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Skyworks Solutions (NASDAQ:SWKS) Reports Q2 In Line With Expectations But Quarterly Guidance Underwhelms


Full Report / June 23, 2022
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Wireless chips maker Skyworks Solutions (NASDAQ: SWKS) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 13.9% year on year to $1.33 billion. However, guidance for the next quarter was less impressive, coming in at $1.23 billion at the midpoint, being 5.27% below analyst estimates. Skyworks Solutions made a GAAP profit of $305.8 million, down on its profit of $325 million, in the same quarter last year.

Skyworks Solutions (SWKS) Q2 FY2022 Highlights:

  • Revenue: $1.33 billion vs analyst estimates of $1.33 billion (small beat)
  • EPS (non-GAAP): $2.63 vs analyst estimates of $2.63 (small beat)
  • Revenue guidance for Q3 2022 is $1.23 billion at the midpoint, below analyst estimates of $1.29 billion
  • Free cash flow of $266.2 million, down 45.2% from previous quarter
  • Inventory Days Outstanding: 121, up from 96 previous quarter
  • Gross Margin (GAAP): 47.7%, down from 49.3% 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 mediocre, averaging 15.8% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.17 billion to $1.33 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

While Skyworks Solutions beat analysts' revenue estimates, this was a very slow quarter with just 13.9% revenue growth. This marks 7 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, Skyworks Solutions believes the growth is set to continue, and is guiding for revenue to grow 10.1% YoY next quarter, and Wall St analysts are estimating growth 12% 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 121, 7 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

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 47.7% in Q2, down 1.6 percentage points year on year.

Skyworks Solutions Gross Margin (GAAP)

Skyworks Solutions's gross margins have been stable over the past year, averaging 47.9%, 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 36.7% in Q2, down 0.8 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 37.2%. 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 15.4% 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 $266.2 million in Q2, down 43.9% year on year.

Skyworks Solutions Free Cash Flow

Skyworks Solutions has generated $1.04 billion in free cash flow over the last twelve months. This is a solid result, which translates to 19.8% of revenue. That's above average for semiconductor companies, and should put Skyworks Solutions in a relatively strong position to invest in future growth.

Skyworks Solutions’s average return on invested capital (ROIC) over the last 5 years of 33.2% 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 Q2 Results

Sporting a market capitalization of $15.9 billion, more than $778.2 million 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 struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Overall, it seems to us that this was a complicated quarter for Skyworks Solutions. The company currently trades at $92.3 per share.

Updated: May 30, 2022, 4:0 AM ET

Is Now The Time?

Skyworks Solutions may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Skyworks Solutions is a solid business. However, its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there. But on a positive note, its impressive operating margins are indicative of an highly efficient business model, and its high return on invested capital suggests it is well run and in a strong position for profit growth.

Skyworks Solutions's price to earnings ratio based on the next twelve months is 9.0x. There are definitely things to like about Skyworks Solutions and looking at the semiconductors landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $150.8 per share right before these results, implying that they saw upside in buying Skyworks Solutions even in the short term.

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