Skyworks Solutions Inc (SWKS) — Q1 2017 Earnings Call Transcript

Thank you, operator. Good afternoon, everyone, and welcome to Skyworks' First Fiscal Quarter 2017 Conference Call. With me on the call today are Liam Griffin, our President and Chief Executive Officer, and Kris Sennesael, our Chief Financial Officer. Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking statements. Please refer to our earnings press release and recent SEC filings, including our Annual Report on Form 10-K, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, the results and guidance we will discuss today are non-GAAP financial measures, consistent with our past practices. 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 to Liam.

Thanks, Mitch, and welcome, everyone. The Skyworks team delivered exceptional results in the December quarter. Let me begin with a few highlights. We achieved revenue of $914 million, up 9.4% sequentially and above our guidance range. We expanded gross margins to 51.2% and operating margins to 38.8%, illustrating strong operational execution and prudent expense management. We produced record earnings per share of $1.61, $0.03 better than our guidance and perhaps most importantly, we generated nearly $0.5 billion in cash flow from operations in the quarter, another record for Skyworks. In addition to our strong P&L and balance sheet performance, I am especially pleased with our design win execution, particularly at marquee customers. Of note, we secured SkyOne platform wins with multiple Tier 1 Sky OEMs, extended our leadership position in diversity receive systems and secured a key win in our custom high band PAD portfolio. We ramped fully integrated low, mid and high band solutions integrating SkyBlue technology for Huawei's Mate9 platform, their flagship phone. We launched multiple devices across Samsung's entire portfolio and gained momentum in China, with key wins at market leaders Oppo, Vivo, Meizu, and Xiaomi. All of these wins were captured by resulting from the growing complexity and performance requirements inherent in today's advanced mobile architectures. Specifically, we're seeing the continued shift to highly integrated transmit solutions, leveraging our core capabilities in gallium arsenide, temperature compensated SAW filtering, and enhanced power management. In addition, we are benefiting from the rapid move toward carrier aggregation, a major catalyst in driving higher data rates with expanding bandwidth in both uplink and downlink transmission. In parallel, we continue to expand our opportunity by growing our content reach with new revolutionary diversity receive systems, specifically targeted at the most complex carrier aggregation challenges, as well as a growing suite of analog solutions from Wi-Fi, GPS, antenna tuning, signal conditioning, and more. Now moving on to our broad markets portfolio and IoT. We expanded our design win pipeline to include wins with Netgear home security systems, ARRIS cable modems, as well as Comcast and Rogers with carrier-grade broadband gateways. In addition, we secured design wins supporting the latest voice assistant technology from Amazon, Google, and Microsoft. We also capitalized on the newest trend towards home Wi-Fi mesh networking, with key wins at Linksys, Ubiquiti Networks, and other leading OEMs. And finally, we broadened our footprint across the automotive sector, leveraging the diverse array of wireless protocols supporting connected car applications, vehicle to vehicle communication, and 4G telematics. In this past quarter, we were pleased to have consummated a strategic design win at a leading U.S. electric car OEM. Our Q1 results, strong outlook, and design win momentum reflect solid tracks in spanning out mobile, IoT, and broad market portfolio. The success we are demonstrating is part of a secular multiyear trend and we are still in the early innings. At a higher level, Skyworks is at the epicenter of a sea change in mobility. Our end markets are driving a substantial move from brick-and-mortar to a rapidly growing mobile economy. This trend places an unprecedented burden on analog RF and mixed-signal performance, vastly increasing the value and utility of our solutions. It's compelling to see how many different avenues mobile technology now supports, whether it's streaming 4K video, social media, mobile payment, or rapidly evolving areas such as augmented reality, virtual assistance, and the connected car. Popular apps including Facebook, Uber, Netflix, YouTube, Spotify, and Wave all share key characteristics. They require ultrafast, low latency, highly secure and efficient connectivity, as well as location-based services. These challenging needs are invariably facilitated by an integrated Skyworks engine. Importantly, we uniquely support all the wireless protocols enabling these diverse applications including Wi-Fi, Bluetooth, ZigBee, GPS, and LTE. Further 5G represents a massive growth opportunity for our industry and certainly for Skyworks. In fact, market projections suggest 5G data rates will approach 10X the speed of current 4G and LTE solutions. To put this in perspective, downloading a full-length HD movie in 3G took one day. In 4G, the same file took minutes. On a 5G network, this content will be downloaded in mere seconds. At the same time, the connected car is yet another catalyst that offers significant opportunity for Skyworks. Looking out over the next few years, the amount of data that will be delivered to and from the car is estimated to be 5 to 10 times more than the bandwidth used by today's smartphone. For instance, by 2020, a single autonomous car is expected to consume 4,000 gigabits of data per day for real-time diagnostics, positioning, and vehicle-to-vehicle communications, and that's equivalent to the daily data consumed by more than 2,000 smartphone users in 2017. Skyworks is uniquely positioned to capitalize with solutions that solve all of these daunting connectivity challenges, setting the stage for outperformance across cars and new markets. With that, I will turn the call over to Kris for a review of our financial results and Q2 outlook.

