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Skyworks Solutions Inc (NASDAQ:SWKS)
Q3 2019 Earnings Call
Aug 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Skyworks Solutions Third Quarter and Fiscal Year 2019 Earnings Call. This call is being recorded. At this time, I will turn the call over to Mitch Haws, Investor Relations for Skyworks. Mr. Haws, please go ahead.

Mitchell J. Haws -- Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone. And welcome to Skyworks third fiscal quarter 2019 conference call. With me today are Liam Griffin, our President and Chief Executive Officer; and Kris Sennesael, our Chief Financial Officer.

Before we begin, I would like to remind everyone that our discussion today will include statements relating to future results and expectations that are or may be considered forward-looking statements. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today.

Additionally, the results and guidance we will discuss include non-GAAP financial measures, consistent with our past practice. 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 the call to Liam.

Liam K. Griffin -- President & Chief Executive Officer

Thanks, Mitch and welcome everyone. Skyworks delivered solid financial results in Q3 as the resiliency of our business model allowed us to maintain strong profitability and cash flow. Looking at the quarter in more detail. We reported revenue of $767 million, slightly above our guidance, drove gross margin of 50.4% and operating margin of 33%, while delivering earnings per share of $1.35. And our cash generation continues to be strong with operating cash flow of $950 million year-to-date.

Looking forward, our design win pipeline is expanding as we capitalize on the ramp of 5G in wireless infrastructure, smartphones and across IoT. For example, in wireless infrastructure, Skyworks is now supporting a number of global 5G deployments. Our solutions address both 5G macro base stations and small cell radios, and we are ramping today with leading European and Japanese infrastructure OEMs. In addition, Skyworks is enabling 5G massive MIMO base stations for a leading Korean customer. Across the IoT space, we are gaining share in new emerging categories with the recent wins at Facebook for the Oculus VR headsets and with Vizio for their sound bars, leveraging our analog SoCs and cognitive wireless radios.

We also secured low-power LTE Cat M design wins with the leading module providers, including Telit, Gemalto, U-Blox and Sierra Wireless. And we are expanding our reach in the wearables market where we are populating devices that combine our cellular and WiFi technology. We've also extended our WiFi leadership with several signature design wins in the last quarter, including Cisco with their WiFi 6 solutions, DIRECTV for their over-the-top streaming devices, as well as design wins with industry leaders such as Amazon, Nest and Netgear.

Finally, in mobile, for the coming wave of 5G phones, we've deepened our engagements with key customers, leveraging our unique suite of solutions to support launches at Samsung, LG, Oppo, Vivo and others. As these opportunities demonstrate, the demand for advanced connectivity and the expansive nature of 5G are creating real-time opportunities for Skyworks.

With 5G now launched on four continents, operators are seeing the compelling economics that 5G services can bring, and we expect momentum to continue building into 2020 and beyond. To be clear, 5G is a technology, not a product. And we expect the performance gains in speed, latency and network capacity to spawn [Phonetic] a much broader ecosystem where 5G becomes the universal connector. With the application scope going far beyond the smartphone, 5G is already driving new usage cases in emerging areas like industrial IoT, autonomous transport, smart cities and digital health. For Skyworks, this is a tremendous opportunity as our scale and experience across multiple technology generations position us to lead as 5G becomes a reality.

Our capital investments have enabled us to build highly specialized, vertically integrated supply chain capable of meeting the complex demand of the world's most innovative customers. We continue to advance our filter capabilities, creating leadership positions in SAW and TC-SAW, and in Q3, we commenced volume production of BAW-enabled devices. These devices will be shipping this quarter. Incorporating BAW expands our TAM in mobile and positions us to support a wider array of customers, markets and applications.

And in addition to 5G, our capabilities in broad markets have grown, as we now serve an expanded set of global customers, including companies like Ford, Continental, LG, along with factory automation leaders such as Bosch, Honeywell, Siemens and GE. Today, we generate nearly $1.1 billion in annual revenues from our broad market portfolio. That's a compound growth rate of 16% since 2013.

