Skyworks Solutions Inc (SWKS) — Q3 2025 Earnings Call Transcript

Thank you, operator. Good afternoon, everyone, and welcome to Skyworks' Third Fiscal Quarter 2025 Conference Call. With me today for our prepared remarks is Phil Brace, our Chief Executive Officer and President; and Rob Schriesheim, Interim Chief Financial Officer for Skyworks. This call is being broadcast over the web and can be accessed from the Investor Relations section of the company's website at skyworksinc.com. In addition, the company's prepared remarks will be made available on our website promptly after the conclusion of the call. 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, today's discussion will include non-GAAP financial measures consistent with our 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 Phil.

Thanks, Raji, and welcome, everyone. Skyworks delivered strong results this quarter, fueled by an upside in Mobile and sustained strength across Broad Markets. We posted revenue of $965 million, delivered earnings per share of $1.33, and generated free cash flow of $253 million. Revenue, gross margin, and EPS exceeded the high end of our guidance. We returned $430 million to shareholders this quarter through share repurchases and dividends and more than $1 billion across the past two quarters, supported by strong free cash flow and disciplined working capital management. In Mobile, revenue came in above seasonal trends with strength continuing into the September quarter, supported by healthy sell-through at our top customer and new product launches in Android. While end demand signals remain solid, we're actively monitoring the channel and are maintaining a disciplined approach to inventory. Looking ahead, we see multiple drivers of long-term RF content growth, including opportunities from internal modem adoption, higher RF complexity with AI features, and a larger addressable footprint within the smartphone. At the same time, we'll continue to deliver more performance in smaller form factors, enabling richer features within current sockets. Smartphone replacement cycles remain historically long, now averaging over four years, even as our top customer maintains a record installed base. The first wave of AI-capable phones is reaching scale, and early demand signals are encouraging. As AI capabilities become more intuitive and integrated, we believe this could drive an inflection in upgrade cycles, leading to a potential tailwind to volumes and content over time. Our deep RF expertise, strong customer relationships, and advanced manufacturing put us in a strong position to lead through this next phase. Broad Markets continue to gain momentum, driven by new customer engagements across edge IoT and automotive. We are seeing stronger order flow, healthy book-to-bill levels, and lean channel inventory. In edge IoT, WiFi 7 adoption is accelerating across consumer, enterprise, and industrial applications. These systems demand faster speeds at ultra-low latency, translating to greater RF complexity. Looking ahead, we're already investing in WiFi 8 to support the next wave of performance. Automotive remains a key growth driver for Skyworks, supported by long design cycles that offer greater visibility and more durable revenue streams. We broadened our reach across a growing roster of global OEMs, securing programs with BYD, Ford, Geely, Nissan, and others. As vehicles become more software-defined and connected, the need for secure wireless links continues to grow, from 5G telematics to over-the-air updates and infotainment, all of which increase our content opportunity. In traditional data center and infrastructure, business activity is rebounding as inventory normalizes. Meanwhile, accelerating AI workloads are driving upgrades to 800 gig and 1.6 terabit switches, increasing demand for our precision timing solutions. Altogether, Broad Markets is becoming a stronger, more resilient growth engine for Skyworks, and we expect this momentum to continue with both sequential and year-over-year growth in the September quarter. In aggregate, this is a $1.5 billion business with a double-digit long-term growth profile and gross margins above the corporate average, a core part of our portfolio that we believe remains underappreciated relative to its scale and contribution. Today, we're taking action to optimize our manufacturing footprint with the planned closure of our Woburn manufacturing facility and the consolidation of operations into our Newbury Park site. This move is designed to drive higher fab utilization, lower fixed costs, and improve overall efficiency in the future. As our product mix shifts towards more advanced, higher-value content, this consolidation positions us to expand gross margins over time while reinvesting in next-generation technologies and maintaining the scale and technical capability required to serve our premium customers at the highest levels. Before we dive into the numbers, I want to welcome Rob Schriesheim to the team in his role as interim CFO. Rob has served on the Skyworks Board for nearly 20 years and knows our business, strategy, and leadership team exceptionally well. His appointment ensures continuity as we move through this transition. On the CFO search, we've been taking a deliberate approach and have a number of strong candidates in the pipeline. I expect the process to conclude shortly. With that, I'll turn the call over to Rob for a discussion of last quarter's performance and outlook for Q4 of fiscal '25.