Thanks, Liam. The revenue for the first fiscal quarter was $914 million, up 9.4% sequentially and exceeding our guidance and consensus estimates. Gross profit was $468 million or 51.2% of revenue and operating expenses were $113 million. As a result, we generated $354 million of operating income, translating into a 38.8% operating margin. Our tax rate was 14.7%, driving net income of $302 million or $1.61 of diluted earnings per share, exceeding our guidance by $0.03. Turning to the balance sheet and cash flow, cash flow from operations was a record $496 million, driven by higher profitability and ongoing improvements in working capital. In particular, days sales outstanding declined from 45 to 37 days, while days of inventory declined from 94 to 86 days. Improvements in overall working capital generated over $100 million of cash flow in Q1. Capital expenditures were $50 million, about 5% of revenue and in line with our target model. Further, in Q1, we repurchased 1.4 million shares of our common stock at an average price of roughly $76. Finally, we ended the first quarter with a cash balance of $1.35 billion down from $1.8 billion at the end of Q4. Now moving to our outlook for fiscal Q2. For the second quarter of 2017, we anticipate our revenue to be $840 million, up about 8% compared to Q2 of last year. At this revenue level, we expect gross margins to be in the low 50% range with operating expenses of approximately $115 million as we continue to invest in growth initiatives, including our IoT business. Below the line, we anticipate roughly $0.5 million in interest and other expense and a tax rate of approximately 15%. We expect our share count to be roughly 186 million shares. Accordingly, we plan to generate earnings per share of $1.40 in the second quarter, up 12% year-over-year. With that, I will turn the call back over to Liam.

Thank you, Kris. As our first quarter results and outlook illustrate, we are off to a strong start in fiscal 2017. We delivered solid revenue and earnings, set a record for EPS and quarterly cash flow, while guiding about March quarter consensus estimates. Our profitability and increasingly strong cash generation is allowing us to fund growth and deliver higher returns to our shareholders. In fact, the new $500 million share buyback authorization announced today reflects the confidence of both the executive team and our Board with respect to our strategic outlook. Skyworks' systems level expertise, operational scale, and deep customer engagement are enabling us to capitalize on the rapidly expanding mobile and IoT ecosystems, while positioning us for 5G leadership. That concludes our prepared remarks. Operator, let's set the lines up for questions.

Yes. Hey, congratulations. Tremendous quarter and guidance. Liam, let me ask you. At this time, usually in the year there's a lot of movement and a lot of concern amongst investors about the end markets and the different geographies. Would you be able to comment for us on where the inventory stands and what you are able to see in the marketplace at this time?

Sure, Harsh. For us right now, the market backdrop looks quite good and we continue to see an increasing push in mobile for higher complexity, higher performance, and that for us, as you know, translates into opportunity. It's not all with one or two accounts. We're starting to see some great penetration with leaders in China. We mentioned Huawei, certainly large players in the U.S., and large players in Korea are all exhibiting that. And then in parallel, and we talked about this for a while, but it's really coming together nicely that our broad business, our broad market portfolio continues to grow. Looking at a year-over-year basis, we're reporting a 10% to 15% year-over-year growth rate, which provides just another boost for us in terms of the top line.

And Liam, as my follow-up, would you be able to tell us what your largest customer was as a percentage of revenues?

It was slightly above 40%.

Thanks, guys. Congrats again.

Thanks, Harsh.

Hey guys. Thanks for taking my question and I'll echo the nice results. Liam, maybe just as you talked about you're happy with design progress at marquee customers. Maybe as you look at the rest of the year, where do you see the biggest opportunity gain content adding color by product or by customer region would be helpful.

Sure, Blayne. What we're seeing is very good success in keeping pace with our core architecture SkyOne architecture, switching architectures, but we're now augmenting this with new technology and kind of what I call an expanding product reach doing great work in carrier aggregation, both uplink and downlink. We have some unique solutions that we really pioneered in the industry around downlink receipt side, addressing CA and the complexities. We're taking that kind of engine and pushing that forward to names like Huawei and names like Samsung and some of the other China players. Our GPS technology is getting adopted now on a quite consistent basis. Wi-Fi has been moving to MIMO architectures in mobile and also in some of the broader markets. So, it's really quite a mix, and what I am really pleased about is our team's ability to look long at these challenges in mobile and then architect very unique solutions with customers hand-in-hand to finally deliver what makes Skyworks special. So, we see that trend continuing.

