Wireless chips maker Skyworks Solutions (NASDAQ: SWKS) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 13.4% year on year to $1.22 billion. However, next quarter's revenue guidance of $1.2 billion was less impressive, coming in 6.89% below analysts' estimates. Turning to EPS, Skyworks Solutions made a non-GAAP profit of $2.20 per share, down from its profit of $3.02 per share in the same quarter last year.
Skyworks Solutions (SWKS) Q4 FY2023 Highlights:
- Revenue: $1.22 billion vs analyst estimates of $1.22 billion (small beat)
- EPS (non-GAAP): $2.20 vs analyst estimates of $2.10 (4.71% beat)
- Revenue Guidance for Q1 2024 is $1.2 billion at the midpoint, below analyst estimates of $1.29 billion
- Free Cash Flow of $295.6 million, similar to the previous quarter
- Inventory Days Outstanding: 138, down from 185 in the previous quarter
- Gross Margin (GAAP): 39.2%, down from 47.5% in the 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.
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, its revenue declined from $1.41 billion in the same quarter last year to $1.22 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).
This was a slow quarter for the company as its revenue dropped 13.4% year on year, in line with analysts' estimates. This could mean that the current downcycle is deepening.
Skyworks Solutions's revenue growth has slowed over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 9.73% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 4.71% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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.
This quarter, Skyworks Solutions's DIO came in at 138, which is 2 more days than its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are slightly above the long-term average.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Skyworks Solutions's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 39.2% in Q4, down 8.3 percentage points year on year.
Skyworks Solutions's gross margins have been trending down over the last 12 months, averaging 44.1%. This weakness isn't great as Skyworks Solutions's margins are already slightly below the industry average and falling margins point to potentially deteriorating pricing power.
Profitability
Skyworks Solutions reported an operating margin of 32.6% in Q4, down 4.9 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Skyworks Solutions's operating margins have been trending down over the last year, averaging 33.4%. However, the company's profitability is still above average for semiconductor companies, driven by an efficient cost structure.
Earnings, Cash & Competitive Moat
Analysts covering Skyworks Solutions expect earnings per share to grow 5.69% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Skyworks Solutions's free cash flow came in at $295.6 million in Q4, up 212% year on year.
As you can see above, Skyworks Solutions produced $1.65 billion in free cash flow over the last 12 months, an eye-popping 33.8% of revenue. This is a great result; Skyworks Solutions's free cash flow conversion places it among the best semiconductor companies and, if sustainable, puts the company in an advantageous position to invest in new products while remaining resilient during industry downturns.
Over the last five years Skyworks Solutions has averaged a 23.9% return on invested capital (ROIC), implying that it has a defensible competitive position and has invested in profitable growth.
Key Takeaways from Skyworks Solutions's Q4 Results
Sporting a market capitalization of $13.9 billion, more than $738.5 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Skyworks Solutions is attractively positioned to invest in growth.
We were impressed by Skyworks Solutions's strong improvement in inventory levels. EPS outperformance vs. Wall Street's estimates was also a positive. On the other hand, its revenue guidance and EPS for next quarter underwhelmed and its gross margin shrunk. The guidance is likely what is driving weakness in the stock. Overall, the results could have been better. The company is down 7.04% on the results and currently trades at $83.2 per share.
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. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last three years. And while its gross margins are weaker than its semiconductor peers we look at, the good news is its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion. On top of that, its sturdy operating margins suggest disciplined operating expense controls.
Skyworks Solutions's price-to-earnings ratio based on the next 12 months is 10.0x. 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.
Wall Street analysts covering the company had a one-year price target of $119.8 per share right before these results, implying that they saw upside in buying Skyworks Solutions even in the short term.
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