Skyworks Solutions, Inc. (NASDAQ:SWKS) JPMorgan 21st Annual Tech/Auto Forum Conference January 5, 2023 2:05 PM ET

Company Participants

Carlos Bori - Senior Vice President of Sales and Marketing

Mitch Haws - Vice President of Investor Relations

Conference Call Participants

Harlan Sur - JPMorgan

Harlan Sur

All right. Let's go ahead and get started. Good morning, and thank you for attending JPMorgan's 21st Annual CES Semiconductor, Technology and Automotive Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Carlos Bori, Senior Vice President of Sales and Marketing for Skyworks. We also have Mitch Haws, Vice President of Investor Relations here with us today.

I've asked Carlos to start us off by spending a few minutes describing what the team is showcasing here at CES, given that Skyworks is a leader in cellular and IoT connectivity with growing exposure to the automotive and industrial and infrastructure markets. So gentlemen, thank you for joining us today. And Carlos, let me go ahead and turn it over to you.

Carlos Bori

Okay. Thank you very much. I appreciate the opportunity to speak with everybody today. It's always great to begin the New Year at CES, a terrific opportunity to get things going in the right direction. And as always, we have some interesting demonstrations and releases plan for the industry this year.

And if I were to highlight a couple, I would start with the automotive segment, where we're showcasing our automotive-grade complete RF front-end system for 5G, inclusive of all the low, the mid to high bands, the ultrahigh bands for 5G, all supplied by organic -- vertically integrated Skyworks technology, and we can talk more about that throughout the presentation. But we're also highlighting in automotive, our power isolation portfolio, which is used for battery management systems for motor-drive, inverter traction. It's also used for battery management systems onboard chargers, among other applications and also timing solutions for automotive. With all the new cameras and the LiDAR that you're seeing in these new cars, you're sending tens of gigabits per second of data around the cabin and our timing solutions are being leveraged for those applications as well.

In infrastructure, you'll see that we're -- we have a demonstration for our AccuTime and NetSync clock and timing portfolio, really initially generated for cloud applications, and we can talk about that, too. But as the industry transitions to 5G core infrastructure, unlike today where you're mostly using a 4G core and you're getting data on the 5G path, to really leverage the true differentiating attributes of 5G, which is the extremely low latency, the ultra reliability and the massive machine-type communication potentiality, you really need much more much tighter clocking solutions that are synchronized at the endpoint, at the base station and all the way back to the network.

So this is greenfield opportunity for us. We're just starting to see the revenue from design wins with the top 3 suppliers you'll see debt demonstrations about that as well. We're also going to showcase our new HBT gallium arsenide process for the base station wireless infrastructure, an industry that we've been supporting for years. You'll also see some interesting things in audio. And again, you'll see the timing solutions that are gaining traction in the market for cloud and data center applications.

Question-and-Answer Session

Q - Harlan Sur

Perfect. That was a great overview. Thank you for that. So if I look at the overall business looking into this fiscal year, calendar year '23, the smartphone market is looking to be flat to down 5% in units. Auto and industrial trends, although still relatively strong, looking to potentially weaken given a muted global macro environment. The team seems very confident that they will continue to outperform the market given content gains, strong design win pipeline. So help us understand how you're thinking about 2023, right, segments that are going to be weaker and dynamics that will continue to remain strong within the Skyworks business.

Carlos Bori

Okay. I won't spend too much time on smartphones, but I feel like I have to hit on a couple of points at least. We began this cycle a couple of years ago, and we benefited from a significant growth in FY '21. But we've also continued to grow our revenue with our number one customer through the next phone and then the phone after that. And we continue to expect growth at our top customer in the years ahead.

I'd also like to point out in the smartphone industry that we're still in the midst of a 5G transition. You're still seeing a portfolio at Samsung, at the top 3 China suppliers and other manufacturers ship to 5G. That's a tailwind for us. We don't do business really in 4G anymore.

And then finally, there are significant trends in complexity and performance that are still driving innovation every upgrade cycle, every new platform, people didn't expect to see satellite communications and phones this year. People didn't expect to see as much uplink transmit, dual uplink transmit last year and this year. So there's still significant trends that encourage us to believe we can continue to grow in the smartphone space.

But beyond smartphones, I talked about automotive a bit. We're well over $200 million run rate there. It's a healthy mix of 5G RF technology as well as power isolation and timing from the acquisition from Silicon Labs.

