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No Surprises In Skyworks Solutions's (NASDAQ:SWKS) Q4 Sales Numbers But Quarterly Guidance Underwhelms


Full Report / November 03, 2022
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Wireless chips maker Skyworks Solutions (NASDAQ: SWKS) reported results in line with analyst expectations in Q4 FY2022 quarter, with revenue up 7.33% year on year to $1.4 billion. However, guidance for the next quarter was less impressive, coming in at $1.32 billion at the midpoint, being 12% below analyst estimates. Skyworks Solutions made a GAAP profit of $302.2 million, down on its profit of $326.3 million, in the same quarter last year.

Skyworks Solutions (SWKS) Q4 FY2022 Highlights:

  • Revenue: $1.4 billion vs analyst estimates of $1.39 billion (small beat)
  • EPS (non-GAAP): $3.02 vs analyst estimates of $2.90 (4.13% beat)
  • Revenue guidance for Q1 2023 is $1.32 billion at the midpoint, below analyst estimates of $1.5 billion
  • Free cash flow of $94.5 million, roughly flat from previous quarter
  • Inventory Days Outstanding: 149, down from 154 previous quarter
  • Gross Margin (GAAP): 47.5%, up from 46.8% 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 strong, averaging 20% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $1.31 billion to $1.4 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 7.33% revenue growth. This marks 9 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.

Skyworks Solutions's revenue growth is expected to go negative next quarter, with the company guiding to decline of 12.2% YoY next quarter, but analyst consensus sees growth of 2.58% 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 149, 29 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher 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 47.5% in Q4, up 0.7 percentage points year on year.

Skyworks Solutions Gross Margin (GAAP)

Despite declining over the past year, Skyworks Solutions still retains industry average gross margins, averaging 47.4%, pointing to a good competitive offering, decent cost controls, and only modest pricing pressure.

Profitability

Skyworks Solutions reported an operating margin of 37.5% in Q4, up 0.4 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 down over the last year, averaging 37.1%. However, Skyworks Solutions's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to be fairly flat 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 $94.5 million in Q4, down 30.1% year on year.

Skyworks Solutions Free Cash Flow

Skyworks Solutions has generated $935.1 million in free cash flow over the last twelve months, translating to 17% 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 26.1% 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

With a market capitalization of $13.3 billion, more than $586.8 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We liked to see that Skyworks Solutions beat analysts’ earnings expectations pretty strongly this quarter. And we were also glad to see the inventory levels go down. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Skyworks Solutions. The company is down 1.48% on the results and currently trades at $81.04 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. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last three years. And on top of that, 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 7.2x. In the end, beauty is in the eye of the beholder. While Skyworks Solutions wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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