Good afternoon, and welcome to the Skyworks Solutions Second Quarter Fiscal Year 2023 Earnings Call. This call is being recorded. At this time, I will turn the call over to Mitch Haws, Investor Relations for Skyworks. Mr. Haws, please go ahead.

Thank you, everyone, and welcome to Skyworks’ second fiscal quarter 2023 conference call. With me today are Liam Griffin, our Chairman, Chief Executive Officer, and President; 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 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 to Liam.

Thanks, Mitch, and welcome everyone. The Skyworks team executed well in a challenging market environment, delivering second quarter revenue above consensus estimates with solid profitability and strong cash flow generation. Looking at Q2 in more detail, we delivered revenue of $1.153 billion. We drove a gross margin of 50% and an operating margin of 33.5%. We posted earnings per share of $2.02 and generated $412 million of operating cash flow. In addition to the financial results, we expanded our design-win pipeline, reflecting our success in diversifying our customer base and product portfolio. Across mobile and IoT, we delivered Sky5 platforms for Samsung's newly released smartphones, launched WiFi 6E and WiFi 7 gateways for CommScope and ASUS, and secured 5G content with a mobile computing leader. In infrastructure and industrial, we enabled small-cell deployments with a Japanese telecommunications company, provided enhanced Power-over-Ethernet functionality to Cisco for their enterprise networks, and shipped programmable timing solutions to the top U.S. satellite provider. In automotive, we continue to post year-over-year revenue growth and ramp digital radio products with a leading Korean OEM. These engagements highlight the increasingly diverse and expansive nature of our business, supporting the broadest array of customers and applications in our history. Several key market trends underscore the growth potential of advanced connectivity in the rapidly evolving EV industry. For example, WiFi continues to expand globally as the world's most affordable method of connecting the unconnected. Cisco forecasts that the number of hotspots worldwide will reach 600 million this year. As a market leader, Skyworks is uniquely positioned to benefit as deployments expand and the shift to WiFi 7 drives increasing complexity. In addition, the average U.S. household today has more than 10 wirelessly connected devices. Each of these devices requires fast connections, low latency, and efficient battery life, all enabled by our integrated solutions. Furthermore, the market for electric vehicles is expected to expand four-fold by 2027, leveraging our power isolation platforms, which are becoming a leading choice for global EV manufacturers. Skyworks' success in enabling these major technology transitions is underpinned by increasing demand for our leading-edge systems solutions, differentiated by performance, integration, and customer value. Moving forward, Skyworks is strategically equipped to capitalize on the rapidly changing connectivity landscape with an expanding set of customer relationships built over more than two decades, global scale and world-class manufacturing capabilities, a seasoned and talented workforce with a proven record of execution across multiple semiconductor cycles, and an efficient cash flow engine that funds innovation while providing consistent cash return. With that, I will turn the call over to Kris for a discussion of last quarter's performance and our outlook for Q3.

