SWKS: Acquisition and prelim results

Investment Analysis Clubs Saul’s Investing Discussions
1

SWKS announced it’s buying PMC (ticker PMCS) today for $2B in cash.

http://www.businesswire.com/news/home/20151005006797/en/#.Vh…

Should be immediately accretive to non-GAAP earnings, and the company expects it to generate at least an extra $0.75 in non-GAAP EPS annually once certain synergies have been realized, and with immediate margin expansion and accretion.

The company also provided preliminary 4Q results:

Based on preliminary results, Skyworks expects to deliver approximately $880 million in revenue and $1.52 of non-GAAP diluted earnings per share for the fourth quarter of fiscal 2015. “Skyworks’ sustained outperformance is being driven by the growing adoption of our integrated mobile systems and new opportunities across the Internet of Things,” said Donald W. Palette, executive vice president and chief financial officer.

Here’s what that would look like:

                                       SWKS
           Price: $81.87          1YPEG: 0.25          Adjusted P/E: 16          

                        Adjusted Earnings - Historical Stats
+---------------------------------------------------------------------------------+
| Fiscal Q.     Adj. EPS     TTM EPS      YoY TTM Growth      Growth Acceleration |
+---------------------------------------------------------------------------------+
| Q4 2015          $1.52       $5.27               62.7%                   -17.9% |
| Q3 2015          $1.34       $4.87               76.4%                    -0.1% |
| Q2 2015          $1.15       $4.36               76.5%                    18.8% |
| Q1 2015          $1.26       $3.83               64.4%                    38.2% |
| Q4 2014          $1.12       $3.24               46.6%                    48.4% |
| Q3 2014          $0.83       $2.76               31.4%                          |
| Q2 2014          $0.62       $2.47                                              |
| Q1 2014          $0.67       $2.33                                              |
| Q4 2013          $0.64       $2.21                                              |
| Q3 2013          $0.54       $2.10                                              |
| Q2 2013          $0.48                                                          |
| Q1 2013          $0.55                                                          |
| Q4 2012          $0.53                                                          |
+---------------------------------------------------------------------------------+

                             Revenue - Historical Stats
+---------------------------------------------------------------------------------+
| Fiscal Q.      Revenue    TTM Revenue     YoY TTM Growth    Growth Acceleration |
+---------------------------------------------------------------------------------+
| Q4 2015          $880M         $3.26B              42.2%                 -17.3% |
| Q3 2015          $810M         $3.10B              51.0%                  -0.6% |
| Q2 2015          $762M         $2.87B              51.3%                  26.4% |
| Q1 2015          $806M         $2.59B              40.6%                  46.0% |
| Q4 2014          $718M         $2.29B              27.8%                  53.6% |
| Q3 2014          $587M         $2.05B              18.1%                        |
| Q2 2014          $481M         $1.90B                                           |
| Q1 2014          $505M         $1.84B                                           |
| Q4 2013          $477M         $1.79B                                           |
| Q3 2013          $436M         $1.74B                                           |
| Q2 2013          $425M                                                          |
| Q1 2013          $454M                                                          |
| Q4 2012          $421M                                                          |
+---------------------------------------------------------------------------------+

The acquisition looks interesting. I’m guessing this is to complement their IoT offerings, allowing them to offer end-to-end solutions (collecting the data and storing it), but that’s just a wild guess. I need to learn more about PCM.

Here’s what the company says in the press release:

“With our acquisition of PMC, Skyworks will be uniquely positioned to capitalize on the explosive demand for high performance solutions that seamlessly connect, transport and store Big Data,” said David J. Aldrich, chairman and chief executive officer of Skyworks. “Specifically, we plan to leverage PMC’s innovative storage systems, flash controllers, optical switches and network infrastructure solutions to expand our engagements with some of the world’s leading OEMs and ODMs as well as emerging hyperscale data center customers. At a higher level, this complementary yet highly synergistic acquisition is consistent with our stated strategy of diversifying into adjacent vertical markets while leveraging our system-level expertise and global scale. PMC enables us to substantially expand our serviceable market within some of the fastest growing segments in technology including cloud storage and optical networking.

Conference call tomorrow at 9am eastern, and I’m sure we’ll learn more in that.

Would love to hear what others are thinking about the acquisition.

Neil
Long SWKS

29 Likes
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PMC is a good company, has strong traction in storage / data center markets.

However, acquisition by SWKS is strange - Different customer base, different technologies, different product life cycles…

SWKS has been very successful mostly because of razor sharp focus on RF… PMC is a different business altogether… Very little synergy.

I am surprised. May be the CEO wants to repeat SWKS success in another area (most likely storage). Will be interesting to hear their case tomorrow.

8 Likes
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Would love to hear what others are thinking about the acquisition.

I’m not sure what to think yet. PMCS has about $75M in non-GAAP earnings per year. Aldrich says there will be $75M in synergies. That’s $150M to the bottom line of SWKS which is where Aldrich gets his 75 cents of additional annual adj EPS to SWKS ($150M divided by 200 million shares = $0.75 additional adj EPS). To get that additional business, SWKS is paying cash and taking on debt. The cost is $2B to get annual $150M adj earnings (in other words the cost is a 13.33x multiple on the incremental earnings).

Is it worth it? I’m not sure. A very brief look at PMCS shows revenue and adj EPS flat in the most recently reported quarter. I haven’t looked at other quarters to see their historical growth and I didn’t look if their target market is growing or if they have a competitive position in their target market(s). On the surface, 13.33x earnings seems rich for a company that is not growing.

The big question that I have is what will this acquisition do for SWKS. Specifically, I’d like to know how the two companies products will mesh to enhance SWKS’s competitive position in its own target markets. Will SWKS be able to develop new products with the combined products, knowhow and IP to better compete in some of its target markets, and, if so, will the margins expand or at least remain neutral?

Hopefully, Aldrich will explain everything on the call tomorrow.

Chris

22 Likes
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Listened to call. Have to leave the house now and can’t post much, but sounds like SWKS management know what they are doing.
Saul

5 Likes
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i like it. We all have been talking about how SWKS is more than just a supplier to smartphone manufacturers. The Investment Thesis is more than that. It is about us being confident that SWKS is going to be a dominant player in the IoT space.

Well, SWKS just made their move that confirms that investment thesis. SWKS powers the devices that are the IoT. But all that data must be stored somewhere. That is the technology that SWKS just bought.

Now, there are other storage businesses out there: NTAP ($9b market cap), EMC or Cisco which are even less affordable.

The move itself makes absolute sense. The choice they had to make is to go with PMCS or one of the really small (start up) players such as Infinite IO, Kaminario, Nantero, Hedvig, etc…the issue with the start ups is that it is a different list of hot storage companies every year. PMCS is established but does not come at a $ amount that NTAP, for example, comes at.

I like it.

15 Likes