Thanks, Liam. I just wanted to ask on the gross margin, I know it's seasonally weak this period, down 100 basis points. If you can just talk about the puts and takes and then maybe your outlook for margins for the rest of the year.

I am very satisfied with our performance in the first quarter, achieving a gross margin of 51.2%. As we look ahead to the second quarter, we acknowledge that it is typically a slower period, with revenue expected to decrease by about $74 million to $75 million, which will impact the gross margin. However, we are confident in our ability to further improve margins in the second half of the year, as we anticipate revenue growth in the upcoming three quarters.

Thanks so much.

Thanks for taking my question. Just one more on gross margins pressure if I could. When I look at last year, there was a bigger revenue drop from December to March and I believe gross margins declined about 60 basis points. I think this time you're guiding to somewhat higher decline in gross margins. Is it just prudent factory management, utilization management, what is giving a bigger hit to gross margin this time versus last year?

Yes so, we're talking here a couple basis points right. And so we will see where we come in with the actual of Q2, but it's definitely true that last year there was some inventory build, but now for the last two quarters in a row, we have been working on an inventory reduction program. Again, it's all about the same level of gross margins as it's important for us to go and further drive gross margin expansion in the second half of 2017 as we see to strengthen the business and the revenue growth coming in.

Yes, and let me add to that Vivek. We were very confident that as Kris articulated, as we stepped through the second half fiscal and second half calendar year, you're going to see revenue and margin step up. So, we're committed to continuing that path.

Got it. And as my follow-up Liam, if you could just give us the breakdown you usually give between the different product lines and integrated mobile broad markets etcetera, but the bigger question is you gave a lot of detail around your IoT and automotive wins. When I go back to the 10K you had filed, outside of Apple, your sales grew about 8% last year or so. So, I am just wondering how are your sales doing outside of Apple in December and in March? If you could just give us some color on what your design win and progress has been outside of that large customer, whether it's by product or segmented or what have you, thank you?

Sure, our growth and success outside of our largest customers has been outstanding. Huawei became the number two account for us this last quarter. They're going to continue to be one of our leaders. We have our customer in Korea, who will continue to grow significantly into 2017 and our largest customers will set up very well for us as well as we address some very complex architectures with compelling products. So, we feel really good about that on the mobile side. And then let me remind you that the broad market portfolio from the infrastructure to IoT to early stages of automotive, all look good and the staff there are double-digit year-over-year.

Thank you.

Hi. Thanks for taking my question. My question is can you talk about what your expectations for the RF TAM growth for the industry and the flagship smartphone this year and maybe talk about what your expectations of growth is relative to that TAM? I know historically you've talked about that TAM growing at a 10% to 15% CAGR?

Sure, John. I think part of the driver there, as you probably know, is just really the upgrade cycle across the board. So, you have your most developed accounts that will be moving up with higher levels of complexity, bringing in more complex EA architectures, maybe even going MIMO on the radio potentially that's out there. And then you have your value tier players that are moving up maybe at a higher rate percentage-wise, but haven't quite hit the dollar value of the top tier. So, we address all of that. We're not a player that spends much time with the 2G or 3G market. So, the segments that we address, we think it is a double-digit TAM opportunity. One of the things that we've been going at Skyworks is we continue to innovate and elevate our portfolio. So, these products today that we're selling and enjoying share gains just didn't exist three or four years ago. So, we're continuing to push the envelope. There is also a lot of technology that flows between mobile and IoT. Our very strong portfolio in Wi-Fi, we have a Bluetooth portable. We have a GPS portfolio. None of that is really part of the traditional RF TAM, but it matters. Our SkyBlue technology for power management is becoming more and more pivotal for us in design wins. So, it's really a broadening suite. In overall TAM, probably 10% to 12%, but I think we have some unique opportunities to address it in our portfolio.

Great. Thank you. And my follow-up question is on 5G. Liam, you seem to be very optimistic about your prospects in 5G. If I look at some of the initial frequencies being discussed in 5G, they tend to be much higher than what we've even seen at 4G. Can you just break down the opportunities for you to benefit from content growth in 5G? And also, maybe can you talk about the role of TC-SAW within 5G given the higher frequencies?

Yeah, absolutely. So 5G is really going to be a game changer for the space. It could present up to 10 times the data rate that we see today in 4G. There are these three big themes when you look at 5G, you try to create a faster data pipe, lower latency, more efficient. It's about increasing bandwidth which is going to drive carrier aggregation of the click, higher modulation schemes that you're going from 256 QAM maybe to 1024 higher density as complexity. There is MIMO architectures that will scratch that pipe. All of these themes are very important, and if you think about frequency for it John, if you move up to some of these higher frequencies in 5G, they are very often TDD modulation, so time division duplex and TDD requires band pass filtering. It doesn't require duplex or so. We have a unique opportunity there to stretch our TC socket with only too higher frequencies in a TDD domain and gain additional share.

