Skyworks Solutions, Inc.
Q1 2013 Earnings Call Transcript

Published: 31 Jan 2013

[Operator:]

Good afternoon, and welcome to Skyworks Solutions First Quarter Fiscal Year 2013 Earnings Call. This call is being recorded. At this time, I will turn the call over to Steve Ferranti, Senior Director of Investor Relations for Skyworks. Mr. Ferranti, please go ahead.

[Stephen Ferranti:]

Thanks, Michelle. Good afternoon, everyone, and welcome to Skyworks' first fiscal quarter 2013 conference call. Joining me today are Dave Aldrich; Don Palette; and Liam Griffin. Dave will begin today's call with a business overview, followed by Don's financial review and outlook. We will then open the lines for your questions. Please note that our comments today will include statements relating to future results that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties including, but not limited to, those noted in our earnings release, and those detailed from time to time in our SEC filings. I would also like to remind everyone that our results and guidance we will discuss today are from [ph] our non-GAAP income statement consistent with the format we have used in the past. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I'll turn over the call to Dave for his comments on the quarter.

[David J. Aldrich:]

Thanks, Steve, and welcome, everyone. I'm pleased to report that Skyworks is off to a great start to fiscal 2013. Our strong first quarter performance and better-than-seasonal guidance again demonstrate how our diversification and expanding market opportunities enable us to consistently deliver superior financial results. At a high level, we're capitalizing on the proliferation of connectivity in all its forms across the diversified analog landscape. In fact, it's virtually impossible to find a segment today that is not incorporating some form of always-on access. And as the enabler of all things connected, Skyworks is benefiting from, and in some ways facilitating, this market transition. Today we bring to bear an entire portfolio of leading-edge technologies along with world-class system engineering capabilities to provide differentiated, performance-based solutions, spanning the entire diversified analog market. So as the world at large becomes increasingly more connected, we are uniquely positioned to lead this transition. And our strategy is paying off as reflected by the strength of our financial results and guidance. During the first quarter, we delivered revenue of $454 million. Now that's up more than 15% year-over-year. We achieved an operating margin of 25.3%. We posted [indiscernible] earnings per share and generated $148 million in cash flow from operations. [indiscernible] capital remained very strong at 21.4% [indiscernible]. In short, Q1 was an excellent quarter for us across all our key metrics. And for our second fiscal quarter, we see continuing momentum as key program ramps and growth in new product categories helped to offset normal seasonality. The combination of mid-teens revenue growth and mid-20% operating margin that we've demonstrated thus far into Q -- into fiscal 2013 puts our financial returns among the best of breed in the semiconductor industry. With the opportunity pipeline and design win momentum we have in place today, the stage is set for continued revenue growth, continued margin expansion and earnings leverage for the remainder of 2013 and beyond. Now for a more in-depth review of our financial results, I'll turn the call over to Don for his outlook.

[Donald W. Palette:]

Thanks, Dave, and thanks for joining us, everyone, we appreciate that. Revenue for the first quarter was $453.7 million, up more than 15% versus the year-ago quarter and nearly 8% sequentially. Gross profit was $195 million or 43% of revenue, which is in line with our prior guidance. Operating expenses were $80.2 million, consisting of R&D expense of $50.7 million and SG&A expense of $29.5 million. We generated $114.8 million of operating income, yielding a 25.3% operating margin, which is a 70-basis-point increase over the prior quarter. Our cash tax rate for the quarter was 7.3%, producing net income of $106.6 million or $0.55 of diluted earnings per share or $0.01 better than our guidance. Turning to our first quarter balance sheet and cash flow statement, we generated $148 million in cash flow from operations; we invested $26.4 million in capital expenditures with the -- with depreciation of $18.5 million; and we repurchased 1.9 million shares of our common stock, representing a $42 million investment. Given our confidence on our business outlook, we continue to believe that repurchasing shares of our common stock represents a highly attractive use of our cash. And finally, we exited the quarter with $378 million in cash and no debt. Now for our second quarter business outlook, with the order visibility and specific platform launches we have in place today, we expect Q2 revenue to be $420 million, representing better-than-normal seasonality and a 15% year-over-year growth. At this revenue level, we suggest modeling gross margin in the range of 42.3% to 42.5%, with operating expenses of approximately $80 million. We continue to see opportunities for sustainable margin expansion in the second half and beyond as we leverage our current capital investments and benefit from the transition to a richer mix of margin-enhancing system solutions. Below the line, we anticipate $100,000 in expenses from interest income and other expenses and a cash tax rate around 7%. We project our tax rate to remain at these levels for the remainder of our 2013 fiscal year. We expect share count to be around 193.5 million shares, resulting in second quarter EPS of $0.47. All of the underlying drivers are in place for Skyworks to continue to outperform, putting us on a clear path to achieving our mid-term business model of 30% operating margin which, as a remainder, generates around $3 in annualized earnings per share. With that, I'll turn the call back over to Dave for his comments on the market.

