Skyworks Solutions Inc (SWKS) — Q2 2015 Earnings Call Transcript

Thank you, Greg. Good afternoon, everyone, and welcome to Skyworks Second Fiscal Quarter 2015 Conference Call. Joining me today are Dave Aldrich, Don Palette, and Liam Griffin. Dave will begin today's call with a business overview followed by Don's financial review and outlook. We will then open the lines for your questions. Please note that our comments today will include statements relating to future results that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially and adversely from those projected as a result of certain risks and uncertainties, including, but not limited to, those noted in our earnings release and those detailed from time to time in our SEC filings. I would also like to remind everyone that the results and guidance we will discuss today are from a non-GAAP income statement, consistent with the format we've used in the past. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I'll turn the call over to Dave for his comments on the quarter.

Thanks, Steve, and welcome, everyone. I'm very pleased to announce Skyworks' strong financial results for the second quarter of fiscal 2015, with revenue and EPS exceeding our guidance, and significantly outpacing normal seasonal patterns. Our outperformance underscores the success of our diversification strategy, as broad-based contributions across our customer base, end markets, and product lines drive growth well in excess of the market. Our business continues to perform at a very high level, as we capitalize on powerful drivers, fueled by the global proliferation of connectivity. At the same time, by leveraging our architectural and integration leadership, we are enhancing our competitive differentiation, expanding profitability while creating greater value for our customers. This combination of strong industry tailwinds and an enriched value proposition enables us to consistently provide above-market growth and to deliver best-in-class financial returns with robust cash flow. Specifically, during the quarter, we produced revenue of $762 million, representing a 58% year-over-year top-line growth. We maintained gross margins of 46.7%, offsetting quarterly seasonal patterns, and up 200 basis points year-over-year. We also generated operating income of $259 million, that's up 99% year-over-year. We posted a $1.15 earnings per share. And we guided revenue in June to be up to $800 million, that's 36% up year-over-year, along with a 130 basis point sequential improvement in gross margins and $1.28 in EPS. We are reaping the benefits of our dual strategy of providing leadership and custom integrated solutions while continuing to diversify into high-margin verticals. And as a measure of our progress, in 2011, around 60% of our revenue came from single-function devices for mobile applications. Today, more than 2/3 of our revenue is comprised of integrated mobile systems and broad markets, which are our fastest growth areas, driving improved financial returns and putting us on a clear path towards 50% gross margins and above. As the leader in complex RF and analog integration, we're the primary beneficiary of the ongoing industry shift towards systems solutions. As the communications architectures continue to advance in complexity, we're becoming an integral part of our customers' development roadmaps, providing more value in the overall supply chain. This is creating a fundamental shift in our business model; simply put, more complex systems drive increased profitability. Now our Q2 design wins highlight some examples of the success we've had in capturing new high-value system-level opportunities. In our broad markets business, we've recently won a complete Wi-Fi system module, integrating a third-party SOC and supporting Skyworks analog content for video monitoring solutions for Google. We've won a suite of Skyworks products in Machine-to-Machine modules for industrial applications from CR wireless, and over $20 of content powering a new small cell base station platform. We also have multiple design wins for OnStar telematics platforms in GM's global fleet. In Mobile, we're now enabling Samsung's Galaxy S6 platform with SkyOne Ultra as well as our switching and Wi-Fi connectivity products. We've ramped our SkyOne mini-platform with numerous Chinese smartphone OEMs, expanding our SkyOne family. And we launched switching and connectivity modules in Google's Nexus 6 smartphone platform. These design wins highlight our competitive edge in complex integration, and we'll positively contribute to our growth trajectory for the next few years. Now, I'll turn it over to Don for a more in-depth review of our financial results.