Thanks, Liam. Skyworks' revenue for the second fiscal quarter of 2023 was $1.153 billion, exceeding consensus estimates. Mobile was approximately 60% of total revenue with year-over-year revenue growth at our largest customer, reflecting growth content gains across their product portfolio. This revenue growth was offset by weakness in demand from the Android ecosystem as it continues to destock inventory. Broad markets reached 40% of total revenue for the first time, with a strong contribution from automotive, infrastructure, and industrial markets. Gross profit was $577 million, resulting in a gross margin of 50%. Operating expenses of $190 million declined on a sequential and year-over-year basis, given our focus on managing discretionary expenses. We generated $386 million of operating income, translating into an operating margin of 33.5%. We incurred $13 million of other expenses, and our effective tax rate was 13.4%, driving net income of $323 million and diluted earnings per share of $2.02, in line with the guidance that we provided during the last earnings call. Now turning to cash flow. Skyworks' business model continues to deliver very strong cash generation. Second fiscal quarter cash flow from operations was $412 million, and capital expenditures were $45 million, resulting in a free cash flow of $366 million and a cash flow margin of 32%. Through the first half of the fiscal year, we've generated record free cash flow of $1.1 billion and a 43% free cash flow margin. Given our consistent level of profitability and lower CapEx spending, we expect free cash flow margin to remain well above our target of 30% for the fiscal year. Also, during fiscal Q2, we paid $99 million in dividends, repurchased $9 million of Skyworks stock, and repaid $200 million of our variable-rate term loans. In addition, we increased our cash and investment balance to almost $1.1 billion to provide sufficient liquidity to repay $500 million of bonds that will reach maturity during fiscal Q3. Now let's move on to our outlook for Q3 of fiscal 2023. Taking into account the ongoing challenging macroeconomic environment and a slower-than-expected recovery in inventory destocking, especially in the Android ecosystem, we anticipate revenue for our third fiscal quarter to be between $1.05 billion and $1.09 billion. Gross margin is projected to be in the range of 47% to 48%, reflecting the cyclical impact of lower factory utilization while we are reducing our internal inventory levels. We expect operating expenses of approximately $183 million to $187 million, down sequentially and year-over-year as we are optimizing operational efficiencies. We will continue to make the necessary investments in technology and product development to further enhance our leadership position in mobile and drive diversification and growth in our broad markets business. Below the line, we anticipate roughly $13 million in other expenses and an effective tax rate of 13.5% to 14%. We expect our diluted share count to be approximately 160 million shares; accordingly, at the midpoint of the revenue range of $1.70 billion, we intend to deliver diluted earnings per share of $1.67. And with that, I'll turn the call back over to Liam.

Thanks, Kris. Skyworks has delivered solid results through the first half of our fiscal year, demonstrating strong profitability and record free cash flow generation. With deep customer engagements, underpinned by decades of technology investments in scale, Skyworks is well-equipped to lead and continue to outperform. Moving forward, the Skyworks team remains focused on driving operational efficiency while leveraging leading-edge technologies to capture opportunities across a dynamic market for connectivity. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. One moment please for your first question. Your first question comes from Ambrish Srivastava with BMO. Please go ahead.

Hi, thank you very much. Excuse me, Kris and Liam, you guys have spoiled us. I have to go back eight, 10 years to see a four-handle on gross margin, and you have navigated through many quarters of sequential decline, even I'm going back 10 plus, 15, 20, and you have still been able to hold margins. So my first question is, what's going on on the margin front? Is it pricing, or is it something structurally different this time versus now going back to the last eight, 10 years?

Yes, I will address that question. In the second quarter, we achieved a gross margin of 50%, which was in line with our guidance. However, we began to notice some underutilization charges affecting our income statement during this period. For the third fiscal quarter, we are guiding for a gross margin of 47% to 48% due to experiencing 400 to 500 basis points of underutilization charges. These are somewhat offset by ongoing cost reductions and improvements in operations. The underutilization charges stem from a slower-than-expected recovery in the Android smartphone markets as they continue to deplete inventory. Initially, we expected a stronger recovery in the latter half of the fiscal and calendar year, and while we do see some recovery signs, it is happening later and slower than we had projected. As a result, we are adjusting factory utilizations across all our facilities, which is causing those 400 to 500 basis points of underutilization charges. Unfortunately, these charges have a negative effect on gross margin, but they do not impact our cash flow, which will remain strong. Additionally, we have been maintaining a slightly higher level of inventory in anticipation of a stronger recovery in the latter half. Given the slower recovery, we will adjust our inventory levels accordingly, which may not help our gross margin but will enhance our cash generation.

I want to follow up on the gross margin aspect. You currently have inventory at 185 days, and if I recall correctly, your target is 85 days. You mentioned this two or three years ago. If we need to return to that target, the headwind may last longer than one quarter; it might take a couple of quarters for inventory to normalize. Am I understanding this correctly?

You are thinking about it the right way. First of all, inventory came slightly down already in Q2, but days were up on lower revenue. Days will always be elevated in our two slowest seasonal quarters and we will improve in our stronger seasonal quarters. We will bring down inventory in absolute dollars as well as in days of inventory on a normalized level. As a result of that, gross margin will be on or about the same level for multiple quarters. Eventually, as the business starts improving, margins will get back up. As I noted earlier, this is not a pricing or major cost issue. It is just a temporary underutilization issue.