[David J. Aldrich:]

Thank you, Don. For the remainder of the call, I'd like to provide some additional perspective on how we see the trend towards always-on connectivity transforming our analog markets. One of the overriding themes at this year's Consumer Electronics Show was the Internet of Things, which is comprised of sensors and embedded connectivity deployed across a seemingly endless range of devices that touch our everyday lives. We see this trend driving a proliferation of access points from conventional mobile devices, like smartphones, like tablets, to nontraditional devices like home appliances, medical devices, gaming consoles, industrial machinery, home entertainment systems, Smart Energy and security systems, just to name a few. Just compare the number of connected devices in your home today versus just a couple of years ago. The result may surprise you, and I can assure you that the list will only continue to grow over the next few years. In fact, some analysts are projecting over 50 billion connected devices within the next decade. This trend is happening today, and it represents the next major growth stage for the analog industry. Along with the explosion in access points, complexity is being driven substantially higher. Most network devices span a variety of communications protocols, including some mix of cellular, WiFi, Zigbee, peer-to-peer, Bluetooth, NFC on both licensed and unlicensed spectrum and across multiple operating frequencies. And the design challenges within this environment require competencies across mixed signal, analog and RF, including signal transmission and conditioning, seamless handoffs between disparate air interface technologies, power management, voltage regulation, battery charging, isolation, filtering and tuning, among others. And we have spent, at Skyworks, the last decade putting in place substantial differentiators to simplify these complex design challenges. Some examples

[Operator:]

[Operator Instructions] First question from the line of Vivek Arya of Bank of America Merrill Lynch.

[Vivek Arya:]

First, just a clarification, what was the mix between handsets and non-handsets in this quarter and where do you expect that mix to be in the March quarter?

[Donald W. Palette:]

The mix, Vivek, this is Don, this quarter was similar to the mix that we had last quarter. It was 60% -- approximately 60% handsets and 40% HPA. And as far as the March quarter, we don't guide that, but we wouldn't expect that number to change materially in that quarter.

[Vivek Arya:]

Got it. And that's my question, Dave, you are guiding to better-than-seasonal trend. And I think you mentioned share gains in your prepared remarks. Can you give us any more color around that? Is it driven by share gains at one single customer's new model? Is it more broad based? Because we have heard a lot of weakness at one of your larger customers in the March quarter, but you are guiding to better-than-seasonal trends, so I'm trying to understand where that strength is coming from.

[David J. Aldrich:]

Sure, Vivek, thank you. In fact, we see -- you're probably right, March normal seasonality is in the 10% to 12% range. We're going to do better than that. And as you mentioned, some of our customers are doing very well, others not so well. They're challenged. We are seeing new analog opportunities ramping, antenna switch modules, wireless LAN devices, some tuning products. We've also -- as we talked about in the prepared comments, we've expanded into some new verticals. We are seeing sequential growth there in some cases in a seasonally down quarter for mobile. So I think it's just a combination of those identified programs, as well as beginning to ramp into some of these new verticals.

[Operator:]

A question from the line of Craig Ellis of B. Riley& Co.

[Brett Piira:]

This is Brett Piira here for Craig. I guess could you just talk a little bit about your 802.11ac design wins and then once in that, when do you see the ecosystem evolving into the smartphone, tablet, PC-type area? And do you still expect that to be meaningful in 2013?

[Liam K. Griffin:]

Sure, Brett, this is Liam. 802.11ac is a major upgrade opportunity for the WiLAN ecosystem with Skyworks being a direct beneficiary. We are today closely aligned with the leading chipset providers, number one. We have design wins today and access points and routers that are shipping. We have new design wins that just occurred in the last quarter in notebooks and netbooks. And we see Q3, Q4 fiscal significant ramp in 802.11ac and handsets. So it's a story that is building momentum. And we think it's sustainable for a number of years.

[Brett Piira:]

Okay. And then could you just provide me with your mix of 2G in the quarter?

[Donald W. Palette:]

It was roughly 20% 2G and 80% EDGE and WEDGE.

[Operator:]

And the next question from the line of Mike Walkley of Canaccord.

[Matthew D. Ramsay:]

This is Matt Ramsey on the line today for Mike. Just a couple for me. I wondered if you -- this is kind of building on the last question. I wondered if you might break out your 4G mix in the quarter, just because now, I mean with the 2 big guys kind of ramping 4G phones globally, it seems like that's probably a material portion of sales, and you hadn't broken out before. So I was just wondering if you might today.

[David J. Aldrich:]

Well, our -- it's a little -- Matt, it's a little hard to answer that question specifically because as Don mentioned, it's about 80% 3G, 4G, 20% traditional feature phones and the like. And within those smartphones is a combination of 4G, 3G backward compatibility all the way to 2G. So it's difficult to break it out. But those products in smartphones for us are 3G and 4G PAs, increasingly WiFi enabled, the GPS and LNAs, the analog power management devices. So it's a pretty broad suite. And now antenna-tuning devices, and so on. So it's a pretty broad suite of analog products that make it up, of which 4G is an element. But it's hard to break it out specifically.

[Matthew D. Ramsay:]

Okay. That's fair. And then I guess as a follow-up and kind of unrelated, Apple talked recently about launching the iPhone LTE-enabled with 36 new carriers. From our work, it seems like LTE network rollouts outside of just the U.S., Korea, Japan are starting to pick up a little bit of steam. Maybe you could talk about what you're seeing on the wireless infrastructure front? Because I know that would be margin accretive for you guys. And anything that you're seeing different from the last several quarters where that market's been pretty weak?