Thanks, Dave. And thanks for joining us, everyone. Revenue for the second quarter was $762.1 million, ahead of our prior guidance of $750 million, and up more than 58% versus the year-ago quarter. Gross profit was $356 million or 46.7% of revenue, ahead of our guidance, and up 200 basis points from the second quarter of fiscal 2014. We maintained gross margins on a sequential basis in spite of the seasonal revenue impact, highlighting the strength of our underlying business fundamentals. Operating expenses were $97 million consisting of R&D expense of $63 million and SG&A expense of $34 million. We generated $258.9 million of operating income, roughly twice that of the year-ago quarter, yielding a 34% operating margin. Our cash tax rate for the quarter was 13.5%, resulting in net income of $224.6 million or $1.15 of diluted earnings per share as compared with diluted EPS of $0.62 in the year-ago quarter. Turning to our second quarter balance sheet and cash flow statement. We generated $155 million in cash flow from operations, putting our first half total at $538 million. We also invested $84 million in capital expenditures with depreciation of $39 million. We distributed $73 million to shareholders through our dividend and stock repurchase activity, and exited the quarter with just over $1 billion in cash on hand and no debt. Moving to our product mix for the second quarter of fiscal 2015. Power amplifiers represented 31% of revenue. Integrated mobile systems was 47%. And broad markets was 22%. Once again, integrated mobile systems was our fastest-growing category, up 139% year-over-year, highlighting the ongoing shift towards higher-margin systems solutions, which is taking place across our customer base. Our broad market product lines which serve the Connected Home, networking, media, automotive, and medical markets have grown at 27% year-to-date, and that's well ahead of the overall analog market, helping to mitigate some of the seasonal trends in the mobile business. Turning to our third quarter business outlook. We expect revenue to be $800 million, and that's up 36% year-over-year. At this revenue level, we anticipate gross margin to be 48%, representing a 130 basis point sequential increase, and that's driven by a combination of growing adoption of our custom integrated solutions and precision analog products, increasing global scale, and enhanced vertical integration and our ongoing operational initiatives. These factors have created a new baseline for our business model, and we now recommend more than 55% incremental gross margin from the new Q3 level, providing a path to continued margin improvement ahead. All of this puts us on a firm path towards our target of at least 50% gross margin for the company. We expect operating expenses to be approximately $99.5 million; for other line, we anticipate around $100,000 in income from interest income and other expenses; and a cash tax rate around 12%. We project our tax rate to stay at this level for the remainder of 2015 fiscal year. Looking forward, we continue to see a cash tax rate in a 14% to 15% range for fiscal 2016. We expect our share count to be around 195.9 million shares, and that results in a third-quarter EPS of $1.28. The stage has been set for a strong 2015, giving us a high level of confidence in our near-term trajectory and accelerating our progress towards $7 in annualized EPS. And with that, I'll turn the call back over to Dave.

Thank you, Don. For the remainder of the call, I would like to provide some added perspective on the underlying trends that we see fueling our growth in the coming years. At the highest level, the world is rapidly becoming more interconnected, fueling an explosion of network devices along with massive growth in wireless data traffic. According to a recent report, mobile data usage grew by 69% last year, driven by the proliferation of smartphones and other interconnected devices within the Internet of Things, along with the adoption of high data rate services like 4G, LTE, and 802.11ac. For service providers, this growing ecosystem of connected devices provides a vital gateway for new revenue streams, linking millions of subscribers with lucrative services like on-demand music and video content, over-the-top programming, security, and cloud-based enterprise services. At the same time, consumers are recognizing that the quality of the connectivity pipe is a key factor in their overall user experience and are upgrading to more powerful devices, bigger data plans, and faster connections. The end result is a race by OEMs across our served markets to provide leading-edge performance, creating a market opportunity that is growing at a mid-teens pace for the foreseeable future. The addressable market for Skyworks is growing even faster. I'd like to highlight three key trends that fuel this: First, there's an explosion in RF and analog complexity, and it's driving robust growth in our served markets and a consolidation of market share. Skyworks' mission is to simplify this increasingly challenging technical environment for our customers. Across the board, we see more content opportunities in each successive generation of device and integrated solutions displacing conventional discrete components. This is happening, and a host of component providers who lack our technology brand, our integration capabilities, and system expertise are simply unable to keep pace. Second, we are rapidly expanding our footprint within existing customers and existing markets, increasing our serviceable opportunity. Our systems solutions enable us to sweep in an unprecedented amount of new Skyworks content, like filtering, tuning, and power management. A prime example is our high-performance filter portfolio, where our unique technology edge is enabling higher levels of system performance through tighter band spacing, less interference, and a more efficient signal path. On top of this, we're launching entirely new product categories like diversity modules, which support enhanced download speeds and represent a substantial expansion of our addressable opportunities. Third and finally, we're leveraging our decades of experience in mobile. We are enabling a growing array of devices in adjacent markets to become seamlessly interconnected, like wearable technologies, home automation, and the connected car, utilizing enabling technologies like 4G, GPS, local area networking standards, and low-energy near-field protocols like ZigBee and Bluetooth. So in closing, we remain quite optimistic about our prospects for the remainder of 2015 and beyond. We've created a unique business model tethered to the global wave of connectivity and combining consistent above-market top line growth with the financial returns of a best-in-class, diversified analog company. This concludes our prepared remarks. Operator, let's open the lines please?

