SWKS, some simple facts one cannot ignore.

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#11

The above statement can be written in a more simple to understand and analyze statement:
Chinese citizens will buy new smartphones that support the faster LTE standard.
This means that they have to buy new more expensive smartphones.
During economic slowdown people tend to delay purchasing items unless they absolutely need them. Faster and stronger smartphone are in the nice to have category (IMHO) thus it is going to be delayed.
Thus SWKS sales are going to be less strong than previously anticipated.
I really hope that Aldrich in the upcoming quarterly will address this issue. If he effectively does, I will change my mind. If on the other hand he doesn’t know or agrees with the above thesis (in the form of cutting guidance for 2016) I will maintain my opinion.

I would like to hear what others have to say which will let us know if this conversation is beneficial. I, for one, believe the need for connectivity will increase. GDP growth will certainly help, but isn’t a requirement for growth in this specific sector.

Regards,
A.J.

#12

If someone disagree with one of the above points (maybe I’ve got a fact wrong here — I personally think that I am on solid ground here).

Smartphones are the gateway to connectivity and the world is becoming increasingly more connected. Smartphone growth may slow a little from its previous pace, but it is far from over.

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#13

Even I have one now … :slight_smile:

#14

Even if China is slowing down, I don’t believe that it will make a significant dent in the sales of smartphones. A smartphone is more than a tech device. It is part jewelry and an important status symbol. People will not easily give that up.

On the other hand, the market is negative on SWKS and you have to respect that. The wisdom of crowds has a long and impressive track record inside and outside the world of stocks.

#15

This is from the last CC, bolding is mine. I think it has been posted before but I think it is relevant to the discussion about slowing smartphone growth. Asked and answered. FWIW, Aldrich has been saying the same thing now for the last 6-8 quarters as they keep beating expectations and I expect to hear the same things again for the next 6-8. If you haven’t, I recommend going back and reading these transcripts.

Atif Malik (Analyst - Citigroup):
Hi, thanks for taking my question and congratulations on another strong quarter. Dave, a question on the gross margins. If I look at other component makers in smartphone market application processors, those guys are talking about ASP pressures next year, and you plan to expand your gross margin. Help me understand why the pricing environment or the gross margin profile for RF guys should remain strong into next year in a decelerating year-over-year smartphone unit environment?
Dave Aldrich (Chairman & CEO):
It’s relatively simple. It isn’t a year-over-year, part-to-part comparison. We are increasingly integrating more functionality as these devices get more complex, and we’re seeing fewer competitors able to do it. Customers can’t handle discrete components any longer, and that level of integration required to have a product that consumes low current. That’s small. That is highly integrated requires many, many different functional blocks with process technology know-how pulled together in a low-cost manufacturing platform with great system architectures.
So, we are able to work with our customers to give them a differentiated system performance which is increasingly becoming analog and RF-dependent. Less digital and more analog and RF-dependent. And, that’s our sweet spot. And so, our customers, it isn’t as if we’re charging our customers more per se per function, it’s that they’re giving us more of the system requirement. And, they’re paying us for it because we generate a great – we add a great deal of value for them.

Brian

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#16

I think about it like this. Would I rather have a market where a million smartphones sold and I have $1 or so in content or would I rather have a 50% smaller smartphone market where I had $3-4 in content in each phone.

Brian

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#17

Yet the most compelling argument to me is that Skyworks management seems both trustworthy and aware of the risks of their exposure to China. Yes, there is risk. The rewards of that risk are why I am in this stock. Everything I have learned indicates management has done its best to mitigate its own risk which thus mitigates my risk as an investor.

Thanks for this enlightening post.
There is an additional bit of information coming from checking the channels that says that smartphones sells are stagnating if not slowing down.
Together with the China slowdown is enough evidence for me to stay on the sidelines waiting for the sky to clear

#18

Brian, What a great quote from Aldrich. We should frame it and put it up on the wall! It’s amazing that there are still so many people, and even analysts, that don’t “get it”!