So in summary, Skyworks is at the forefront of ubiquitous connectivity, leveraging our decades of experience, world-class scale and customer relationships. We are well positioned to continue executing on our vision of connecting everyone and everything all the time.

With that, I will turn the call over to Kris for discussion of last quarter's performance and our outlook for Q4.

Kris A. Sennesael -- Senior Vice President & Chief Financial Officer

Thanks, Liam. Skyworks revenue for the third fiscal quarter of 2019 was $767 million. That is $2 million above the midpoint of our June 4 updated guidance. Our third quarter revenue reflects the impact of the US Bureau of Industry and Security of the US Department of Commerce placing Huawei Technologies and certain of its affiliates on the Entity List. Skyworks ceased all shipments to Huawei as of the date Huawei was added to the Entity List. After an in-depth review of the Export Administration Regulations and the scope of the Entity List restrictions, we ultimately determined that we could lawfully resume shipping certain products, which we did starting early July. However, we expect the business with Huawei to remain well below historical levels into the current quarter.

Third fiscal quarter non-GAAP gross profit was $386 million resulting in a non-GAAP gross margin of 50.4%. As noted in the financial statements attached to our earnings release, we incurred a GAAP-only non-recurring charge of $67 million, primarily consisting of inventory-related writedowns due to the addition of Huawei to the BIS Entity List.

Operating expenses were $134 million, better than our guidance and down slightly sequentially as we continue to effectively manage our operating expenses. We generated $252 million of operating income, translating into an operating margin of 33%. Third quarter effective tax rate was 8.2%. This drove net income of $234 million or $1.35 of diluted earnings per share.

Turning to the balance sheet and cash flow. Third fiscal quarter cash flow from operations was $209 million and for the first nine months of the fiscal year, operating cash flow was $950 million. Third fiscal quarter capital expenditures were $88 million. We distributed $66 million in dividends and repurchased 1.2 million shares of our common stock for a total of $86 million. During the first nine months of the fiscal year, we have returned approximately $710 million to shareholders by our share repurchases and dividends, and this represents 112% of the free cash flow we've generated this year. We ended the quarter with a cash and investment balance of just under $1 billion with no debt.

Now looking ahead to fiscal Q4, we are on track to deliver sequential revenue and earnings growth in the September quarter as we execute on strategic product ramps. Specifically, we anticipate revenue in the range of $815 million to $835 million or $825 million at the midpoint. The revenue outlook assumes Huawei revenue remains at nominal levels given the uncertainty associated with ongoing trade-related issues. At the midpoint of the range, revenue is expected to increase 8% sequentially despite significantly lower revenue to Huawei compared to the June quarter.

Excluding Huawei in the June and September quarters, we expect our revenue to increase 20% sequentially, reflecting strong seasonal ramps at our large customers as we demonstrate our expanding reach and ability to deliver complex and highly integrated solutions. We expect gross margin in the range of 50% to 50.5%, approximately flat compared to the June quarter despite the lower factory utilization associated with the reduced demand from Huawei.

We expect operating expenses of approximately $135 million as we continue to adjust our spending levels. Below the line, we anticipate roughly $3.5 million in other income and an effective tax rate of approximately 8.5%. We expect our diluted share count to be 172.5 million shares. At the midpoint of $825 million in revenue, we plan to deliver diluted earnings per share of $1.50. Finally, today, we also announced a 16% increase in our quarterly dividend to $0.44 per share, reflecting our confidence in Skyworks business model and sustainable cash generation capabilities.

And with that, let me turn the call back to Liam.

Liam K. Griffin -- President & Chief Executive Officer

Thanks, Kris. As a proven technology leader, we are leveraging our Sky5 platform and systems expertise to enable the billions of connections between devices and the cloud, providing the underlying foundation for an entirely new ecosystem in today's connected world. Looking forward, Skyworks is uniquely positioned with established leadership in growing markets and expansive and innovative set of 5G solutions, global scale and the deep customer relationships that are facilitating the mobile economy of tomorrow.