Just want to talk about the smartphone market. There's been some concern of inventory in China. I was wondering if you could comment on your China business, if you saw any impact from inventories related to March results or June guidance. And also, there's been some concern of some Android OEMs pausing on the higher-end smartphones to avoid competition with the strong Apple and Samsung's new launch? I'm just wondering if you had seen any push-outs from your Android customers? And how that might affect your September quarter's seasonal outlook?

Sure, Michael. With respect to China, as you know, that is a very large multi-year growth opportunity for Skyworks. We're actually quite encouraged by the print with China Mobile with 50 million LTE ads in the March quarter, that's really bullish for us. And we see that's trending to the mid-250 level or higher going into the balance of the year. On the near term, there was some choppiness in the March quarter as noted; some of the 2G and 3G players lost some share, had some declines, while 4G continued to ramp. We also saw real strong performance with global Tier 1s participating in the China region. So net-net, it's a great cycle for us. It's an opportunity. We love the 4G upgrade, and we are well-positioned.

Right. And just to follow up on the ramp in LTE, do you have any comments on the seasonality for the September quarter as it relates to China and your overall market trends?

Well, like I said, Dave, it's a little too early to be specific about September. As you know, the second half is the strongest part of the year in much of our business, and it's usually up sequentially high single digits. I think that the traction we have in China and the position we have with our SOC partners and our baseband partners will allow us to continue to ride that 4G wave, and we expect to have a very strong second half in China. But as Liam mentioned, there's also competition from foreign brands, and fortunately, we are also well-positioned there. So I think we'll have less volatility given OEM share shifts. But I do expect in the second half, the LTE upgrade cycle to continue to march towards, I don't know, conservatively, 225 to 250 for 2015.

Can you provide a quick update on the competitive landscape? Have there been any changes? Specifically, what do you think about the speculation that Murata has secured some unfavorable content with your largest customer for the upcoming refresh later this year?

We haven't seen much of change in the competitive landscape. But specifically, with respect to Murata, they are not a new competitor. They've been around for a long time. And their strength has traditionally been in passive, in SAW filters and in some modules, particularly on the receive side. We do come across them in a limited number of fairly niche segments. We've been quite successful competing head-to-head. We haven't seen any change in the competitive landscape, and our confidence that we continue to leverage more content and benefit from increasing complexity with a larger total addressable market is very solid for us.

Maybe a follow-up to that, Dave. You guys obviously had nice content with the latest Samsung, the GS6 refresh. What are your expectations or can you give us any color on what your expectations are later this year with your largest customer on their refresh?

Sure. Obviously, we can't comment on that specific customer. But in general, the architectures are getting much more complex. We're very fortunate to have visibility out, two; in some cases three years in terms of the overall architectures that are being deployed to deal with all this complexity. We see nothing slowing that down, so it's obviously a tailwind for us. We're seeing more addressable content in those kinds of functions you typically think about for us, power amplifiers, duplexers, Wi-Fi, switching and control. But we're seeing a lot now in what we're able to produce in terms of complex, antenna tuning, devices on the receive path, lighting, and power management. As an incumbent, we've been very successful and quite proud of our position in maintaining and growing our footprint with each successive design with all our major customers.

Dave, my question is, is there a way to contrast either the amount of content or the number of sockets that were addressable by you guys last year versus this year? I'm trying to get a sense for what is the diversity of the kind of content that you are going after versus, say, the last one or two years?

Yes, it has been a consistent progression, Vivek. It's challenging to discuss this in terms of just one-year cycles. However, if we look back over the past three years, we were quite strong in multimode and discrete power amplifiers. We had a solid switch portfolio and were starting to enhance our connectivity with our Wi-Fi offerings. We made an acquisition of a power management company during this time. Over the last few years, we've witnessed significant growth in Wi-Fi connectivity, beginning with our leading customers in flagship phones and now expanding throughout the entire smartphone market. This has been a considerable advantage for us, and we currently hold about 51% or more of that market. We provide the best overall solution, capable of shielding, integrating, and reducing interference from the increasing number of Wi-Fi networks next to cellular bands. Our power devices have seen growth both in display and camera flash applications, particularly with dual-mode devices, adding more content for us. The AC upgrade cycle is crucial for us, especially with power amplifier duplexers. We introduced SkyOne to fully capitalize on our wide range of products and system capabilities. While that product range has become increasingly diverse, it is really gaining momentum in enabling more filters and enhanced switching. Overall, as mentioned earlier, I believe 15% is a reasonable estimate for the growth of our existing total addressable market. However, I think we can achieve much better results since we're benefiting from both the current market growth and increased functionality.

