Skyworks Conf Call

Investment Analysis Clubs Saul’s Investing Discussions
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snippet thanks to Seeking Alpha’s transcript:

http://seekingalpha.com/article/3969435-skyworks-solutions-s…

…This year, inventory drawdowns and slower sell-through trends at our top customer are providing a drag on overall demand levels, impacting our Q3 guidance despite our strong growth in broader markets and with other OEMs.

As we navigate through these customer-specific dynamics, our competitive position and our financial model remain quite strong. We continue to improve our gross margins and our overall financial returns, while investing aggressively in innovation and in capacity. It’s also worth emphasizing a couple of important points. First, among our top customers, we see complexity and increasing performance requirements driving content expansion across the board. As an example, our overall content on Samsung’s flagship Galaxy S7 platform is up 20% versus prior models. We’ve also secured more than $9 of content within Huawei’s new flagship smartphone platforms, helping to drive over 40% year over year growth with this customer.

Secondly, we continue to be highly successful in leading the market transition toward integrated solutions, and we’re consolidating share while extending our technology leadership. And third, we continue to see significant traction with the Internet of Things, as evidenced by our 18% year over year growth in our broad markets products segment. These factors give us high confidence in our longer term growth prospects…

They sound pretty good.

Saul

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This paragraph was nice too:

…During the quarter we delivered revenue of $775 million. That’s in line with our guidance. We posted gross margin of 50.8%. That’s up 410 basis points year over year. We generated operating income of $285 million. That’s up 10% year over year. We produced operating margin of 36.8%, and we provided $1.25 in earnings per share. That’s up 9% versus the prior year. For the first half of fiscal 2016, we generated roughly $383 million in free cash flow… redistributing over 60% or $234 million to shareholders through our dividend plan and our share repurchase activity.

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Just for clarification, Saul, do the clippings in your two posts in this thread make you want to run out and buy more SWKS today? I mean, obviously it is nice to know they are running the business well, but until and unless more significant revenue growth is expected to resume or does resume, do you really think the stock price is going to go anywhere?

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Just for clarification, Saul, do the clippings in your two posts in this thread make you want to run out and buy more SWKS today?

Hi Paul,
Actually I did run out and buy some more today. (As you know, over the past couple of months I had reduced my previously 21% position in SWKS down to about 13%, so I ran out today and bought some back.) It doesn’t take a very detailed read of the conference call to realize there is nothing wrong. (I did not, for instance, get the same assurance from the INFN conference call). And now, at $67.50, the PE is about 11.8
Saul

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Hello Saul and Friends invested and smitten by both SWKS and INFN,

I did not, for instance, get the same assurance from the INFN conference call ~ Saul

Monkey wonders which parts from the INFN call gave you pause, confidence-wise, Saul? Because both the Skyworks and Infinera suits sounded like they were saying “nothing to see here, folks, we’re doing great!”

For example, here’s a few snippet’s from Infinera:

We are seeing most customers continuing to build footprint and add capacity, although some are exhibiting more choppiness in their spending than we had anticipated. We view this as a near-term dynamic and are not concerned about the medium- to long-term opportunity these customers represent or the opportunity of the overall market.

…

In closing, I remain very optimistic about the state of our business. Our customer base is healthy and broadening. Success in the short term will largely be dependent on the timing of our customers making investments in network upgrades particularly in metro and data center. While there is some uncertainty on this timing, we consider our customers making these investments a when rather than an if decision.

In the medium and longer terms, the trends are undeniably favorable. As a frame of reference, our introduction of Gen-3 PIC technology in the early part of the decade propelled us to a long-haul market leadership and was instrumental in building a large percentage of our current installed base. We consider the new Infinite Capacity Engine based on Gen 4 PIC technology to be an even more significant technology leap and this time we have a strong installed base already in place that is hungry to leverage our technology advancements in their network with straightforward line card installations. By continuing our commitment to innovation leadership and delivering the Infinera experience with each and every transaction, I am confident we will execute on the significant opportunities we have ahead of us.

Coming off many great consecutive quarters. Disappointed in Q2 outlook, but our industry can be lumpy. Don’t let short term fluctuations blur your perspective of our long term opportunity. Bandwidth demand will be strong. Video is a strong driver. Twitter will stream NFL games. ICPs are seeing a bandwidth multiplication effect. Server to server traffic is growing. Rise of GB cities, 5G mobile, and more increase demand. Customers value intelligent networks more and more with time. Our tech can meet these requirements. We can continue to deliver highly scalable, cost efficient networks. Our opportunity is good. Should gain market share end to end in optical transport market with great bottom line results.

So is the lack of confidence in the numbers themselves and the presence of this short term choppiness, or in something the suits said that rubbed you the wrong way that Monkey didn’t catch?

Monkey,
Long SWKS and INFN

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So is the lack of confidence in the numbers themselves and the presence of this short term choppiness, or in something the suits said that rubbed you the wrong way that Monkey didn’t catch?

Monkey,

I am sure both businesses will do great. The relevant question, IMO, is whether a great business will mean enough earnings for shareholders to make a great return. I share Saul’s view that SWKS should provide shareholders with great returns. With INFN I’m not so sure.

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In the longer term, I think there will be some tailwinds coming from India. As Tim Cook pointed out in the Apple conference call, India is just beginning a major ramp-up from mostly 2G, up to 4G LTE. As they do so, there will be huge demand for appropriately-capable phones (though not necessarily Apple), which will add tremendously to TAM their, just as it did in China. I can’t imagine the same won’t eventually be true in other emerging markets.