Thanks, Phil. It's a privilege to step in as interim CFO and support the Skyworks team during this transition. Having served on the Board for nearly two decades and being a shareholder, I know the company well and have confidence in our strategy, our financial discipline, and our long-term growth opportunities. Turning to our third fiscal quarter results. Skyworks delivered revenue of $965 million, exceeding the high end of our guidance range. During the quarter, our largest customer accounted for about 63% of revenue. Mobile represented 62% of total revenue, up 1% sequentially and 8% year-over-year, driven by stronger sell-through at our top customer and new product launches in Android. Broad Markets, which includes edge IoT, automotive, industrial, infrastructure, and cloud grew 2% sequentially and 5% year-over-year. This marks the sixth consecutive quarter of growth and reflects stronger end demand and further inventory normalization across key verticals. Gross profit was $454 million, with gross margins of 47.1%, above expectations, driven by product mix and ongoing cost discipline. We see further opportunities to expand margins over time as we execute on our manufacturing efficiency roadmap. Operating expenses totaled $230 million, aligned with our long-term product roadmap. We remain disciplined with spend, balancing investment in future growth with prudent cost management. Operating income reached $224 million, translating to an operating margin of 23.3%. Other income was $1 million, and our effective tax rate was 11.2%, resulting in net income of $200 million and diluted earnings per share of $1.33, $0.09 above our guidance. Cash flow remained strong, with operating cash flow of $314 million and capital expenditures of $61 million, resulting in free cash flow of $253 million, or 26% of revenue. Over the past two years, our free cash flow has benefited from effective working capital management as we've reduced inventory levels. We returned $430 million to shareholders during the quarter, comprised of $104 million in dividends and $330 million in share repurchases. Over the past two quarters, we've returned more than $1 billion to shareholders. We ended the quarter with $1.3 billion in cash and investments and $1 billion in debt, maintaining a strong balance sheet and ample flexibility to support our strategic and financial priorities. Looking ahead to the fourth quarter of fiscal 2025, we expect revenue to range between $1 billion to $1.03 billion. In Mobile, we anticipate mid-single-digit sequential growth. We're seeing healthy sell-through, lean channel inventories, and solid order visibility heading into the September quarter. Broad Markets is set to grow again this quarter, with year-over-year trends accelerating and continued strength in bookings, backlog, and channel sell-through. Gross margin is projected to be approximately 47%, plus or minus 50 basis points, reflecting the stable product mix and ongoing cost discipline. We expect operating expenses between $235 million and $245 million as we continue to fund key R&D initiatives while maintaining tight control over discretionary spend. As a reminder, the September quarter includes a 14th week, which adds about $7 million in incremental expenses. Below the line, we anticipate approximately $4 million in other income, an effective tax rate of 13%, and a diluted share count of 149.5 million shares. At the midpoint of our revenue outlook, this equates to expected diluted EPS of $1.40. With that, I'll turn it back to Phil for closing remarks.

Thank you, Rob. Before I close, I want to thank our employees for their incredible dedication and our customers and partners for their continued trust and collaboration. Operator, let's open the line for questions.

I guess the first question is within the handset business, is there anything that you consider that's changed over the last 90 days or with respect to what you expect on content, what you expect on unit sales? Just a little bit of color about what may have been changing within the Mobile landscape.

Thanks for the question. Look, I think, in general, we've just seen strong demand, I mean, strong demand for some of our products. I think our largest customer had a conference call the other day and reflected that in some very strong demand. And we're seeing the benefit of strong unit demand and frankly, shipments that benefit us from a mix point of view. So that continues to be strong as reflected in our results and our forward-looking guidance.

Okay. Regarding the extra week mentioned for the September quarter, how should we consider the seasonality for the December quarter, especially in light of the changes in content with your largest customer, typical seasonal trends, and the impact of not having that extra week as you enter December?