I'll try to move quickly here, but we knew we would have a differentiated approach in automotive because the requirements are so stringent and we controlled the process technology, we controlled the assembly and test technology, and we could provide a more credible story in terms of supply sustainment and performance over temperature, et cetera. We do our own gallium arsenide, the wafers are produced in suburbs of Los Angeles and Boston, Massachusetts. We do our own test and assembly in Mexico, we leverage our IP and co-develop new processes and key technologies like SOI and CMOS. And we pull all of that complexity together in custom modules that we control. And so the uptake on 5G RF in the automotive industry has been actually better than we expected.

And then on power isolation, that's going well, too. Our alpha customer or Silicon Labs is alpha customer, was the number one EV producer here in North America. We have low teens content and growing, and we're benefiting from unit growth at that customer. But we're also supplying that technology to BYD, the unit leader in China to Volkswagen, other unit leaders like Hyundai and Toyota, Nissan, the luxury brands in Germany. It's really just been a game of meeting the capacity requirements in '21 and '22, and we still are unable to close the gaps here in '23. It's not just a content story, but it's also an EV unit story as well. And then in ICE, everything is going to 5G and the timing requirements and ICE cars are just as stringent as they are in EVs as the automation trends pick up.

In the broader IoT space, we're seeing a huge uplift as the world transitions from WiFi 6 or WiFi 6E. We're well positioned as a partner with Broadcom. We did a press release a few weeks ago. We're seeing an upgrade cycle in 6E now. It's affecting carriers, commercial, consumer and enterprise applications. It's even helping us in the smartphone space because as you double the available spectrum and you add more than what we had before in 2 and 5 gigahertz, and you cram that all between 6 and 7, these are all right next to the 5G ultra-high bands, making the performance requirements in smartphones, high too. But we're putting more PAs, more switches, more attenuators, more BAW filter technology in all of our WiFi components as well, the big routers that service a hub in your home and in your offices but in all the endpoints as well. So we expect that business to continue to grow year-over-year.

And then generally in IoT, both fixed and mobile, people are down in the PC space. And I get that because units are down. But for us, it's a growth segment this year because the attach rate of 5G wide area network is outpacing the declines in units. And we can say that about a lot of spaces because ultimately, that's a business that we're in unwiring a lot of these applications. So if you look at automotive, if you look at I didn't say anything about the infrastructure or cloud. We're expecting to continue low double-digit CAGR extending -- actually, it will be a slow down this year compared to last year, but still double-digit growth in our timing portfolio for the data center and cloud applications as well.

So if you eliminate the Android headwinds that we're going to continue to see, we're very positive about our outlook in calendar year '23.

Harlan Sur

So many of the trends that you talked about are inside of your broad markets business, right? And you've driven great diversification. It was 36% of your revenues in fiscal '22 as you mentioned, automotive, IoT, industrial, data center, comms infrastructure, aerospace and defense, right, it's driven, I think, a 17% CAGR over the past 10 years. The combination of organic and inorganic strategy. But if you could give us maybe just a rough breakout of the broad markets business by end market and how you see this segment growing within your overall corporate target of 10% to 15% sort of annualized growth?

Carlos Bori

Okay. That's a good question. There's a lot to unpack there. But I would say it's going to be over $2 billion -- it was over $2 billion in FY '22. Again, that was 36% or 37%. It's -- given the Android headwinds that we have in 2023, it's going to absolutely outpace our mobile growth and that's going to -- I think that's going to continue to happen into FY '24 and '25 just because of the EV growth and the power isolation traction and the timing traction we have in that space.

The data center, we've always wanted to index to the data center and the cloud applications because we're at the endpoints. We're collecting and producing a lot of data with the smartphones. And we know it's all going back up to the cloud, being washed over with algorithms and sent it right back down. So we think that space is going to continue to grow for us.

And then just general IoT, the uptake, we're seeing more 5G cellular engines everywhere in smartphones. A growth vector this year that we didn't expect was fixed wireless access, Verizon, AT&T, Comcast, they're all producing products that use 5G cellular engines as backhauls of copper or fiber optic. We're seeing uptick in attach rates in iPads or other tablets. The energy grid management is also a growth vector for us. That could be wireless. That could be LoRa. That could be 5G. So if you look at fixed and mobile IoT, cloud, auto, that's what's going to be driving our growth, and that's where we're putting our money.

Harlan Sur

So I believe you mentioned this, the team finished fiscal '22 with automotive revenues annualizing at $200 million plus. That's pretty significant growth. Now you augmented a growing auto connectivity business with the Silicon Labs I&A acquisition in 2021, and you've significantly expanded your auto content opportunity, especially around electrification, right? EV, the team has strong momentum, as you mentioned, power, isolation, both for DC/DC conversion, your gate driver portfolio for the main traction inverter and EV.