Great. Thank you.

Yes. Thank you. Question on growth this year, as you look through, can you give us some sense in terms of whether it's that leading smartphone OEMs in North America and Korea versus China, kind of where you think your growth will skew in 2017?

Sure, Craig. Yes, the growth should span across our larger customers. It should also span across kind of what I would consider a value Tier portfolio, the Oppo and Vivo and maybe to a lesser extent Meizu and Xiaomi moving up. Huawei, we mentioned today, is now a clear number two customer for us. They have really stepped up in terms of the content, the richness of content and the reach of technology, providing opportunity for us to deliver mid-band, high-band, low-band solutions, power management, diversity receive, addressed CA uplink, and downlink. So, we see a great opportunity with the value tier moving up and then the high tier actually increasing their content. Those are the important themes. And then the additional in parallel opportunities in broad markets continue to span, and we expect double-digit growth there for the foreseeable future.

Got it. And then as my follow-up on the buyback announcement, can you put that into the context in terms of as you evaluate internal growth opportunities and also just M&A in the industry?

We are committed to returning cash to our shareholders through our dividend and share buyback programs. In the first quarter, we returned $106 million by repurchasing 1.4 million shares and have initiated a new $500 million program. Historically, we have returned 40% to 50% of our free cash flow to shareholders, and we plan to continue this practice.

Great. Thanks a lot, guys. You guys have been seeing pretty good dollar content gain on flagship phones. I think around order of about 20%, and maybe address this a little bit, but I was hoping you could talk a little bit about if you expect to continue to see 20% growth, dollar content growth across flagships. But also, I wanted to drill down on the mid-range phones where it seems like there is a lot of opportunity. Could you see 20% growth at this point on mid-range phones or should we be looking at a different relative growth?

Yes, both aspects are essential for us. We're truly excited about flagship phones, as they present a great opportunity. We have discussed this technology and the mobile ecosystem extensively, which includes all the innovative applications driving changes in hardware. Each year, customers have varying cycles, and every generation of smartphone technology we address brings new challenges and opportunities for Skyworks, which fuels our growth. We have also expanded our reach into new technological areas for additional gains, and we are optimistic about this trend continuing. Our teams are performing exceptionally well with our most important customers, collaborating with the best talent on both sides to ensure success. This will be a significant part of our narrative. At the same time, there is a significant number of mid-tier smartphone producers that have not yet experienced substantial performance enhancements. For example, our long-standing partnership with Huawei has shown that once they adopted advanced technology in power management, Wi-Fi, and other complex systems, our revenue experienced a boost. There remains a valuable tier that has yet to make this transition, and we will work closely to drive that progress with them.

Okay. Great. And I was wondering if you could talk a little bit about China overall as a percentage. Huawei has shut up a lot, and so I was wondering if you could still quantify say China on its own as a percent as a bucket, and maybe with and without Huawei, and then if you're willing, what Samsung was as a percentage of revenue in the quarter?

Sure. Well, China all-in for us is about 25% of revenue, and it’s not just mobile. We have a pretty strong infrastructure position in China across Huawei, across ZTE and others. The mobile business is strong and then there is some other broad market portfolios there. So, it’s about 20%, 25% of the revenues there, and what was the second part of the question?

It was on Samsung, so Samsung just fell below the 10% level and we all know why that is. But we see a nice bounce back of the Samsung business already starting in Q2 and in the second half of 2017.

Okay. Thanks, and congrats on the good quarter.

Thank you.

Hi, thank you. I wanted to focus on the free cash flow. In the last couple of quarters, so now this is two quarters in a row, your free cash flow margin has gone up to 50%, and you laid out. Thanks for laying out the contribution from the working capital levers that you were able to put. The question is, how should we think about what is the steady-state free cash flow margin profile for the company, because it has jumped up significantly? And then second, kind of tied to that and I am not sure if you answered the question that was asked earlier, how to think about the buyback that you just announced vis-à-vis your appetite for M&A. Is that the sign that you're more comfortable in the business and returning shareholder value just via that or is it a sign of that plus the fact that you're now generating enough cash that you can make an acquisition as well as follow the step? Thank you.

So, I’ll take the first part on free cash flow, and I'm really happy with the performance there, especially in Q1. We’ve generated almost $0.5 billion of cash flow from operations. We have been focusing very strongly on working capital management, driving down DSOs, driving down days of inventory, and so that has helped a lot in the quarter. We're at the level right now that there is not a lot of improvement from that level now and so you won't see a repeat of those further improvements in working capital. But having said that, when you look at our business model, we will continue to generate a ton of cash every quarter going forward.

