For Skyworks Solutions (SWKS 0.83%), it's a good time to be an Apple (AAPL 2.15%) parts supplier. The 5G mobility upgrade cycle is underway as consumers buy new iPhones and other devices that can connect to new 5G networks, and these next-gen connectivity semiconductors that it designs fetch a higher price than older 4G and 3G mobile chips. Apple represented just over half of Skyworks' sales in 2020, and as more 5G capable iPhones ship, Skyworks' revenue is soaring, too.
But there's always a risk that Apple might pull the rug out from its suppliers and start developing its own silicon in-house. In fact, rumors abound that Apple is working on its own 5G baseband modem. Thus, in a multi-year effort to diversify its business away from the tech giant, Skyworks recently announced it's plopping down $2.75 billion to acquire the automotive and network infrastructure segment of Silicon Labs (SLAB +0.46%) -- a great long-term investment in case Apple ever decides to part ways.
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5G modems vs. 5G RF front-ends
It's worth noting that not all references to 5G chips are the same. The semiconductors and circuitry that make up a 5G-capable smartphone are complex and include many semiconductors from various vendors. In simple terms, a new phone has radio frequency (RF) antennas that receive a wireless signal, a modem that allows a phone's operating system to communicate with a mobile network, power amplifiers that help with signal processing, and the like.
Skyworks specializes in RF chips and amplifiers, while companies like Samsung and Qualcomm (QCOM 1.02%) lead in 5G modems. Apple currently utilizes Qualcomm's modems in the iPhone, but it acquired Intel's (INTC +1.15%) small smartphone modem business back in 2019 for $1 billion, which sparked concern Qualcomm could lose out on that lucrative business within the next couple of years if Apple is indeed developing its own in-house chips.
For the record, if Apple does develop its own smartphone modem, it won't automatically affect Skyworks' supply relationship for the iPhone since it makes different parts for use within a 5G device. Nevertheless, Qualcomm's tenuous relationship with Apple is a dire warning for any company that derives too much business from any one customer -- especially one like Apple, which has been bringing other electronic component design development under its roof. Thus Skyworks bid for Silicon Labs' infrastructure and automotive business, which is on pace to haul in about $400 million in revenue in 2021. Based on the roughly $4.4 billion in revenue Skyworks is on track to achieve in 2021 without Silicon Labs, the acquisition will boost sales by around 10% and help diversify Skyworks away from Apple and smartphones in general in a big way.
Progress outside of smartphones is already underway
During its fiscal 2021 second-quarter earnings call, Skyworks' management reported great progress on sales outside of the smartphone market. Labeled "broad markets" and encompassing everything from consumer electronics to internet modems to connected industrial equipment, this segment generated $385 million in revenue -- one-third of Skyworks' total revenue and up 67% year over year. Given total sales advanced 53% year over year, this implies chips outside of smartphones are quickly catching up to the smartphone connectivity bread-and-butter.
And of the two-thirds of the business that is reliant on phones, it isn't just the high-end Apple iPhone that's driving results anymore. Management has been reporting growing sales of its 5G chips to mid-tier manufacturers like Samsung, and Chinese manufacturers like Oppo, Vivo, and Xiaomi. If the most recent trajectory holds, Apple could account for less than half of Skyworks' revenue this year -- not including the acquisition of Silicon Labs.
Put another way, Apple is always a looming risk for Skyworks Solutions' connectivity chip business. But as of right now, it's Qualcomm that is set to lose out on iPhone business in the new 5G era. There's no guarantee the smartphone leader won't change its plans and cut out Skyworks, too, but for the time being, the connectivity hardware company's move into network infrastructure and automotive technology will go a long way toward making it a more resilient business long-term.
