Skyworks Solutions Inc (SWKS) — Q2 2020 Earnings Call Transcript

Thank you, Sheryl. Good afternoon, everyone, and welcome to the Skyworks' second fiscal quarter 2020 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 include non-GAAP financial measures, consistent with past practice. 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 Liam.

Thanks, Mitch, and welcome, everyone. Before we begin the overview of the business and our Q2 results, I wanted to provide an update on the COVID-19 outbreak, impacting individuals, companies, governments and markets across the globe. Our thoughts are with the millions who have suffered the effects of this global pandemic. At Skyworks, we are deeply engaged with our own employees, a team of more than 9,000 deployed across the globe. Since the crisis began, we have taken early and aggressive actions to protect our people. We've implemented multiple safety protocols, including social distancing, daily temperature testing, and heightened sanitation standards. In addition, we initiated rotating shifts at our global manufacturing sites. The implementation of these protective measures has collectively allowed Skyworks to better safeguard employee health, while simultaneously supporting our business and manufacturing sites worldwide. Finally, an update on the temporary suspension of activity in our Mexicali facility. After working in close collaboration with state and local officials in Mexico, we were given permission to resume operations last week. Assuming no further interruptions, we do not expect the temporary suspension to have a significant impact on our business going forward. Now, looking at the second quarter in more detail. We reported revenue of $766 million, in line with our revised guidance. We produced a gross margin of 50.2% and an operating margin of 32.5%. We posted earnings per share of $1.34, and we generated strong operating cash flow, totaling $280 million in the quarter. Further, our design win momentum reflects our execution across a rapidly evolving business environment, one in which our wireless technologies are playing an essential and critical role. We are enabling markets from telemedicine to emergency response, remote work, online education, real-time security, streaming entertainment and safe store-to-door food delivery. Our mission of connecting everyone and everything all the time has never been more relevant. During this time of social distancing and decreased travel, the technology Skyworks provides has become a primary means of connecting people all over the world. The rollout and adoption of 5G and other advanced wireless technologies, such as Wi-Fi 6 and Enhanced GPS have become the pillars in support of the vast connected economy. Skyworks is proud to play an integral role in making these vital technologies and essential connections a reality. During the March quarter, we expanded our engagement with leading customers, securing key design wins across numerous applications from the mobile phone to wireless infrastructure, IoT, automotive, machine to machine and medical applications. In mobile, we are leveraging our Sky5 platform across multiple flagship 5G launches, including Samsung, Oppo, Vivo, Xiaomi and other Tier 1 players. And expanding our technology reach across our customized Diversity Receive platforms with new 5G centric solutions, driving sharp gains in design win count. In IoT, we are supporting high performance 5G and Wi-Fi-enabled tablets specifically developed for health, safety and telemedicine applications. Across mobile operators, we are powering 5G hotspots with Verizon and AT&T, supporting the expanding work-from-home trend. We're extending our market leadership in Wi-Fi 6 with home and enterprise gateways at Cisco. We're enabling home security applications at Honeywell and ramping remote patient monitoring systems with GE. We're also launching asset tracking and fleet management solutions with Juniper and Blackberry. Moving to the infrastructure space. We're supporting 5G Massive MIMO and small cell base station deployments across the U.S., Europe and Japan. And in automotive, we're accelerating connectivity content with leading brands including Volkswagen, Renault, Hyundai, and Nissan. These highlights demonstrate our technology leadership underpinned by a diverse and growing set of critical product categories, resolving increasingly complex architectures and preparing our customers for the performance gains demanded in 5G. In these unprecedented times, our existing technologies and connectivity protocols are processing extraordinarily high data traffic. This explosion in data consumption is taxing networks with real-time video, high-speed processing, streaming content, and a long list of critical services, all dependent upon seamless, reliable and ubiquitous connectivity. To illustrate how the pressure on the network capacity is intensifying. Just over the last few months, we've seen visits to Amazon's website rise more than 30% year over year, Zoom Video Conferencing passing a milestone of 300 million daily participants, and Microsoft Teams platform logging a single day record of 2.7 billion minutes. And now, with 5G just beginning to launch, the average user today is still working with legacy technologies, showing system weakness in this high data demand environment. Clearly, more than ever, always-on connectivity is paramount. Skyworks and our partners in the mobile and wireless ecosystems are anticipating and accelerating the development and delivery of much-needed cutting-edge technologies led by 5G, Wi-Fi 6, Enhanced GPS and other networking protocols. As Skyworks and the world navigate this challenging environment, our focus will continue to ensure streamlined, high-speed connectivity, delivering a path for reliable, constant and safe communication, reaching all of our customers and their varied applications. With that, I will turn the call over to Chris for a discussion of Q2 and our outlook for Q3.