With respect to the M&A element there, just to remind everyone, we are very focused on our core franchise in connectivity. It's a significant market. There is a great deal of investment going forward there that has turned to be profitable for us and fruitful for us. But at the same time, we do evaluate M&A opportunities. We look at a lot of potential transactions. We have a very high bar with our financial consideration on that end. But we keep an open mind. We announced the $500 million shares repurchase program here today and we certainly have the opportunity if the right deal comes about to exercise an M&A transaction.

Hi, guys, let me add my congratulations. Liam, just wanted to first ask, the guidance was better than seasonal trend, what do you attribute that to? Is it sort of dollar content gains on the platforms? Is it the end of the inventory reduction program you mentioned earlier on the call?

Yes, absolutely, it's really about our ability to outperform on design wins that were consummated kind of in the middle of the prior year and now flowing forward. So, we were really excited about that the content reach again is expanding. We’re engaging more and more with fully integrated SkyOne Solutions rather than power amplifiers and filter separated. The carrier aggregation products that we put forward and diversity received are quite compelling in the market. And then again, the roster of IoT accounts that we’re bringing forward continues to grow and the content within those applications where maybe we started with a single Wi-Fi device. Now we have 3x3 devices. We’re embedding GPS more and more. We've got Bluetooth opportunities. So, the whole spectrum is expanded. And as we look at March, we feel very good about our guidance there as Kris indicated. Backlog coverage is solid. We’re fully booked and it’s a very balanced quarter as well.

Great, and then a follow-up, just you mentioned on the prepared comments a couple of high-band PAD wins, a scenario you’ve been underpenetrated. What's your outlook for that business going forward, and can you comment whether those are using outsourced pass filters or are you starting to be able to source some of those filters in the high band with TC-SAW internal capacity?

Yes, sure, sure, great question. Well as you know, when we go to market, our strategy is to sell a system solution. So, it input to output performance. So, it incorporates our highly customized and curated gallium arsenide technology, unique filtering technology, SOI packaging, testing. The whole engine is really a Skyworks signature and within that engine, we select the best process and the best technology to deliver what our customers want and outperform technically. So, this is not the first high band win. We have been clocking and clicking design wins here for a while. This one was meaningful for us. It did move us up to some higher frequencies above 3 gigahertz, and let me also remind you and I answered the question earlier that in some of these domains, there's a need for a TDD Time Division Duplexing versus FDD, Frequency Division and that can change the technology curve and the selection as well. So, it will continue to grow in that space. We’ll continue to grow in mid-band. We’ll continue to move our TC technology up higher and continue to lead in low band as well.

Great. Thank you.

Thank you. I guess the first question, you did not answer before, revenue breakout by broad market mobile and PA, and then I had another question.

Yes, so the broad market was approximately 25% of total revenue. Mobile was slightly above 60%, and so the rest power amplifier is slightly below 15%.

Great. Thank you, and then just a follow-up on BAW and given the trend in carrier aggregation to have front-end that are going to cover a mix of high-end low bands, is there a trigger point where you guys are obviously bullish on TC-SAW, but is there a trigger point where you decide you have to invest to add captive BAW and if so, what is that? I’m just wondering how you think about the decision to sort BAW on a merchant basis or to invest in it captively. Thanks.

Sure, well let me start with you mentioned carrier aggregation. We have an incredible portfolio in carrier aggregation. It has nothing to do with BAW. We can use TC-SAW. We can use other capabilities, organic capabilities and we're a market leader there without question. Looking now, there are opportunities where a higher frequency, high-performance BAW filtering makes a lot of sense, but we don’t sell discrete devices. So, our plan is to try to create the best engine, the best complete sub-system that meets our customer's needs. In many cases, we can do it with our organic technology. We do have a path with foundry partners to bring in BAW within our modules, if needed. Our TC-SAW capabilities continue to improve and if you look at spectrum, the most crowded spectrum is in the lower frequency bands. 700 meg up to 1.1 gig, very, very crowded. TC-SAW capabilities are ideal. Bulk acoustic wave can’t play at those lower frequencies and anywhere where some frequencies that are very high with extremely high performance needs where BAW’s critical. So, we’re not hindered by any of that. I think we feel very comfortable with our outlook. We have a lot of great technology choices. And if you look across the peer group, there are some players in our space that don’t in-house gallium arsenide. They go to foundry partners. So, it's not uncommon to have a few points of technology where you outsource to a partner and we do that on occasion, but invariably, we use our own organic products.

Thank you.

Thanks for taking my question. Congrats on the progress. Liam, maybe if I can say that last question another way, I guess can you just talk about your filter roadmap, your capacity plans, you had talked or maybe your predecessor had talked previously about specifically getting into BAW capability, and I guess with those foundry partners in BAW, are you capacity constrained or are you limited as to some of those sockets you can get into just from a market availability?