[David J. Aldrich:]

Sure. Yes. The wireless infrastructure space, as we've discussed in the past, has always been a major opportunity for Skyworks, and it had been relatively sluggish through 2012. We are starting to see some design wins pick up and some demand pick up with customers like Ericsson, Huawei in Asia, Nokia-Siemens. So we have a great footprint there. We have a deep portfolio of analog mixed signal technologies and margins. And we agree, we think the LTE rollouts on handsets are going to be a catalyst for a major upgrade cycle.

[Operator:]

And next question from the line of Parag Agarwal of Topeka Capital Markets.

[Parag Agarwal:]

Don, first question is about gross margin. How should we expect the gross margin to trend as we go forward? And if you could highlight specific margin drivers that we should look for.

[Donald W. Palette:]

Sure, Parag. I mean, it -- this is consistent with what -- when we talked about our goal of a 30% operating margin. The incremental revenue at this point -- what we recommend that you do is on a -- is to drop that through at about 46% to 47% incremental margin. And we've said our goal is to drive that back up into the high 40s or even 50. But at this point in time, the best way to model it for '13 is to use that 46% to 47%. And that improvement from the drop you've seen in the last few quarters, I mean that's really driven by a combination of things. It's more of a -- it's a mix shift from -- going from 2G lower margin products, where we're going more towards high-end smartphones. And also the contribution Liam talked about as far as the overall content we're getting from the non-PA part of the business. And those margins are all accretive to the overall Skyworks. So you get your mix shift towards more and more content that's outside the traditional PA space and it's also a movement away from 2G. Those things, coupled with the extra volume, are going to drive margin enhancement for us in the back half of the year.

[Parag Agarwal:]

And, Dave, regarding the share gains, should we expect your share gains to accelerate as we head towards the end of the year, maybe driven by LTE and SkyOne and SkyHi? And also if you could talk about the traction you are seeing with SkyOne?

[David J. Aldrich:]

Sure. I think you should see more the -- the trend of high share for Skyworks in smartphones and tablets and related devices, but you should also see more content bolted around the traditional transmit products for us. So as you see from recent Teardown reports, we're finding increasingly that our customers are coming to Skyworks and they're looking for more of a complete-system approach. They're asking us to figure out how to shield the -- how to shield frequency interference or coexistence issues, they're asking us how to figure out how to tune the antenna and work on the power management side, or the the architecture to improve current consumption. There's a lot of switching content, and of course, as you know, we're doing high performance GPS and LNAs and WiFi devices. So you should continue to see more dollar content, more functional content from Skyworks in each successive rollout and design. That's what you should expect.

[Operator:]

A question from the line of Alex Gauna of JMP Securities.

[Alex Gauna:]

I was wondering if you could -- if I could take another step -- stab at this, Dave, and ask you about LTE exposure disjuncture. Maybe if just limit the question to PA opportunities specifically tuned for LTE. Is that maybe 5% or less of your mix or 10% of your mix or less, ballpark, and what could it go to by the end of the year as your mix improves?

[David J. Aldrich:]

If I understand, Al, among our PA segment of the business, LTE is much higher than 5% or 10%. The only -- my only comment earlier was really meant to point out that we tend to tally the revenue and the content at which LTE may be a functional block or just simply one transmit path. So I don't have the number at my fingertips exactly, what percentage is, but it is increasing rapidly, and it's much higher than single digits.

[Alex Gauna:]

Okay. And I was wondering if you could talk about the backlog coverage for the current quarter and maybe what the turns were last quarter and what you need to do to make that into this quarter.

[David J. Aldrich:]

It's quite similar. Our -- we're largely booked. I'll call it 80% to 90%. That, plus our Hub contract, give us a great deal of comfort that we put an appropriately conservative model out there.

[Donald W. Palette:]

Pretty much fully covered when you include the Hub forecast, Alex.

[Operator:]

And the next question from the line of Harsh Kumar of Stephens.

[Harsh N. Kumar:]

Two questions. First of all, I know, Don, you said expect the mix to be 60-40 again. But is there any standout category or any particular end market that's a stand out in the March quarter for you guys?

[Liam K. Griffin:]

Well, I would say -- we talked about it a bit here. You're starting to see more traction outside of mobile. The 802.11ac opportunities, although they will address handsets in the second half, right now we're seeing a nice swing out here with routers. We've got MIMO contents so we could have 2 to 3 streams of devices in a single router. We've got some nice uptick now in our ZigBee portfolio, spanning home automation and security, we mentioned a few of those in the opening comments. So there's a lot of diversification outside of mobile that is moving us above seasonality and then we have some nice design wins that we're putting in place today in handsets that will affect us in the second half.

[David J. Aldrich:]

We're also seeing some lighting in display, power management products that are ramping incrementally for a relatively small base, but those are products that we either acquired or have developed in the last couple of years that have -- that we have been presenting to our mainstream customers where we're starting to gain traction as we provide more of that overall system solution. We're seeing the same thing with more customers for our LNA products, and we continue to take share and ride the growth of WiFi.

