Don’t Miss the Skyworks Solutions Opportunity

Shares of Skyworks Solutions (SWKS) have slipped approximately 8% despite producing solid financial numbers for the second-quarter of this year. Its earnings for the quarter grew by 9% to $1.25 per share as compared to earnings of $1.15 per share in the same quarter of last year. Also, its revenue increased by 2% on a year-over-year basis. Moreover, the company generated approximately $383 million in free cash flow for the first six months of the year and distributed $234 million to shareholders through its dividend and share repurchase plan.

In fact, the company exited the quarter with roughly $1.2 billion in cash flow on hand with no debt on its balance sheet. Thus, in my view, this drop in its share price wasn’t justified. However, it creates an opportunity for investors to buy more of the shares. Let us find out why:

Gross margin improvement

In a not so solid quarter seasonally, Skyworks was able to expand both net income and margins. Its net income grew by 10% while gross margin expanded approximately 410 basis points for the quarter. With this expansion, its gross margin for the quarter stands at 50.4% up from 46.7% in the same quarter last year. This uptick in the net income and gross margin was due to the following reasons. First, Skyworks was able to contain its operating costs for the quarter, and second, a new production of higher margin products and product mix from its higher value integrated systems, coupled with its scale and flexible manufacturing operations.

Its product mix played a significant role in driving its margin. This is comprised of power amplifiers, integrated mobile systems, and broad markets. These segments accounted for 17%, 58% and 25% of the total sales for the second-quarter of 2016. In fact, the company saw a healthy growth in both integrated mobile systems and broad markets, with the broad market growing more than 18% year-over-year.

As a result of this new production, its cost of goods sold came in at $384.7 million for the quarter, a slump of 6% as compared to a cost of goods sold of $409.9 million in the second-quarter of 2015. The most important thing to observe here is that despite this drop in the cost of goods sold, the company was able to improve its top line performance as stated above.

At the same time, the company was able to reduce its SG&A costs by 24% to $35.5 million for the quarter as compared to SG&A expenses of $47.4 million in the second-quarter of 2015. Because of this cost reduction effort, the company managed to restrict its operating costs to $108.6 million for the quarter. This compares to the operating costs of $132.3 million for the second-quarter of 2015.

Looking ahead to the third-quarter and to the full year, Skyworks sees additional margin improvement opportunities, as it continues to ramp up its custom solutions and leverage its recent capital investments in innovation and capacity. Driven by these initiatives, the most important thing is that the company expects its gross margin for the third-quarter to improve by 200 basis points to 51% versus last year and targets a goal of at least 53% gross margin for the year.

In fact, growth in the margin for the third-quarter is expected despite the fact that the company expects its revenue to decline by 7% to $750 million year-over-year. This drop in revenue is due to softness in its largest customer. However, it expects this softness to be covered by other customers such as Samsung, which is seeing tremendous growth in China for mobile integrated and broad market segments. Therefore, in my opinion, the company would see significant improvement in its financials for the year due to these margin improvement initiatives.

IoT and growth in integrated mobile system remain a tailwind for Skyworks

Internet of Things has become a real cash cow for Skyworks, as it is seeing significant traction for IoT in the broad market segment. The company saw an 18% growth in the Internet of Things in the last reported quarter, as new markets such as automobile, medical, industrial, wearable and smart home started gaining traction for IoT. For instance, few of its new wins in these markets include a vehicle-to-vehicle system with Cadillac’s 2017 platform, GPS-based industrial tracking devices for Lotera, a new connected home hub for a leading online retailer and Cat-M solutions for machine-to-machine applications in a variety of end markets.

Apart from these, the company secured wins in connectivity modules in set-top boxes for ARRIS, temperature control systems for multiple smart home solutions, analog IC supporting new smartwatch platforms, and 16 Skyworks devices in Cisco's latest large enterprise access point systems.

Looking ahead, Skyworks measures an opportunity of tens of billions of units and projects these new markets to grow at a compounded average growth rate of 83% through 202. The company expects to tap this growth in IoT with its suite of connectivity solutions such as wide area networking, Wi-Fi, ZigBee, Bluetooth and GPS standards. In addition, the company is seeing higher demand for data and wireless data due to an increasing use of new applications such as streaming media, mobile advertising, virtual reality and cloud-based services across consumer and enterprise applications

Conclusion

Skyworks solutions, with its customer-specific solutions, remains strong to address the growth in the IoT and mobile system. Also, its margin improvement initiatives should enable the company to improve its bottom line performance going forward.

Published on May 12, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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