Skyworks Solutions, Inc.

Good afternoon and welcome to Skyworks Solutions first quarter fiscal year 2020 earnings call. This call is being recorded. At this time, I will turn the call over to Mitch Hawes, investor relations for Skyworks. Mr. Hawes, please go ahead.

Thank you, Rob. Good afternoon, everyone, and welcome to Skyworks first fiscal quarter 2020 conference call. With me on the call today are Liam Griffin, our president and chief executive officer, and Chris Senesal, our chief financial officer. Before we begin, I would like to remind everyone that our discussion will include statements related to future results and expectations that are or may be considered forward-looking statements. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, the results and guidance we will discuss discussed include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the investor relations section of our company website for a complete reconciliation to GAAP. With that, I'll turn the call over to Liam.

Thanks, Mitch, and welcome, everyone. Skyworks exceeded December quarter expectations driven by a global demand for high-performance connectivity solutions. As our results demonstrate, Skyworks is leveraging decades of experience scale, and vertical integration capabilities, along with our highly advanced Sky5 platform, accelerating the adoption of 5G technology across a broadening set of end markets and customers. Now, looking at the first quarter in more detail, we grew revenues by 8% sequentially to $896 million, produced gross margin of 50.1%, and operating margin of 35.2%. We posted earnings per share of $1.68, 3 cents ahead of our guidance and up 11% sequentially. And we generated exceptional operating cash flow, totaling $398 million in the quarter. At a higher level, Skyworks is ushering in an age of truly ubiquitous connectivity, enabling richer, smarter, and more convenient ways to live, work, play, and educate. Smartphones are leading this early transition with substantial volumes of 5G-enabled devices shipping this quarter. But more importantly, over time, we expect an incredible unit uptake outside of mobile where connected devices and things will be measured in tens of billions. And as we've noted in prior calls, 5G catalyzes new markets from IoT, autonomous transport, artificial intelligence, and high-definition streaming media. Currently in the U.S., there are approximately eight networked devices per person, a number that is expected to climb to 14 devices by 2022. That represents a 50% increase. And as a recent example, a higher percentage of U.S. households now subscribe to a streaming media service rather than traditional pay TV. Clearly, our world continues to rely upon seamless, high-speed connectivity, and this trend will only accelerate as 5G adoption grows and novel usage cases emerge. Recall, 5G is a technology, not a product, not a brand or a slogan. It offers gigabit speeds, ultra-low latency, and greatly enhanced network capacity, fueling a wide range of applications while becoming the universal connector. Skyworks is playing a pivotal role in the deployment of this standard. with a rich 20-year heritage in designing and delivering highly integrated and customized system solutions. We have demonstrated technology leadership across a vast set of critical product categories, resolving increasingly complex architectures and preparing our customers for the performance gains demanded in 5G. As we look ahead, the expanding product pipeline at Skyworks is clearly generating strong design wind momentum across both mobile and broad market segments. Specifically, in our mobile business, traction in 5G is gaining strength with our Sky5 platform powering launches at Oppo, Vivo, Xiaomi, and Samsung. Our baseband agnostic solutions offer interoperability and are being deployed across leading chipset suppliers, including MediaTek, Samsung, and Qualcomm. And with our expanding filter capabilities in TC Saw and Bulk Acoustic Wave, we help our customers navigate complex challenges. while extending our reach across a broader spectrum of 4G and 5G bands. Moving on to broad markets, at CES, Skyworks announced a unique set of 5G-enabled solutions, including massive MIMO IoT, a suite of connected home devices, and high-fidelity smart audio products. Specifically, we are powering rapidly emerging IoT applications with cellular-based platforms certified by KDDI NTT Docomo, SoftBank, and Verizon. We're driving growth with the launch of our Wi-Fi 6 platforms, expanding our customer reach with industry leaders including AT&T, Cisco, Netgear, Aris, and Aruba. We're advancing automotive content with SkyOne in our emerging V2X portfolio and supplying low-power, long-range IoT products at Ring and many others. In the infrastructure space, Skyworks is leveraging its capabilities in silicon germanium, SOI, gallium arsenide, bulk acoustic wave, and ceramic filters, while powering 5G MIMO and small cell base station design winds. In addition, we are gaining momentum in automotive, enabling new winds with leaders like Continental, Nissan, and Renault, along with industrial players including Honeywell, Bosch, and GE. As these highlights suggest, we remain focused on driving diversification across high-value segments and markets with more than 2,000 products supporting thousands of customers. So in summary, Skyworks has decades of connectivity experience across multiple technology transitions, uniquely positioning us to meet the performance demands of 5G. Our portfolio of highly integrated customized connectivity engines bolstered by the early strategic investments we have made, anticipating both the complexity and the immense opportunity across our end markets. And finally, a highly profitable and predictable business model that allows us to invest aggressively while providing consistent returns to our shareholders. With that, I will turn the call over to Chris for discussion of Q1 and our outlook for Q2.