Take us through the auto portfolio. Let's do a deep dive in the auto portfolio. And you mentioned some of the customer logos. But mention some of the customer logos and more importantly, how do you see the growth of this segment over the next few years? I mean the first thing that comes to my mind, given your isolation and electrification products is if you look at third-party estimates out there, I mean EV growth is, production is targeted to grow like 30% CAGR or something over the next few years.

Carlos Bori

Yes, that's right. So it's a little bit daunting to consider how fast that business is growing really. And we're strapped on to that number one -- who I consider as the number one EV maker in the world. We've partnered with them early, and we're hanging on because they're growing quickly, not just in units but also in content. And if you include BYD and Volkswagen and Toyota, a lot of these customers with which we have direct relationships with a lot, we benefit from having a historical strong relationship in 5G.

I think given the digital isolation portfolio that we have, the technology that we inherited or that we bought from Silicon Labs is differentiated, it's not the same as what TI or ADI does. They're incredible competitors in this space. So I'm not here trying to say that we're better or worse, but it's differentiated. It's a different approach. It seems to be resonating with these customers.

And what we're really focused on right now is the mindset that we entered this acquisition with, which was, we were impressed with the technology. We were impressed with the list of global leading brands, and we wanted to put scale behind it. And we're doing our best to do that. It's not happening as fast as we'd like it to happen. We were caught in the middle of a global chip shortage, as everybody knows. But I think it's going to be a matter of continuing to invest, continue to inspire this mindset down in Texas of taking risks of doing things in a different unique way and then putting the muscle and the resources behind it that we know how to do it well.

Harlan Sur

So your broad markets connectivity leadership has been a strong driver, cellular, WiFi, other connectivity technology is Bluetooth, GPS, LoRa, ZigBee, it sounds like you guys have some content with LEO, those low earth orbit satellite constellations. Where are the biggest opportunities for connectivity portfolio again within broad markets? Is it smart home? Is it smart factory? Is it smart car? I mean, what are the biggest opportunities for connectivity?

Carlos Bori

Okay. Well, I would say right now, what's facing us in the next 6 to 12 months is the upgrade cycle from WiFi 6 to 6E to 7. There's just twice as much bandwidth, which requires more content. And it's more complex because you have coexistent challenges now that you didn't have before. And WiFi impacts everything. It impacts the connected home. It impacts office, enterprise, industrial applications. So that's a very broad-based growth vector for us.

But we're also pushing the limits on Bluetooth. People want broader coverage. They want lower energy. We're seeing no slowdown in precision demand for GPS, L1 and L5. We're seeing uptake of new technologies like LoRa by leading brands around the world. And the only -- so I would say GPS and wireless and Bluetooth broad-based adoption, uptake rates, all expected -- and we're seeing updated adoption for 5G cellular engines as well.

The disappointing thing about 5G as everybody understands, I'm sure, is that we just don't have real core 5G networks in place yet. Once we do have core 5G networks in place, you'll see a strong uplift in our timing portfolio. Again, our NetSync and our AccuTime, which is really going to be required to make those low latency, ultra-reliable massive machine-type communications, those applications possible. And you'll also see a lot more demand for our 5G core engine technology as well. And so it's going to happen this year, we're getting orders. We have backlog, it's not as fast as we'd like it to be. So I'm not sure we're going to have -- I think the best is yet to come for 5G in broad market applications.

Harlan Sur

You mentioned the WiFi upgrade. We're going through the WiFi 6E upgrade cycle now, which is pretty big. WiFi 7 is the next big inflection. Obviously, the Skyworks team has always had a very, very strong partnership with Broadcom, who typically tends to drive these WiFi transitions. What is the timing of the move to WiFi 7?

Carlos Bori

So we're in the midst of WiFi 6E right now, which is great for broad market applications because you do require new BAW filter technology, more amplification, low-noise amplifiers as well. We think WiFi 7 in broad market applications will begin to launch at the end of this calendar year. And you mentioned Broadcom as a key partner, it's a big driver of the business that we've always had with WiFi. It always gives us a leg up in the transition timeframe, which is important. And the relationship is as strong as ever. In fact, I'd say it's stronger than it's ever has been. We just announced a press release a few weeks ago a collaboration with Broadcom announcing a new product line from scribers called Sky ICE, incredibly low power consumption. And it's the first time really ever the Broadcom at Skyworks have collaborated, not just on the hardware side, but on software side well, able to deliver a 30% reduction in current consumption for the new routers that you'll see coming out enabling service providers like Comcast to really make the industrial idea a lot smaller, a lot more attractive. And we're going to continue that relationship, that collaboration moving forward into WiFi 7 as well. In terms of timing for WiFi 7, we'll see it in broad at the end of this year. I think we should really have to look forward to see broader-based adoption and for the units to really take off is keep an eye towards when the leading smartphone manufacturers start to adopt that. There's a lot of debate about when that's going to happen. I would say we're not that far away. I'd say we're not that far away.