Saul

It’s relatively simple. It isn’t a year-over-year, part-to-part comparison. We are increasingly integrating more functionality as these devices get more complex, and we’re seeing fewer competitors able to do it. Customers can’t handle discrete components any longer, and the level of integration required to have a product that consumes low current. That is small. That is highly integrated. That requires many, many different functional blocks with process technology know-how pulled together in a low-cost manufacturing platform with great system architectures.

So, we are able to work with our customers to give them a differentiated system performance which is increasingly becoming analog and RF-dependent. Less digital and more analog and RF-dependent. And, that’s our sweet spot. And so, it isn’t as if we’re charging our customers more per se per function, it’s that they’re giving us more of the system. And, they’re paying us for it because we add a great deal of value for them.

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#19

Chinese slowdown

You mentioned this Chinese slowdown about 3-4 times and this seems to be the main reason for your view that SWKS is in danger. China, though, is not in a negative growth situation. Their economy is showing one of the most positive growth percentages in the world. It is really a deceleration and not at all a negative growth. And if the deceleration is in large part due to decreased infrastructure spending, slower manufacturing output, lower exports, less buying of copper, steel, etc. AND it is still showing 6-7% overall growth imaging how fast the consumer economy in China is growing. People are spending more and more money and part of that spending goes to things like phones (SWKS), shoes (SKX), and other things that people buy. Add on top of this that their transition from 3G to 4G was only 20% complete recently. This means that there are A LOT of peoples that people in China will still be buying. Just my opinion…

Chris

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#20 

           Net Revenue by Region
  ===========================================
              2015        2014       2013
           ----------  ----------  ----------
  China    $ 2,249.2   $ 1,574.4   $   979.3
  Total    $ 3,258.4   $ 2,291.5   $ 1,792.0
  China%        69.0%       68.7%       54.6%
  ===========================================

othalan,

This table is misleading because it reflects where the OEM products are manufactured, not sold. SWKS products are bought in China, integrated into products there, and then sold throughout the world. The exposure to China end users of mobile devices and other products that contain SWKS components is much, much smaller than 69%. I think Aldritch said on Cramer a few months ago that the market exposure (i.e. people purchasing products with SWKS stuff in them) is more like 20%.

Chris

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#21

Chris, thank you for that clarification. I had not connected the dots to the fact that these are manufacturing customers, not end user consumption.

1 Like
#22

shukisassson,

Their revenue is %76 fully depended on SmartPhones.
2. Thus only 24% is allocated to what is called IoT.
3. The growth from SmartPhone is almost exclusively depended on China.
4. China is in a transition from a Manufacturing based economy to Service based economy.
5. This transition is having some severe problems.
6. As a result the Chinese economy is slowing down substantially.
7. Thus the Earning Per Share growth of SWKS is at a real danger.

About the only facts in your train of thought are 1, 2 (which are really the same thing), and 4. The rest are either opinions, or misinterpretations. Let me elaborate:

As others have pointed out, China’s economy is not slowing down substantially; its rate of growth is tapering down. But (according to official numbers), it still is growing 6-7% per year while transitioning from a manufacturing to a consumer based economy.

The transition isn’t having ‘severe’ problems. In fact, it is proceeding apace. Consumerism in China is huge, and growing.

It is true that China is the biggest player in the cell phone market, but all of Asia is growing. From South Korea and Japan, which are technophilic societies that are reliably going to upgrade to the latest tech, to India (which has amazing cell-phone penetration into the poorest strata of society), a country that is nearly as large and whose economy is growing nearly as fast as China, you have huge swaths of the world’s population either upgrading or entering the smart-phone market. Throw in the West, and Skyworks looks to be in no danger to this observer.

But, you seem bent on selling, so don’t let me dissuade you. I wish I had some free cash lying around to pick up more shares.

Tiptree, Fool One guide, long SWRKS

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#23

China’s economy is not slowing down substantially; its rate of growth is tapering down. But (according to official numbers), it still is growing 6-7% per year

Not sure this is a true reflection of reality. There are concerns that the Chinese government is manipulating the numbers. Third party estimates suggest slower or even no growth. It doesn’t take a lot to assume even a decline.

Nobody knows right now how the Chinese economy is truly doing but the official numbers have to be taken with some caution.