Thanks, Liam. Skyworks revenue for the first fiscal quarter of 2020 was 896 million, up 8% sequentially, and 16 million above the midpoint of the outlook we provided in November, driven by the successful launch of flagship phones and the early success of our Sky5 product portfolio as new 5G phones start ramping globally. Cross-profit in the first quarter was 449 million, resulting in a gross margin of 50.1% in line with expectations. Operating expenses were $134 million, down 4% year-over-year, as we continued to prudently manage OPEX while making the necessary investments to accelerate future growth of the business. We generated $315 million of operating income, translating into an operating margin of 35.2%, up 120 basis points from fiscal Q4. Other income was $1 million, and our effective tax rate was 8.9%, driving net income of $289 million, or $1.68 of diluted earnings per share, up 11% sequentially. Turning to the balance sheet and cash flow, first fiscal quarter cash flow from operations was $398 million, Capital expenditures were $111 million, resulting in $287 million of free cash flow on $896 million of revenue, translating into a strong free cash flow margin of 32%. We paid $75 million in dividends and repurchased 742,000 shares of our common stock for a total of $74 million. During the last 12 months, we have returned 87% of free cash flow back to the shareholders through a combination of our dividends and share buyback program. We ended the first fiscal quarter with cash and investments of 1.2 billion and we have no debt. Now let's move on to our outlook for Q2 of fiscal 2020. Early momentum from the initial launch of 5G as we ramp design wins in our mobile business matched with solid traction in broad markets are driving better than seasonal performance in the March quarter. For the second fiscal quarter of 2020, we anticipate revenue to be between 800 and 820 million. At the midpoint of the range, our revenues would be flat to last year's Q2. However, including Huawei or excluding Huawei in the second quarter of fiscal 19 and fiscal Revenue is expected to be up mid-teens year over year. We expect gross margin between 50 and 50.5% and operating expenses of approximately 135 million. Below the line, we anticipate roughly 2 million in other income and a tax rate of 9%. We expect our diluted share count to further reduce to approximately 171 million shares. Accordingly, at the midpoint of these ranges, We intend to deliver diluted earnings per share of $1.46. With that, I'll turn the call back over to Liam. Thanks, Chris.

Skyworks delivered strong results to start fiscal 2020. Looking ahead, we are in the early innings of a multi-year technology cycle with 5G gaining momentum and the growth of connected people and things continuing to expand. We have invested aggressively ahead of this transition. and we are uniquely positioned with strategic technologies crafted in our own fabs providing sustainable competitive advantage. At the same time, through crisp operational execution and a strong business model, we are translating these results into long-term shareholder value. That concludes our prepared remarks. Operator, let's open the lines for questions.

Certainly. In order to ask a question, you will need to press star 1 in your telephone. To withdraw your question, press the pound key. Given time constraints, please limit yourself to one question and one follow-up. And your first question comes from a line of Vivek Arya from Bank of America Merrill Lynch. Your line is open.

