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Huawei Restrictions Hit Skyworks Solutions

By Brian Feroldi - Aug 8, 2019 at 4:53PM

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Revenue and profit fell hard after Skyworks temporarily stopped doing all business with one of its largest customers.

Skyworks Solutions (SWKS -0.53%), a maker of specialty semiconductors, reported its fiscal 2019 third-quarter results on Thursday.

Investors were previously warned that it was going to be a tough quarter. The mobile industry is in flux, and Skyworks depends on strong mobile sales to drive its results.

As if that backdrop wasn't tough enough, the U.S. government added Huawei Technologies to its Entity List, forcing Skyworks to cease all business with the company. That's a big problem because Huawei represented about 12% of its trailing-12-month sales; Skyworks management was forced to cut its third-quarter revenue and profit guidance in June.

Skyworks Solutions fiscal Q3: The raw numbers

Metric Q3 2019 Q3 2018 Change
Revenue $767 million $894 million

(14%)

GAAP operating income $160 million $311 million (49%)
GAAP net income $144 million $286 million (50%)
GAAP earnings per share $0.83 $1.57 (47%)

GAAP = generally accepted accounting principles. Data source: Skyworks Solutions.

What happened this quarter?

  • Revenue of $767 million landed in the middle of management's updated guidance range. However, it was well below the initial guidance range of $815 million to $835 million.
  • Non-GAAP (adjusted) net income was $144 million, or $1.35 per share. This was down 18%, but it was $0.01 better than the updated guidance.
  • Non-GAAP gross margin dropped 50 basis points to 50.4%.
  • Non-GAAP operating margin dropped 340 basis points to 32.9%.
  • Stock buybacks totaled $86 million. The diluted share count dropped 5% year over year, which helped soften the decline in earnings per share.
  • The quarterly dividend was raised 16% to $0.44 per share.
  • Cash balance at quarter's end was $970 million.
Many hands holding smartphones in a circle over a table

Image source: Getty Images.

What management had to say

CEO Liam Griffin kept his commentary focused on the big picture, saying in the company's press release:

The core fundamentals of our business remain strong despite current market volatility. Demand for advanced connectivity and the expansive nature of 5G are creating real-time opportunities for architectures that facilitate high-speed data, near-zero latency and exceptional reliability. As a proven technology leader, we are leveraging our Sky5 platform and systems expertise to enable billions of connections across a vast set of diverse end markets, providing the foundation for an entirely new ecosystem in today's connected world.

On the conference call with Wall Street, Griffin mentioned that Skyworks secured a number of 5G and Internet of Things design wins during the quarter, with a wide range of companies.

Looking forward

CFO Kris Sennesael shared some commentary with investors on the company's status with Huawei:

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.

Sennesael said Skyworks will post sequential revenue and profit growth in the current quarter. However, the numbers are still expected to look pretty ugly when measured year over year.

Metric 2019 Q4 Guidance 2018 Q4 Actual Implied Change*
Revenue $815 million to $835 million $1.008 billion (18%)
Non-GAAP earnings per share $1.50 $1.94 (23%)

*Change is for midpoint of guidance for revenue. Data source: Skyworks Solutions.

Griffin did his best to stay positive, and ended his prepared remarks on the conference call by reaffirming that the company remains well-positioned for long-term success:

Skyworks is uniquely positioned with established leadership in growing markets and an expansive and innovative set of 5G solutions, global scale, and the deep customer relationships that are facilitating the mobile economy of tomorrow.

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