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Skyworks Solutions (NASDAQ:SWKS) Exceeds Q4 Expectations


Full Report / November 04, 2021
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Wireless chips maker Skyworks Solutions (NASDAQ: SWKS) announced better-than-expected results in the Q4 FY2021 quarter, with revenue up 37% year on year to $1.31 billion. The company expects that next quarter's revenue would be around $1.5 billion, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Skyworks Solutions made a GAAP profit of $326.3 million, improving on its profit of $246.9 million, in the same quarter last year.

Skyworks Solutions (SWKS) Q4 FY2021 Highlights:

  • Revenue: $1.31 billion vs analyst estimates of $1.29 billion (1% beat)
  • EPS (non-GAAP): $2.62 vs analyst estimates of $2.54 (3.18% beat)
  • Revenue guidance for Q1 2022 is $1.5 billion at the midpoint, in line with what analysts were expecting
  • Free cash flow of $135.3 million, down 14.3% from previous quarter
  • Inventory Days Outstanding: 116, down from 132 previous quarter
  • Gross Margin (GAAP): 46.8%, down from 47.9% same quarter last year

Result of a merger of Alpha Industries and the wireless communications division of Conexant, Skyworks Solutions (NASDAQ: SWKS) is a designer and manufacturer of chips used in smartphones, autos, and industrial applications to amplify, filter, and process wireless signals.

Skyworks is an analog chip maker whose chips are used in radio frequency (RF) functions, essentially the chips that decode wireless signals. The most obvious use case is in mobile phones, and this is its biggest business, supplying Apple with RF chips for its iPhones accounts for a significant part of Skyworks revenues.

But Skyworks chips are also used for any connected device that processes wireless signals – such as the array of sensors that make up the Internet of Things and growing uses in factories and autos.

In 2021, Skyworks acquired Silicon Lab’s infrastructure and automotive business, to increase its exposure to autos and industrials. As the world’s wireless networks evolve from 3G to 4G to 5G, a wider variety of wireless spectrum and frequency bands come into play, which translates into a rising amount of RF content in smartphones, cars, and any connected device, a long term secular tailwind RF producers stand to benefit from.

Skyworks’s peers and competitors include Broadcom (NASDAQ:AVGO), Cirrus Logic (NASDAQ:CRUS), MACOM Technology (NASDAQ:MTSI), Qorvo (NASDAQ:QRVO), Qualcomm (NASDAQ:QCOM), and Texas Instruments (NASDAQ:TXN).

Analog Semiconductors

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Sales Growth

Skyworks Solutions's revenue growth over the last three years has been measured, averaging 13.1% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $956.8 million to $1.31 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Skyworks Solutions Total Revenue

This was a strong quarter for Skyworks Solutions as revenues grew 37%, topping analyst estimates. This marks 5 straight quarters of revenue growth, implying we are mid-cycle for Skyworks Solutions, as a typical upcycle tends to last 8-10 quarters.

Skyworks Solutions believes the growth is set to accelerate, and is guiding for revenue to grow 56.7% YoY next quarter, and Wall St analysts are estimating growth 12.3% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Skyworks Solutions Inventory Days Outstanding

This quarter, Skyworks Solutions’s inventory days came in at 116, 3 days above the five year average, suggesting that despite the recent decrease the inventory levels are still slightly above the long term average.

Pricing Power

Skyworks Solutions's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 46.8% in Q4, down 1.1 percentage points year on year.

Skyworks Solutions Gross Margin (GAAP)

Skyworks Solutions's gross margins have been stable over the past year, averaging 49.1%, and remain ahead of other semiconductor companies, pointing to a solid competitive offering, good cost controls, and little in the way of pricing pressure.

Profitability

Skyworks Solutions reported an operating margin of 37.1% in Q4, up 2.2 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Skyworks Solutions Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 38%. Skyworks Solutions's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 11.2% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Skyworks Solutions's free cash flow came in at $135.3 million in Q4, up 11.7% year on year.

Skyworks Solutions Free Cash Flow

Skyworks Solutions has generated $1.13 billion in free cash flow over the last twelve months, translating to 22.3% of revenues. This is a strong result; Skyworks Solutions's free cash flow conversion was higher than most semiconductor companies, in the last year. If it maintains this level of cash generation, it will be able to invest plenty in new products, and ride out any cyclical downturn more easily.

Skyworks Solutions’s average return on invested capital (ROIC) over the last 5 years of 31.2% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Skyworks Solutions's Q4 Results

Sporting a market capitalization of $28.6 billion, more than $1.02 billion in cash and with positive free cash flow over the last twelve months, we're confident that Skyworks Solutions has the resources it needs to pursue a high growth business strategy.

We were very impressed by the strong improvements in Skyworks Solutions’s inventory levels. And we were also excited to see the really strong revenue growth. On the other hand, there was a deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But investors might have been expecting more and the company is down 1.09% on the results and currently trades at $169.4 per share.

Is Now The Time?

When considering Skyworks Solutions, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Skyworks Solutions is not a bad business. However, its revenue growth has been slowe, and analysts expect growth rates to slow again later after the recent acceleration. But on a positive note, its impressive operating margins are indicative of an highly efficient business model.

Skyworks Solutions's price to earnings ratio based on the next twelve months is 14.9x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Skyworks Solutions doesn't trade at a completely unreasonable price point.

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