Thanks for taking my question, and congratulations on the strong results and guidance. Good to see the recovery in the sector after a while. So Liam, I had two questions. First, just on the core business, I'm curious, you mentioned the start of the 5G ramp. How much of that ramp are you seeing in the March quarter? And just roughly, what is the direction of content that you're seeing in these 5G smartphones? And I think you mentioned integration. Is it kind of a winner-take-all in some of these initial wins, or are you still kind of maintaining your share in the specific component that you have expertise in?

Sure. Well, the way we're seeing it right now, we believe we're absolutely gaining share in 5G. And the rollouts of these new highly complex phones are exactly what we want to see. We're continuing to gain share with our Sky5 platform. We're doing the very difficult things that we've been talking about in prior calls, really crafting and creating these wonderful devices that are going into 5G-enabled phones. We're seeing that across a number of customers. great position in China with a number of leading players, position at Samsung, and then also with some of the larger players in the U.S. that haven't even launched their 5G phone yet. So there's a lot of positive momentum there, and we feel very upbeat about where we're going in the second half.

All right. And my follow-up is kind of a strategic question. So you have been developing your internal BOR capability for some time, but one of your competitors put up their RF assets for sale. I'm curious, you know, if those assets get sold to a potential competitor or customer, you know, what's the impact or are, you know, those assets something that, you know, you might be interested in taking a look at? Just how should we think about, you know, kind of the impact of this potential consolidation on Skyworks?

Sure, sure. I appreciate the question. Well, we really can't get into any specifics around M&A. We're well aware of the opportunity that you just suggested. But at the same time, we are really happy with what we're doing in our organic business. And we see a tremendous opportunity there with 5G now just starting and the momentum in our demand really accelerating. So we feel good about it. But at the same time, you know, we have to look at M&A opportunities. And I'm pleased to say that we have the powder and the cash flow to do deals when deals are necessary. But at this point, we really just can't comment on anything specifically.

And your next question comes from the line of Timothy R. Curry from UBS. Your line is open.

Thanks much. Chris, can you give us the splits for both businesses for December and how you think about it for the guidance for March?

Yeah, so our broad market business in the December quarter was approximately 27% of total revenue. That is in line with what we saw last year. Keep in mind that the December quarter is typically a very strong mobile quarter with obviously a lot of business with our large customer and then the ramp of 5G phones. So mobile was 73% of total revenue. Looking forward into the March quarter, that is where we see a little bit of a flip, right? This is typically a stronger broad markets quarter. We do expect some mid-single-digit sequential growth in our broad markets business, and we will see some mid-single year-over-year growth in broad markets. in the March quarter, and then, of course, even further, stronger growth in the second half of 2020.

Great. Thanks for that. And can you just talk about Huawei and how it ended up playing out? I think you expected about $10 million, and my guess is that it was maybe a little bit better than that. But how did it play out and sort of how do you think, you know, not just about them as a customer, but how do you think about you know, how the export, you know, restrictions might change and how that is impacting what that customer and what your other Chinese customers are, you know, pulling, how, you know, hard they might be pulling. Are they, you know, perhaps double ordering things?

Sure. Well, obviously, it's an evolving situation. And, you know, we have a really dynamic business today in China with Oppo, Vivo, Xiaomi, and even some of the media tech ecosystems supported. Huawei, of course, you know, there's been some limitations in what we can do. As we've said in the past, you know, we can't provide a quarter-by-quarter guidance by customer, but I will say that in the Q1 timeframe, Huawei came in a little bit better than we expected. But I will tell you that we are de-risking exposure to Huawei in the business. We're still going after the design wins. We're going to do everything we can to gain share when it's available, but we are de-risking that in our financial outlook as we go forward. So we want to make sure that that's clear to the investors.

And your next question comes from the line of Tashiya Hari from Goldman Sachs. Your line is open.