Got it. And then, Dave, how do you look at the right mix of handsets versus the non-handset opportunity for Skyworks? Obviously, you are growing very well in both. But is there a target mix as you look out the next few years? And do you think M&A fits somewhere in getting towards that target mix?

Yes, I would view it this way. It's not about mobile and non-mobile; it’s really about integrated devices versus non-integrated devices. In our broad-markets business and our integrated mobile business, we find that we are very well positioned, as our customers see significant value there. There is increasing content for us and very few competitors compared to areas like discrete power amplifiers. We appreciate this business mix expanding to make up most of our company. Currently, our power amplifier segment is diminishing, and our discrete business is also contracting. We are increasingly becoming a systems solution provider. M&A has been and continues to be a crucial part of this strategy. Over the past few years, we have acquired a Wi-Fi business, a connectivity business, a power and lighting business, and a high-performance filter business. These acquisitions support a vertical market strategy where we can increase our value. We are focusing on being more robust and competing based on system performance, where we have very few, if any, competitors, reflecting the quality of our components.

And just one point I'd like to add. The exciting point of what Dave said is, if you look at the way we've now split the revenues, that broad market space is up 27% for the first half of this year versus last year. And there aren't any diversified analog companies growing like that. So, I mean, it's really got a lot of momentum behind it.

Maybe follow-up on that question, just for the next quarter when you look at handsets versus the broad-based, could you talk about your growth expectations, can you just maybe talk about the contribution of each?

Yes, sure. Well, we certainly expect growth in both segments, and we will deliver growth in both segments. You have a great opportunity in smartphones in our core markets and mobile, as we've outlined with our global Tier 1s and also the China cycle. And as Dave mentioned, it really is about a growing total addressable market and our ability to capture more and more of this with sticky system solutions. On the broad market side, we are seeing the vast majority of the opportunities in new markets, automotive, wearable technology, and then, our core business in broad includes infrastructure and access points. All those segments are moving up and will continue to be upside into the second half.

Yes, in the last quarter, we were up nearly 30% in the broad markets' business. And of course, if you track the diversified airline companies, their growth is nowhere near that. So you can see that we're really focused on the right device categories, leveraging what we're good at in mobile with some of these markets becoming interconnected in a wireless way for the first time.

And just specifically on those segments that we split out, you've got broad markets and integrated mobile systems growing. Our standalone PA business is down flat to down slightly. So again, the growth is coming from those two areas when you look at the guidance.

All right. And Don, obviously, the gross margin expectations are getting very attractive. Can you talk about operating margin leverage? Are you seeing maybe a similar, I guess, delta from where you are today to what your expectations might eventually be?

Well, there's a tremendous amount of leverage still in the model, and the best way to handle that is that we've now given you new guidance on a baseline of what we've just guided 48% margin, and you're going to drop that through on whatever you handicap the top line growth at 55%, the incremental margin. And so that's going to trend very quickly to 50% and beyond. We're going to continue to see leverage on our OpEx base; I think we got a proven track record of being able to do that. So when you add those two things together, you're going to see some very attractive returns as you go forward.

Can you tell us where we are in the adoption of diversity receive modules versus just a switch for diversity receive? How far along are we in that cycle? And then what's the content as that takes off?

Sure, Suji. We're actually in the very early innings on the deployment of that technology. We have a great opportunity to advance data rates with this technology. Our customers love it. It's a significant content boost to our mobile portfolio. But in terms of what we're doing right now, we have a couple of meaningful design wins, but there's a whole slate of opportunities that we're pursuing right now. We're in the sampling stage and development stage, high degree of customization, also bringing in technologies like filters and SOI switch, and really interesting things being brought together. You should look forward to more commentary on this as we go through the year.

Okay, great. And then on the switch business, can you update us on whether the supplies have caught up to demand yet? And how has the demand been in that business?