Sure, sure, well let me start with the organic product line. So, we have a really strong competitive edge with our TC-SAW facility, SAW Japan, as you may remember, this came about through our joint venture with Panasonic, which is now a wholly-owned entity with Skyworks. And we have the capacity to do about 3 billion units of TC-SAW per year, and we have room right now. We're not at full utilization, but we have a really strong pipeline going forward that’s going to enjoy the benefit of those filters. If you look at what we can do, it's just really again, it depends on the customers' needs, it depends on whether you are in a frequency duplexing domain or a time division duplexing domain. There are nuances there and so we try to match the best complete system with the customer needs. We do have BAW. We're completely aware of BAW acoustic wave technology and what it can and can't do. We have strong partners right now that we can bring it in on a foundry basis. We continue to look within the walls of our company to do it organically or construct devices that are just as competitive organically. Some of that is TDD. What I'll tell you today is we enjoy a robust opportunity with the filtering we have today augmented by our gallium arsenide or switching our packaging and our complete systems focus.

And then Kris maybe on the OpEx side, you constrained spending to this last year where revenue was in decline, but it sounds like you are getting right back into a bit of spending on IoT and other areas. Can you talk about where you're spending and what your plans are for this year?

Yes, absolutely. So Q1 came in at $113 million up $6 million from Q4, but keep in mind that we started accruing for incentives again, and so going forward, we target to have our OpEx on or about 13% of revenue. So, you will continue to see some modest increases quarter-over-quarter there as well. 13% is actually, I believe, world class, and so I feel good about that level of investments that we make. We definitely make sure that we continue to make the necessary investments to further diversify the business in the broader market in IoT, and we won't hesitate to make those investments.

Thanks. Congrats.

Thank you.

Great. Thanks for taking my question. My first one is on China, and I was hoping you could provide a little bit more detail on what trends you saw in fiscal Q1? If you can provide kind of a year-over-year number that would be great. And also, if you can talk about your expectations for fiscal Q2, again specific to China? And then on inventory, how comfortable are you today in terms of inventory in China both in the supply chain and also in retail?

Sure, sure, well, China of course is a meaningful growth driver for Skyworks. I mentioned earlier on the call it's about 25% of our revenue all in. And it's a market that consumes and exports, right. We have a lot of Tier 1 players that are moving up inside Huawei, and then it's an export market as well, and we can enjoy both sides of that. One of the things that has helped us in China is having a strong baseband partnerships, very tight coupling with Hisilicon captive to Huawei today. Also, a lengthy relationship with MediaTek, and MediaTek is really en route now to move towards higher levels of integration adopting SkyOne-like structures from Skyworks that are a big pop, and names like Oppo and Vivo continue to look strong for us. We don't do much at all with the 3G and 2G white box markets. So, our revenue is really driven around the market leaders. And I'll tell you that right now Huawei is the one that's really stepping up in content, and the others are moving along that curve. So, I think there are going to be some upgrade opportunities within 4G with some of the mid and value tier players within China.

And so, on your second question on inventory in the channel, we actually feel very good about the level of inventory in the channel. Most, if not all, of the inventory that we had with our largest customer has been consummated, and so we don't see any issues in terms of inventory in the channel.

Right, and that's China as well, so that's global in China specifically.

Okay. Great. And then as my follow-up, I had a question on your production ramp in Japan. I guess I am curious which inning we are in the ramp and what are the implications for gross margins going forward as we continue to ramp that facility?

Yes, the facility has significant opportunities ahead. It remains a strong advantage for us. We have a growing list of customers and a new array of frequencies to address. This situation continues to be a vital asset. Currently, our outlook suggests that we should manage capacity adequately for a while, depending on the scale of our design wins in the latter half of the year. The factory is operating efficiently with more customers taking advantage of our offerings, and the demand for integrated duplexes and integrated filtering has been outstanding.

So, we continue to insource some of the filter fabrication there as well. And we haven't really quantified that, but it's going to have a meaningful impact on our further gross margin improvement in the second half of 2017.

Okay. Great. Thank you.

Thanks for taking the question guys, and nice job on the execution. Liam, I wanted to ask an intermediate to long-term question; it's nice to see the business back to 8% year-on-year growth in the fiscal second quarter. So, the question is, as you look at the business, what's your view on the potential for this return to year-on-year growth could be sustainable year-on-year growth, and what do you think the right level of longer-term growth is for Skyworks given the portfolio mix that you have and the investments that you're making in the business?

Yes, no, I appreciate that and you're right. I think we weathered a bit of storm here in '16 and most of the clouds there have abated and it's not just market shares. We’re gaining share, we’re creating new content. We’re expanding in IoT and in broad markets and it’s meaningful and its sustainable. We’re confident that the second half for us should be a double-digit growth rate year-over-year. We think we’ll have strength going into the next fiscal year as well just given our outlook and our design wins that we've secured recently. So, we feel good about it. Again, there is room to go on the margin line. We’re going to work that. The demand side, let's say, looks very good and more diversified I should add.