Hi, guys. Thanks for taking the question and congrats on the strong results. Liam, I was hoping you could talk a little bit about the infrastructure business within broad markets. A couple of your peers have talked to a pause in activity on the part of your customers. Is that sort of the case with Skyworks? And if so, How much of a drag was it in the quarter? And more importantly, I guess, what's the outlook into fiscal Q2 in the back half of the year? Can I have a follow-up? Thank you.

Sure. Yeah, I mean, the infrastructure business has been a little bit slow, and I don't think it's changed in terms of its pace, but it's a very necessary element in 5G, and I know some of the players like Ericsson and Nokia are really stepping up right now. Obviously, there's Huawei opportunities in there as well. They have some limitations, but, you know, it's obviously an opportunity. I see the infrastructure space still very vital for us. We do some incredible work there with our MIMO solutions, antenna arrays, some of the filtering that we mentioned, including ceramic filters. We have a role, and we have a necessary role in that area. I would expect infrastructure to pick up in the second half of the year. It's also a positive margin driver for us across broad markets. We know how to operate in those industries. We have very good relationships with the customers. we should expect a better climate there in the second half.

Got it. That's great. And then as a follow-up, this one's for Chris. On your last call, you guys talked about gross margins potentially hitting your 53% target in the back half of the fiscal year. I just wanted to confirm is still the case, and if so, what were some of the key drivers on a half-over-half basis? Thank you.

Yeah, first of all, I'm pleased with our gross margin execution. So in the December quarter, we came in at 50.1, slightly above what we guided. And so we are guiding slightly up in the March quarter at 50 to 50 and a half, despite our normal seasonal decline in revenue going into the March quarter. And then in the back half of 2020, I do expect further gross margin improvements towards our longer-term goal of 53%. And I didn't say last time that we were going to hit 53% at the end of 2020, but continue to make very good progress towards that target, longer-term target of 53%.

And your next question comes from the line of Blaine Curtis from Barclays. Your line is open.

Hey, guys, this is Tom O'Malley. I'm from Blaine Curtis. I just want to clarify real quick. Chris, you made a comment about broad markets into March. You originally said that it was going to be up mid-single digits, and then you said mid-single-digit growth year-over-year. Could you just clarify, is it sequential or year-over-year?

So it's both. So sequentially, it's mid-single digits, as well as year-over-year, it's mid-single digits, excluding Huawei, right? because we had some Huawei infrastructure business that was part of that broad markets. Obviously, due to the ban, we lost most or almost all of that. And so if I exclude Huawei, we will be back to mid single digit year over year growth in March, and then a potentially even stronger year over year growth, excluding Huawei in the second half of 2020.

Great, that's helpful. And then just a broader question. When you guys are looking at design wins, particularly in 5G, you guys have a competitor that also does the modems. Clearly, the competition is pretty fierce there, and there's a lot of talk about them being attached with the RF on many early solutions. How do you compete there, and how do you break down the bundling aspect?

Sure. Well, you know, our customers drive that, and our customers want solutions from Skyworks. The integration capabilities that we bring, specifically in 5G, where the architectures are substantially more complex than they were in 4G, integration around solutions such as our Sky5 platform are ideal for customers moving into 5G. And, I mean, the proof is in the pudding. If you look at the devices today, the 5G devices that are going to market right now, you're going to see that kind of integration from Skyworks. It's not it's not being driven by the chipset provider. That may work in small markets where the customer doesn't have a level of sophistication and they want a turnkey solution all in, but that's not what we're seeing right now. We're seeing best-in-class solutions, leveraging integration, looking for companies that have their own facilities like us, from filter to gallium arsenide to assembly and test, customizing and crafting the solutions. That's how we win. And by the way, we work with every baseband supplier, whether they're a friend or a foe, And we take our lead from the customer, and that's always worked for us.

Great. Thanks, guys.

Sure.

And your next question comes from the line of Amber from BMO. Your line is open.