That concludes our prepared remarks. Operator, let's open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) We have a question from line of Vivek Arya. Please go ahead.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thank you for taking my question. I actually had two of them, if I could. First, Liam, I'm curious how do you expect your largest customer to do in September, both on a sequential and on an year-on-year basis? I realized everyone in the industry is conservative on units, but I was hoping you could give us your insights on content growth that can perhaps help offset some of that unit conservatism. So to whatever extent you can, if you could help us give us some color on sequential and year-on-year growth at your largest customer.

Liam K. Griffin -- President & Chief Executive Officer

Sure. Well, I mean it certainly comes down to units, but I will say that the Skyworks team continues to work with all of the more significant flagship phones and customers, and we continue to do that this year. And a number of very exciting design wins have been consummated with leading customers; we're really proud of what we've done. We're continuing to expand the scope and the reach of the device count and the complexity of what we offer. So we really can't predict how the unit curve will look, but I can tell you that our ability to grow and gain content especially in highly complex high-margin areas is something that we will demonstrate and will be very proud to show.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

And as a follow-up Liam, as you start fiscal '20, I realized was that last year was a tough year for the industry with all the weakness in premium units and then the Huawei ban. But as you start fiscal '20, how should we just conceptually think about growth? There is definitely benefits from the onset of 5G, but how material can it be and if you could just give us an overall look at how you are looking at Skyworks's overall growth prospects for fiscal '20? Thank you.

Liam K. Griffin -- President & Chief Executive Officer

Yeah, I think '19, as you mentioned, had been a difficult year for a number of reasons. So there was some volatility early in our fiscal year. That was kind of a macro issue. And then, we've had the effects of this Huawei ban, which have been pretty significant, but we'll manage. But I do think there is tremendous momentum and excitement around mobile today and around 5G at a higher level. So we're starting to see the roll-outs on the infrastructure side. We talked about that in prepared remarks. We're certainly working with all of the customers that matter and helping them develop 5G capabilities in their smartphone devices. And we expect this to be an incredible catalyst for the industry.

As I said in the prepared remarks, 5G is really a universal connector. It is a technology. It's not a product. It will populate multi-market opportunities for us. We have great, great solutions to make that happen. So we're really excited about 2020 and beyond. We also feel good in the near term right now. We just guided a 20% sequential quarter, if we net out the effects of Huawei, which we really can't control today. As we look into our Q1, the December quarter, we see sequential growth coming again. So we feel bullish about that and the prospects of 5G ahead.

Operator

Next question comes from the line of Craig Ellis with B. Riley FBR. Please go ahead.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Yeah. That's B. Riley FBR. Thanks for taking the question guys. Liam, let me just follow up on the last comment, as we look at the December quarter, how should we think about normal seasonality for that business and is the profile that you see right now, one quarter out trending favorable versus that seasonality or to macro cross-currents [Indecipherable] I mean that you would expect to be below normal seasonality?

Liam K. Griffin -- President & Chief Executive Officer

Well, I think we will be able to deliver a solid seasonal ramp, Craig, coming into our Q1 here in the back half of the calendar year. And again, it is a number of customers involved here, not just one. But we feel good about the outlook during that time frame. We have very good visibility by the way on -- with respect to that timing. And we also have very good visibility on what we've consummated from a design perspective and the devices that we put forth in leading smartphone. So we feel good about coming through. And then, balance of the year, we'll see how things go, I think broad markets continues to be a strategic vector for us. And despite some of the challenges that we're enduring right now with Huawei, we think a lot of that demand in time is going to get redistributed, and we'll be able to take advantage of that.

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Okay. And then, for the follow-up, let me just get to really clarification cleanups for Kris. Kris, can you give us the segment splits and then, just on inventory, days moved up pretty materially, on hand was up about 5% despite the writedown. So how should we think about the Company's ability to work down inventory and get it back into a normal level? Thanks guys.

