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Skyworks Solutions Exceeds Guidance but Predicts a Challenging Quarter Ahead

By Brian Feroldi - May 7, 2018 at 10:46AM

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A weak smartphone market caused management to issue soft guidance.

Skyworks Solutions (SWKS 0.08%) reported its fiscal second-quarter results on May 3. The specialty semiconductor chip manufacturer reported top-line growth of 7% during the period, which was better than management had projected. A much lower tax rate and stock buybacks helped translate the modest top-line gains into double-digit growth on the bottom line.

Skyworks Solutions' first quarter: The raw numbers

 Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$913.4 million

$851.7 million

7.2%

Non-GAAP operating income

$331.1 million

$312.5 million

5.9%

Non-GAAP net income

$302.3 million

$272.0 million

11%

Non-GAAP earnings per share

$1.64

$1.45

13%

Data source: Skyworks Solutions. Non-GAAP = adjusted.

Semiconductor chip on circuit board technology

Image source: Getty Images.

What happened with Skyworks this quarter?

  • Gross margin expanded 30 basis points to 50.7%.
  • Non-GAAP earnings per share of $1.64 were $0.04 ahead of management's guidance.
  • The company's tax rate dropped substantially during the quarter to 9.5%. Skyworks expects this low tax rate to persist through the rest of the fiscal year. 
  • Free cash flow was $344 million during the quarter.
  • The company repurchased more than 1 million shares during the period.
  • Cash balance at quarter's end was $1.9 billion. The balance sheet remains debt-free.

What management had to say

CEO Liam Griffin credited the company's top-line growth to robust demand for the company's "high-performance connectivity engines."

He also commented that the business continues to pump out healthy financial results and is well-positioned to take advantage of emerging opportunities: "We demonstrated continued strength in our financial fundamentals as improvements in profitability directly translated into cash flow growth. At the same time, our solutions are enabling an expanding and diversified set of end markets spanning the Internet of Things, automotive, home security, and factory automation."

Griffin said that he was enthusiastic about the recent launch of its Sky5 platform, which is designed to enable 5G communications. 

Looking forward

While Skyworks' underlying business fundamentals remain strong, CFO Kris Sennesael admitted that there are a few factors that are going to make it hard for the company to post year-over-year growth in the current quarter. First, he noted that the smartphone market is showing "near-term softness." Second, the U.S. government is imposing trade restrictions on an important Chinese original equipment manufacturer.

With those headwinds in mind, here's the guidance that Sennesael offered investors for the current quarter:

Metric Fiscal 2018 Q3 Guidance Range Fiscal 2017 Q3 Actual Implied Change at Midpoint
Revenue $875 million to $900 million $901 million (1%)
Non-GAAP EPS $1.59 $1.57 1%

Data source: Skyworks.

On the bright side, Sennesael noted that there are several business lines that are expected to ramp up production in the second half of 2018 that should help drive "sequential revenue growth in the September quarter with sustained momentum into the December period."

Griffin knew that this guidance might not be received well, so he did his best to remind shareholders that the long-term thesis for owning his company's stock remains intact:

Skyworks is on track to deliver another year of record performance underpinned by content-rich design wins, spanning a number of strategic end markets, world-class operational execution and scale, the launch of our Sky5 platform as 5G becomes a reality, and decades of experience in developing innovative solutions over successive technology generations. Finally and most importantly, we are committed to delivering premium levels of profitability and cash generation, consistently creating value for our shareholders.

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