Hi. Thank you. Liam, you may not have to worry about that, whether you have to buy that business or not. It looks like a PR hit the tape as soon as your call started. Oh, really?

Okay. Yeah.

They signed a multi-year deal with Apple. Okay. Let me just focus on you guys. What does your portfolio look like for 5G, for ball? And then within your portfolio, where do you think you have the most opportunity to gain content in 5G?

Sure. Well, I mean, just to take a long look, just a little bit of a backdrop here. I understand right now 4G phones – are basically driving, you know, spectrum from 700 megahertz to about 2.5 to 3 gig, right? So all that action continues in a mobile phone today. And then you add to that with 5G solutions, unique solutions that roam at 5G spectrum. Let's say 3 to 6 gig or 6 gig and higher. That's an incredible opportunity. It's all incremental physical content. And each one of the players in our space looks at it differently. What we want to do is capture the maximum opportunity, work with our customers, give them absolute choice on the kind of componentry they want, the markets that they're going to roam in, their current budget, all of these things, and then craft an integrated solution for them. So when we say Sky5 is a platform, it's a platform. It could be very different from the largest customer to a customer in Korea to customers in China. And that is a unique Skyworks differentiator. And we have the tool sets to do that now. We've added bulk acoustic wave. We have high capacity in TC saw. We have standard saw. We have crafted assembly and test with facilities under our watch. Really unique stuff. And that makes a big difference for us. And it broadens the opportunity reach that we have in any given 5G device.

Okay. And my follow-up for Chris is on the operating model and as you try to avail of the opportunities, what does it do to OPEX and also CapEx as we think through? Just remind us what CapEx was guide us for this year as well, if that changes or not.

Yeah. And so in terms of operating model, we are driving the business and growing the top line above market. We are driving operational efficiencies and bringing high added value products to the market that will drive the gross margins towards our longer-term target of 53%, and our operating margins approaching 40%. Currently, OPEX is running on about 15%, and I think we can do a little bit better there, so you get to an operating margin that approach 40%. At the same time, we're very much focused on driving free cash flow at 30 percent or slightly above 30 percent. And you saw last quarter we had 32 percent of free cash flow margin. We will continue to invest in the business. There's no question about that. We, as Liam just explained, one of our strengths is our operational footprint. with our gallium arsenide FAPs, our filter operation, as well as our back-end operation. And we continue to expand the capacity in those FAPs, and we continue to develop new technology, package technologies and filter technologies. And that, of course, requires sufficient CAPEX support. CAPEX is running on or about 10 percent of revenue, and I think in the foreseeable future, that's what you have to put into your models.

And your next question comes from the line of Bill Peterson from J.P. Morgan. Your line is open.

Yeah, thanks for taking the question. Coming back to broad markets, you spoke to the infrastructure opportunities. Of course, a large portion is your Wi-Fi and IoT. You mentioned the infrastructure is kind of back halfway there, but try to get a feel for how you expect the ramp of Wi-Fi to progress and I guess how that manifests itself in your broad markets growth really for the full fiscal year and especially the back half. Sure.

Yeah, no, it makes sense, Bill. So I think if you look at broad markets in total, you know, I want to give you a little bit more of a broad view here. So we have, first of all, a wide set of protocols to reach for, right? 5G, Wi-Fi 6, Bluetooth, GPS, ZigBee, LoRa. All of those are opportunities for us to connect things with our customer. The Wi-Fi 6 now is really gaining momentum. We've got some new strategic design wins that are just coming about in this last quarter and looking into the second half of the year, more ramps. with names like AT&T and Cisco and Netgear. And we've also done some great work moving into industrial and automotive spaces. So we're securing wins now with Bosch, Honeywell, Siemens, GE. These were not customers two or three years ago. They were not at all on the playing field for Skyworks. And now we're also moving in automotive. We've got wins with Continental, BMW, Renault, Nissan, and others. So a lot of really cool things. And even some, you know, amazing consumer products. We've got some devices now, infant monitoring with Procter & Gamble. Of course, we're lined up with Ring. We've got a lot of product with Amazon. So it's a really rich portfolio that goes from, you know, high end to mid-tier. But the key for us, Bill, is it levers technology and it levers connectivity. And the fact that we have that broad set of protocols, we can pick and choose with our customer what's the right connectivity protocol to lock into their solutions. So we feel really good about that, and we think that that momentum is going to carry forward for many, many years.