[Harsh N. Kumar:]

Great. As I -- I mean, listening to your commentary and again reading the press release, seems like a lot of good things happening in the high-performance analog. And I think you just answered my second question. Seems like you're on a -- would you agree that you feel like you're at an inflection point with respect to that business?

[David J. Aldrich:]

I think we had a -- it's been a long investment. We've been investing in building out the marketing and the design infrastructure and the product building blocks and now the solutions. We've been doing that now going on 6 or 7 years. So -- but we are beginning to see sequential growth as we have more content, and we're able to leverage the existing relationships we have. So these products are becoming more battle hardened. We are becoming more established with a footprint in the designs, and we're starting to see a snowball effect if that's what -- I think that's what you mean.

[Operator:]

A question from the line of Blayne Curtis of Barclays.

[Blayne Curtis:]

You mentioned the antenna tuning wins in your preamble. I was wondering if you could just kind of frame your thoughts on just the overall market there and when you expect to be shipping in phones?

[David J. Aldrich:]

Well, actually, we are shipping antennas tuning solutions today using a number of different architectures and topologies. We think it is an increasingly important part of the architectures when you look at multimode, multiband and LTE. And what antenna tuning does is it effectively -- synthetically lengthens or shortens the antenna to improve matching, and Skyworks have some great IP around this. So what we're doing today is leveraging our switch technology SOI and pHEMT, also some of our developments, integrated solutions and packaging technologies to deliver custom solutions. So we are in production with antenna tuning, quite frankly it's not a one-size-fits-all solution. You have to look at each customer, each OEM, what their antenna is doing what bands they have, manage coexistence and filtering, in some cases. But we think it's going to be a powerful revenue driver for us for many years. It's early days for this, and we're well-positioned at the start.

[Blayne Curtis:]

And maybe if you could address -- you talked about 2G but maybe just address the overall emerging market and low-end 3G market, whether you're seeing any uplift there and kind of what the inventory picture is and how you're positioned?

[David J. Aldrich:]

Sure. This is Dave. We don't see any inventory position there so inventory position is lean and appropriately so, for us. We typically address that market through a combination of distribution and direct. I would say about the 2G market, the beauty of some of these emerging markets is that, at China in particular, is that we are now seeing an inflection point where 2G, 3G, smartphones, high-performance devices are proliferating throughout that market. So there's a great deal of more content. Some of them have -- a lot of these phones have backward compatibility or they may, in fact, have a transmit path on 2G but they are 3G. Smartphones with a lot more contents, a lot more bands, a lot more filtering, a lot more switching, more WiFi connectivity just like the rest of the world. 2G is a standalone product, is -- has declined -- continues to decline perhaps mid-single-digit percentage of our revenue. That market is crowded with competitors. The ASP pressure is high and in fact customers simply don't want -- making -- successful customers making the transition to more high-performance smartphones and devices, simply don't want a discrete 2G PA. They want someone to integrate that solution into entire transmit and receive path. So you won't see much 2G standalone component business at Skyworks, it's simply not an attractive market. We're looking to facilitate the upgrade cycle to the smartphone.

[Operator:]

And the next question from the line of Anthony Stoss of Craig-Hallum.

[Anthony J. Stoss:]

Don, could you talk about your in-house capacity utilization, and maybe start with the percent that you guys manufactured in the December quarter versus subcontracted out, if you will? And then, Dave, could you talk about where you stand on your BAW filter products and how competitive you think you'll be?

[David J. Aldrich:]

Sure, Anthony. As far as utilization, I think it's consistent with the discussions we've had in the past. When you look at that utilization, we really look at it in 2 forms and one is sort of a equipment line utilization and the other is facility, square footage, bricks and mortar utilization. As far as the lines and the equipment again, we're fully utilized. That's been consistent for us for a long period of time. When you look at our ability to ramp production when you look at square footage utilization, we've got, particularly in Mexicali, we have square footage available. So for Shore Capital, we're able to expand capacity and drive incremental margin benefit because there's a fairly significant cost differential for us to do that internally versus externally. As far as internal versus external, how we actually source that, when you look at the last quarter, our HBT -- our GaAs wafer supply was about 20% externally sourced and 80% internally sourced. And then you got a keep in mind that as we've continued to grow in some of these bolt on opportunities that we've talked about, we're sourcing more and more of our products, they're silicon-based, and we're sourcing more and more of those from the outside. But as far as the GaAs goes, it's about 80/20 on the wafer supply.

[David J. Aldrich:]

This is Dave. I think the second question was around filters. Let me try to clarify. We participate in filters as part of an integrated power amplitude -- tune to a power amplifier in the same of package of PAD. SkyOne has the complete suite of filters for all frequency and band. But we don't sell discrete filters. That's not our business. In these applications, in fact, today we're one of the largest integrators of filters in the world today. And let me kind of give you a sense for it. Below 2 gigahertz or so, we use SAW-based product. Their performance is high, the cost is low. And when then there's narrow spacing, so in other words, when their band's on top of one another at transmit and receive on top of one another in that market, we use temperature-compensated surface acoustic devices, temperature-compensated SAWS. That allows us to eliminate the temperature drift and have real spot-on performance. In very high frequency bands or bands -- AM bands that were -- again the TR is right on top of each other, transmit and receive, while the bands themselves are -- there isn't a lot of adjacent frequency gap. We do use some bulk devices for high frequencies, BAW, primarily Bulk Acoustic Wave, and that's an appropriate technology for high frequency. And so there's always a trade-off between a SAW does well and what a BAW does well and what a temperature-compensated SAW does well. We have strategic partners aligned for each of these devices today we are in production. And it gives us a great deal of flexibility because those suppliers are different. No one in the world has competencies that will handle all bands and all configuration at high performance. So it's a far better return profile. And we think -- and gives us a great deal more supply flexibility to work with the best process technology for given the existing application and band configuration. And we're doing that across the board today.