Thanks, Liam. Skyworks' revenue for the second fiscal quarter of 2020 was $766 million, in line with the March 4 updated outlook, where we reduced our revenue guidance for the COVID-19 impact by approximately $45 million. At $766 million, revenue is down 5% year over year. However, excluding Huawei-related revenue in both Q2 of fiscal '19 and fiscal '20, revenue is up 4% year over year, despite the negative impact from COVID-19. Gross profit in the second quarter was $384 million, resulting in a gross margin of 50.2%. Operating expenses were $135 million, flat year-over-year, as we continue to prudently manage OpEx while making the necessary investments to accelerate the future growth of the business. We generated $249 million of operating income, translating into an operating margin of 32.5%. Other income was $4.5 million, and our effective tax rate was 9.4%, driving net income of $230 million or $1.34 of diluted earnings per share. Turning to the balance sheet and cash flow. Second fiscal quarter cash flow from operations was $280 million and capital expenditures were $60 million, resulting in $220 million of free cash flow on $766 million of revenue, translating into a strong free cash flow margin of 29%. We paid $75 million in dividends and repurchased 3.2 million shares of our common stock for a total of $284 million. During the last 12 months, we have returned 92% of the free cash flow back to the shareholders through a combination of dividends and share buybacks. We ended the second fiscal quarter with cash and investments of $1.1 billion, and we have no debt. Now, let's move on to our outlook for Q3 of fiscal 2020. Given the supply chain and demand disruptions associated with COVID-19, visibility is limited for the June quarter, resulting in a wider revenue range compared to the prior quarter. For the third fiscal quarter of 2020, we anticipate revenue to be between $670 million and $710 million. We expect gross margin to be approximately 50% and operating expenses flat with Q2 at approximately $135.5 million. Below the line, we anticipate roughly $2.5 million in other income and a tax rate of 9.5%. We expect our diluted share count to further reduce to approximately 170 million shares. Accordingly, at the midpoint of the revenue range, we intend to deliver diluted earnings per share of $1.13. Lastly, I would like to highlight that the Company declared a cash dividend of $0.44 per share for Q3, and we intend to continue with our share repurchase program. With that, I'll turn the call back over to Liam.

Despite the macro headwinds, Skyworks remains uniquely positioned as a market leader in the most important sectors in technology, capitalizing on our strength in 5G and other advanced wireless protocols. We have made the critical investments in human capital, intellectual property and manufacturing scale to usher in a new era of ubiquitous connectivity. Our relentless focus on solving our customers' most challenging problems positions our partners to win by resolving complexity and advancing user experience. Skyworks’ customer first philosophy drives our product roadmaps, where we leverage unique, customized, system-based solutions, purpose-built to offer interoperability, and unprecedented levels of performance. Powered by the strength of our balance sheet and our cash generation capabilities, we are funding the investments that drive sustainable growth, differentiating Skyworks as both the leading technology innovator and a strong provider of consistent cash returns to our shareholders. That concludes our prepared remarks. Operator, let's open the lines for questions.

Thank you for taking my question. I actually had two, one on the June quarter, and then second on the calendar second half expectations. So, Liam on the June quarter, I was hoping you could give us some more color. I know it's a little early, visibility is limited. But, how have bookings played out so far? If you could give us some color by geography and mobile versus broad markets. And there's some glimmers that China might be recovering. Have you seen that in your business? Just some more color around what you have seen so far in your June quarter?

We have observed improvements in demand as we moved through March and into April. The beginning of the year was challenging for the entire industry, but we have continued to secure design wins, particularly those initiated at the end of 2019, which are beginning to gain traction. Although we faced a difficult period at the end of March, we have noted considerable improvement as we entered the first month of our June quarter. While there are still some visibility challenges, we remain confident in the guidance we provided for the June quarter, particularly the lower end of that range, and we believe there is potential for greater outcomes.