Kris A. Sennesael -- Senior Vice President & Chief Financial Officer

Yeah, let me first give you the split of broad markets in Q3 was 37% of total revenue, which was up low-single-digits sequentially, as well as year-over-year. And you have to, of course, keep in mind that in broad markets, business was also impacted by the Huawei ban. Some of the Huawei revenue is accounted for us in broad markets, the infrastructure part as well as some non-mobile wireless connectivity solutions that we provide to Huawei. Again, broad markets, it's running at more than $1.1 billion in annualized revenue, and I think Liam talked in the prepared remarks about a lot of the strength that we see in that market segment with the launch of WiFi 6, some of the wearable products, automotive and IoT in general. And so, broad markets was 37%. On the flip side, mobile was 63%, which was down approximately 10% sequentially and our slowest seasonal quarter of the year and of course, that segment was impacted even more by the Huawei shipment ban. So that's the split.

And then maybe on inventory, inventory in the June quarter, which again is our slowest seasonal quarter of the year, was up $25 million. Days of inventory were up 13 days to 139 days. And so, during our seasonal slowest quarter of the year here, we definitely have been level loading our factories in order to drive efficient usage of our capital equipment and -- all of it, of course, in support of the new product ramps that we have with our key customers and where we talked about it; we see a 20% sequential growth into the September quarter, excluding Huawei and then even further growth into the December quarter.

And so we -- in the September and December quarter, we do expect days of inventory to come down as we will consume some of that inventory. And going forward, I do expect inventory to flip away between 110 days to 140 days depending on where we are in the seasonal cycle. And so, that is slightly higher than historical levels. But you have to keep in mind that, what was it, four or five years ago, none of the filters, we were making in house, we were all purchasing from third parties. And maybe two years ago, we go to roughly 50% of the filters in-house. By now, we are getting close to 95% of the filters in-house. And so, that's obviously is driving some higher levels of inventory, but again, inventory is fully in line with what we expected and days of inventory will come down in the September and December quarter.

Operator

Next question comes from the line of Craig Hettenbach with Morgan Stanley. Please go ahead.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes. Thank you. Liam, as we think about 5G from a design perspective, any color in terms of the traction you're seeing on the smartphone side and then also just a rough estimate of how that's playing out in dollar content and the initial wave?

Liam K. Griffin -- President & Chief Executive Officer

Sure, Craig. Absolutely. Well, we see an expanding opportunity in 5G in a number of areas. There is just a great deal of complexity that needs to be resolved in the system. Our customers are looking for integration and kind of cohesive solution, so platforms like Sky5 that we develop are perfect solutions for these customers. They are configurable. We can resolve a lot of that complexity, and we also have to deal with the challenge of backward compatibility into 4G and 3G. So if you look at a 5G-enabled phone, you're going to have 5G bands and 5G technology, but you're also going to need to be interoperable with 4G and 3G. There's a physical device -- there's a physical challenge in the design of the phones. There's a battle for current consumption and coexistence within the device, a lot of complexity that we're working on today with our customers. We're lining up with the critical baseband providers as well. So our solutions could be somewhat agnostic around the baseband ecosystem, and adding some of the technologies that we've developed in-house. The DRx technologies will be even more vital in 5G. We've got ultra-high-band devices that we're shipping. We got BAW technology that we just commenced shipping now that we spoke about. So we're in very good position. But I will tell you that 5G is difficult. It's challenging. And our customers are reaching out to partners that they trust and partners that have been here, and that's what we want to be, one of those partners that help our customers to be successful.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. And then just as a follow-up, update on Avnera. I know when you bought them, I mean, in terms of the context of Skyworks having a much larger platform, bigger customers, how are you seeing that play through in terms of design work that they're doing? Are you able to leverage that in terms of some of the momentum for new designs at Avnera?

Liam K. Griffin -- President & Chief Executive Officer

Sure, Craig. That's a great question. And that portfolio is doing very well for us. So, one of the designs that we mentioned in the opening remarks was powered by Avnera. They've got some very slick SoC technology that we're leveraging, certainly some great performance in audio. But overall, right now, we're very pleased with what we've seen from that acquisition. It's fully integrated with Skyworks. So we're able to take advantage of a larger sales and marketing organization and a little more strength on the operational side, but so far, it's looking very good. Appreciate that.

Operator

Next question comes from the line of Chris Caso with Raymond James. Please go ahead.