Yes, yes. No, I think we are certainly seeing a lot of appetite for switching. As you see, more and more of these bands in traditional phones, where you don't have the diversity architecture, you're dealing with SOI or PM switching. It's been a robust run in that technology. Supply and demand are about in balance right now, and we still continue to do quite a bit of business in that segment.

Several questions, if I could. On the filter business, now that it's mostly internal, would you say this is one of your larger drivers for the margin, given you don't have to buy them in the open market anymore or is it mostly just integrated modules? And then to your DRx, receive diversity modules, are those active parts or those are mostly passive, and if they are passive, wouldn't you be competing with someone like Murata?

Yes, just on the margin piece of that. We've got a lot of things that are driving that continued strong top line growth because volume matters in our business. This favorable mix towards integrated mobile systems growth, which have very nice attractive incremental margins, operational execution, and the filters are part of it. So there's multiple facets of the margin expansion, but filters are part of it.

And with respect to the receives or the DRx. The interesting part there is, obviously, you have complex, low-loss switching, and a lot of filtering. The filtering is becoming very tricky, and the need for very tight spacing and high performance. There's architectures that I think will begin to look for in that receive path, the amplification of very low noise amplifier that could be segmented around the frequency band. I think the content there is very understated in most people's models, and I think it's going to be a big growth driver. The competitive nature is going to be very tough, because it's going to be a combination of active compound semiconductors, passive devices. It's going to be an MCM; I don't think it's going to be a slug of ceramic; I think it's going to be a complex, multi-layered MCM that pulls all that together. As you know, we're quite strong there.

In terms of filter capacity, it's been challenging, especially with the exceptional Panasonic asset you now have, particularly in TC. Dave, you produced a billion filters last quarter; how is that working out? Is your capacity sufficient, or will you need to invest more to maintain that level considering what you mentioned about DRx and other products? You are among only two companies capable of producing those products. How do you foresee your capacity in that aspect? Doesn't what you mentioned indicate that it eliminates many of your competitors, since only a couple of entities can manufacture that component?

Yes, that's right, Ed. And the capacity has been a little tight, because we've just ramped it so fast. But we've really been able to hire some terrific folks. We've put a lot of capital in place. The yields have come way up from when it was an asset owned by Panasonic. I'm actually thrilled with the performance of that team. But if you look at our capital expenditures and Don's comment on what to expect going forward, that's really in two areas: It's in filters and it's in modules. So you should expect us to continue to ramp that up; I think it will be more than a billion this year in high-performance SAW filters. Next year, it's going to be where you hold on your hat; the filter demand is going to be really high. Temp comp is starting to tackle some pretty thorny system challenges. We think we can deploy it in lieu of certainly a SAW filter; and in some cases, a bulk device.

Two-part. I would love to hear your views on carrier aggregation and how you see that continue to play out going forward. I don't know if I missed this, Don, your CapEx spend last quarter and what to expect for the remainder of the year.

Sure, Tony. I mean, certainly carrier aggregation is becoming more and more critical now as you go into these highly complex 4G phones, data rates are really in high demand, and the complexity in a system goes up. We have tremendous solutions; some of our SkyOne Ultra technology is actually building a carrier aggregation capability inside of this complex PAD module. It’s one of the nuances of our architecture, how we take this complexity and not only manage the amplification but also the switching and the threading together of these bands that you see in carrier aggregation. That's another market where we've got some design wins with leading industry players, but we're starting to see more and more folks in China and other markets pick up the technology.

In the first quarter, we spent $87 million on capital expenditures, and in the previous quarter, we spent $84 million. Looking ahead to the second half, we anticipate making investments in both filter and module capacity, which is where much of our spending is directed. We expect the second half spending to be comparable to what we observed in the first half. Our capital expenditure investments have clearly contributed to a significant improvement in our margins, both at the starting point and incrementally. The advantages you are witnessing stem from these investments, which serve as a strong positive indicator for us. We are confident in the volume we are generating, and this spending will lead to returns and benefits for our shareholders. Overall, it is a positive development for our company.

Two questions, if I could. First, you mentioned the SkyOne and SkyOne Ultra traction. I'm curious if you could give us a sense: Do you think these wins are coming for new sockets for you or do you think it's just kind of upgrades from people that were using some of your more discrete products? So is it resulting in a market share gain by new wins? And then secondly, if you could just talk a little bit about the Wi-Fi market. A lot of interactions there as well. Do you think that wave 2 could potentially be a step function increase there with all the different radios? I'm just curious on your take on that and timing.