[Operator:]

And the next question is from the line of Dale Pfau of Cantor Fitzgerald.

[Dale Pfau:]

Don, you've sort of danced around this, but maybe you could talk a little bit about the share of your products that are going the outside foundries versus internal, and how that's going to affect our margins. And can we get some margin expansion over the course of the year? Is the mix going to shift or the utilization get better? But how are we going to get some margin expansion here?

[Donald W. Palette:]

No, it's consistent with what we've talked about in the past. First of all, as we continue to grow, we've got a 15% top line growth opportunity. We're going to get a significant benefit both in what we in-source, the manufacturing internally and we manufacture externally, we'll get a margin benefit in that. So that's point number one. Number two is, as we continue to move -- as the margins that we get on this incremental dollar content that we're getting, that both Dave and Liam would talk about, is accretive to the overall Skyworks margins. So as we see the greater and greater attach rate for GPS/LNAs, for instance, for WiFi devices. All of that within the mobile and outside of the mobile space, that's going to add margin dollars and margin percentage to the company. So that's a real [indiscernible]. Then we're going to see a mix shift in our traditional space where power amplifiers in the handset space were primarily part of the revenue, where we're moving away from 2G to 3G low-end smartphones and high-end smartphones. All of those products have accretive margins. So it's that combination that's going to continue to drive margin expansion. And, yes, we are outsourcing content. When you look at the incremental revenue and capacity we've added through acquisitions, all of that content -- and it's silicon-based, all that's outsourced. So that's been a consistent part of what we've been done in order to drive the margin profile for the last year, 1.5 years. That's not new.

[Dale Pfau:]

And then as one follow-up, as your content hits would increase in the system architecture and customer dealing with the system, at what point do your customers get a little twitchy about having so much content with one supplier? Or have we already crossed that bridge?

[David J. Aldrich:]

I think -- Dale, this is Dave. I think we crossed that bridge. If you look at it from a -- as the front-end complexity, if you will. By the front end, I mean analog, analog-mixed signal RF. As that complexity begins to rival the complexity in the applications processor in the modem and the overall system and it has a big, huge impact on the overall performance of the device itself, it is increasingly becoming -- they need a best system solution that is integrated, that's bundled, that's shielded, that's bulletproof. And just as most of our OEM customers have gotten over the fact that they're going to have custom baseband, for example, they're going to have a custom front end, and I think we just need to make sure that we have flawless execution on the supply chain side, high yields, never have reliability hiccups, and we're good at that. So I think they have crossed that bridge. Some more than others. Some like to generate more competition. But the fact is, that is increasingly a custom business, and very few customers are going out and shopping for the best discrete component. So very few, if any. And so we think that, that ability to integrate by keeping a broad technology footprint, by keeping our cost structure low, by being able to integrate both the semiconductor, as well as the module, the laminate and the passive gives us an opportunity to add a lot of value for our customers. And as long as we continue to support them as we have, I don't think there's an issue with that.

[Operator:]

And the next question is from the line of Vijay Rakesh of Sterne Agee.

[Vijay R. Rakesh:]

I had a couple of questions. When you look at your -- when you look at last year, you had good traction, the top couple of question why you did very well. Just wondering as you look at fiscal '13 or we look at 2013 here, how you look at -- how you feel as your top customers, how do you see those guys ramp? How do you guys -- how are you guys doing on the new platforms coming out, the market share there?

[David J. Aldrich:]

I think that we well, in the mobile smartphone portion of our business, you will -- you should think about us having the kind of penetration and concentration that the market, the overall market has. So unlike many, we do participate with all the leading -- all the OEMs, and we participate on all the baseband providers, reference designs and systems. So we will look an awful lot like the market. We'll exceed the growth of the market because we're bolt on more content, and the demands of the market are looking -- customers are looking for more of the kind of solution we provided versus point products. That's good for us. So I think you should continue to look at it that way. I would expect you to see subsequent design iterations with our customers maintaining the content that we have today in the functional blocks, in which we participate. But seeing us bolt on more content, more shielding, more filtering, and switching, and all the rest.

[Liam K. Griffin:]

Yes. I mean, as a follow-on to that, success for us in 2013 and 2014 and beyond isn't just execution in the front end, where we're we've been successful. But now you're really going to see and you're just starting to see it now. ASM, antenna tuning being bolted on, multiple bands of WiLAN 802.11ac, display devices, LED backlight, camera flash, and a whole suite of power management, so that the opportunity around the center of the plate in multimode, multiband PAs and LTE is there. And we're going to execute, but we can really surround that with some complementary devices in analog and mixed signal and drive not only revenue but margin.