Chris Caso -- Raymond James -- Analyst

Yes, thank you. Good evening. Just a question on Huawei and just trying to get a little more color on what you had said. From the pre-announcement earlier in the quarter, it seems that you took out about $60 million out of what you said was a 12% customer in the quarter, which would kind of work out to maybe, sort of, $40 million of remaining shipments to Huawei in the June quarter. I guess, we're to understand that those shipments are minimal as you go into the September quarter and therefore, that's the sequential headwind that you're facing. And then, maybe as a follow on that, others it seems like every company has had some difference in terms of what they can and can't ship to Huawei, some folks are also applying for some licenses for additional shipments. Just some more color on what you can and can't ship and the potential for being able to ship more.

Kris A. Sennesael -- Senior Vice President & Chief Financial Officer

Yeah, Chris. Maybe, I'll provide some more color on Huawei. So in Q3, Huawei's revenue was slightly above 10% of overall -- of the total revenue and that was all shipped prior to the ban being effective. We didn't ship after the ban was effective. And as you know, we did adjust our guidance, and we took out roughly $60 million of revenue when we updated the guidance. So definitely in Q3, it's the stronger seasonal quarter typically for Huawei. And so, we did expect actually more revenue than what we've seen in the first half of the fiscal year. And so looking forward to Q4, we do expect very minimal revenue with them. We are -- we can legally ship certain products, but the demand signal that we get from Huawei is actually very low. We expect revenue to be probably below $10 million in Q4. I mean, Liam, do you want to add something?

Liam K. Griffin -- President & Chief Executive Officer

Yeah, I mean just to be clear. So, Chris, I mean when the ban came out, we stop shipping immediately and we did not ship again for the balance of Q3. As we entered Q4, doing a little homework with our legal team on reaching out to SIA and some other associations to get guidance, we felt comfortable with certain products being shipped, and we've been commencing shipments, but it's been at a very low level. So that's kind of the difference between what we've done. I know other competitors may play it differently, but that's how we played it. We still feel very good about the business we have today, net of Huawei. If while we comes back, that's great, but the guidance that we provided with a 20% sequential, netting out Huawei in Q3 and Q4, I think says a lot about the organic business and our read into what we can do.

Chris Caso -- Raymond James -- Analyst

All right. That's very helpful color. Thank you for that. Just as a follow-up, what is the longer-term implications here? And I guess for one, do you feel like as 5G comes out next year, you'll be able to ship components to Huawei 5G phones under the current rules? And if there are still restrictions, we've been hearing for some time that the highly integrated solutions by yourselves and other US manufacturers really necessary to enable 5G phones, are there alternatives? In other words, are there potential for, if the situation doesn't get resolved, some of these opportunities will just disappear for the long term?

Liam K. Griffin -- President & Chief Executive Officer

Yeah. That's a great question. The way I look at it is and you're right, I mean, the technologies that we provide and I know you understand is a very, very complex. We're not a discrete component player. We haven't been that company for years. So the kind of things that we offer to companies like Huawei are very, very complex and very hard to displace. Having said all that, I don't think this is going to stop 5G. I think there could be certainly some challenges in China, specifically around 5G and access to technologies, but I think from a global perspective, the power of the 5G catalyst here and the investments and the opportunities for connectivity are just so powerful that, that's going to continue. Could there be a bit of a pause levered with the China issue? Sure. But I don't think it's going to stop the industry globally from executing on this vision of moving up into 5G and the latency and speed and benefits that it provides. So -- and we'll stay with that. And the other thing here is that the demand can move around. If some companies or regions are impaired, yeah, it will hurt in the short term, but overall I think that, that revenue and that opportunity can get redistributed, and we'll be right there for that as well.

Operator

Next question comes from the line of Blayne Curtis with Barclays. Please go ahead.

Thomas O'Malley -- Barclays Investment Bank -- Analyst

Hey guys, this is Tom O'Malley on for Blayne Curtis. My first one is around the China handset business outside of Huawei, some of the industries through this earnings period have talked about how Huawei is looking internally in China and maybe taking some share there and that could affect you guys. How do you guys view that market right now? And are you seeing that trend play out where other Tier 1 players and Tier 2 players are ceding some market share?

