Skyworks Solutions Inc. (NGS: SWKS) fell 4% in a rising market on 11/3/20 despite reporting strongly above-consensus results for 4Q20 (calendar 3Q20) and guiding well above consensus for fiscal 1Q21. In fiscal 4Q20, Skyworks swung to a positive annual top-line comparison for the first time since fiscal 4Q18, while also returning to EPS growth.
CEO Liam Griffith noted that 4Q20 successfully capped a fiscal 2020 that ‘both tested and demonstrated the resilience of our business model.’ The company in recent years has focused on building its broad markets business, while continuing to rely on mobility as its chief source of revenue. With the development and maturation of Skyworks’ Sky5 portfolio of solutions, and with 5G launches now well underway, Skyworks is ramping its products in an expanding set of end-markets spanning both mobility and broad markets. These include mobile devices, IoT, automotive, and wireless infrastructure.
In mobility, Sky5 supported 5G mobile device launches from Samsung, Oppo, Vivo, Xiaomi and other tier-1 players. Absent from the list is former leading customer Huawei, currently on the U.S. entities list that forbids or prohibits commerce. In the broad markets business, Skyworks is supporting touchless point of sale devices, WiFi access points, enterprise IoT applications, and more.
We raised our rating on SWKS to BUY in mid-March with the shares trading just below $90 on nonfundamental price action (the broad market selloff). Although the stock has rallied on prospects for a solid 5G device launch at key customer Apple, SWKS continues to appear attractive. Our positive outlook is based on prospects for recovery in broad market verticals and the beginning of the 5G upgrade cycle at Apple. Our long-term rating remains BUY.
SWKS is up 14% so far in 2020 versus a 20% gain for peers. SWKS jumped 80% in 2019, outstripping the 38% gain for Argus-covered semiconductor peers. SWKS declined 29% in 2018 versus a 4% decline for peers. SWKS rose 27% in 2017, compared to a 33% gain for peers. SWKS shares edged down 1% in 2016, below the 70% peer-group gain. SWKS rose 2% in 2015, compared to a 9% gain for peers.
For fiscal 4Q20 (calendar 3Q20), Skyworks reported revenue of $957 million, which was up 16% year-over-year; sales were up 30% sequentially. Revenue far exceeded the $840 million midpoint of management’s $830-$850 million guidance range, and also topped the $824 million consensus forecast. Non-GAAP earnings for fiscal 4Q20 totaled $1.85 per diluted share, which was up 22% annually and $0.59 sequentially from fiscal 3Q20. Adjusted EPS topped management’s guidance (at the revenue midpoint) of $1.51, as well as the $1.52 consensus call.
Skyworks Solutions, in our view, appears well positioned in both its mobile solutions business and in its broad markets business. The mobile business appears to be nicely leveraged to the fall 2020 5G device launch, which is now well underway. The company also appears to have begun generating sequential momentum in its broad markets business. The reduction in trade-related headwinds, which has been obscured by COVID-19, should benefit Skyworks in the coming quarters, even if the pandemic remains stubbornly in place as it appears to be doing.
Skyworks’ wireless technology solutions are playing an essential and critical role during the pandemic. During this period of social distancing and decreased travel, according to CEO Liam Griffith, Skyworks products have been helping to enable remote work, online education, streaming entertainment, store-to-door food delivery, security, and telemedicine. The rollout and adoption of 5G, WiFi 6, and enhanced GPS have become ‘pillars’ in support of the vast connected economy, stated the CEO.
For fiscal 4Q20, Broad markets revenue (31% of total) increased 8% annually while surging by 30% sequentially. Mobility revenue of $662 million (69% of total) was up 19% year-over-year and also up 30% sequentially.
With its mobility business heavily leveraged to the device market and with Apple typically accounting for more than 40% of annual revenue, Skyworks has been designing its product set with the 5G launch in mind. The CEO noted that Skyworks is ‘capitalizing on years of investment’ and is now driving and benefiting from the rollout of 5G in markets around the world. More than 38 countries have already launched 5G networks, with many more regions preparing to deploy.
Skyworks cited data that 12% of the world’s smartphones are 5G enabled, a percentage that could climb to 50% by 2023. In mobile, the Sky5 platform supported the launch of new 5G phones from Samsung, Oppo, Vivo, Xiaomi, Google and other tier-1 players. New export restrictions caused Skyworks to cease shipping product to Huawei as of mid-September. Huawei, which at times in the past accounted for more than 10% of revenue, represented 3% for 4Q20 revenue; that percentage will likely be zero going forward.
The biggest customer for Skyworks is Apple, and the company has indicated that it content the new iPhones is its highest yet on a dollar basis. After representing about 40% of total Skyworks revenue in FY16 and FY17, Apple’s contribution increased to 47% in FY18 and 51% in FY19. With 5G, that number could push up to 55% going forward.
Despite Apple pushing its 5G out nearly a month from its planned late September launch, Skyworks’ strong revenue performance in the quarter signals that the push-out was immaterial. The company believes the industry is ‘very, very early in the 5G cycle,’ suggesting that the Apple launch could be a prolonged and positive driver for Skyworks going forward.
The broad markets business, which serves a diverse set of end markets, has been challenged first by the trade wars and more recently by the broad slowdown in the consumer and industrial economies related to the pandemic. In fiscal 4Q20, broad markets posted its first year-over-year revenue growth since fiscal 3Q19 (calendar 2Q19).