Okay, thanks. And I guess if you think about the 5G phones that are going to be launched here in the first half of this year, of course, you know, Samsung already launched 5G phones last year. You have the, as you guys call it, OVX. Can you speak specifically to the 5G winds you have, I guess, for really like ultra-high winds, And I know that the 4G bands are clear and important, LTE, Advance Pro, and so forth. But can you speak to the design ones you have in the OVX camp and Samsung?

Yeah, absolutely. So the 5G momentum, the early momentum in 5G, a lot of that is actually led by the China name. So we have great position in 5G solutions. So this is, again, 5G. So we still have great 4G position with these accounts, but we're overlaying incremental content in 5G with names like Oppo, Vivo, and Xiaomi. So those players were very strong. We're doing some good work partnering with chipset providers. MediaTek is one as an example in their Phase 7 designs. We've got great position, design reference position. These are all 5G solutions. And again, early moves with China with those players that I named, but also, you know, some really significant moves that we expect later in the year with some of the larger customers as well where you'll see substantial content gains as well.

And your next question comes from the line of Edward Snyder from Charter Equity Research. Your line is open.

Thanks a lot. Liam, we talk a lot about 5G. I'd like to clarify if we could, especially with regard to your comments about share gains with some of the new products coming out, the smartphone products coming out here. If we divide the world into, like, 4G, 4G Advanced, 4G Pro, and the pure 5G content, which is mostly ultra-widebanded, Are you referring to both or referring to one? I know you guys were strong in some of the initial ultra-high band last year, and I know they're wrapping not only that but also the band N77 bands in the Chinese form. Is that where you're seeing most of your share gains?

Yeah, exactly. So we're continuing to have the 4G placement, which is basically kind of backward compatibility, and then UHB bands, N77, N79 bands, unique products there that are incremental that you wouldn't see in a 4G phone, but they'd be incremental dollars that would lay into a 5G phone. And the other point that we've been making here is, and as you know, the more complexity that you have, the more devices that we have physically, we've got to deal with size, we've got to deal with competition for current consumption, coexistence, and all the challenges that you get when you put more and more semiconductors together. Our approach with that is to offer that customer the Sky 5 platform and configure it in such a way that some of those challenges that one would have in putting together a complex device can be resolved with Skyworks overlaying that into a platform solution. But the incremental content isn't. It's UHB, it's N77, N79. There's more bands coming out over time. But we're in a really good position to capitalize as 5G continues to roll out.

Yeah, and you've done really well there. As a separate part of that, then let's talk about the 4G, if we could, for a while. China went to phase six last year. As we all know, Corvo took a lot of that because there's a lot of nervousness on the OEM's part about going to a fully integrated front end, so they wanted one guy. We've gotten feedback that that's starting to change now, and that Skyward's starting to carve out your traditional low band part of that platform. Are you seeing that to any material extent? And then, in the larger question, I know your Ball filter program is coming along very well. You've got some received devices now, and they're going to have duplexes, but that seems to be a long way from being able to offer the kind of performance that you have to offer to actually capture the mid and high bands, too. Is there a path to that mid-high band portion of the 4G section of these phones over the next year or so, or is it going to be something further out?