Liam K. Griffin -- President & Chief Executive Officer

Yeah, that's a great question. We've had a good position with Huawei. But we've also had a very strong position with Oppo, Vivo and Xiaomi. And so far, the business there has been promising and been kind of on track, still developing some interesting new solutions for those customers as well. And we've been able to build those partnerships over a year. So that part of the China ecosystem at this point looks pretty good.

Thomas O'Malley -- Barclays Investment Bank -- Analyst

Great. And then, my second one is more maintenance. Can you guys give us the percentage of your largest customer in June? You guys have been pretty helpful about that in the past.

Kris A. Sennesael -- Senior Vice President & Chief Financial Officer

Yeah. So in June, the largest customer was well over 40% of total revenue. Again, the June quarter is somewhat of the slower seasonal quarter there. And as we ramp with the large customer in Q4, obviously, that will go up.

Liam K. Griffin -- President & Chief Executive Officer

Yeah. And obviously, with some of the Huawei revenue out of the pie, the ratios get skewed a little bit as well, Tom.

Operator

Question comes from the line of Karl Ackerman with Cowen. Please go ahead.

Karl Ackerman -- Cowen and Company -- Analyst

Good afternoon, gentlemen. If I may, I'd like to fall back up on the previous question. So your China-based smartphone customer, you're seeing very strong domestic growth through the June quarter given nationalistic support. So I'm curious, does your outlook for the September quarter and beyond contemplate ramifications of that perceived nationalism to your mobile opportunity at other smartphone OEMs where you have higher content? And I have a follow up.

Liam K. Griffin -- President & Chief Executive Officer

Yeah, to the extent that we can. Yes, we feel -- we've talked about some of the other players in China and the demand outlook there looks steady. We talked about Huawei and the issues that we have right here and that could get resolved. And if it gets resolved, we're right back in. But we're still very aggressive in gaining success in design wins globally across the board. The only exception right now is the Huawei situation where we're kind of stuck.

But beyond that, we're active, we're developing solutions, we're gaining design wins. And as we mentioned in some of the prior questions, the products that we make are not commodities, they're not interchangeable. They're very complex custom commodities or custom devices that are necessary for 5G and even higher-end 4G networks.

Karl Ackerman -- Cowen and Company -- Analyst

That's helpful. As my follow-up, in your prepared comments, you discussed early shipments of 11ax products. What's your view on the competitive landscape on 11ax given recent M&A in the space and how do you see the adoption of 11ax within enterprise access points and consumer applications over the next few quarters? Thank you.

Liam K. Griffin -- President & Chief Executive Officer

Sure. Well, 11ax right now is probably -- I mean, it's in early stage, but it's definitely the technology that you want to be in for WiFi -- for higher-speed WiFi. So the 11ax engines that we have today are doing quite well. We named some of the design wins that we had, Cisco is one for example. And what we do is we have great partnerships with some of the SoC players. So we're able to basically calibrate our solutions with the SoC providers and together kind of take advantage of the overall market and lever those solutions broadly with SoC partnerships, similar to what we do with baseband partnerships. We also have really good technology in WiFi. We've been a market leader from the beginning in WiFi and have been able to take the solutions up over the last several years to higher and higher performance levels. The customer reach that we mentioned continues to expand, and WiFi has been a pretty big catalyst in our broad market portfolio and that's a portfolio we've mentioned has been growing at about 15% CAGR. So there's a lot of strength and then outlook in that portfolio. And we're seeing more and more customers and applications adopt 11ax. It's still early innings for 11ax, but I think we're very well positioned for that.

Operator

And next question comes from the line of Edward Snyder with Charter Equity. Please go ahead.

Edward Snyder -- Charter Equity Research -- Analyst

Thanks a lot. Liam, just wanted to talk about 5G, but I'd like to get more specific, especially regarding the handsets. Other than the ultra-high-band pad and maybe Band 41 at this stage, I mean we could throw in, if you want Band 71. Other than those three areas, are you seeing any 5G content in phones today? I know it's going to expand you to do millimeter wave today, and are you working on that with your largest OEMs? Thanks.