LNS

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#24

“smartphones sells are stagnating if not slowing down.” possibly true , but with SWKS the biggest factor might be how many of the phones sold are upgraded from gen 2 or gen 3.
Because I understand this upgrading benefits both carriers and phone users .

Yesterday in Best Buy I looked at some of the awesome new TV , I believe they are called 4K. These sets benefit the user, but not the broadcasters ,who would have to buy new equipment. So there is apparently no rush for broadcasters. or other medias sellers , they are looking for more efficiency for themselves, and like mobile phone carriers they mostly don’t give a darn about their customers.

LTE benefits both. . I think. If I am wrong please somebody point it out.

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#25

LTE upfront, saves the carrier bandwidth. It has a a theoretical maximum of 15 bits per Hertz of bandwidth. This is a truly amazing number. It also allows for carrier aggregation. This allows carriers to add bandwidth where they can get it.

Additionally, LTE lays the ground work for Voice Over LTE, a complete end to voice system via the IP network with Quality of Service (QOS) built in. This benefits the carrier as they will be able to completely retire the circuit switched network. Additionally, it give the customer HD voice. Once HD voice is implemented widely, there will be nothing but dust on the land line telephones.

Finally, LTE 5G is being drawn up now, the main difference will be low latency, sub 1 ms. Looking over the network and proposed standards.(Note the standards are not issued yet, the working group will not publish until February.) I foresee some truly interesting things on the product side. On the carrier side, we may see a Borg type net with all nodes being replaceable, and all the switching in the cell site itself, (probably the only way to hit the latency target) and close in server centers for rapid response cached data.

Cheers
Qazulight

8 Likes
#26

With sales of modular designs available and the many chip designers on the (job) market, willing to take much less than they made at their last job just to have a solid gig, I do not think that it would be very difficult to catch up with Skyworks and surpass them. So no, I am not buying it. I note that MF often makes technology errors, e.g. I had a glowing market pitch not too long ago which spoke about the breakthrough technology Bluetooth, by that time a moldy old idea. Or, earlier, umpteen pitches quoting Cisco guy on IOT, bah humbug. Too easy to tap into and cause havoc, the savvy buyer will not put their devices on IOT and let hackers into their lives so easily. linda

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#27

There may be lots of chip designers … although I am not so sure that there is an abundance who are actually on the market … but do you understand that analog and digital are entirely different things? The vast bulk of chip designers know digital. Precious few know analog.

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#28

1. Their revenue is %76 fully depended on SmartPhones.
2. Thus only 24% is allocated to what is called IoT.

I’m not sure I would see this as a negative.

The “IotT” part of the business is far more immature than the phone side. But it will likely also have faster growth rates, so in a few years, the proportion will be more balance (unless phones keep going like gangbusters, which would be fine for SWKS). In particular, I think cars will be a big area of growth. As cars shift toward self-driving (which may very well be gradual), and in general as cars offer many of the types of functionalities we appreciate on our phones and tablets, eventually all cars will come with their own cellular chipset…and the related Skyworks solutions necessary.

Thus the Earning Per Share growth of SWKS is at a real danger.

By this, do you mean the torrid rate of eps growth will slow drastically, or that eps may actually decrease?

For given that the stock is currently selling for a hair over 10X expected current-year earnings, even if all Skyworks could ever manage is for eps to keep pace with inflation (assuming they don’t do value-destroying things with the retained earnings), then this is a reasonable purchase. Any actual increase is all gravy.

In this kind of conditions SWKS is likely to loose its momentum and be punished by the market.

Seems to me that given that SWKS is 40% off its high, that it has already been punished quite severely by the market.

The counter argument can be that this is all baked to the current price of the stock.
I don’t believe it is and thus I am out. I wish the ones holding this company good luck as a I believe they really need it now.

So, it seems like the gist of your argument is that we are in the bottom of the ninth in the whole process of computing mobility in the world. If that is true, then your selling will have been wise.

I would (and indeed am, in a big way), that we are more like in the top of the fifth (and that is just for smartphones), and the players in the rest of Skyworks opportunities are still in the pre-game warm-up.

With sales of modular designs available and the many chip designers on the (job) market, willing to take much less than they made at their last job just to have a solid gig, I do not think that it would be very difficult to catch up with Skyworks and surpass them.