Harlan Sur

Perfect. Okay. Any questions from the audience? So maybe turning to your mobile business. Near to midterm, the team called out weakness in core mobile markets with your mobile business expected to decline about 9%, 10% sequentially, unpacking your guidance, driven primarily by weakness and subsequent inventory correction in the Android market, China market and weakness at Samsung. You're shipping below consumption here. How long does it take for your Android handset customers to clear inventories and drive a profile for Skyworks where you and your customers are shipping to end market consumption.

Carlos Bori

Yes. Well, how extremely frustrating that experience was, right? December -- it was December of 2021, where we began to be concerned looking at inventory levels. We started to correct in March. We hit the brakes hard in June, didn't ship almost anything in September and didn't -- and we'll tell you about December, but the trend really hasn't changed. I -- and let me just preface the next few comments on, it's not all Android. There's a new Android customer here in North America that we're partnering with. We're having great year-over-year sales with. It's really concentrated in our top Asia partners really. And it started in China, it's now impacting Samsung as well. If it weren't for bad behavior on the industry, right, not us or anybody specifically, but everybody fueled that inventory over drive hang. And we seem to do it every -- we seem to have these boom and bust cycles. I really did think it was going to be over by this December quarter. But I'm starting to think it may last into March, possibly even June. The amount of inventory that was -- that’s still in the channel regardless of who it is, we know it's there, and it's going to take some time to work through. But I think we've moved on from that and we've now for a couple of quarters have just accepted the reality, and we're focusing all of our time on new process technology, new optimizations, new iterations across gallium arsenide, across our TC-SAW filter line, our BAW line. We're trying to make our packages smaller and higher performance.

In Mexico, we're focused on NPI velocity and ultimately capturing key design wins for these next generation of 5G phones that you'll see from Samsung, from OPPO, from Vivo from Xiaomi, it's just a matter of time before that picks up again. And again, we're focusing on our design win footprint at this point, not so much prognosticating because I just can't tell at this point.

Harlan Sur

Yes. So that's a good segue into my next question, which is on the other side of this, right, obviously, you've taken down your China exposure to near zero, which is -- and as you mentioned, you guys were way more proactive in seeing this back in late '21 and managing down your inventories at Asia/China customers. But coming out of the back end of this, when things do start to recover, how is the design win pipeline? What is the engagement with the OPPO, Vivo, Xiaomis of the world coming out of this. Are you going to be in a much better position content-wise, functionality-wise?

Carlos Bori

Okay. I'm glad you asked that, and I'm stunned that I haven't brought this up earlier in this conversation. Primarily very encouraged and enthusiastic about coming out of this down cycle because we have significantly expanded our technology scope. We are now in a position to extend our success in BAW filter technology from our largest customer to now the other global leading brands. It's too bad, it's -- I guess, I should say, I wish we would have been able to do this sooner. But the reality is everybody knows well, that we had spent many, many years developing BAW filter technology, and we were very conservative with it, very careful. We launched it on the 11, the iPhone 11. We had a more substantial impact on the iPhone 12, the first 5G phone. And you can see from the teardowns, we've increased our position on the 13 and on the 14 as well. We expect that trend to continue. But what that success has done is it's taking a conservative approach upfront because it's not good enough to have good BAW filter technology that you can leverage to make 1 million pieces or 50 million pieces. You have to have BAW filter technology that can hold up to the most aggressive, the most demanding semiconductor cycle of the year, every year, right, producing 100 million devices, 17 or 15, however many we have, 100 million of each of them in four months, and you can't make a mistake. So that drove the careful approach upfront. But then we just could not expand fast enough. We didn't anticipate that the uptake rate at our biggest customer would be as big as it was. So we have been limited on that mid-high band primary path and the mid-high band receive pet and some of the ultra-high band path at the other leading brands. And as everybody knows, that's a large part of the smartphone RF opportunity. We're now ready to do that. And so when we come out of this -- we won't come out of this -- we'll come out of it with a larger TAM, a larger SAM, serviceable available market than we ever had before. And so that's making us feel pretty good.