We are not providing guidance beyond the current quarter. However, we are experiencing strong demand across both Mobile and non-mobile sectors. Our book-to-bill ratio is solid, and our inventories are currently low. The December quarter has been somewhat more volatile than in previous years due to various factors. Therefore, it’s challenging for us to make predictions at this time. We are focused on taking one step at a time, continuing to execute our plans and maintaining our guidance for the quarter.

And just a quick follow-up, Chris. This is Raji. The extra week did not have an impact on the revenue for the September guide. It just has an impact on the OpEx.

You have mentioned previously this year the changes with your largest customer regarding the new product release. I would like to discuss a few points. It seems that this relates to the unusual mix of phones that will be launched this year. While I understand you cannot share specific details, as we look toward 2026, if the trends discussed by your largest customer and others, like Qualcomm, materialize as anticipated, and if the mix starts to favor an internal modem, will that naturally enhance your overall content? This would not pertain to the phones currently being produced, but if we were to take a fixed view on internal versus external for 2026, would that provide a significant advantage for your company? Or are there likely to be substantial changes for next year's model that would reset everything and require a fresh evaluation?

Yes, during this cycle, we have noticed that we have more content available in the internal modem since some previously unavailable parts are now accessible again. It’s important to assess this factor as we move through the cycle. Additionally, the mix of what customers are shipping among different phones, variations of iPhone models, and geographical considerations all play a role. Currently, we have some positive momentum due to solid demand for phones that include our content. Moving forward, we will see how things develop, but for now, the situation looks promising.

If I could follow up, part of the situation this year has been that the internal modem represents such a small percentage of total phones sold, making dual sourcing difficult, especially since we are only handling about 10% or 15% of the total volume. My question is whether it’s reasonable to expect that the internal modem might start to gain traction as volumes increase. This could be a natural outcome of regaining market share with the upcoming phone models that use external modems. Clearly, you qualify for competition against companies like Avago or Broadcom. I’m trying to understand if it’s logical to think that with increased volume, your share might also grow, allowing you to capture a larger portion of that market. If your content is already performing well without transmit diversity receive capabilities, it seems reasonable to expect significant growth when those are included, right?

Yes. I mean all things being equal, I think that's probably fair. But I mean all things aren't necessarily equal. It just depends on what phones they ship and all the rest of that stuff. But generally speaking, we do have more content available on the internal modem versus the external modem. So as that shifts more to the internal modem, there's a natural tailwind for us there, I would say that.

This is Sam Feldman on for Karl Ackerman. So you indicated Android revenues were flat on a sequential basis in March quarter at around $70 million. How should we think about your Android business in this quarter relative to last quarter? And going forward, can you grow from these levels?

Yes. So this is Raji. So our Android revenue in the June quarter was up significantly. It was up just under $100 million. And this is really primarily related to our ramp with Google, and we expect continued growth into the September quarter when we're thinking about Android.

Great. And I have a follow-up. So is there any way to discern between demand pulling ahead of tariffs versus improved demand? And what inventory levels are you seeing at your end customers compared to last quarter?

Yes. We're trying to keep a really close eye on it. I think we've talked about in our prepared remarks. So in the past year, we've really been trying to be disciplined to take our inventory down. Our inventories right now are very, very thin lean levels. And so we're trying to maintain focus on that. Obviously, our customers don't always tell us why they're ordering products. We just try and deliver where we can. And we're just trying to keep our inventories low to manage that. And our current guidance reflects what we believe is the current environment with respect to tariffs and all the rest.

Congrats on the results. Phil, maybe for you now that you've had some more time to look deeply at things at Skyworks, have you kind of solidified your view on the importance of diversification beyond handset? And perhaps, you have any thoughts just broadly without obviously identifying any targets, but thoughts on end markets or products that are desirable for Skyworks? Or alternatively, would you be open to a larger merger within the RF industry? How might you feel on that?