Your next question comes from Blayne Curtis with Barclays. Please go ahead.

Hey, guys. Thanks for taking my question. I had two. Maybe I wanted to ask. You highlighted the weakness in Android; I think some other customers have seen some inventory correction at their largest customers. So I was curious, what the percentage was in March, and if you also have to work through some inventory at that customer?

The largest customer in March was approximately 64% of total revenue. In terms of inventory, they manage their supply chain very well.

Okay. And then a perspective on the guide on broad markets, just kind of curious, it was down a little bit in March; how do you see that trending in June?

Blayne, we definitely continue to diversify the broad markets portfolio. It continues to be very strategic for us. We're capturing new design wins every month. Automotive has been strong, and we've got a little bit more action going in WiFi 7 and also in some of the infrastructure market. So that business is looking really strong. Additionally, the contribution from the I&A portfolio continues to track well, so there are still a lot of bright spots there. On the other side of the business, obviously there are some unique headwinds in mobile, but there are also some really dynamic activities going on in the broad market space.

Your next question comes from Vivek Arya with Bank of America. Please go ahead.

Thanks for taking my question. I wanted to go back to where Skyworks is being of inventory issues. Because Liam and Kris, I remember you guys were early to recognize the weakness in the China market last year. So I thought you had already taken care of the Android issue. Are there any new issues that have come with your largest customer? So I just wanted to reconfirm that the weakness you're seeing right now is still Android and not at your largest customer?

So, Vivek, you are right. The weakness is indeed in Android. We have managed the component inventory in the channel as effectively as we can. However, we cannot control the inventory levels at the customer level, particularly at the phone level, which is the primary issue. Our customers continue to reduce their inventory in a weak demand environment.

Got it. And finally, a follow-up. The fact that you are reducing factory utilization ahead of what is typically your strongest seasonal quarter, should we also be toning down our expectations of mid-teens plus kind of sequential growth that you usually have in September, given all these macro factors?

So we only guide one quarter at a time here. But sitting here today, we do expect some good sequential growth in September and December. Our largest customer ramps up their new product launches, and as in the past, we will have some good content in those phones that will ramp up in the back half of the calendar year.

Your next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Yes, thank you. Kris, I wanted to just follow-up on some of the inventory discussions earlier. Obviously, June tends to be the seasonally weakest period of the year for you. But do you think you're actually shipping in line with sell-through at this point ahead of this seasonal ramp that you normally see in the second half of the year?

So not in the Android ecosystem; we are still shipping below consumption because they are still burning through excess inventory at the phone level.

Got it, got it, okay. And then I guess, just going back to the margin discussion. When would you anticipate underutilization charges to abate? And as you address that question, are there any risks to inventory obsolescence? If you could just discuss that as well, that would be very helpful. Thank you.

This is a multiple-quarter event because it takes time for those underutilization charges to reflect in the income statement. They go through inventory turns before impacting your income statement. We are experiencing a soft demand environment in Android; it is improving but at a slightly slower pace than anticipated. We are also reducing inventory simultaneously. This remains a multi-quarter event. Regarding excess and obsolete inventory, we do not see any significant risks; we have managed the situation effectively.

Yes. To jump in here, this is Liam. Obviously, this is a macro cycle that we're going through. Every company has their own nuances here. But I would remind you, the cash returns are very solid. We paid our bills on CapEx. Free cash flow margins are going to be sustainable at 30% plus. So there are many positives around that. We will get through the cycle. We're very focused on execution, and it has been a little tough from some of our customers, so we're working with them and getting the inputs that drive our business. We continue to drive design win penetration in new markets, both in broad markets and some of our mobile players and IoT players. There are a lot of positives there. Yes, we're enduring a tough cycle; however, we're doing the right things to ensure a better future. The business remains solid. Cash returns are robust, we have customer engagements that continue to ramp, and we are confident about the outlook.

Next question comes from Gary Mobley with Wells Fargo. Please go ahead.