Sure. No problem. With respect to SkyOne, it's been a combination of upgrading existing customers and in many cases forging our initial engagement with SkyOne and new accounts. We're seeing the platform count go up. We've got about eight products in production right now, and by the time we exit the calendar year, we'll probably have ten more platforms in production. The ability to customize and put the specific bands, leveraging our filters in many cases, has been one of the differentiators. So that portfolio is doing quite well. This is really a turning point in our SkyOne architecture and our SkyOne traction. With respect to Wi-Fi, Wi-Fi continues to be a leadership portfolio for us at Skyworks; it hits the IoT space, it's been hitting mobile, we're seeing opportunities in media over-the-top boxes, opportunities in automotive that we've mentioned. We see 11ac strength that we bring to market as one of our differentiators, and it will be a portfolio that grows well in the second half through 2016 and beyond.

I just wanted to talk a little bit about pricing. It looks like the low and mid-tier smartphone segments have been hurting us at the expense of the high end, where you guys have been clearly gaining content. Just wondering if you are seeing any change in any of the pricing dynamics?

Nothing in particular. As we've migrated our portfolio into the devices we've been describing in this entire call, whether it's SkyOne, Ultra SkyOne, any for the open market in China, and so on and so forth. They're really not products that are subject to the same kind of pricing dynamics. So we see kind of gentle low to mid-single digit pricing on a year-over-year basis for most of our devices, and I don't see anything changing there at all.

I wanted to follow up on the previous comments regarding China. Liam mentioned there are some pockets of activity there. I'm interested in how Q1 performed compared to your expectations for Q2, and if you are seeing growth in Q2, are you noticing a shift from 3-mode to 5-mode devices in that segment?

Yes, sure. In fiscal Q2 at the March quarter, we were flattish, maybe down one point or two, but in the current quarter, in the June quarter, we are seeing growth, and it's coming across a number of platforms. We do a really good job of working with all the chipset providers, Mediatek, Qualcomm; we're seeing some success with names like Xiaomi, Lenovo, even Huawei, and ZTE. While we feel really good about the second half in China, we had a little bit of a bumpy start, but we were able to navigate through that with our heavy allocation towards 4G, and we start to see the momentum come back into that market.

It seems like one of the big drivers here is the shift to LTE. So something you could talk a little bit about how you see LTE rolling out regionally over the next couple of years. I'll see China, hopefully, this year. How does that extend over the next couple of years?

Sure, yes. We speak a lot about China and some of the developed nations, United States and Europe, et cetera. LTE has been rolling for a while, and China is a great opportunity because you have nearly 1 billion subscribers, and less than 20% are carrying an LTE product. There's a huge upgrade cycle, and that upgrade cycle will create additional turnover in years to come, so that's why we make such an important distinction around the China market. If you think about it, you've got a band count increase for sure, you have a filter count increase that we can leverage in the modules. You also have more switching arms, you have the carrier application technology we talked about, the ability to deliver high-performance receive technology with DRX, power management. When you build this kind of an engine, invariably there's Wi-Fi attached. We're trading that opportunity against what we were two, three years ago, 2G and 3G phones in China that may have had 150 to 250 content. That's really where you see that opportunity.

I think you should think about it as being something that will sweep into all territories over time throughout the world, and it’s really the same dynamic that will drive an N from an ac implementation with 802.11. I think there's 5G behind it by the way. We're doing architectures today that are sweeping millimeter wave functionality, as the world looks for allocation of more frequency. The problem is bandwidth at high speed. Bandwidth at high speed will only be solved as consumers demand it more and more and more, and carriers find it as a way to follow the money, so you're going to see it sweep across the entire world. A generation of technology is right behind it because it's all about bandwidth.

Okay, great. That's very helpful. And then, the numbers were good I am just trying to think another way, but I was just curious, is there any FX impacts that you guys had as well with numbers have been. Maybe you know a little bit better without any FX headwinds?

No, I mean, all of our top lines are in dollars, so the only impact we have is dollar-peso for Mexicali expenses and a little bit now at the end with filter acquisition as they are actually liability positions with a strong dollar that was actually favorable; so it’s not material, but we haven't had any analysis.

