Shares Skyworks Solutions (SWKS 1.30%), which makes semiconductors for wireless devices, crashed Wednesday morning, down 10.1% as of 10:20 a.m. ET, despite hitting analyst targets for its fiscal second-quarter sales and earnings last night.
Heading into earnings day, analysts had predicted Skyworks would earn $2.63 per share (pro forma) on sales of $1.33 billion. Skyworks nailed the earnings goal, and reported sales of $1.34 billion.
So why is the stock down?
Well, because not all the news was great. On the one hand, yes, Skyworks grew its sales 14% in its fiscal Q2, and this was more than expected and a new record for the company in a second quarter. Yes, it also reported $2.63 per share in adjusted diluted EPS, which was an 11% increase over a year ago. But when calculated according to generally accepted accounting principles (GAAP), earnings were 29% lower than that -- just $1.86 per share -- and this number was down 5% year over year.
(The big difference between GAAP and non-GAAP numbers this quarter: "Amortization of acquisition-related intangibles," which subtracted $0.37 from earnings per share.)
Also, free cash flow at Skyworks fell off a cliff in Q2. Cash from operations plummeted 66% year over year, and despite less capital spending, free cash flow fell to $266.2 million -- just 87% of reported net income and a 44% decline year over year.
That weak free cash flow number suggests Skywork's quality of earnings may not be all that great, and implies bad things for future earnings numbers. Indeed, it's Skyworks guidance on future profits that seems to have investors most upset today. Guiding on the fiscal third quarter, Skyworks said it expects revenue to range from $1.2 billion to $1.26 billion -- all below Wall Street's expected $1.3 billion.
Skyworks also predicted non-GAAP earnings will be about $2.36 per share in Q3 -- where Wall Street wanted to see $2.55. So, long story short, after meeting analyst targets in Q2, Skyworks has predicted it will miss earnings in Q3. Investors are selling before that happens, and I cannot blame them for it.