Got it. And then, Liam, on the second half, how are you thinking about the seasonal ramps? Because what we have heard from some of your peers in the mobile supply chain is that overall phone volumes are lower, but the 5G unit expectations are kind of hanging in there around the 170 million to 200 million unit number for this calendar year. Is that consistent with what you're hearing? Just in general, how should we think about your seasonal ramp going into September, right, which tends to be your strongest sequential growth quarter? Thank you.

Yes, great question. So, a couple of things. We have high conviction and are really happy with the design win positions we have going into the second half of the year. It is really about timing, Vivek, it really is. We think the appetite from the consumer is very, very high. There were supply chain issues earlier in the year for everybody. And I think once those supply chain issues resolve, and they are resolving, the consumer then has an opportunity to capture that demand with high-end products. So, we have very good position with the leading players both in the U.S. and abroad. And we do believe that the second half calendar year and Q4 for us are going to be much stronger than what you see in Q3.

Kris and Liam, I just wanted to get a better sense for your operating plan. How are you modifying it in light of what you're seeing in COVID? And specifically, how should we be thinking about OpEx beyond the quarter, CapEx, as well as capital allocation? Are you going to with your share buyback? So, I just wanted more color on those. And I had a follow-up.

We are maintaining our operating plan and will continue to focus on driving top-line growth. As Liam mentioned, we anticipate significant strength, particularly in the second half of the calendar year. We are keeping our margins above 50%, and as the business grows, we expect improvements in gross margins. We are operating efficiently and will maintain this approach while managing expenses. We are implementing some reductions in discretionary spending but will still invest in R&D and sales and marketing to support our customers and growth in the latter half of the year. Regarding capital allocation, we will adhere to our CapEx plan and look for potential areas to make reductions without hesitation. However, most of our capital expenditures will focus on new technologies, including the BAW filter and complex assembly processes. These investments are necessary to support the ramp-up of 5G and other initiatives. Lastly, we plan to return the majority of our free cash flow to shareholders through a combination of our dividend program and ongoing share buybacks.

Okay, sounds good. Sounds like you're very confident about at least things that you can control, in light of what we're seeing. I had a very quick follow-up on the inventory days. Days went up a lot. We were expecting March in absolute dollars to go up. Is there a risk of obsolescence on the inventories side?

No. So, from an inventory point of view, we are running slightly higher than normal. We actually increased inventory in the March quarter with $44 million and days of inventory is now at 165 days, which is slightly higher than normal. But, it is by design. We have increased our buffer stocks, we have increased even finished goods inventory. We kept the loading in our factories. Again, it's all in support of the ramp in the second half. And we want to make sure we continue to deliver on time to our customers. It actually came in pretty handy. As you know, we had a temporary suspension in our Mexican factory. We were able to continue to deliver products to our customers. Luckily, that situation now has been resolved, while we are building this inventory that has very few or little risk from an E&O point of view. And despite all of that, we continue to deliver a very strong free cash flow.

Thank you. For first question, can you break down the revenue from the various segments? And specifically with the broad market business, if you could talk about the near-term trends that you're seeing in that business as you go into June?

Yes, Chris. So, in the March quarter, mobile was approximately 70% of total revenue, which was down mid-teens on a sequential basis, which is somewhat in line with normal seasonality. And it was flat on a year-over-year basis. Of course, that includes the reduction in Huawei. Because if I exclude Huawei in Q2 of fiscal '19 and Q2 of fiscal '20, the mobile revenue was actually up 9%, almost 10% on a year-over-year basis, driven by content gains, as well as early 5G ramp with our Chinese customers. So, our broad market business was approximately 30% of total revenue in the March quarter. It was down mid-single digits sequentially. But, we do expect it to be up sequentially into June quarter, in part driven by the work-from-home, learn-from-home trends that result in strength in PC, tablets, wearables, Wi-Fi hotspots, the adoption of Wi-Fi 6 and all the wireless protocols.

Thank you. As a follow-up, could you provide more details about the China business? Specifically, it would be helpful to distinguish some production issues your customers faced in the March quarter when their facilities were shut down. It's clear that things have improved since then. To the extent you can share, what is the current demand situation and how are those customers performing in selling phones as they adapt to what might become the new normal in China?