Liam K. Griffin -- President & Chief Executive Officer

Well, there are elements of 5G in certain company launches, Ed, this fall. But you're right, I mean 5G is really going to be more of a 2020 release, I think, in the market. There will be some phones that will have some capabilities. But the real upside to 5G is more of a 2020 and beyond opportunity, and we're well positioned for that with our Sky5 platform. We've got a really unique portfolio of devices that can be harmonized and customized depending on the bands and depending on the carrier and depending on the needs of the OEMs. So I think we look good. But you're right, the 5G opportunity is more of a 2020 play. We are working now on the design wins that will support that 2020 and beyond launch of course.

Edward Snyder -- Charter Equity Research -- Analyst

So then, just to be clear, do you see yourself participating in the millimeter wave side, I know Qualcomm is the only game in town and their parts are atrocious [Phonetic] in terms of performance-wise. And so, if you're a large OEM, your largest customers, they want to fuel the phone using that product and they don't want to suffer the battery life problems and the heat problems we're already seeing now. We're going to have to do something other than the CMOS. Are you working on something now, and do you think Qualcomm's control of the baseband would impede you from winning a slide if you were?

Liam K. Griffin -- President & Chief Executive Officer

Well, I mean, we certainly see millimeter wave as another opportunity in mobile. Here as we go to 5G, there's opportunity on the infrastructure side, an opportunity on the handheld side. So we're looking at both. I don't believe we're going to be impeded by any baseband and we've been interoperable across the board here for years and years of all customers, including our largest one. So we will ensure that we're able to be flexible there. But those technologies, I don't think they're going to be widespread early on, but over time, millimeter wave could be a catalyst in the industry, again infrastructure and within the handset, and we'll continue to work on those opportunities.

Operator

Next question comes from the line of Harsh Kumar with Piper Jaffray. Please go ahead.

Harsh Kumar -- Piper Jaffray -- Analyst

Yeah. Hey, guys. First of all, congratulations on commercial BAW shipments. Liam, I had a quick one on that for you. I think your largest customer is widely speculated to have their 5G phone out of next year. How would you rate the readiness of your BAW portfolio? And then as a follow-up to that, for example, like in Sky5 solution that you mentioned in your press release, how much of the BAW is internal versus externally sourced?

Liam K. Griffin -- President & Chief Executive Officer

Yeah. So great questions. And I think what you're going to see is kind of a blending in of the technology over time. When you look at Sky5 and the incorporation of BAW, we're going to start to see that really roll off -- roll up as we move out. We're delivering solutions now, this quarter that I mentioned. And what you're going to see now is the BAW technology that we're delivering is organic, the technologies that we mentioned in the prepared remarks about shipping this quarter, those are organic solutions, they are BAW-enabled devices in a system level solution or Sky5 level of solution. So they are not discrete filters. They are integrated with other elements. And it's Skyworks organic stuff. We've been working on this for years and just to do a quick commercial on our filter business, we're doing 10 billion temperature compensated SAW filters a year. We are doing hundreds of millions of devices in our Mexicali site. We've got a Singapore location that's also driving some very sophisticated package and test. So we have all of the critical supply chain elements to make it work. We've been very conservative about talking about BAW, but now we're there and we're delivering. And we expect it to be at the beginning of some real significant opportunities as 5G moves along and the complexity of mobile phone continues to go up.

Harsh Kumar -- Piper Jaffray -- Analyst

Hey, thanks for the color, Liam. And then for my follow-up, a West Coast competitor namely Qualcomm effectively talks about there being some kind of a benefit and then having a 5G baseband and tying their RF to it. First of all, do you see any validity in that statement? And then secondly, do you run into them as far as design wins or competition is concerned in 5G?