Yes. I mean look, obviously, that's a very broad question. And I would say, certainly, I mean, you just look strategically at the company, and it's hard not to think that the single customer concentration we have is certainly probably suppressing our multiples compared to what it otherwise would be. So obviously, kind of diversification and growing the business is important. Having said that, right, I mean, we remain incredibly focused on continuing to keep our eye on the ball where our current bread is butter, right? We've got to maintain major focus on that. And so my message internally with the team is you need to walk and chew gum at the same time, right? We need to continue to be focused on executing cleanly, delivering the best parts we can for our largest customer and then frankly, continue to look for ways to grow and diversify our businesses elsewhere. I think if you ask me about priorities and how I look at things in general, I'd probably look for things that are gross margin accretive, a little stickier, have a little, we'll say, a longer time constant of the revenue to help balance some of the potential volatility that comes from being in the handset market. So that's how I'd prioritize that. And in terms of size and scale, I mean, I'm really going to be focused on making sure that we can do things that are accretive. And I think that, that's going to be kind of an important focus for us and the management team.

Awesome. And perhaps as a follow-up, are there any economics attached with closing the Woburn facility or consolidating that? Are there any other opportunities? And more broadly, maybe you can just talk to OpEx growth from here, how you kind of view it on a multiyear basis?

Yes. Regarding the factory question, we are not disclosing specific numbers at this time because it takes time to work through the details. We have to manage many components and processes. Ultimately, our gross margin will be influenced by utilization and other factors. Nonetheless, this will serve as a positive factor for factory utilization, capital expenditure reduction, operational expense improvement, and overall fixed cost asset utilization. It should continue to act as a positive influence, and we will keep updating our guidance as we move forward. Rob, do you have any additional thoughts on this?

Yes, a couple of comments. First of all, having been on this Board for almost, I'm embarrassed to say, 20 years, one of the things we were excited about when we brought Phil in was not only is he got heavy operational focus and chops and discipline, but he thinks very strategically and he acts very decisively, and the fab consolidation or optimization was very much in line with that. He made that decision very quickly, and it was clearly focused on where the business is going, where the industry is going to forward invest in more advanced technologies. As to your second question on operating expenses, as I indicated in my prepared remarks, $235 million to $245 million in the September quarter, and we just did $230 million in the June quarter. Now that $235 million to $245 million in the September quarter includes about $7 million related to the 14th week. So excluding that, OpEx is up only modestly quarter-over-quarter, and we'd expect it to trend lower in the December quarter. So for the full year, the 16% year-over-year increase in FY '25 reflects both the timing dynamic and targeted investments we've made to support R&D programs. But I would also say, looking ahead to FY '26 and beyond, Phil has made it very clear that we're going to be very disciplined.

This is Liam Pharr on for Vivek. On the first one, just what is your content visibility in flagship phones into next year?

I'm a bit hesitant to answer that because it really depends on several factors. If you're inquiring about when the next down-selection will occur, that usually happens in late fall around the Christmas and January timeframe. So, we won't have additional visibility beyond what we've already communicated. That said, our results indicate that our customers are shipping a good mix of phones with high content. Looking long term, I'm optimistic about the growth of RF content as more transmission capabilities are developed, the internal modem becomes available, and if our customers see an increase in their refresh cycles. All these factors will influence our performance moving forward.

Makes sense. Okay. So then in terms of kind of this pricing environment and you're bidding for new sockets, has there been any material change there over the last kind of 90 days or 6 months as you kind of continue to work for those sockets for expanding off of your current base, but also maybe regaining the ones that you've lost at your top customer?

Yes, the pricing environment remains highly competitive. We face strong and credible competitors, and this competition strengthens us. To succeed in this field, one must embrace the challenge. We are doing that, and the pricing conditions have remained stable. Customers expect us to provide the best product at the best price, and we are committed to meeting those expectations. Looking ahead, I am encouraged by several long-term content drivers, including the shift to internal modems, increased transmit capability, and enhancements in AI technology. Most importantly, I believe that nearly all devices connected to the Internet will be wireless, and I feel confident about our position in this area.

Great. So Phil, I don't know if you want to pontificate about it or not, but we've talked about it before. Do you feel like this year is probably your low point in content at your largest customer, given all the other trends?