[Vijay R. Rakesh:]

Got it. And the 802.11ac that you just mentioned, how big is it now? And how do you expect that growth year-on-year, if you could give us some color on whatever?

[Liam K. Griffin:]

Sure, it is a small percentage of our WiLAN portfolio today. It's going through an upgrade cycle from 11n. We think it's going to accelerate, but we love the opportunity. It's early. We're moving fast. We've got great relationships with the OEM partners in the chipset side, and we like the applications that are being driven by 11ac. It's going to enable quite a bit of interesting new consumer level applications.

[Operator:]

And the next question is from the line of Nitin Kumar of BNP Paribas.

[Nitin Kumar:]

My quick question on the pricing environment, especially on the handset side. I know content has been increasing and -- but like has been mentioned before, there's been some weakness in the higher and and more momentum in the lower end of the spectrum. Have you guys any seen pricing pressure or anything like that?

[David J. Aldrich:]

We've seen pricing pressure be the most dramatic on the point products in 2G. We've seen increasing content offset any pricing pressure on the mid- to high-tier products or smartphone products, whether they'd be low, mid or high end, and a more normalized pricing pattern with these newer devices. We need to be on a path to continue to add value. We've been able to sweep in more functionality so that our customers pay us more, even though for the individual functional block, they're seeing enough value that they can meet their bill of material cost objectives. And that's our goal.

[Donald W. Palette:]

Yes, and if you look that actual year-over-year price erosion number that we track and monitor very closely, we're tracking pretty much at that same 9% number that we've seen over the last few years. So anything new. The only -- at the low-end, as they said, there's been maybe a little bit more pressure, but overall our percentage is in line with what it's been historically. So that points to the upside in some of the other parts of the market.

[Nitin Kumar:]

I know linear products has been very strong, and I think, Dave, you mentioned automotives. As you sit here in the cycle, what are your thoughts for the rest of the year in terms of 2013? Do you see an improvement from this point on or any specific thought?

[David J. Aldrich:]

I see the continuing -- a few years ago, we were kind of 80/20 on the mobile FAS space. FAS being dominated by transmit power. We are now more like 60/40. I see that trend continuing to be more balanced as we ramp vertical markets and as we add more content within our mobile customer systems than simply the transmit chain, and more system solutions, more functionality. So I think you will see the trend of more dollars and a more balanced portfolio, both in terms of a number of markets we address, the verticals we're penetrating, but also in terms of the amount of content we have, and how diverse it is within a smartphone for example.

[Operator:]

Your next question is from the line of Mike Burton of Brean Capital.

[Mike Burton:]

I wanted to talk a little bit about the -- if you could give us a little color about ET? When does that really become important to you? Do you have PAs to work with Qualcomm? And maybe to your strategy there, are you developing your own pHEMT or is it as a partner? And do you view ET as an opportunity for Skyworks to differentiate?

[David J. Aldrich:]

Let me clarify that a little bit. That's a good question, Mike. ET is important. And for the big baseband providers out there, and you mentioned one, ET will be integrated as part of the chipset. And the system, the front-end PA system, if you will, is being quite customized around high performance to dovetail into that chipset solution. So it's not an ET PA as much as it is a PA that's optimized to deliver envelope tracking in the overall system architecture. So it is very important. And in fact for the first reference designs -- for the first designs that are hitting the market, we are the reference design with our multimode PA on the largest chipset supplier's ET System. So we are -- it is a growth driver for us. Most chipset suppliers, the large ones, at least, will facilitate ET, and there'll be a partnership between what the PA does. It won't be a separate PMIC for ET that the PA supplier provides. It will be more providing the right PA, maybe antenna tuning and bolting around it. There will be some small percentage of the market in our view that will have a discrete ET device. And we've been working on those devices. We have that capability. We also as you know, we bought a power management company. We've got PMIC capability. And that DC to DC converter technology gives us an advantage to drive the supply voltage and drive the transmit chain. So it's a good opportunity for us. We're leading today on the reference design with the largest, and we're excited about it.

[Mike Burton:]

That's helpful. And also your view on the CMOS PA market. You guys obviously bought the volume supplier at the time when you bought Axiom. Can you maybe size that market for us now? That market is progressing to some day capture low-end 3G. And if so, what sort of impact would that have on the space and for Skyworks obviously?

[David J. Aldrich:]

The low-end CMOS PA market is tiny, frankly, because the 2G market continues to decline in units and in price. We do CMOS. We do low-end gallium arsenide. We do very cost-effective front-end modules to take that PA and integrate it with switch and control and logic to have it more integrated solution. But we're finding that the market for those discrete 2G products is dwindling. And so it's not frankly not a very attractive market for us. It's maybe 5% or 6% of our revenue, and it will not be accretive to margin. That's just not the way that market's going to play out. It is, however, 2G, you need backward-compatible to 2G in these low-end smartphones. And so that is where we're focused on. Integrated devices, there'll be CMOS content, there'll be gallium arsenic content, there'll be silicon germanium and SOI content in that transmit path. And we're really quite agnostic with respect and indifferent with respect to which technology it is.

[Operator:]

Your next question is from the line of Aalok Shah of DA Davidson.

