worst enemy as it will provide the rationale for Apple to do something about it themselves due to the amount being forked out in every unit and the total value (or cost) to the business.

They will either rotate suppliers or do it themselves. That is what Apple do every time. If you think Skyworks has a magic source or Apple sees a win win relationship in maintaining and growing its reliance on Skyworks think again.

Ant

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Actually this was my point about Skyworks valuation being stretched - I didn’t mean on a P/E basis I meant on a total market cap basis and revenue basis. They are reaching a point of such high valuation they are becoming their own worst enemy as it will provide the rationale for Apple to do something about it themselves due to the amount being forked out in every unit and the total value (or cost) to the business.

Ant, I don’t want to minimize the risk of Skyworks losing Apple. It would definitely hurt in the short term. But the company is about a lot more than Apple. It’s about a lot more than mobile (even though that is providing very nice tailwinds, and the company has wins in a lot of phones from a lot of manufacturers). Long-term, this is about the Internet of Things, which is going to be such a huge industry that there will be a lot of winners. Skyworks is already benefiting from it, and that is likely to continue. As CEO Aldrich said:

We’ve spent the last decade investing significant resources and leveraging our technology to expand our presence in traditional analog markets like automotive, medical and industrial. We have established significant traction in these higher-margin growth avenues, and we see tremendous opportunity ahead…

We take a very long-term strategic view of our business, and we think we’re positioned extremely well. I don’t think we’ve ever been positioned as well as we are today for the long term.

So hopefully Apple continues to be a customer with future devices, but they’re just one part of the story IMHO. And as Saul pointed out, it seems very unlikely Apple would ditch them overnight – and meanwhile, SWKS continues to diversify its business every quarter, continues to build momentum with IoT every quarter, and that Apple revenue becomes less important every quarter (though it’s still nice!). Just look at the latest quarterly release and the design wins: there are a couple mobile ones in there (Galaxy S6, Nexus) but most are IoT related.

I personally don’t see SWKS as a one trick pony. And they’ve already successfully navigated the transition from basic “chip company” to custom solutions provider. Aldrich again:

We are reaping the benefits of our dual strategy of providing leadership and custom integrated solutions, while continuing to diversify into high-margin verticals. And as a measure of our progress, in 2011, around 60% of our revenue came from single-function devices for mobile applications. Today, more than 2/3 of our revenue is comprised of integrated mobile systems and broad markets, which are our fastest growth areas, driving improved financial returns, and putting us on a clear path towards 50% gross margins and above. And as the leader in complex RF and analog integration, we’re the primary beneficiary of the ongoing industry shift towards systems solutions. And as the communications architectures continue to advance in complexity, we’re becoming an integral part of our customers’ development roadmaps, providing more value in the overall supply chain. This is creating a fundamental shift in our business model; simply put, more complex systems drive increased profitability.

So while I hear you about folks not seeming overly concerned about losing Apple, I personally don’t think it’s so much about minimizing that risk as it is looking at that single customer within the larger context of where Skyworks is headed as a business. That’s not to say it can’t all go horribly wrong – it certainly can (and even though Saul owns a lot, 80% of his portfolio is not in SWKS). But I personally think that Skyworks has positioned itself to benefit from very large macro trends over the forseeable future that go beyond any single customer.

Just my 2 cents.

Neil
Long SWKS

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Neil these are really good points and represent the key to Skyworks’ valuation and future potential. To me there are 3 stories:

  1. The more complex design factor and margins
    This is great from a profitability and margin point of view - right up to the point where they could be designed out. So the risk reward goes up. Very rewarding but in a winner takes all binary in or out situation very high risk.

  2. The penetration within multi industry verticals
    This is very important and a positive - diversifying away from one client in one sector. Absolutely.

  3. The positioning in line with most important trends (IOT)
    This one I’m struggling to see what Skyworks is doing beyond talking about it and targeting it. Right now it seems to be trying to talk up the association but I haven’t seen the hard connection that ARM, Sierra Wireless and Qualcomm have achieved. Maybe they will in time.

Ant

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Again the IRF story was an interesting one. Everyone including the company was saying that they had such a strong moat and were immutable from client content and the risk of substitution because they had their engineering teams onsite with clients working client-side. In the end their business still fell out of bed in 1 year.

Thanks Ant, That IS sobering and is certainly something to keep full attention on.
Saul

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