Certainly, Chris. We're observing that the Chinese market is recovering more quickly than some competitors in the U.S. They were most affected by the virus initially but are now leading the recovery. We're seeing benefits from major brands like Oppo, Vivo, and Xiaomi, along with emerging growth in 5G from Samsung. Currently, while the market isn't quite at last year's levels, it's beginning to improve. The penetration of 5G is robust, and the pace of growth is increasing. We're noticing a rise in unit growth, but the content within those units is very important to us. There has been significant improvement in 5G content in China. It’s crucial to maintain backward compatibility with 3G, 4G, and now 5G, which presents a solid opportunity for us. However, this also adds complexity for the customer, and our goal is to simplify this by leveraging integrated solutions like Sky5. We're witnessing that progress, and Chinese brands are gaining traction. There is still considerable potential for growth from our current position, and they are showing promising advancement.

Just following up on the broad markets business, any additional context you have in terms of supply versus demand? Certainly, there's been some demand impact here, but also, customers kind of looking to secure supplies. So, just curious to how you're seeing that play out in your broad market business?

Sure, Craig. You're right. I mean, there was definitely a period of time and it's still being resolved with some imbalances in supply and demand. There has been quite a bit of demand in broad markets for technologies like Wi-Fi, Wi-Fi 6, even some of the GPS technologies, and we deliver those. So, we fortunately do the lion's share of our business in-house, right, under our watch in our own factories. So, we've been able to be more active, more agile and executing to those demands. And a lot of those demands, as Chris mentioned, were driven by new applications, work-from-home, again, all of it, the services that are starting to create the opportunity, right, we're seeing today, whether it's safer home and entertainment, whatever it may be, the technologies that we make, not just 5G, but the Wi-Fi and GPS are really moving fast. So, we're getting to a point where the supply and demand intersection is closing. But, we do see a meaningful change in user appetite for the technologies, right? I think, you're going to see more and more folks now truly adopt telemedicine or truly adopt video conferencing, some of these things that were kind of nascent and really hadn't been played out. So, we're looking forward to that. And the Wi-Fi 6 technologies, as I said, are probably the leader in broad market. But, we're also generating new wins with very, very important customers globally, that three or four years ago weren't on our list, names like GE, names like Honeywell, Raytheon to continue to really broaden that reach and that side of the market.

Got it. And then, just Liam just for follow-up to the flagship phones in the back half of this year. Can you talk about just kind of year-to-year how you're feeling about kind of that content?

Sure. As I mentioned, we have some key players launching 5G, and the 5G narrative is centered around added content and increased complexity. It will soon become clear that our solutions are performing exceptionally well, and our content opportunities are significant, which we have successfully acted upon. Some of these developments haven't made it to the market yet, but we are confident in our direction and progress, which is encouraging. We expect to see progress in Q4 and into our fiscal Q1, specifically the December quarter. Therefore, from September to December, you can anticipate a lot of that momentum to emerge.

I'm just curious. You went through your own factory shutdown, but the handset OEMs went through that issue in Q1, you had an up-quarter. It's hard to disseminate, because you're obviously I think, coming off a very low level and maybe gaining some sure. But I'm just kind of curious your perspective on an Android market. Was there any inventory that was built in Q1, and does that rectify itself in Q2 with this guidance?

Yes. I believe we are currently normalizing and starting to see significant improvements in the supply chain. As you mentioned, the transition from February to now has involved considerable supply chain disruptions across the board. We are fortunate to have our own facilities, which allows us to manage our operations fairly well. However, the broader industry is facing challenges, particularly in certain locations and factories that are struggling to find employees due to health-related issues. Fortunately, I sense that these issues are beginning to ease, and we are observing positive signs of improvement. Looking at the Android cycle, we are in a strong position with MediaTek, which has been a vital contributor in Asia and other emerging markets. We are also seeing promising developments with companies like Oppo, Vivo, and Xiaomi as we advance and as the supply chains continue to stabilize, especially in China and other Asian regions. We believe there is potential for growth in this area. Overall, there is a significant global demand for 5G technology, but consumers have not fully tapped into it yet due to supply chain challenges and other disruptions, including the effects of the stay-at-home period. This situation will improve, and the demand for technology will increase. Throughout this challenging time, we've recognized that our wireless devices are essential for communication and work, and the demand for this technology will only grow. We are excited to contribute to the advancement of these technologies in the future.