Liam K. Griffin -- President & Chief Executive Officer

Sure. Well, we all -- we compete with lots of companies. So -- and we used to that and I think it's healthy. And we've done our best to garner the lion's share of design wins, so in the areas that we can play. So we're not at all concerned about that. That's a normal thing. But I will say that, in most cases, we've got very collaborative baseband providers that work with us and understand that ultimately, the work that we're doing as semiconductor providers is to try to make our customers products the best. So that's the way we look at it. So we're working shoulder-to-shoulder with baseband partners, endeavoring to produce tremendous phones for our customers and tremendous technology. We're going to continue to do that. And it's made us who we are at Skyworks. There is a lot of really interesting things happening in 5G, a lot of very, very difficult challenges to resolve. We got great people on our side. We got great partnerships with most of the baseband players and the ecosystems there. And we'll be able to deliver the products that our customers want.

Operator

Our last question comes from the line of Shawn Harrison with Longbow Research. Please go ahead.

Shawn Harrison -- Longbow Research -- Analyst

Hi, thanks for taking my questions. Mainly focused for Kris here, the capital intensity is running about 12% of sales year-to- date. How do you see that tracking in the fourth quarter and then into next year considering all the 5G launches that will be coming up?

Kris A. Sennesael -- Senior Vice President & Chief Financial Officer

Yeah, you're right. So CapEx is running in the 12% range to revenue right now. And of course, we will have to take into account reduced demand signal from Huawei as we look at factory utilizations and CapEx into that. Now, on the flip side, of course, we will continue to make the necessary investments to advance the technology and to increase our capabilities in part in our back-end operation, but also as Liam just talked about that, especially in our filter operation, not necessarily expanding capacity, but upgrading and making our technology more robust in TC-SAW and then of course, as we execute on our BAW ramp and get more and more BAW-integrated products out there, we will have to expand our BAW filter technology and capacity as well. Going forward, I expect CapEx to maybe trend below 10% of revenue, but there's a lot of elements that play into that.

Shawn Harrison -- Longbow Research -- Analyst

And then, second as a follow-up, I think you mentioned there is some under the -- underutilization drag because of the Huawei weakness, I was hoping you could maybe quantify what the impact is at least here in the near term from that drag on gross margin?

Kris A. Sennesael -- Senior Vice President & Chief Financial Officer

Yeah, so gross margin in Q3 came in at 50.4% and we guided Q4, now the September quarter to 50% to 50.5%, so flat to maybe slightly down. And so, first of all, I think we continue to execute very well on driving higher value-added and higher complex products into the market, and that typically translates into higher gross margin. And we continue to execute really well on cost reductions and operational efficiencies as well. And we do have a little bit of a mixed benefit. Having said that, the addition of Huawei to the Entity List and a strongly reduced demand signal from Huawei is becoming somewhat of a headwind for gross margins and gross margin expansion. I just -- I mean Huawei was running on or about 15% of total revenue, and most of that product was running through our fabs, the front-end fabs, the back-end fab and some of our filter fabs as well.

And so, that underutilization is becoming a little bit of a headwind. We, of course, will see how the whole Huawei situation plays out and what the future demand will be. And of course, we will not hesitate in the near term to take the necessary actions to take out as much cost as we can. Having said that, of course, I mean we continue to produce very strong operating margins well above 30% and very strong EBITDA margins on or about 45%, and that will definitely remain one of our main focus items.

Operator

Ladies and gentlemen, that does conclude today's question-and-answer session. I'll now turn the call over back to Mr. Griffin for any closing comments. Please go ahead.

Liam K. Griffin -- President & Chief Executive Officer

Thank you. And thank you all for participating on today's call. We look forward to seeing you at upcoming investor conferences and other events during the quarter. Thank you.

Operator

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

Duration: 42 minutes

Call participants:

Mitchell J. Haws -- Vice President of Investor Relations

Liam K. Griffin -- President & Chief Executive Officer

Kris A. Sennesael -- Senior Vice President & Chief Financial Officer

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Craig Ellis -- B. Riley FBR, Inc. -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Chris Caso -- Raymond James -- Analyst

Thomas O'Malley -- Barclays Investment Bank -- Analyst

Karl Ackerman -- Cowen and Company -- Analyst

Edward Snyder -- Charter Equity Research -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Shawn Harrison -- Longbow Research -- Analyst

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