This is just a reminder.
In the Sept 2015 quarter, SWKS management unveiled a mid-term, which they defined as 6-8 quarters away, target of $8/share EPS. I assume they meant $8/sh EPS on a run rate, not on a TTM basis, but I could be wrong about that. This would be between March and September 2017.
Now, here’s what was said on the last earnings call:
Craig A. Ellis - B. Riley & Co. LLC
Thanks for that. And the follow up is for Don. Don, as we look at the other part of the target financial model below gross margin at the $8 in annualized earnings, can you just walk us through your thinking in terms of the timeframe with which you think we could get to that earnings level?
Donald W. Palette - Chief Financial Officer & Executive Vice President
Yeah, I mean, when you step back and you look at the core elements of the financial model, that’s gross margin expansion, that’s top line growth, that’s managing OpEx, they continue to strengthen. And you see that, for instance, on the margin line what we just guided at 51%, so we’re up sequentially in margin even though we are down some in revenue. So the assumptions underlying the new target model are very, very solid. The gross margin, our ability to manage OpEx, we know how to do all those things.
As far as handicapping when it happens, right now we’re in a little bit of a tough backdrop that we’re working through. So as you model growth opportunities off of let’s say the September quarter, or December, pick a quarter, you apply whatever annual growth rate you want to that. The 60% drop through, you’ll see that the model is still in place, and that’ll get you there in a reasonable timeframe. But you have to model that and make your own assumptions to get to that timeframe.
The way I read that is that the CFO was basically saying that SWKS is going through a rough patch on the revenue side and that they are not comfortable providing 6-8 quarter mid-term guidance as they did previously. He’s also saying that their OpEx and their gross margin assumptions as still very much intact.
And revenue increases are based on total addressable market growth, market share growth, and content growth. SWKS keeps saying that they are taking market share due to a shrinking number of competitors. They are also saying that they are increasing content with each new generation.
Now a question for Saul. So SWKS at $65 SWKS has a P/E of 11.38 and if they hit their guidance the P/E will rise to 11.65. However, the 1YRPEG will increase from 0.37 to 0.80. SWKS has been on target in hitting their guidance in recent quarters. So my questions are, Saul, if you see the 1YRPEG rise to 0.80 would you lighten your position? And would you consider that SWKS has said that they expect a very strong back half on calendar 2016? What factors will you weigh the most in making a decision to change your allocation to SWKS?