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Skyworks' (SWKS) Q3 Earnings Beat, Weak Mobile Hurts Top Line

Skyworks Solutions Inc.SWKS reported third-quarter fiscal 2018 non-GAAP earnings of $1.64 per share, which beat the Zacks Consensus Estimate as well as management guidance by a nickel. The figure improved 4.5% from the year-ago quarter.

Revenues of $894.3 million were down 0.7% year over year, primarily due to weakness in mobile business and loss of ZTE revenues (which usually contributes $25-$30 million per quarter).

However, the revenue figure was in line the Zacks Consensus Estimate and close to the upper end of management's guidance of $875-$900 million.

Mobile contributed almost 70% of revenues, while the rest came from broad markets. Notably, China contributes almost 25-30% of revenues, majority of which is contributed by mobile.

The better-than-expected performance reflected Skyworks' growing clout in the Internet-of-Things (IoT) solutions and 5G applications.

Skyworks Solutions, Inc. Price, Consensus and EPS Surprise

Skyworks Solutions, Inc. Price, Consensus and EPS Surprise | Skyworks Solutions, Inc. Quote

Quarter Details

During the quarter, Skyworks unveiled Sky5 product suite with 5G antenna tuners. This product delivers bandwidth coverage ranging from 60 megahertz to 6 gigahertz.

The company also launched street lighting modules with Philips for smart cities and introduced networking products supporting AT&T/DIRECTV routers.

Skyworks also launched high-precision GPS functionality improving ride-sharing, mobile payment and fleet management services in the quarter. Additionally, the company inked partnership with Sierra Wireless on LTE CAT-12 data cards for M2M applications.

Skyworks Solutions, Inc. Revenue (TTM)

Skyworks Solutions, Inc. Revenue (TTM) | Skyworks Solutions, Inc. Quote

Moreover, Skyworks enabled telematics at BMW and General Motors. The company has also increased its presence across Nest thermostats, fire detectors and video doorbells by using Bluetooth Low Energy, Zigbee, Thread and Wi-Fi protocols.

Skyworks also commenced production of access solution for Cisco's CSCO enterprise system. Moreover, the company extended its reach within Linksys new dual-band mesh networks. Further, Skyworks ramped connectivity engines for Amazon 4K Fire TV.

During the quarter, Skyworks also deployed massive MIMO base station architectures with a leading European infrastructure provider.

Operating Details

Non-GAAP gross margin expanded 20 basis points (bps) on a year-over-year basis to 50.9%.

Research & development (R&D) expenses as percentage of revenues increased 60 bps on a year-over-year basis to 10.8%. However, selling, general & administrative (SG&A) expenses decreased 50 bps from the year-ago quarter to 5%.

As a result, non-GAAP operating margin contracted 70 bps on a year-over-year basis to 36.3% in the reported quarter.

Balance Sheet & Cash Flow

As of Jun 29, 2018, cash & cash equivalents were $1.65 billion, down from $1.88 billion as of Mar 30, 2018.

Cash flow from operating activities was $258 million, down from $434.2 million in the previous quarter. Capital expenditure was $191 million in the quarter.

The company increased dividend payout by 19% to 38 cents per share, during the quarter. Skyworks repurchased 2.5 million shares for a total of $240 million.

Guidance

For fourth-quarter fiscal 2018, revenues are expected to increase 11-13% sequentially or $1 billion at mid-point. Management expects couple of million dollars in revenues from ZTE.

Gross margin is expected in the range of 51-51.5%. Skyworks continues to target gross margin of 53% over the long term.

Operating expenses are projected to be $135 million.

Non-GAAP earnings are expected to be $1.91 per share, up 16% sequentially, at mid-point.

Conclusion

Skyworks is benefiting from its portfolio strength, particularly in the 5G applications and IoT market. The lifting of ban on ZTE by the United States is positive, although the contribution from the Chinese original equipment manufacturer (OEM) is expected to be minimal in the near term.

Further, Skyworks continues to win content at mobile and OEMs like Huawei, Samsung, Oppo, Vivo, LG and Nokia.

In terms of competition, management believes that Qualcomm QCOM , despite pursuing programs that Skyworks is already a part of, is not a major threat. Moreover, the trade war between the United States and China will not have much impact on the company's top-line growth.

However, weakness in China and Samsung remains a headwind.

Zacks Rank & Key Pick

Currently, Skyworks has a Zacks Rank #3 (Hold).

Qorvo QRVO , with Zacks Rank #2 (Buy), is a stock worth considering in the same sector. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Qorvo is set to report first-quarter fiscal 2019 results on Aug 1.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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