Dave, I was wondering if I can get some put and takes around your U.S.-based customer; your large Korean customer in China, as you look into the June guidance?

As you know, June is typically the transitional quarter. We're going to be up because, as we've mentioned, we see some growth in China, we see growth going into June, in China. We see quite a bit in broad markets continuing to chug along, so a sequential growth and year-over-year growth. I believe that we're in the enviable position of not needing to worry too much about OEM share shifts, because if you look at the content and teardown reports, whether they're MediaTek enabled, indigenous OEM or if it's Samsung or others. We just continue to look to drive that content higher. We're very well positioned, and I just don't worry too much in terms of Skyworks' overall financial performance about the overall OEM share shifts, but we are well positioned among the flagship models that I think you're referring to.

That was helpful. And as a follow-up, if I can ask you, you're clearly diversifying into non-handset markets. What is the most exciting non-handset market, by end market that you see for yourself and Skyworks?

It's been really around the home. If you think about it, if you look at the devices, thermostats, it really kind of started with smart meters, and it moved into all kinds of categories from gaming, now lighting; the 802.11ac space with these really complex home routers; it's a huge opportunity for us. These media gateways that are being provided by the various cable and wireless service providers have many dollars of content for us. That's exciting. I like wearables a lot because the consumer content there is high, and we’ve got a good entry with our low-power Wi-Fi and switching products. Automotive has been a bit of a sleeper. We've had high dollar content with high margin, but only recently we've started to see with the advent of smart automobiles, the kind of connected hub environments that exist in the car. We're seeing a lot of design activity there, and a lot of very high margin wins. It’s not trivial anymore; it’s becoming rather meaningful.

Don, I want to go back to your guidance on incremental gross margin switches; very robust and at a level that I think a lot of us thought was possible, and you're giving a nice runway there. As you look at the underlying drivers to those incrementals going forward, integrated solutions mix, the scale and operational advantages that you have, it seems like one is more related to pricing for functional value, and the other related to driving your unit costs lower. How should we think about the relative contribution of those different factors over time?

I mean, everything that we've talked about is important. Our volume hubs in the strong top line are always going to allow us to improve the incremental returns. The favorable product mix is probably right now with the value-add proposition you described, that's probably slightly ahead of some of the operational execution; they're both critical and important. When you add those two things together, you're going to see some very attractive returns as you go forward.

That's very helpful. The follow-up is somewhat related to that. It's more of a philosophical question. I'll direct it to you, Dave. The company has done a very good job moving the mix of business towards integrated over time. There's still quite a ways to go. Are there any discontinuities with either capital intensity or with R&D intensity? Is the portfolio shift that you see on the horizon?

Yes, a philosophical question. The discontinuities have been ongoing for the last several years; we are seeing the need to have more direct engagement with our customers, with people and business unit people, who have a much broader set of experiences around how to optimize the overall system performance right from the SOC to the antenna and back. So that's been new for us; we have been kind of upgrading our capability, hiring a lot of folks. So that's a discontinuity that I think we've got under control. I think capital really isn't the issue, because fortunately for us, the investments we've made in these complex multi-chip modules really allow us to dovetail into a nice mix of internal production versus external production, keeping that flexible model, but we're really able to leverage what our customers want and use an MCM-type approach for much of it. Probably the biggest discontinuity for us that we needed to solve and we are well on our way to hopefully doing that is we really needed to have more filter passive offerings within our active portfolio. That was a change for us; that hasn't been traditionally our skill; we've avoided those discrete markets because they tended to be gross margin challenged, but now it's part of an overall system solutions, they become an intricate set of capabilities for us. That was a discontinuity that we're continuing to work through.

That question, not the most exciting parts of smartphones, but there's trend towards thinner flagship smartphones. Perhaps, do you have any advantages in your shielding and packaging solutions you might be able to exploit? It seems heat dissipation is a big issue, especially for these big chipsets on the digital side?

Yes, that's right, and it's such a good question actually, because while at the same time you've got heat dissipation, you've got more bands, you've got more things amplifying that want to interfere with one another. There's a tremendous amount of pressure on size, both the x and y-axis. So it is a challenge; it's kind of a fun challenge for our engineers. You need to have an arsenal of capabilities that allow you, as you say, to shield, to mold, and overmold, thin, and so on. Yes, it is a challenge, and it’s an opportunity because it’s hard, if not impossible to architect using a set of components, no matter how good those components are. You need to find a way to create a module or set of modules and ICs that interplay well together; that can drop on that PCB and not add a lot of multilayers, and we can do it in-house, which is unique.