Yeah, yeah. So let me try to capture both. So on the MediaTek side, When you're getting to the lower band opportunities, there's a tremendous amount of Skyworks opportunity there with low band pad, with DSM, et cetera. So that's the 4G space. When you go to the ultra high band or mid and high band solutions, we recognize that's a challenge, but we're on pace right now to address it. We've done some good work with some UHB opportunities. We do recognize the performance merits with some of the leading players in mid and high band, and we aspire to get there. We're doing the work internally, but we understand that, you know, it is going to be a task. It's going to be a challenge, but we have, you know, the expertise, growing expertise, engagement with customers. The facilities are important. We've got, you know, some facilities here in that position that will help us. But, yeah, we're on the path to achieving the highest grade, but we still have a lot of work to do, quite frankly.

And your next question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Yeah, thanks for taking the question. Congratulations on the good execution, guys. Liam, I wanted to follow up on that last question and maybe tie it into one that Vivek answered and really focus on a longer-term dynamic. So Skyworks is historically working with customers 18 months out of a handset launch on new products. So from the vantage point that you have now, what does content gain look like in the funnel for things that we'll be launching in calendar 21 versus the early content gain that you're getting in year one of 5G? Is it flat? Is it up? If it's up, to what extent would it be up next year as you continue to try and flex into things like mid-band or high-band pads with your block capability?

Sure, sure. So let me just be really clear about one thing. The technologies that we have right now, and we don't have everything, but the technologies that we have right now in 4G and the new technologies that we have in 5G are going to add substantial content to our opportunities, no question about that. So now we're talking about, you know, further out involved, what else can we do? We've got aspirations to continue to do more, but the things that we're doing now today, Leveraging BAW, leveraging Sky5 as a platform, leveraging the incremental content that 5G bands bring, all going to be a great, great opportunity for us to step up. And one of the things that's helping us is the complexity. We keep saying this, but it's really important. The technology burden in a 5G device is substantially harder, more difficult to implement, more challenging for the customer, and then bring that to market quickly. So there's a lot there. We are the experts at doing that. That's why we talk about decades of experience. We've been through these transitions. This is one of the harder ones, and that's great for us, and it's great for the top players in the market because we're going to be able to enjoy solving our customers' problems and putting them in a position to win. So we're excited about it. We're going to lever all of our technologies, our TC Saw capability, our packaging technology, bulk acoustic waves, ceramic. All of these technologies that we have will play a role, but the content opportunity is absolutely there. We've talked about that before in presentations, prepared remarks, but we see, you know, meaningful dollars of content opportunity, and some of that will start in the second half of this year.

And with regards to that last point, with content kicking in in the second half of the year, beyond what we're seeing with momentum in the business here in the quarter that you're just guiding to, which is above seasonal. So is it fair to think that with the content that you've got, you've got a year where integrated mobile can drive consistently above seasonal performance in the business, or is it just too early to be able to have that kind of visibility from where you are today?

Yeah, I mean, it's difficult to figure out what the natural seasonality is going to be, but we definitely see improving opportunities for us design wins that have been consummated that haven't yet shipped. And, you know, let's also look at where the customers are. You know, one of the largest customers, great customer, hasn't put a 5G phone out yet. So that's another thing to think through. So I think there's plenty on the horizon. We're really excited about it. You know, we just delivered a beaten race, Q1 and Q2. I think the broad markets business is going to accelerate. We talked a little bit about that with Chris. The 5G opportunities are right there in front of us. We're executing fully. We're adding capital. And we're really enthused about the opportunities that are in front of us.

Your next question comes from the line of Chris Caso from Raymond James. Your line is open.

Yes, thank you. I guess first question is if you could characterize the strength that you're seeing and kind of where the strength is coming from that's driving the better seasonal Q1. I guess I'm assuming that The new Chinese 5G phones are a large part of that, if you can clarify that. And then as we go through the year, what is going to be the pace of new introductions and your content gains from the Chinese phones? Is that going to be something that's steady through the year? Is it more kind of front-end loaded? Maybe get some clarification on that.

