Skyworks (SWKS) Beats On Q2 Earnings & Revenues, Stock Down

Skyworks Solutions Inc. (NASDAQ:SWKS) reported second-quarter fiscal 2017 non-GAAP earnings of $1.45 per share, which increased 16% from the year-ago quarter but declined 9.9% on a sequential basis. Further, the figure beat management’s guidance by a nickel.

Earnings (including stock-based compensation) were $1.33 per share, beating the Zacks Consensus Estimate by three cents.

Revenues of $851.7 million were up 9.9% year over year but decreased 6.8% sequentially and fared better than management’s guidance (down 8% sequentially) and Zacks Consensus Estimate of $840 million.

Management noted that broad markets (includes IoT) – more than 25% of revenues – were up 18% on a year-over-year basis in the quarter. The figure is close to $250 million a quarter, of which 70% came from the IoT business. Meanwhile, Mobile business was slightly below with 75% of total revenue.

Notably, Skyworks largest customer (Apple (NASDAQ:AAPL)) contributed less than 40% of quarterly revenues, while Huawei and Samsung (KS:005930) were above 10% customers in the quarter.

Management stated weak demand from low-end OEM handset makers in China (25% of total revenue), was significantly mitigated by strong demand high-end and mid-tier makers like Huawei, Oppo and Vivo.

Shares fell almost 2.3% in after-hour trading, following the earnings announcement. Notably, Skywork shares have gained 36.6% on a year-to-date basis, outperforming the broader Zacks Semiconductors - Radio Frequency industry’s return of 33.2%.

We expect the second-quarter beat, positive guidance, aggressive share buyback and improving growth prospects at Apple, Samsung and Huawei will help the stock’s momentum in the rest of 2017.

Internet of Things (IoT), Mobile, Automotive Key Drivers

Skyworks continues to capitalize on global mobile connectivity and demand for high-performance solutions across a diverse set of verticals and the Internet of Things (IoT) market. The demand for system-level solutions and higher levels of integration are increasing, as customers implement next level of functionality for higher bandwidth. These in turn are playing directly into Skyworks' strengths and generating huge demand for its products.

The company’s products powered Huawei’s P10/P10+ smartphones and Samsung’s Galaxy S8 platform. The company’s sockets can now be found across MediaTek’s next generation architectures.

Its products are now used by a number of well-known technology companies like Cisco (NASDAQ:CSCO) – in MIMO gateways, Nintendo – in its Switch Gaming console, Fitbit (NYSE:FIT) , Garmin (NASDAQ:GRMN) and LG. Skyworks’also won contracts from Google (NASDAQ:GOOGL), Plume and three leading auto manufacturers during the quarter.

Management acknowledged IoT to be a key growth driver in the long run. The company noted that per industry projections IoT volumes are anticipated to expand five-fold, reaching 75 billion units by 2025, driven by robust demand for connected home, smart grid, factory automation, wearables and virtual assistants.

Skyworks’ believes that its expanding product portfolio covering all important aspects of wireless protocols including Wi-Fi, GPS, LTE, Bluetooth and ZigBee positions it well to benefit from this massive growth opportunity. The company also believes that upcoming 5G upgrade cycle is a major catalyst.

Margin Contracts

Non-GAAP gross margin contracted 40 basis points (bps) on a year-over-year basis and 80 bps sequentially to 49.9%.

Research & development (R&D) expense increased 20 bps, while selling, general & administrative (SG&A) expense declined 10 bps from the year-ago quarter. Sequentially R&D expense increased 150 bps but SG&A remained flat.

The increase in R&D reflects Skyworks continuing investments in expanding business, particularly in the IoT market.

As a result, non-GAAP operating margin contracted 10 bps on a year-over-year basis and 230 bps sequentially to 34.1% in the reported quarter.

Balance Sheet & Cash Flow

As of Mar 31, 2017, cash & cash equivalents were $1.41 billion, up $56.4 million sequentially. Cash flow from operating activities was $235.9 million as compared with $495.9 million reported in the previous quarter.

In the second quarter, Skyworks repurchased 1 million shares for $95 million.

Guidance

For third-quarter fiscal 2017, revenues are expected to be up 18% year over year to $890 million. The figure is anticipated to be better than the Zacks Consensus Estimate of $866.7 million.

Gross margin is expected to be in the range of 50.5–51%, while operating expenses to be $122 million. Non-GAAP earnings are anticipated to be $1.52 per share, up 23% on a year-over-year basis. The Zacks Consensus Estimate (including stock-based compensation) is currently pegged at $1.40.

Skyworks’ expects revenues to grow sequentially in third-quarter fiscal 2017 (ending June), fourth-quarter fiscal 2017 (ending September) and first-quarter fiscal 2018 (ending December). This improvement will help in gross margin expansion sequentially.

Moreover, management believes that along with gross margin expansion, improvement in operational efficiency will aid the company achieve long-term target of 53% gross margin and 40% operating margin.

Zacks Rank

Skyworks currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Zacks' Hidden Trades

While we share many recommendations and ideas with the public, certain moves are hidden from everyone but selected members of our portfolio services. Would you like to peek behind the curtain today and view them?

Starting now, for the next month, I invite you to follow all Zacks' private buys and sells in real time from value to momentum...from stocks under $10 to ETF to option movers...from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for Zacks' secret trade>>