[Aalok K. Shah:]

Just if I just pick your brain real quick on WiFi, especially on the 802.11ac. A lot of companies tell us there's, of course, the 2 bands. And some companies were in the couple, some were in the high band, some in the low band. How do you guys attack that market? are guys going after both? And how do customers kind of view that opportunity for you guys?

[David J. Aldrich:]

Sure. Well, first of all, we absolutely are attacking both bands, 2, 4 and 5 gig. And we have been, for the most part, the incumbent supplier in 11n. So in many cases, it's continuing to fortify the chipset partnerships that we have with the 2 leading players. And we have very strong positions with both. It's taking our current customers through the upgrade cycle. We were very early in sampling the technology, again provided by the support of our baseband partner. So we look at an absolute upgrade cycle at 2, 4 and 5 gig. We're seeing, as I mentioned before, MIMO, multiple streams and routers and access points that really magnifies the content. And then by and large, the handsets that we see today are going to go 2, 4 and 5 gig as well. So there's a lot of momentum there. I think if you listen to what Broadcom said as an example, how bullish they, we're right by them on those designs. So 2, 4 and 5 gig absolutely. I think if you look out a few years, there's some opportunities for us to integrate that into a single solution. But we are very well positioned in, quite frankly, what customers that we have solid relationships with.

[Aalok K. Shah:]

Are you guys [ph] preferred vendor or preferred partner with Broadcom? We heard multiple different competitors of yours talk about the market and how they're well positioned with Broadcom. Can you describe how you think your relationship with Broadcom is?

[Liam K. Griffin:]

Well, we think our position is very strong. We've been a partner for quite a while. And if you go back to our partner, SiGe, that we've acquired a year ago, that they had been involved there for years. So the relationship is solid. They're a lead player. There's others. And our position, we believe, is very strong.

[Operator:]

Next question, from the line of Ittai Kidron of Oppenheimer.

[Ittai Kidron:]

Dave, can you give us an update on SkyOne, the design activity, the revenue ramp over there?

[David J. Aldrich:]

Sure, Ittai. SkyOne, just as a refresher, SkyOne is a product that moves from the baseband chipset, the output of the baseband chipset through the antenna and back. It has all switching control, logic, filters, all filter bands and PAs. And it's really, Ittai, it's really a platform because we have devices that are going to be for more network-specific customers, who look to be more narrow, geographically. Others for the world phone market. The idea is that it's completely shielded and integrated that we take the analog complexity away for which we get paid for, which is nice. So we have released that product. We have it in various stages of qualification with at least 3 OEMs, and you will see that product ramping throughout 2013. It's just beginning because it's a very different architectural approach, and our customers need to get comfortable with it and go through the qualification of the sourcing, reliability, analysis, and it looks very good. So it's going be a good for us. It's going to -- it'll take a little while. It'll ramp faster than most because the ASP is very high. But nonetheless, it'll take a little while.

[Liam K. Griffin:]

Yes. And another follow on to that, Ittai, is that if you think about the R&D burden putting out a smartphone, the next-generation smartphone, what our customers need to do in terms of industrial design and display and performance that have nothing to do with RF. There's a tremendous amount of R&D burden, budget and challenge that is moving towards the display and look and feel. The RF budget is getting smaller, so we have an opportunity to come in and really solve that problem with multiple bands, antenna tuning and switching. We can make it configurable. So SkyOne really can be modulated and customized depending on the needs and the bands of the end OEM. So we are seeing that value being delivered and received with our customers, and we think it's great opportunity.

[Ittai Kidron:]

Okay. Just to follow-up on that now. Correct me if I'm wrong, it was my impression that you have already revenue for that in the March quarter. Is that not true? And as a follow-up question, can you talk about China? Your business activity there sequentially in December, and how do you expect that to be in the March quarter?

[David J. Aldrich:]

Ittai, with respect to SkyOne, I think given the rate of qualification you will see in the spring, if there's anything in March, it will be de minimis, it will be very small. So what was the second half?

[Liam K. Griffin:]

With respect to China, what we've talked about here for a couple of calls is that kind of a smaller 2G business right now. So we have a lot of great relationships with companies like MediaTek and Spreadtrum. But the 2G business for us right now is getting smaller, and that's totally okay. Now to combat that though, on the upside, we're seeing some pickup in 3G. We're seeing better performance our of Huawei and ZTE. We're seeing performance out of Lenovo, for example, on smartphones. So we're seeing that migration from low-end single band GSM 2G to an upgrade cycle in 3G. It's playing out quite nicely.

[Operator:]

And the next question, from the line of Quinn Bolton of Needham.

[Quinn Bolton:]

Steve, just wanted to ask 2 quick questions. You spent a lot of time on the call talking about the bolt-on content around the traditional transmit chain. But as you look forward in 2013, 2014, given the trends toward sort of multimode converged PAs or wider band PAs, do you think that the actual PA content starts to level out or actually declines and your overall content growth comes from this bolt-on analog content?