I would like to inquire about your BAW efforts, especially given Qualcomm's strong confidence in their SAW technology, and the fact that the Broadcom asset ultimately did not get sold. Can you provide details on what you are currently shipping for BAW? Additionally, as you look ahead to the latter half of the year and into the next year regarding shipments for mid to high band modules, what are your expectations for Skyworks in that timeframe?

The score is improving significantly regarding BAW. We have secured some important design wins and are actively shipping products. The device count is increasing substantially, which is expanding our customer base. Additionally, volumes and units are rising among some key strategic customers. Recently, we surpassed 100 million units of BAW-enabled devices, which we achieved about two weeks ago since the launch of our BAW technology. We're very pleased with the launch; it's taking some time, but we're accelerating progress. We have opportunities with new customers, and we have already won designs with strategic customers. We'll continue to develop this technology using our in-house engineering teams, fabs, and IP to provide solutions that our customers desire.

Thank you very much. Liam, you mentioned the sharp gain in DRx modules, content or design wins, based on 5G content. Is any of that due to finally getting a transmit function in DRx modules to support MIMO or CA or diversity, or is it still on the receive side? And are you in production on the BAW Duplex yet?

Yes. I mean, it's a great question. So, the DRx category, as you know, has really been an incredible performer in mobile devices, capitalizing on the downlink. And there's so many variants, Ed, for us. So, we have a really wide portfolio in that technology. And we are starting to see greater usage across the board. There are so many different versions, whether it's DRx DSM, ultra-high band, mid-band, you can go across the board, and we're able to play in each one of those categories. And, it's a technology that requires very strong, very powerful filtering, the ability to work collectively with potentially LNAs and other technologies, and then integrate in a way that works for the customer. So, we're doing really well there. And we do want to continue on the BAW side to advance the technology into higher and higher bands, and capture more and more of that pie. And I think, we have some important customers and accounts that work with us that collaboratively we're trying to get to that solution together. But along the way, the DRx solutions are gaining a lot of share, a lot of traction. They’re extremely valuable to the customer. It's a high-end solution at very fair pricing, and allows the customer to get a great end solution. So, that technology continues to move. The bulk acoustic wave technologies, again, continue to move up. We’ve demonstrated some volume now. But we still have a lot of room to move from here. I mean, by no means have we captured all the business. There’s a lot out there for us to go after.

On ultra-high band, the sub-6 bands in China require both 77 and 79, while T-Mobile is utilizing Sprint's Band 41 for 5G. We are observing the addition of up to five new transmit-receive chains in some high-end smartphones. How many of your customers are prioritizing size, favoring your dual-band solution over the flexibility of choosing individual bands, similar to the approach in China? I'm interested in understanding which solution is preferred and whether you are seeing a significant number of customers opting for high-end solutions that require more integration. Thank you.

Yes, that's a great question. You're right that n77 and n79 are currently very important in the 5G landscape. Additionally, you bring up a point I didn't mention. The integration process is crucial; it's not just a neat packaging feature. It's fundamentally about enhancing the product's density. Kris pointed out that some of our capital investments focus on advancements in packaging. We are, of course, developing filters and striving to improve frequency capabilities without filtering technology. However, exceptional packaging technology is also necessary to achieve miniaturization. As we incorporate more technology, including 3G, 4G, and incremental 5G elements, it becomes increasingly complex both in terms of transmission and reception. Therefore, the technologies we possess are essential, and customers are keen to integrate them. While there is still some demand for discrete solutions, that trend is fading. The new technologies in 5G will center around densification, packaging, and delivering all these components to customers in a user-friendly format.

My first one was on your exposure in China. Kris, I think, last quarter, you guys were kind enough to size your business with the non-Huawei, the OVX camp at around $100 million in the December quarter. I'm curious how big those guys were in the March quarter and what the outlook was into June? And related to that, we're getting quite a few headlines related to the U.S.-China trade relationships. Any of this kind of potentially impacts you guys down the line? Then, I have a quick follow-up.

