Wireless semiconductor suppliers like Skyworks (NASDAQ:SWKS) aren't sexy. They make cell-phone chips, not cool new products like Apple's (NASDAQ:AAPL) iPod shuffle. And for the most part, as a small-cap stock with a market capitalization of about $1.2 billion, Skyworks is under the radar.
However, the better you understand the value chain, the more interesting these companies become. Skyworks and competitors like RF Micro Devices (NASDAQ:RFMD) provide components such as power amplifiers to handset manufacturers like Motorola (NYSE:MOT) and Nokia (NYSE:NOK), which are vendors to wireless operators Cingular/AT&T Wireless and Sprint (NYSE:FON)/Nextel (NASDAQ:NXTL).
Skyworks reported solid results on Jan. 19 for its fiscal first quarter. Earnings growth of 225% met consensus estimates of $0.13 a share on 26% year-over-year revenue growth. Revenue also grew from the sequential quarter from $218 million to $220 million.
Wall Street and investors, of course, are looking to the future and, specifically, the current quarter. They get worried when management reduces revenue and earnings guidance. Three little words from management give them pause: "guidance below expectations."
And Skyworks' revenue guidance for its fiscal second quarter was $190 million, below analysts' expectations of $211 million. Why? The wireless industry is highly cyclical, and on the earnings call CEO David Aldrich says those reduced revenues will be affected by "handset market seasonality in the 13 to 15 percent range partially offset by share gains at several top-tier OEMs."
But let's get back to the value chain for a second. One of the OEMs (original equipment manufacturers) mentioned is Motorola, Skyworks' biggest customer, accounting for 14% of 2004 fiscal revenues. That's a pretty good chunk of sales, and Skyworks cites the "reliance on a small number of customers for a large portion of sales" among its risk factors in its fiscal 2004 10-K.
The point is, what happens upstream with the big guys like Motorola affects what happens downstream to wireless semiconductor vendors like Skyworks. And while Motorola just reported a stellar quarter, investors didn't like the guidance for the current quarter with worries of slowing sales growth and competitive pressures.
Further upstream, the proposed merger of Sprint and Nextel will most likely affect Motorola's relationship as sole supplier of Nextel's handsets, in turn affecting Skyworks' sales to Motorola.
Understanding Skyworks' value chain will help investors deepen their knowledge of wireless industry dynamics. And you don't need to be a business-school student to do it.
For more on the wireless industry value chain, check out these:
Fool contributor Chris Cather owns none of the stocks mentioned and is not a business school student, but still likes learning about value chains.