[David J. Aldrich:]

Well, it's hard for me to distinguish. The content that will grow will be given the band proliferation. There'll be some architectures that we'll use on multimode PA. So while there have been more band that will tend to keep the price of the MMMB up and consistent, but clearly the cost per band needs to drop, right? It's got to scale somehow. It's got to be some semiconductor integration advantage on the MMMB. But where those customers will use an MMMB, there'll be some very -- the [indiscernible] filter is very, very complicated

[Quinn Bolton:]

Great. And just on the ET question. You talked about the tight coupling with the chipsets. Does that mean you end up having to do specific PAs for each reference design, or is the ET PA broad enough that it can interface with multiple chipsets or multiple vendors' ET chipsets?

[David J. Aldrich:]

I think it's quite unique per chipset and oftentimes will be customized by customer platform. Not only the PA, but the power management scheme, the PA device and the antenna tuning.

[Liam K. Griffin:]

And having said that, there's a limited universe of suppliers that have the sophistication to handle that matching. Having power management in our wing is definitely an advantage for us.

[Operator:]

Next question, from the line of Tom Sepenzis of Northland.

[Thomas A. Sepenzis:]

I just wanted to -- I had a couple quick housekeeping things. One, can you -- I think your tax rate is going to be 7% for the rest of the year, is that correct?

[Donald W. Palette:]

Yes, that's correct.

[Thomas A. Sepenzis:]

And what is driving the low rate?

[Donald W. Palette:]

We had guided to 7.5%. The change from 7.5% to 7% was really just the passing of the recent tax legislation. They confirmed that they were going to extend the R&D tax credit and bonus depreciation. So that's what drove it down from 7.5% to 7%. When you look at our 7.5% and compare it to others in the space, we have a very competitive tax rate. And it's really a result of what we've been doing with some business restructuring initiatives. And that's really helped us drive that rate to a very, very competitive level. But that small changes because of the legislation.

[Thomas A. Sepenzis:]

And do you expect that to continue beyond 2013 and into 2014?

[Donald W. Palette:]

Well, we don't guide. Guiding the rate is hard because it's based on the whole elements of earnings and -- but what we've said is that as earnings and revenue grow, it's not linear. So that rate probably is going to roll up a little bit. And I think if you're looking at beyond '13 and '14, I think using a lot [ph] [indiscernible] rate is probably pretty competitive. But again we haven't specifically guided that. But it is going to go up a little bit.

[Operator:]

And next question, from the line of Edward Snyder of Charter Equity.

[Edward F. Snyder:]

Dave, you look at over the landscape a little bit longer term than the next couple of quarters. You've got a lot of excess cash capacity in the industry right now. You got MMPAs, dual-band pads, things that are compressing the overall GaAs ASP per band I would say. And at the same time, as you've mentioned and as some you have pointed out, the filter business is starting to boom, especially in the BAW side of the thing. We've got these new antenna tuners as a new technology out here. Skyworks is very strong in the analog side of the business. Would it be unreasonable expectation to suggest that maybe the business models starts moving more to that direction. I don't want to say away from GaAs, of course, but maybe less of an accent just on the kind of classic historic RF GaAs business? And where does that put Skyworks, given you're likely not going to get into the BAW side or even SAW given the unit volumes? Would you be pushing more into some of the more infrastructure fragmented markets and then maybe away from such a large reliance on RF GaAs?

[David J. Aldrich:]

And I would say that you've already seen a transition where a few years ago, or a couple we were 80/20, 80 mobile, most of which was gallium arsenide. Today, that number is getting closer to half-and-half. And within the PA space in the transmit side, we've got a mix of technologies. And you're right about too much GaAs capacity. But I'd characterize it this way

[Edward F. Snyder:]

And so to the safe kind of point, you've always been kind of a leader on the cost side of the GaAs business. You got your own assembly test, which is unique in the industry. RF Micro just picked up Amalfi, was formerly the largest 2G supplier. RF Micro's pretty big in 2G enough. They certainly are the largest. And from our check, it sounds like pricing has eased a bit. Skyworks was early in the CMOS. It's not a big part of your business now or I would expect neither is 2G. But if that segment starts to grow and the margin starts to -- or at least ASP start to rise a bit given there's less competition today than it was a year ago, is that an area where Skyworks could possibly grow? You still have the Axiom product lines. I don't know how much they've been updated over the several years that you've had them, but given your cost advantage in testing and assembly, is that something that could be reasonably assumed in outyears if we see growth in the area that Skyworks should move back in?

[David J. Aldrich:]

No, I think you should assume that where 2G is required in backward compatibility for low-end smartphone, for example, Skyworks will be a leader there. And it will be a mix of technologies that will have CMOS but we'll have silicon and insulators, some gallium arsenide for sure. I don't think you should expect growth in margin units or total TAM dollars in the 2G standalone market, whether it's CMOS or gallium arsenide. That market, that ship has sailed. I mean, that market is in a unit volume decline. And the competitors who are in that space, think of the local indigenous suppliers in that part of the world, as well as the silicon guides you talked about, we bought one. The margins in those businesses are just not consistent with the margins that we want to generate in our business model. They're very dilutive. So we just don't think investing any money in that business is good for our investors.

[Operator:]

Ladies and gentlemen, that concludes today's question-and-answer session. And I'll now turn the call back over to Mr. Aldrich for any closing comments.

[David J. Aldrich:]

Okay. Thank you for joining, everyone, and we look forward to seeing you in upcoming conferences.

[Operator:]

Thank you. And, ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.