Yes. Our China business remains on or about 20% of total revenue. And we definitely see strength with Oppo, Vivo, Xiaomi as they ramp their 5G phones with strong Skyworks content in it. Unfortunately, the business with Huawei remains at a much lower level than it was historically, although we are able to continue to ship under the ban, which is still effective right now.

Got it. And then, a quick follow-up on gross margins. I was positively surprised to see gross margins in the quarter, essentially come in line with guidance, despite lower revenue. And I guess similarly into June, you're guiding to essentially flat gross margins with a reduced revenue outlook. So, I guess, I was curious, what were some of the offsets in the March quarter? Kris, you spoke to maintaining factory loading, so maybe that's explanation. But were there any positives that sort of materialized in margin, and what are some of the potential offsets into June?

No. I mean, we continue to work really hard to improve gross margins. And as I talked about that before, one of the most important things is of course is advancing the technology, higher complexity, more value addition, new products, especially with 5G, Wi-Fi 6 that we bring to market. And typically, those higher complex type of products demand a higher gross margin. And so as we bring those new products to market, you will see a boost from that. Unfortunately, yes, there is some disruption in the supply chain and some inefficiencies, as a result of COVID-19. And so, that's why we are not at 53% gross margin today, but we hope that once all those disruptions get out of the supply chain and we start ramping the business, we will see some nice further improvements on the gross margins.

Thanks for taking the question. And congrats on the financial performance and Liam on the internal BAW milestone, that's a big one for the company, given your support there. What I wanted to do with the first question is just to make sure I'm looking at what you're seeing with integrated mobile correctly over the say, the 12 to 18-month time period. So, we have been shipping Sky5, we continue to do that and it sounds like it broadened our OEM base in the quarter. And so, that sets us up well for the back half. You've got 5G Diversity Receive. And I wasn't clear if you were saying that was going to ship in volume in the second half, or really for next year, but in the second half, our 5G unit should at least double, half on half for the industry, just given the projections that are out there from some of the big guys. And then, next year, hopefully, we don't have a situation where we lose 10% of our sales days due to a virus crisis. So, help me, one, understand that timing for some of the new products is somewhat, as I outlined in terms of their impact on financials. And what does that mean for next year's growth? Are we solidly back in double-digit growth next year for integrated mobile?

Yes, those were great questions, and there are many angles to consider. I’d like to share our current perspective and how we see things evolving. We're optimistic about the designs and deals we have in place. Many of our products have yet to ship, and you raised some important points. Sky5 is gaining strong traction and has significant potential. The Diversity Receive is being delivered across low, mid, and high bands, utilizing impressive new technologies. As we expand into broader markets, we're noticing a positive uptick in Wi-Fi technologies, particularly Wi-Fi 6, which are high-performance products rather than entry-level ones. The current work-from-home trends and new applications triggered by this environment are likely to persist, indicating ongoing demand. In terms of the larger picture, the numbers are a matter of timing. We anticipate an increase in revenue with high confidence, especially as we emerge from a low point; Q3 marks a turning point for us and we expect to see growth from here. It’s really about the pace of change, revenue growth, and timing, rather than focusing on short quarterly results. We are confident in our trajectory. Our products are superior, with faster and more reliable 5G technologies and improved latency. We can adapt to IoT needs, and while the COVID-19 pandemic was unforeseen and did slow our business, we are starting to rebound and remain optimistic about the future. Our manufacturing capabilities are strong, and we maintain close communication with our customers to align supply and demand effectively. This presents a great opportunity for Skyworks. We have in-house facilities and develop at the chip level, integrating everything at the systems level, allowing us to offer flexible solutions tailored to our customers' varying market needs and constraints. Although progress has been delayed, we expect to see recovery starting by the end of this quarter and continuing into Q4 and the second half of the calendar year.

That's helpful and then the follow-up is just on the broad markets, and one of the comments from your recent remarks and earlier. As you went through some of the applications for which broad markets is seeing good demand and has some runway, whether it'd be auto or others. One of the things I don't think I'd heard previously but was on today's call was telemedicine. And so, the question is, in the world that we're now in, beyond telemedicine, are there other application areas that are coming into the broad markets portfolio as new incremental TAM for units? And if so, what would they be.

