Skyworks Solutions (NASDAQ: SWKS ) is a semiconductor company that specializes in refining and processing analog signals. These chips often refine and amplify messy real-world data such as radio waves before passing a cleaner, stronger signal on to the next step of the processing chain.
Skyworks' biggest seller is its radio chips for use in Apple's (NASDAQ: AAPL ) iPhones and iPads, but the company doesn't live and die by Cupertino alone.
Besides selling chips to a wide variety of mobile device makers, Skyworks also counts car makers, medical device designers, and military suppliers among its top customers. Skyworks notes that only 5% of today's cars ship with digital communications built in, but expects all cars to get this feature within three to five years.
So the company is part of the smartphone revolution, but also has solid plans for the next stage of its evolution. Skyworks won't go away when the smartphone furor dies down.
The case for Skyworks
Sales have doubled in only the past five years. The company doesn't pay a dividend, but it does buy back more shares than it prints these days. The buybacks aren't huge, but they do more than just erasing the impact of stock-based compensation. So its capital stewardship may not be perfect, but it could be far worse.
Skyworks went on a small buyout binge in 2011, powered by its newfound smartphone wealth. Management spent about $550 million on three purchases, including one public and one private head-to-head competitor.
The Advanced Analogic deal added Korean technology giants Samsung and LG to Skyworks' customer list, and gave the company a presence in Southeast Asia. The SiGe Semiconductor deal was less about acquiring customers and more focused on adding new technology and products. Both immediately added to the bottom line, underscoring Skyworks' overarching strategy for acquisitions.
"We look for acquisitions that are very quickly or immediately accretive, and that have an opportunity for us to add a platform that we can grow from," said CEO David Aldrich in a recent earnings call. He went on:
So these are bolt-on, wedge fillers, we're really looking for growth engines. We don't see any technology gaps per se today, at least not major ones. We opportunistically look for a cultural fit, something that we could integrate very quickly, and something that would be immediately accretive.
That's a clear and very sensible strategy. You won't see Skyworks throwing shareholder assets after speculative properties in some mad dash for buyout-driven growth. Add to our profits right away or come back later.
There's no shortage of rivals in the analog processing space, but Skyworks sets itself apart with a laser-like focus on product quality and a unique control over bleeding-edge manufacturing processes.
We already talked about Skyworks shipping chips to Apple, Samsung, and LG -- three leaders in the piping hot mobile computing revolution. Nokia accounted for 13% of Skyworks' revenue as recently as 2011, but has now fallen below the 10% reporting threshold. The Finns failed to transition from unquestioned leadership in basic feature phones to the new smartphone paradigm.
The list of key customers in Skyworks' 10-K filings is a diverse group. Cisco Systems uses Skyworks processors in its wireless routing portfolio.
General Electric and Philips build medical devices around its products. Then there's Northrop Grumman, who might send in CIA agents if I'd disclose how Skyworks is helping the giant defense contractor.
All of these major clients are top-notch businesses in their own right, with decades of operating history and plenty of freedom to handpick world-class suppliers. Apple, in particular, is notoriously picky about its component choices -- and has chosen Skyworks for crucial functions in its two most important product lines.
If a company can be judged by its customers alone, Skyworks clearly sits in an enviable position.
Skyworks takes sustainability seriously. The company has cut its water use by two-thirds since 2005, while its hazardous waste production dropped by a massive 87%. At the same time, the energy cost of producing 1,000 chips dropped from 190 to 50 kWh.
The company often contributes to disaster relief efforts, keeps tabs on human rights across its supply chain, and plans to report its use of conflict minerals in the near future.
Skyworks provides thousands of American jobs by keeping all of its in-house manufacturing operations in California and New England, with product assembly and testing facilities in Mexico.
David Aldrige gets a 91% approval rating from his employees, according to Glassdoor.com. The company regularly receives "best places to work" awards from Boston Globe and the Orange County Register, and prides itself on an open and entrepreneurial business culture.
Oh, and if you want to catch a glimpse of operations and working conditions inside Skyworks' manufacturing plants, circa 2003, check out this music video by indie rock outfit The Postal Service. Yes, really.
Risks to consider
The greatest danger to Skyworks is potential overcrowding in the smartphone radio sector. Even in the iPhone 5, Skyworks shares this space with close rivals Triquint Semiconductor and Avago. This company simply cannot afford to rest on its voluminous laurels, or its largest customers would easily be able to source their radio chips from other designers.
The Foolish bottom line
There's a lot to love about Skyworks, from unstoppable growth to flawless customer lists and top-notch sustainability efforts. The CEO has run this show for 13 years, and has a solid plan for the next stage of his company's evolution, when smartphones become tired commodities.