Thanks for that. And then the follow-up, Kris, regarding the quarter, you may have mentioned earlier perhaps I missed it, but can you specify where the upside was on a segment basis? It looks like on a revenue mix basis it must have been coming from integrated mobile, but is that correct or was it somewhere else?

Yeah, on a sequential basis mobile was the strongest growth driver, absolutely.

Thanks guys.

Hi everyone, congratulations on the quarter. I noticed you increased CapEx. Could you provide more details on what percentage of that is allocated to TC-SAW? Also, Liam, could you update us on your newer GPS solutions and SkyBlue? Thank you.

So, the vast majority of the CapEx was actually in our backend facility where we continue to expand our capacity.

Right. Tony, and also GPS, GPS has really been prolific here over the last two or three quarters, and forward-looking outlook as more and more devices now location services matter, highly precise locations matter. And we have some really unique things that we do in our Mexicali factory to shield and kind of manage the complexity of GPS and the size requirement. So, that continues to roll out and it’s a big driver in IoT. So, we have attachment across mobile, but the number of IoT nodes that we could leverage with GPS I think is quite compelling, and that's in other case where we're just starting to rack up the design wins. We have really good technology. It takes advantage of some of the core IP that we have in the amplifiers that we have today in cellular and trying to design and shape those for other applications.

And then as a follow-up, I know you guys in the past talked about a mid-term goal of 52% gross margins. Has anything changed in your view in getting there?

No, absolutely not. We have our goal to get to the 53% gross margin. We have 30% operating expense and that gets you to 40% operating margin. And so, we're committed to that and driving the whole organization very hard to go and execute towards it.

Great job, guys. Thank you.

Thank you.

Hi, thanks for taking my question, and Liam, a good job on the execution. My question is on the guidance, can you just qualitatively talk about how do you see the mobile and the broad markets in the March quarter relatively they're down 8% sequential decline?

Sure. Yes, the broad markets in IoT space should be up about 10% to 12% roughly. If mobile is not typically bullish here in the March quarter, we do have unique customer dynamics where some customers in fact are up even within mobile and that’s all about content. So, it’s not a particularly unusual signal. One of the reasons why we’re doing better than seasonal is just again a higher growth rate in the broad space and also with one of our larger customers in Korea content step up, which also provides a sequential gain in revenue.

Yes, first of all again, I’m very pleased with the fact that we have been able to drive down inventory days. Remember in Q3 it was 108 days. It can down in Q4 to 94 days and we now are at 86 days. Again, Q1 is a seasonally soft quarter and we do see a lot of strength in our business in the second half with double-digit year-over-year growth in the second half. And of course, the second quarter we are going to prepare for that, and so we are increasing our factory loadings and as a result of that, you will see an increase in inventory during the March quarter as well in absolute dollars as in days of inventories.

Hi guys. Just looking at inventory looks like it stayed flat through the December quarter. How do you see inventory exiting the March quarter?

Yes, first of all, again I’m very pleased with the fact that we have been able to drive down inventory days. Remember in Q3 it was 108 days. It came down in Q4 to 94 days and we now are at 86 days. Again, Q1 is a seasonally soft quarter and we do see a lot of strength in our business in the second half with double-digit year-over-year growth in the second half. And of course, the second quarter we are going to prepare for that, and so we are increasing our factory loadings. As a result of that, you will see an increase in inventory during the March quarter as well in absolute dollars as in days of inventories.

Got it, and just one follow-up here on the gross margin. I saw you mention that you still see a 52%, 53% gross margin target. The gross margins have stayed in that 50%, 51% for the last four quarters. Can you give us what the puts and takes are? Is that a 6 inch to 8 inch transition or how do you see the margins work or drive that? Thanks.

So, the present group margin expansion is basically coming from three ways. First of all, and I repeat myself here, but we do see drastic revenue growth in the second half of '17 and of course revenue growth helps with the fixed cost absorption and the margin expansion. Secondly, we continue to execute on our cost reduction programs and operational efficiencies that will continue to have further margin improvements, and then last and we talked already a little bit about that, we continue to ramp the filter factory, continuing with our insourcing into the filter factory and that will also further drive margin improvements.

Hi, this is Josh Burkhalter on behalf of Rick. Congratulations on the great results. I wanted to re-ask a question that was asked previously, but on a longer term. So, in the medium term you mentioned you think you can grow above the RF industry in general. I was wondering how much of that do you think is derived from broad markets versus mobile?