Well, yes, look, I mean, we've obviously had a couple of down-selections that have not worked in our favor. And I think someone quoted happiness as an upward sloping line. And so I think we've got to change the trajectory of the downward sloping line to the upward sloping line. I think we're all laser-focused on that.

And then if I could ask, Woburn is being closed out, and I know you don't want to give too many specifics about the factory. But obviously, I would imagine one of the goals here is to increase utilization in Newbury Park.

Yes.

When are we likely to see the first results of that? Is it something we're going to see in a quarter or two? Do we wait until next calendar year? And then any...

No, not the next quarter or two. I mean, some of the products that are there, we've got to actually transition them to the Newbury Park side, and some of them are long lead time items. So it will take a little while. But long term, look, you're 100% correct. Long term, this positions us to invest in leading technology in Newbury Park, drive increased factory utilization, better fixed cost utilization which should benefit gross margin and reduce CapEx and all the rest of it. So that's kind of where we are.

Any color on the timing? Is it 2 years or 1 year?

No comment right now.

Okay. And then am I correct assuming that it's all gas in Woburn? And is most of that gas for Broad Markets or Mobile or is it split?

It's split. I mean, the gas technology is used for amplifiers, right? So it's split.

I actually had like three of them. First one, in terms of the auto business, can you say how big the auto business is today? Is it mid-single-digit percentage, 10 percentage? And could this double in the next year? How to think about it? And then I have two follow-ups.

Yes. It's a great question, Krish. This is Raji. So automotive is now tracking around $60 million a quarter and up significantly on a year-over-year basis. And in the press release, we talked about a number of programs that we won, particularly at BYD, Nissan, Ford. And it's really across a variety of our products, whether it's 5G telematics, infotainment, power isolation. So we are quite bullish on that business, and it's very long design cycles and more durable revenue stream. So we have a good pathway there to continue to accelerate that revenue.

Got it. And then on the Mobile side, how solid is the visibility of your largest customer versus Android compared to, let's say, three months ago? Are you seeing stronger sales due to content or units? Or any color on iOS, Android visibility versus three months would be helpful. And then I have one last follow-up.

Right now, our visibility is strong across the board. Book-to-bill is primarily higher than 1, and channel inventories are low. Our visibility is solid at this point, and we don't see any material difference between the two.

Got it. And then lastly, how do you view operating expenses for next year compared to this year, particularly in relation to opportunities for 2026? Is there flexibility in this area, or should we expect it to increase to support future revenue growth? How should we approach the operating expenses?

Yes. When I began, I mentioned that we would take a disciplined approach to operating expenses. Over the past few years, the company has significantly increased its investments, which can be seen as operating expenses. This was primarily aimed at enhancing our research and development efforts, as we are an engineering-focused company. Any modest increase in operating expenses will be specifically targeted toward core R&D. That said, we plan to maintain discipline in this area, and I don't anticipate anything beyond minimal improvements in operating expenses over time.

Asking about the infrastructure networking cloud sub-segment. In fiscal '24, you guys talked a lot about inventory digestion impacting the business, and I think that lasted through the year. But we're seeing a lot of positive demand signals from those end markets. So can you just talk about how that business is performing in the quarter and any specific demand drivers? I think you mentioned 800 gig and 1.6T transition helping as well.

Yes. I mean, I think you got it exactly right. I think in the past couple of quarters, we talked about that, the fact that we did continue to see a little bit of inventory overhang in that space. That does appear to be behind us at this point. Inventory seems to be low, and yes. Nick, this is Raji. So our top customer in the quarter in June was roughly 63% of sales. The split was roughly 85% Mobile, 15% supply/demand is kind of aligned with consumption at this point.

Okay. On the Apple Broad Markets piece, I mean, any reason to think that's very different from the average 15% of overall Apple revenue in 3Q or 4Q?

Broad Markets, thereabouts, and we expect both a similar percentage of sales and a similar split going into the September quarter.

Great. I'd like to thank everybody for participating on today's call, and I look forward to speaking with you at upcoming investor conferences during the quarter. Thank you.