Hi, guys. Thanks for taking my question. I want to ask about your largest customer. In the first half of the fiscal year, you've managed to grow your business for them narrowly. My question is, based on the content gains that you may see in the next-generation platform from them and all other things considered, do you think you can grow your revenue with them for the full year or more importantly, the second half of this year versus last year?

Yes. We can't give you the specifics, but we absolutely aspire to drive a better position in the second half on continuing to cement new programs that we'll get into 2023 and 2024.

Okay. On OpEx management, you're doing a good job with tamping things down and if not decreasing your OpEx in this tough time. Does that involve any proactive measures on headcount or might it in the future?

Yes. We have been doing that. At Skyworks, we have been doing that consistently in the past. We add headcount when needed in support of our technology and product roadmaps. When things get tougher, we adjust. We have made some downward adjustments in headcount as well, ensuring we can continue to support our major customers and programs. It's really about focusing on driving operational efficiencies and trimming some discretionary spending.

Your next question comes from Edward Snyder with Charter Equity Research. Please go ahead.

Thanks a lot. I'm a little confused, Liam. Maybe you could clear it up. Do you expect content to see an increase, decrease, or stay flat in the second half of this year?

Yes. We expect it to be up; that's our game plan. There is a lot of new technology emerging in the leaders, and we're hanging around the hoop on all of them. Our teams are working with the best customers and fielding the best opportunities. We will see how that plays out in the second half, but that's definitely where we're headed.

So in a fantasy world, flat units year-over-year, no change at all? You would naturally expect revenue with the largest customer in the second half of the year to be higher?

That would be our plan, yes.

Perfect. Okay. And then on the Android, I know it's still kind of a mess. There are some architectural changes going on at some flagship phones, even the low-end phones that are involved. I don't want to say integration, but more higher density modules that will show up probably in the next year or so. I know Skyworks has avoided some of that competition in the past just because of the ASPs. Given that it kind of separates you from a lot of the domestic suppliers in China, is it reasonable to assume that Skyworks would participate more aggressively in the Android supply chain in the next two years?

Yes. I would say that, because as those models in Asia and Android become more complex, that's right up our alley. Our aperture is more towards mid to high-end, and we want to lift those customers and help them create a better engine and solution. There is a lot of upside for us in that characteristic because we've been a little bit more high-end play. As the complexity increases, that creates more opportunities for us. It's challenging to hit the hard pitch; we know how to do that, but we also need to take care of the other business. We feel good about it, and we definitely have the know-how to make it work. This will be part of the recovery as we go through the middle of the year.

Your next question comes from Harsh Kumar with Piper Sandler. Please go ahead.

Yes. Hi, guys. I was curious, Liam, if you could provide a sense of how much excess inventory of complete handsets is in the Chinese end market? In other words, I'm trying to understand how long or how many quarters it might take for sell-in versus sell-out?

We don't have a specific number on the excess inventory on the handset level. However, it is a couple of quarters; initially, we anticipated it to be a couple of quarters, but now it might be a couple of quarters more. That is the feedback we are receiving from customers and similar remarks from our peers and competitors.

That's fair, guys. For my follow-up, if I can ask, do you think that broadband might rise in the June quarter on a sequential basis or year-over-year basis? Any color would be great.

Our broad markets business will be slightly down on a sequential basis in the June quarter. We see some strength in automotive and industrial markets, but there is some inventory overhang in consumer enterprise-oriented markets, similar to what peers and competitors have mentioned.

Your next question comes from Ruben Roy with Stifel. Please go ahead.

Thanks you. Thanks for letting me ask a question. Harsh asked the essence of my question, Liam. But specifically on auto, was it up in the March quarter? Do you expect auto to continue to remain strong, as you sort of characterized? The reason I'm asking that is, there were long lead times in auto components. I'm wondering how lead times look and what the inventory assessment is in that market for the rest of the year. Thank you.

Yes, great question. As you know, we actually hadn't done much in automotive two, three years ago, and we're now making great progress. The good news is there's a tremendous amount of new territory we can cover in automotive. We've already won a number of platforms and programs with key OEMs and EV players. The partnership with our I&A business has been a catalyst there as well. This segment is fast-growing with tremendous upside. We have low share relative to the pie, which makes for dynamic opportunities as we go forward. It will definitely grow despite the inventory issues we talked about.