Harlan Sur

So can you just help us understand of your mobile solution sales? How much of those solutions now integrate one or more Skyworks BAW filters and where you see future opportunities for your BAW technology? I think you already mentioned mid-high band and others in some of your Asia and emerging customer -- other emerging customers, but talk about some of the future opportunities. But more importantly, just curious as to the attach rate that you're seeing currently now with some of your flagship customers.

Carlos Bori

Okay. So let's break down the numbers then. We just finished '22, our fiscal year, right, in September. We did $5.5 billion, $2 billion of it was broad. So there was about I guess, $3.5 billion of mobile business in our fiscal year 2022. $1.5 billion of that required BAW filter technology, and it was all concentrated at our largest customer. We need BAW for everybody else. We need it for Samsung, we'd like to sell it to OPPO, Vivo, Xiaomi. But we're also seeing it in broad market applications in broad, as you move to WiFi 6E, you need BAW in cell phones, when you move to 7, you'll need BAW. In the automotive press release that we just announced with MediaTek, there is BAW so you need it in cars as well. You need it almost everywhere. And for us, industrial applications is where we are seeing advanced robotic manufacturing in areas that are deploying core 5G networks. So we need it everywhere, and it's just a matter of scaling it out. And like I said, we've reached the tipping point, we can now extend it, and we're excited about it.

Harlan Sur

So you talked a lot about your larger customers, North American and Korean customers. How should we think about the forward content opportunities in the ultra-premium end of the market for Skyworks?

Carlos Bori

How should we think about the opportunity in the ultra high-performance space? Okay. So that's getting more complex, right? Like I said before, we're now dealing with satellite communications. You're going to see attach rates pick up at other OEMs. You're going to see other satellite providers getting in the game. WiFi 7 is going to be disruptive in smartphones, you have over 1 gigahertz of new bandwidth right next to the ultra-high-band 5G bands. That's going to increase complexity. And so what we're focusing on now, and we can't do it fast enough, but we're iterating every process technology that we have. We're optimizing and iterating our HBT GaAs different types of applications for WiFi for 5G and within bands, it changes as well. We're iterating and we're optimizing our TC-SAW technology. We're trying to make it better, smaller, consume less energy, put multiple die on the same -- or multiple filters and duplexers on the same die. We're doing the same thing with BAW, we're working with our upstream partners as fast as we can to iterate and optimize SOI and CMOS. And then the investments in Mexicali, I think, are often overlooked and underestimated. We take all of those different processes and materials and technologies and put them inside one package right next to one another, and we solve the coexistence problems necessary to meet specs for the most demanding, the most discerning customer in the industry. And again, we do it at very high velocity, 100 million sets in three or four months.

We are continuing to do that as fast as we possibly can, and the focus is on energy consumption and space because we are seeing such a compelling uptake in things like 5G applications for smart watches. We expect to see significant movement in the next 3 to 4 years in AR and VR, and there's going to be a need for a very small RF, 5G front end somewhere in a set of glasses or a set of VR goggles. So I think the trends are coming very fast, and we're doing everything we can to prepare in advance be in position to meet those.

Harlan Sur

On the financial front, even with your guide down in the December quarter, your gross margins are holding up extremely well, right, and are expected to hold around that sort of 50%, 51% range even through a potentially weaker first half of this year. I know the team's level loading strategy helps smooth out the internal utilize throughout the year. But what are some of the other puts and takes to keep gross margins potentially steady even in a weak top line growth profile year?

Carlos Bori

So the level loading is important, and that's an operations issue. I think we do that quite well, supported by great data analytics and customer relationships. But what's most critical, what central to the strategy is we need to capitalize on the complexity trends on the demand for integration and smaller packaging. If we can optimize everything, iterate everything, pull it all together, deliver these smaller packages in a way that enables our end customer to differentiate their product in a way that drives compelling value, then we're going to continue to win. We're going to continue to do well and so with our customers. What we just can't do with stand still. We are not interested in doing -- we just -- we're not good at doing last year's technology. We need to stay at the front end and continue to drive the envelope in terms of performance. And it's a mindset that's cultural. We have confidence and that's the way to keep the margins up.

Harlan Sur

Yes. Very insightful discussion. Thank you, Carlos. I appreciate your participation today.

Carlos Bori

Thank you. Had a great time.

Harlan Sur

Thanks, Mitch. Thank you.