Well, this is quite a vague statement, so hard to rebut.

As far as “sales of modular designs”, unless I’m misunderstanding you, I think you have it 180 degrees backward. Skyworks has moved away from modular items, and has drastically shifted toward very complexly integrated solutions. And, again, you are completely wrong on there being an open opportunity for a bunch of new entrants to eat Skyworks’ lunch. The reality is the opposite; as the complexity of the solutions increases dramatically, there barriers to entry are far higher, and the number of existing firms that can compete is quite small.

Right now, essentially every smartphone OEM has decided that Skyworks offers the best-of-breed for what they do. The fact that Apple has chosen them speaks volumes. As the solution offered by Skyworks is a tiny fraction of the bill of materials, OEMs would be switching not based on price, but by the quality of the offering. Well, which outcome is more likely: 1) that Skyworks, by being in the position of working with essentially every one of the OEMs will gain ever-more expertise in their field (vs. those looking in from the sidelines) and by having the best cash flow will have the most to invest in R&D, or 2) that some marginal current player or some new entrant will–without the ongoing experience and relatively small capital for R&D–leapfrog Skyworks? Kind of like saying who is likely to keep the lead in PC CPUs, Intel or AMD.

There is an additional bit of information coming from checking the channels that says that smartphones sells are stagnating if not slowing down.
Together with the China slowdown is enough evidence for me to stay on the sidelines waiting for the sky to clear

Just keep in mind the extremely wise words of Warren Buffett: you pay a very high price for a cheery consensus.

The time to buy something like Skyworks isnt’ when everyone and his neighbor thinks it’s the cat’s meow. Rather, the best opportunity is when due to fears of possible, short-term struggles, the market walks away.

29 Likes
#29

Who manufactures the chips for Android[-based] phones?

It varies by actual manufacturer (Samsung, Sony, HTC, LG, etc.)… but you can bet that SWKS chipsets are in the vast majority of the higher-end and flagship models, and are embedded in nearly -all- of the models being advertised by the major carriers. And I’m pretty sure that SWKS chips are also in the Nexus devices from Google, but manufactured by third parties (HTC, Huawei, Motorola, and others).

The Nexus 6p is the the top of the line, and here’s a teardown showing that there is Skyworks 77814-11 power amplifier module for LTE in there (along with other stuff from Broadcomm, Qualcomm, etc.):

https://www.ifixit.com/Teardown/Nexus+6P+Teardown/51660

And here’s one for the Nexus 5x:

https://www.ifixit.com/Teardown/Nexus+5X+Teardown/51318

The Samsung Galaxy S6 has multiple SWKS parts:
http://www.ibtimes.co.uk/samsung-galaxy-s6-components-reveal…

The Apple Watch… SWKS Wi-Fi and power amp parts
iPhone 6s… SWKS Low-Band LTE and mid-band PADs

Someone else can dig up and prove/disprove other models at their whim, but that’s enough to know what’s being sold and where it’s landing.

6 Likes
#30

1. Their revenue is %76 fully depended on SmartPhones.
3. The growth from SmartPhone is almost exclusively depended on China.
4. China is in a transition from a Manufacturing based economy to Service based economy.
5. This transition is having some severe problems.
6. As a result the Chinese economy is slowing down substantially.

On these points, I don’t think smartphones are going anywhere. I’m pretty happy with positioning of 76% of revenue currently coming from that line, especially when they are getting more revenue per unit and making it harder for competitors to replace their integrated solutions.

Even if the economy slows down in China, smartphones will still grow. Think of someone with limited income who needs connectivity and information, but has to decide on a single technology solution as they cannot afford a computer, tablet, phone, and whatever else. A smartphone is the single solution. Interestingly, its somehow can be a luxury item, a necessary item, and the most cost effective item to solve that problem in today’s current information focused world.

We usually don’t think of that because most of us had computers long before smartphones, but there are entire populations in the world that essentially skipped that cycle of technology and are going straight to the smartphone.

Now, price did break some support levels and may go short term lower if the market stays weak, but it’s hard to not build an irresponsibly sized position at these levels IMO.
Of course I may be wrong, but I haven’t found an argument that sways my opinion yet.

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