That's helpful. Thanks, Liam. Then just a quick follow-up on Ed's question earlier. Thinking through design activity for next year, maybe in Android, how would you characterize that? It seems like there are many services moving to a single module right now. Would you characterize design activity as strong, or is that still something that you expect to participate more in later this year?

As you know, we've been focusing on the high-end and mid-tier market. The good news is our customers want better performance. We have been cautious in engaging the lower-end markets, but the appetite for connectivity has raised, which makes it more profitable for us. We expect to see more opportunities emerge in the Android cycle. Samsung is improving; Google is a player for us now, and we're seeing growth from other players in China. China has been a tough market, but we believe that it will recover and will serve as another catalyst for us. We have the know-how to make things work, and I think it will be part of our recovery as we navigate through the year.

Your next question comes from Harlan Sur with JPMorgan. Please go ahead.

Good afternoon. Thanks for taking my question. On broad markets, I think 90 days ago, you guys anticipated driving full year growth in this segment. But as mentioned, you've got dynamics in the consumer IoT market. I think even data center, enterprise, and telco markets have continued to soften a bit here. So does the team still believe that it can drive full year growth in broad markets?

Yes, Harlan. I think that's going to be a challenge. We were expecting some modest year-over-year growth on a calendar year basis, but given some macroeconomic challenges like high inflation and increased interest rates affecting consumer and enterprise spending, I think this will be challenging. However, beyond calendar year 2023 into fiscal 2024, we do expect our broad markets business to grow.

The attach rate continues to move higher, and there are multiple nodes in bulk acoustic wave technology. It's not one that fits all; there is a lot of innovation and R&D involved. Additionally, our capital intensity is a plus for us. We've already raised our capabilities and technology nodes with BAW significantly. We have substantial capacity ready to roll on, and it's strategic technology not many companies know how to implement. While applications are evident in handsets, there are many other opportunities where BAW filter is a meaningful part of the strategy. You'll see that more as we proceed through this year and the following years.

Your next question comes from Kevin Cassidy with Rosenblatt Securities. Please go ahead.

Yes. Thanks for taking my question. To understand better, as you cut back on utilization, what's the strategy for bringing it back up? Your lead times start to stretch out, and that's when you build your utilization back up again? What's the plan as business starts to ramp up?

Yes. A lot will depend on how strong the business bounces back. Once we see stronger recovery in the Android market along with continued growth in our broad markets business, we will ramp up factory utilizations. However, it's a couple of quarters before that will happen.

Okay. To bring that utilization back to capacity, is it a matter of rehiring people, or does turning the equipment back on suffice?

No, the equipment is there. We know how to handle that with our capital, scale, and overall readiness. This is purely a demand issue, and there will be substantial activity generated through those cycles leveraging that capital. The opportunity over the next several years remains strong, particularly beyond smartphones.

Your last question comes from Matt Ramsay with TD Cowen. Please go ahead.

Thank you very much, guys. Good afternoon. My first question: some of your peer companies that also have high revenue exposure to your largest customer talked about a dynamic of them buying a bit more early in this calendar year, pulling in some of their inventory purchases and leaving a bit of an air pocket before things ramp in the back half. Is some of this reflected in your guidance or is it more oriented towards Android as you have shared in your prepared comments?

It's more oriented towards the Android side at this point based on our current outlook. We know how to manage through it.

Yes, that is a great question. Our target model is to maintain a free cash flow margin of 30%. In the last couple of years, we've been operating in the mid to high 20s. The reason for not hitting 30% is due to significant investments in technology and manufacturing capabilities. However, looking ahead over the next couple of years, we plan to run the business at mid-single digits as a percent of revenue in CapEx. Combined with robust business growth and high profitability, we anticipate being able to sustainably operate at or above a 30% free cash flow margin. We've already generated more cash than we did last year, with $1.1 billion of free cash flow at a 43% free cash flow margin in the first half of the year. We'll maintain this above 30% for the fiscal year.

Thanks for participating in today's call. We look forward to talking to you at upcoming investor conferences during the quarter. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.