Great. And for my follow-up, I know your integrated mobile business is doing really well here. Can discrete PAs, at one time, you set a target of maybe growing modestly, up say 5%, is that still the case, and perhaps, could you remind us where discrete PAs are still doing very well, like in future phones and perhaps non-mobile applications?

Yes. The discrete PAs will continue to grow through this year and the foreseeable future. They're still going to have the lowest growth rate, so the dollars are going to grow year-over-year; it’s going to become a smaller and smaller percentage of our total revenue mix. That's clearly been happening every quarter, but they will grow; there's still growth there.

Dave, I wanted just to come back; you guys now for a couple of quarters have highlighted the opportunities you see in the diversity receive modules. I just sort of have a question for you, I mean, the receive diversity has been around for a while. I think it's been pretty common on Qualcomm chipsets for a number of years. What's really driving the opportunity? Are you seeing greater attach with received diversity and other chipsets, or is it really just a greater percentage of phones now shipping with LTE, where receive diversity is more commonplace?

I think it's even simpler than that, Quinn. It's really all about the capability of streaming and being able to do it with multiple high-performance, high-speed paths to the antenna. First, the filtering needs to accommodate more bands on the received side, which requires filters with tighter spacing, resulting in very high-performance filters on the receive side. This performance comes at a higher cost. In the past, a passive duplexer was sufficient, but that's no longer the case. Additionally, as performance starts to degrade, the low noise amplifier becomes essential for boosting receive power as it needs to be narrowband around the desired frequency to minimize loss, which you can't achieve with typical bulk CMOS. This expands our device category capabilities. Essentially, if you're streaming video on a phone over multiple bands, you can't rely on a poor duplex or a lossy switch.

Yes, I mean, I think the application of the real benefit here is a substantial increase in data, right? Think of it as MIMO architecture for receive, and it has a radical improvement in performance. Now it's not cheap; there's a lot of complexity; there's a lot of value, but we are seeing the high-end customer adapt this quickly, and we're also seeing a lot of opportunity in mid-tier. That's essentially the benefit that we see.

So just a follow-on question. It sounds like it’s really team expansion on a diversity receive, but wondering if you also think there's a share gain opportunity as part of your strong outlook on the diversity received market.

Yes, it is a share gain opportunity. First and foremost because it's not part of the SOC. So, this is in the domain of the analog module combination of the compound semiconductor passive and the integration of multilayered things like PCBs and LTCC. It is not the domain of the SOC, and there aren't many companies around. You've got companies that do duplexers or companies who could do passive or could do a switch. There aren't very many companies who can pull together the right price point and performance sensitivity that we can.

You were talking a little bit earlier about Internet of Things, the Wi-Fi opportunity. I'm curious of interop tradeshow and seeing exactly what you're talking about. We now have a and multi-user MIMO coming. I'm just curious, back in a previous day, you used to break it out by analog, which kind of captured some of the Wi-Fi attach, and it seems to be growing as fast as cellular. Is that still the case when I think about this Wi-Fi opportunity, the Internet of Things opportunity? Is that commensurate with your cellular growth and any chance you give us ballpark about what kind of that percentage contribution it is to the business model?

Well, maybe if we can do this with Liam. We said in the last quarter, it was up 27% year-over-year. So it's been growing very rapidly; much of that is connectivity; it’s the upgrade cycle to ac; it's new device categories to outperform on the factory floor and automobiles; it's kind of all of that.

It's in the market, so if you think about that from a product perspective, Wi-Fi, Bluetooth, switching, creating connectivity, and the applications that it's serving now is the proliferation of IoT, whether it's media devices, automotive, machine to machine, variable, energy management. We're seeing that roster expand each and every quarter. It's a combination of great technologies and then also hitting a market that's on a growth curve.

Okay. And then, the follow-up on that. I'm kind of curious, obviously, people have already noted the spectacular gross margin with profitability you're putting out. Is the Internet of Things, the Wi-Fi opportunity, is that commensurate with your gross margin profile or is that a negative way difference from what you're achieving globally?

No, it adds value and aligns with the minimum incremental returns. It varies by specific application, but it certainly does not lower that number.

Okay. Well, thank you, everyone, for listening and participating, and I'll look forward to seeing you soon.