Wireless chips maker Skyworks Solutions (NASDAQ: SWKS) reported results in line with analysts' expectations in Q1 FY2024, with revenue down 9.6% year on year to $1.20 billion. The company expects next quarter's revenue to be around $1.05 billion, in line with analysts' estimates. It made a non-GAAP profit of $1.97 per share, down from its profit of $2.59 per share in the same quarter last year.
Skyworks Solutions (SWKS) Q1 FY2024 Highlights:
- Market Capitalization: $16.98 billion
- Revenue: $1.20 billion vs analyst estimates of $1.20 billion (small miss)
- EPS (non-GAAP): $1.97 vs analyst estimates of $1.95 (small beat)
- Revenue Guidance for Q2 2024 is $1.05 billion at the midpoint, roughly in line with what analysts were expecting (EPS guidance slight miss)
- Free Cash Flow of $752.7 million, up 155% from the previous quarter
- Inventory Days Outstanding: 121, down from 138 in the previous quarter
- Gross Margin (GAAP): 42.2%, down from 48% 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).
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 unremarkable, averaging 9.3% annually. This quarter, its revenue declined from $1.33 billion in the same quarter last year to $1.20 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 had a difficult quarter as revenue dropped 9.6% year on year, missing analysts' estimates by 0.2%. This could mean that the current downcycle is deepening.
Skyworks Solutions looks like it's headed into the trough of the semiconductor cycle, as it's guiding for a year-on-year revenue decline of 9.4% next quarter. Analysts are also estimating a 1.4% decline 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 121, which is 15 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.
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 42.2% in Q1, down 5.8 percentage points year on year.
Skyworks Solutions's gross margins have been trending down over the last 12 months, averaging 42.6%. This weakness isn't great as Skyworks Solutions's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Skyworks Solutions reported an operating margin of 30.4% in Q1, down 6.5 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 31.8%. However, the company's profitability is still above average for semiconductor companies, driven by an efficient cost structure.
Earnings, Cash & Competitive Moat
Wall Street expects earnings per share to decline 6.2% 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 $752.7 million in Q1, up 6% year on year.
As you can see above, Skyworks Solutions produced $1.69 billion in free cash flow over the last 12 months, an eye-popping 36.1% 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.
Return on Invested Capital (ROIC)
EPS growth informs us whether a company's revenue growth was profitable. But was it capital-efficient? For example, if two companies had the same EPS growth, we’d prefer the one putting up those numbers with lower capital requirements (usually in the form of balance sheet debt and equity).
Enter ROIC, a pivotal metric showing how much operating profit a company generates relative to the capital it's invested in the business. ROIC not only gauges a company's ability to grow profits but also sheds light on a management team's ability to allocate its limited resources.
Although Skyworks Solutions hasn't been the highest-quality company lately, it historically did a solid job investing in profitable growth initiatives. Its five-year average ROIC was 24%, higher than most semiconductor companies. The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Skyworks Solutions's ROIC has averaged 12.3 percentage point decreases each year. This is a strike against the company and suggests its competitive advantage or profitable investment opportunities are shrinking.
Key Takeaways from Skyworks Solutions's Q1 Results
We were impressed by Skyworks Solutions's strong improvement in inventory levels. That stood out as a positive in these results. While revenue guidance was roughly in line, EPS guidance was slightly below. Management added some constructive commentary, saying "We are seeing signs that the Android smartphone market is recovering. In broad markets, we are well positioned for long-term growth in edge-connected IoT devices, automotive electrification and advanced safety systems, and AI-enabled workloads driving cloud and data center upgrades." Overall, this was a mixed quarter for Skyworks Solutions. The stock is up 5.5% after reporting and currently trades at $110 per share, likely due to muted expectations after some other semis stocks performed much worse.
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 Skyworks Solutions is't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been weak over the last three years, and analysts expect growth to deteriorate from here. And while its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, unfortunately, its gross margins are weaker than its semiconductor peers we look at.
Skyworks Solutions's price-to-earnings ratio based on the next 12 months is 14.0x. 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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