Then there is the IoT market, for which revenues grew 18%. If that keeps up, it will be nearly half the business in 5-10 years (depending, of course, on the trajectory for the phone business).

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One thing that frustrates me is that they’re not buying back shares much more aggressively. Price incredibly cheap: check. Boatloads of excess cash: check. The only way this doesn’t turn out to be poor capital allocation is if they have a truly strategic merger coming up…not some deworsification nonsense. We’ll see.

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As they do so, there will be huge demand for appropriately-capable phones (though not necessarily Apple), which will add tremendously to TAM their, just as it did in China. I can’t imagine the same won’t eventually be true in other emerging markets.

Actually probably not…
Smart phone uptake in India lags other emerging markets not leads it. Apart from Africa, India is one of the last major markets to adopt and China was relatively late to the party as well.
A

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That’s interesting Saul.
I was actually not that impressed with the results and the call. To me they hid behind qualitative macro trend descriptions and techno mumbo jumbo. I have seen this so many times before with tech companies describing the promise and the technical progress but not delivering the results. Frankly I’ve seen you sell out of high performing companies offering better results than this so it intrigues me you stick with them - although complements for effectively trading out at the top and buy back in on a pull back yet again.
They complain about inventory draw downs and sell through trends but I haven’t heard others talk about this so much as shear end consumer demand stalling.
I’m very wary at this point. Their competition is consolidating, the end market is stalling and their performance is going backwards.
A

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We have been listening to continuously positive noises for a long time on these conf calls but…

“But EPS slipped to single-digit growth for the first time in 13 quarters, rising 9% year over year. Sales rose 2%, in the single-digit range for the first time in 14 quarters. Both metrics have decelerated for five consecutive quarters.”

http://www.investors.com/news/technology/skyworks-q3-guide-l…

A

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Ant,

In your past experiences listening to tech companies hide behind tech jargon, industry trends and TAM, are those companies generally increasing margins at the same time?

That may be the most comforting part of their weak guidance for me.

Thanks,
AJ

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Agree AJ - there is some good stuff here. It isn’t all bad at all but I just don’t think it looks great. If the stock hadn’t crashed I probably would have sold out today.

The fact is we are in this stock for growth - top and bottom line. If neither metrics grow then what goes on in the middle is almost immaterial.

It’s a good company with some good tail winds and what they do is differentiated from what their customers can or can’t do but it isn’t differentiated vs the competition and they are still captive to silicon trends and design in and design outs happening (e.g. Samsung S7 in US which could happen across the board with S8). I just don’t see the supermoat or the super business otherwise they wouldn’t be posting numbers like this or having to make excuses like this. If they had a supermoat then the loss of the S7 US version could never have happened or so quickly.

Frankly I would much rather be in a company like ARM’s position in the silicon market than Skyworks. Heads or tales ARM wins. ARM has a supermoat.

A

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Actually probably not…
Smart phone uptake in India lags other emerging markets not leads it. Apart from Africa, India is one of the last major markets to adopt and China was relatively late to the party as well.

But that’s because of lack of infrastructure. Smartphones are enormously more compelling with 4G than 2G. The infrastructure is coming. If you build it, they will come.

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Their competition is consolidating, the end market is stalling and their performance is going backwards.

Sure. Years ago there were boatloads of companies selling discrete filters. Now there’s about four, with really two of those selling highly integrated modules. It’s gone from essentially a commodity market to a rational oligopoly. Sounds good to me. And their expanding margins completely debunk any argument about increased competition. Margins go down as a business loses competitive advantage, right?

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We have been listening to continuously positive noises for a long time on these conf calls but…

…but…free cash flow per share has only gone up 47% CAGR for the past two years.

Gotta look at the data, not the spin.

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In your past experiences listening to tech companies hide behind tech jargon, industry trends and TAM, are those companies generally increasing margins at the same time?

Moreover, one relatively weak quarter after doubling eps over the past two years, and a quarter which is historically one of the weakest at that, does not a trend make. Seriously. Check back in six months…after the iPhone 7…and if they’re still stagnant, then you’ll have a legitimate argument (…maybe…if you haven’t noticed, the global economy is in a world of hurt lately and the US dollar is incredibly strong, which hurts US multinationals…so even if they are weak through the rest of the year (which they won’t be), it’s still no disaster after doubling over the past two).

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The fact is we are in this stock for growth - top and bottom line. If neither metrics grow then what goes on in the middle is almost immaterial.

Financially, that really makes no sense. With any business, it’s worth what the discounted cash flow from here to eternity is worth.

The earnings yield based on consensus current-year earnings is 8.5%. If all this did is match inflation forever, it would be a grand slam; heck, even if it didn’t pace inflation and just stayed flat forever, you’re getting about 4X the yield on a 10-year bond…or the overall market, in case you hadn’t noticed. Any growth (assuming similar ROIC) is just icing on the cake.

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they are still captive to silicon trends and design in and design outs happening (e.g. Samsung S7

IIRC, they had 20% more content in the Samsung S7. Sure, anything can happen, but to date, it’s steadily growing content per phone (globally). Period.

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I just don’t see the supermoat or the super business otherwise they wouldn’t be posting numbers like this or having to make excuses like this.

Do you think Google has a moat? Did you see their earnings report? Or the majority of the S/P 500 lately? Again, maybe you didn’t notice, but the global economy is not so hot, and at the same time the USD is soaring.

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