The dynamics of video conferencing are remarkable, and I'm sure everyone on this call has been using it lately. In my view, even the best current technology isn't sufficient. I believe there will be a growing interest in this area that will create unique opportunities for us. It's crucial to recognize that the service community is becoming increasingly significant right now. We're witnessing how the world has changed. We've mentioned statistics about platforms like Microsoft Teams, Zoom, and trends such as food delivery that emerged during the pandemic. I don’t think these trends will disappear even after COVID-19 is over; I expect some behaviors to persist, and many of these changes are beneficial for our business. Consumers are likely to increasingly depend on wireless and remote technologies in various aspects of their lives, including education, healthcare, and entertainment, all of which we can support with the wireless technologies we offer.

Hi. Good afternoon. Thanks for taking the questions. I guess, the first question as it relates to COVID-19 impacts and in this case on the supply chain, it's good to see obviously Mexicali coming back. But there's obviously a lot of talk that there could be multiple phases of this virus. I'm wondering, I guess, what percentage is coming from Mexicali? What are the opportunities, or have you considered outsourcing? And what are the contingency plans? And I guess, how conceivable is, if you did need to bring up a secondary or a third party to manufacture some of your products?

So Bill, so approximately, 70%, 75% of the revenue is being generated out of the backend facility in Mexicali. Now, before this whole COVID-19 pandemic started, we were already building a more diverse supply chain. So, we have already started to shifts parts of our supply chain with third party assembly and test houses out there, mostly in Asia. And so, that's obviously a trend that we will continue to do so.

Okay. Thanks for that. And I know you guys constantly talk about crafting solutions, working side-by-side with customers. I guess, with a lot of the lockdowns in place globally, how has that impacted your design activities? I mean, I presume obviously your second half design wins are well locked and loaded. But, as we think about next year, how are you working with your customers to craft these solutions?

Yes, we are adapting to the situation. However, our interactions have shifted from face-to-face engagements to more virtual communication. We are not working as closely together in person as we did before, but we will get back to that. In the meantime, our talented engineers are collaborating with our knowledgeable customers using various technologies. We have been utilizing video conferencing, Microsoft Teams, and frequent conference calls, along with sharing presentations and maintaining transparency throughout the process. This has created a different environment. While many of us prefer in-person interaction, these changes could lead to a more distance-based communication model in the future, which aligns with our wireless initiatives. Nevertheless, we remain committed to staying connected with our customers and taking care of our employees as responsible members of the community. We hope to navigate these challenges together and look forward to brighter days ahead.

Yes. Thanks for having me. I have a question for Liam or Kris. Over the past six months, revenues have decreased by about $200 million, yet your margins remain consistent within a 20 to 30 basis point range. I'm wondering what measures have been taken to maintain your margins, especially considering that utilization is likely down significantly and there may have been some inventory buildup. I'm just curious about this.

This reflects a significant amount of effort from the team, and several factors are involved. We are introducing more complex, higher value-added products to the market, which is crucial. Our execution remains strong. Additionally, we are reducing costs in our factories and among third-party suppliers, leading to a more efficient operation. We are also benefiting from a favorable mix as broader markets are growing and offering higher margins compared to our mobile business. Our target model is 53%, and without the challenges you've mentioned, we would have already reached that. Unfortunately, we must navigate these challenges, but we are addressing them. As I noted earlier, in the second half of 2020 and beyond, once these challenges turn into advantages, we expect to see further improvements in gross margins.

It's quite impressive. I wanted to check if there's anything happening. Additionally, you've mentioned China, especially the newer 5G phones like Oppo and Vivo in previous calls. I'm curious if you believe you're gaining significant market share, or if it's simply that China is adopting 5G and you're receiving your fair share of that growth.

No. The way we see it is that we are gaining a significant share, partly because we can integrate our solutions and make it easier for the customer. There is a lot of interest and demand for 5G products in China. We are introducing a complex, customized Sky5 platform for each customer, so they don't have to manage the complexity of setting up multiple devices to create a 5G engine. We handle that on their behalf. This approach has been very effective for us, providing our customers with a quicker time to market and reducing their engineering burden. We can do that for them, and we present our solution in a unique and differentiated way.

Thank you all for participating in today's call. We look forward to talking with you in upcoming events this quarter. Thank you.