Wireless chips maker Skyworks Solutions (NASDAQ: SWKS) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue down 11.9% year on year to $1.32 billion. However, guidance for the next quarter was less impressive, coming in at $1.15 billion at the midpoint, being 3.81% below analyst estimates. Skyworks Solutions made a GAAP profit of $309.4 million, down on its profit of $399.9 million, in the same quarter last year.
Skyworks Solutions (SWKS) Q1 FY2023 Highlights:
- Revenue: $1.32 billion vs analyst estimates of $1.32 billion (small beat)
- EPS (non-GAAP): $2.59 vs analyst expectations of $2.60 (small miss)
- Revenue guidance for Q2 2023 is $1.15 billion at the midpoint, below analyst estimates of $1.19 billion
- Free cash flow of $709.9 million, up from $94.6 million in previous quarter
- Inventory Days Outstanding: 168, up from 149 previous quarter
- Gross Margin (GAAP): 47.9%, up from 47.3% 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).
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.
Skyworks Solutions's revenue growth over the last three years has been solid, averaging 19.6% annually. Last year the quarterly revenue declined from $1.51 billion to $1.32 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).
Despite Skyworks Solutions revenues beating analyst estimates, this was still a slow quarter with a 11.9% revenue decline. Skyworks Solutions's revenue is continuing to decline, signal that the current downcycle is deepening.
Revenue growth went from positive to negative this quarter, and Skyworks Solutions expects it to stay negative next quarter with an estimated decline of 13.8% YoY and analysts think the declines will continue, with next twelve months estimated at 1.69% declines.
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.
This quarter, Skyworks Solutions’s inventory days came in at 168, 43 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Skyworks Solutions's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 47.9% in Q1, up 0.7 percentage points year on year.
Despite declining over the past year, Skyworks Solutions still retains reasonably high gross margins, averaging 47.6%, pointing to a still solid competitive offering, good cost controls, and a lack of significant pricing pressure.
Skyworks Solutions reported an operating margin of 36.9% in Q1, down 1.8 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.
Operating margins have been trending down over the last year, averaging 36.7%. 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 $709.9 million in Q1, up 46.1% year on year.
Skyworks Solutions has generated $1.15 billion in free cash flow over the last twelve months, translating to 21.8% 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 28.7% 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 Q1 Results
Sporting a market capitalization of $18 billion, more than $992.6 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 less good to see that the revenue has declined and 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 up 3.79% on the results and currently trades at $113.5 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. Although we have other favorites, we understand the arguments that Skyworks Solutions is not a bad business. However, its revenue growth has been a little slower, 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.
Skyworks Solutions's price to earnings ratio based on the next twelve months is 10.7x. 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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