The CEO called out specific products and customers supported by Skyworks in the quarter, including touchless point-of-sale systems used by Square. The company also powered WiFi 6 solutions for advanced routers from Netgear and ASUS, Facebook’s newest Oculus VR product, WiFi 6 access points for Amazon, and residential gateways for Verizon and Telecom Italia.
Skyworks bolstered its position in low latency cognitive audio solutions, powering wireless headsets at Logitech, Sony, Razor and others. In Industrial IoT, the company provided embedded connectivity modules enabling Fibocom’s enterprise IoT architecture. Skyworks powered medical solutions (GE and Boston Scientific) and wireless utility metering (Itron and Census).
The company obtained ‘multiple’ design wins for its massive MIMO base station and small-cell business. And in Automotive, Skyworks is supporting telematics systems at BMW, Tesla, Daimler and others.
At the revenue midpoint, management forecast non-GAAP EPS of $2.06, which would be up 11% sequentially and more than 20% year-over-year.
We raised our rating on SWKS to BUY in mid-March with the shares trading just below $90 on nonfundamental price action (the broad market selloff). Although the stock has rallied on prospects for a solid 5G device launch at key customer Apple, SWKS continues to appear attractive. Our positive outlook is based on prospects for recovery in broad market verticals and the beginning of the 5G upgrade cycle at Apple.
EARNINGS & GROWTH ANALYSIS
Revenue far exceeded the $840 million midpoint of management’s $830-$850 million guidance range, and also topped the $824 million consensus forecast. Non-GAAP earnings for fiscal 4Q20 totaled $1.85 per diluted share, which was up 22% annually and $0.59 sequentially from fiscal 3Q20. Adjusted EPS topped management’s guidance (at the revenue midpoint) of $1.51, as well as the $1.52 consensus call.
For fiscal 2020, Skyworks had revenue of $3.36 billion. Non-GAAP EPS for FY20 totaled $6.14, down less than 1% from $6.16 for fiscal 2019.
For fiscal 1Q21, Skyworks guided for revenue of $1.04-$1.07 billion. At the $1.055 billion midpoint, revenue would be up 10% sequentially and 18% year-over-year. At the revenue midpoint, management forecast non-GAAP EPS of $2.06, which would be up 11% sequentially and more than 20% year-over-year.
We are boosting our FY21 forecast to $8.00. We have set a preliminary non-GAAP EPS forecast for FY22 of $8.64 per diluted share.
FINANCIAL STRENGTH & DIVIDEND
Although Skyworks is debt-free, we are withholding a High financial strength rating because of Skyworks’ smaller revenue base relative to peers; its reliance on the inherently unstable mobile device market for over two-thirds of revenue; and its reliance on one customer, Apple.
Cash, equivalents & investments totaled $1.00 billion. Cash, equivalents & investments totaled $1.11 billion.
Skyworks carries no debt.
Cash flow from operations totaled $1.20 billion in FY20, $1.37 billion in FY19.
Skyworks uses its stock repurchase program to offset stock-based compensation awards and to reduce its share base. In February 2019, Skyworks’ board authorized the repurchase of up to $2 billion of SWKS stock. That followed a $1 billion authorization in February 2018.
In July 2020, the board announced a 14% hike in the quarterly dividend, to $0.50 per common share. Previously, in August 2019, the board announced a 16% hike to $0.44 per share. In July 2018, Skyworks raised its quarterly dividend by 19% to $0.38 per common share. In August 2017, Skyworks raised its quarterly dividend by 14.2% to $0.32 per common share. And in May 2016, it raised the payout by 8%.
MANAGEMENT & RISKS
Liam Griffin is the CEO of Skyworks. Kris Sennesael is the CFO. Other key executives include Chief Technology Officer Peter Gammel, and Steven Machuga, VP of Worldwide Operations.
The company’s parts are manufactured in Singapore, China, Mexico and the U.S. and participate in complex global supply chains. Skyworks products are not currently subject to tariffs either here or abroad. Management is watching this situation carefully.
Risks facing Skyworks also include its 40% revenue reliance on Apple, which has a reputation of extracting tight margins from vendors and sometimes dumping vendors unexpectedly. Skyworks reduces that risk by supplying multiple products for the iPhone, including (in the iPhone 7) a low-band power amplifier module and a quad band GSM power amplifier.
Skyworks is growing its handset business faster with other vendors than with Apple, which should reduce the relative revenue contribution from Apple over time. Skyworks is also developing its Broad Markets business, which should reduce its reliance on handset revenue.
Other risks relate to the highly cyclical semiconductor industry, which can contribute to sharp annual and quarterly fluctuations in operating and financial results. The semiconductor space is also highly competitive, which creates persistent pressure on average selling prices. We believe that Skyworks is positioned to mitigate these risks based on its industry expertise, broad product set, deep customer relationships, and focus on both innovation and market expansion.
Addressed markets include mobile device, automotive, industrial, connected home, factory automation, medical, wearable technology, smart energy and other.
SWKS trades at 17.3-times projected non-GAAP FY21 EPS and at 16.0-times our FY22 non-GAAP projection. The two-year average forward P/E of 16.6 is only slightly above the five-year average (for FY16-FY20) of 14.4.
We raised our rating on the SWKS shares to BUY in mid-March; the shares, trading below $90 at the time on nonfundamental price action (the broad market selloff), appeared to offer value at that level. Although the stock has rallied on prospects for a solid 5G device launch, SWKS continues to appear attractive based on prospects for recovery in broad market verticals and the positive outlook for the 5G cycle at key customer Apple. Our long-term rating remains BUY.
On November 4 at midday, BUY-rated SWKS traded at $141.32, up $2.52.