Sure, sure. We’ll take a shot at that. Well, the broad market opportunity is more unbounded right. There is really kind of an infinite set of customers that we're addressing and moving the dial across the board whether it be just adding the new applications and new customers. And then even within IoT, there's a content opportunity where the customers and consumers they get used to a low range technology want to augment it perhaps with higher-end solutions maybe they had MIMO and Wi-Fi or maybe they go from a wearable technology that is just Wi-Fi and then it stretches to LTE. So, there is an action there that I think has tremendous upside and really the market continues to expand. In mobile, mobile is more characterized. I know there's a lot of detail on the unit count. There is a lot of detail on customer innovation and interaction, but what is missed in mobile is again this tremendous economy that relies upon the hardware and relies upon the kind of technology that we offer and so what we see there, and it’s been increasing, is a continued push for performance-oriented solutions and every year there is a different requirement, there is a different opportunity for us to expand upon may be its frequency bands, may be its bringing in new opportunity for us to expand upon maybe it's frequency bands, maybe it's brining in new technologies. We talked about Wi-Fi and GPS; they're happening, and they're happening in some cases. Diversity we see as a new solution for Skyworks. So, all that continues to move and then we have this major 5G upgrade cycle on the horizon. It's a few years out, but Skyworks will be very well positioned there and when that does occur, you will have the backward compatibility for 4G and 3G. So, you'll basically have some duplication of content or some enrichment in content without the legacy going away. So, there are a lot of things on the horizon if you look out. Again, the near term looks good. We talked about it, but if you think long about where the markets are headed and the continuous demand for mobile technology and mobile data and the economy that we've been speaking out far, it looks promising.

Okay. Thank you. And then on the last earnings call, you mentioned you had some mid-band wins in China and also selling some SkyOne integrated products to MediaTek customers. Are those meaningfully contributing and how should we expect, how are you viewing the traction there so far? Thank you.

Yes. Good question. They're contributing, but there's a long way to go in terms of the adoption. While we've talked a lot about, they're embracing this technology now, and it's been great for them, it's been great for us, and I think it's going to propel their business with the performance-driven product, a number of products, and we're seeing that move up a bit. MediaTek is a partner of ours. We're working with them and their reference designs to continue to bring integration to the masses in China. Some of the value tier players Oppo and Vivo for example are moving along that curve, but they're still not to where we expect them to be. So, that's a continuous process, and that doesn’t mean units have to go up. That's really the content, and again, there is a big, big opportunity for us value tier moving up to mid-level and high levels of performance and bringing the kind of technology that we have into their products.

Yes, thanks for sneaking me in, and congrats on the quarterly execution. I wanted to kind of maybe ask within broad markets a few questions. I guess first can you help us understand some of the more let's say higher growth segments within broad markets and then compare that with the more legacy products for, for example, base stations as we think about growth in that in this 2017?

Sure. I think the highest growth categories are really around the connected home high-speed access points and routers. You got these HD cameras. We have design wins with the whole Google net suite. We have design wins with the Netgear, Linksys, Ubiquiti, Wi-Fi mesh. That continues to roll and the content in some of these access points and routers and gateways could be very high, can be double-digit content. A lot of it is Wi-Fi, and there are some other switching technology as well. We're then taking that and spanning out into a variety of newer opportunities early innings with products like drones and we have designs there. Automotive, we think could be a phenomenal catalyst for us for semiconductors in general and for Skyworks. If you think about what really matters in an autonomous car, the connectivity piece right. We have cars today. We're all driving cars, but connectivity is going to really matter. So, in order to make that market work, we're going to need very aggressive 5G solutions, massively expanded data pipe for both the transmit and downlink. All of that's going to be incredible opportunity for us and broad markets ever that's going to be out there a few years. Cellular infrastructure has been a market we've enjoyed for a while. It's not the fastest-growing market. It's solid from a market perspective and we have a number of players there that we're engaged with and that also will go through a 5G upgrade cycle.

Okay. Thanks for that, and then within broad markets too, I noticed in the recent investor call it last year, you talked about your various, let's say tools in your tool chest, and one of them you mentioned in the presentation was actually GaN. Just curious where do you stand again in terms of productization and strategy with GaN, and maybe early it seems like it's early within GaN, but wanted to kind of ask more of a longer-ranging question relative to that part of your portfolio.

We have within the portfolio. It's not a significant piece, but it does play in some of the infrastructure markets. It plays in some optical products. We have a little bit of business there, but we monitor the right technology for the application and for the customer need. The gallium arsenide technology that we have, as you know, we have two very significant fabs are really highly customized and curated gas solutions that proliferate our portfolio. We do have some opportunities with foundry partners to bring in SOI and some other variants around the semiconductor space. And we had access again as needed. So, it's not a mission-critical technology. We have access to it. It may play a little further out here in 5G, but at this point it's on our radar screen and it's an opportunity.

Okay. Thanks for the color and congrats again.

Thank you.

Thank you, operator, and thank you all for participating in today's call. We look forward to seeing you at upcoming investor conferences and other events during the quarter. Thank you.