Sure, sure, Chris. Well, you know, a couple things. This is the first period that we're actually, you know, talking about 5G in devices and bringing revenue to the table. So we're early, early innings, and we're already seeing some improvements in our numbers, Q1 and Q2. And that's the early part of 5G. And if I were to look at that, a lot of that is China. It's Oppo, Vivo, Xiaomi, names like that. But we're also seeing, you know, ramps coming in with Samsung. You know, I think there's going to be some really nice ramps with one of the larger customers. Again, haven't put a 5G phone out. And the complexity that we see that I've talked about on this call is real. And it's a great opportunity for Skyworks. And we're the company that knows how to do the complex things very well. We know mobile. We've been doing this for 20 years. You know, so the transition from 2G to 3G to 4G, talked about that. 5G is much harder. And it's calling upon the resources, our people, our know-how, the facilities, the ability to troubleshoot, all that really good stuff is coming to bear right now and allowing us to win business and allowing our customers to be successful. There's a lot going on on that end. Then the broad market business, the numbers bounce around a little bit, but I can tell you that one of the metrics that we look at is customer acquisition. We want to add customers. We want to add high class, high end players, margin rich customers. We're doing it. Some of the names that we talked about, Bosch, Raytheon, Names like that, you know, getting into industrial and automotive, working with companies like BMW and Nissan. I mean, that's really cool stuff. And it still plays on the connectivity core. And what's really important for Skyworks is connectivity. And we still can lever those technologies and those resources to port into other markets outside of the mobile phones.

That's helpful. Thank you. As a follow-up, you know, to really what you just said, How does that affect your capacity planning as you go through the year? And your CAPEX has been fairly steady. I guess it may be up a little bit. But as the 5G ramp proceeds, are there scenarios where you need to put in more substantial CAPEX in order to meet that? And at what point in time do you need to make some of those decisions?

No, we're making those decisions on a continuous basis. Just look at the December quarter, we put in an additional $100 million of CapEx, and so we will continue to do so every quarter. And again, it's a combination. Some of that is pure capacity related, right, and expanding the capacity so we can handle the higher volumes. But a big part of that is also technology related, different and more complex type of packaging and testing. expanding our reach in filter technologies as well as with our gallium arsenide power amplifiers. So, again, count on about 10% of CapEx, and despite that, we will continue to drive a 30-plus percent free cash technology.

And your next question comes from the line of Carl Ackerman from Cali. Your line is open.

Thank you. I have two, if I may. First of all, if we just go back to the March quarter outlook, there's a question on inventory. But how would we classify or how would you classify your inventory across the channel, given all top six smartphone suppliers are launching flagships in the March and April timeframe? It seems to be kind of a fairly tight window. And I have a follow-up.

You know, the inventory in the channel seems to be very healthy, at least as far as we have visibility right on the component level. There is definitely a little bit of a buildup in anticipation of Chinese New Year. But what we see is that the supply chain is actually struggling a little bit to keep up with the launches of those new 5G phones. And so inventory in the channel is pretty healthy.

Got it. That's helpful. As my follow-up, there's been a lot of noise and I guess perhaps overly concerned on the FCC's decision to halt satellite operators from offering private auctions of the C-band for cellular 5G services here in the United States. Do you think that creates a delay in the implementation of 5G enabled phones here? Should we be worried about it at all? Any color there would be helpful. Thank you.

Sure. Yeah, I don't think that it is going to affect us in any way. In fact, I mean, if they open it up to the public, then it may be an opportunity to have more spectrum and create more opportunities for us to roam, have our devices roam on. But the base case right now doesn't assume that. You know, any upside from the 3.5 auction, so on our end. But, you know, that's a good question. We probably learn more over time. But I don't think there's a negative spin on that on our end. I think we've pretty much positioned 5G. We're very well aligned with the standards boards and, you know, where the spectrum is going to be. So we're all over that. But we'll definitely keep our eyes on the opportunity. If there's more spectrum that's added, we will absolutely be able to develop solutions that will support transmission and communication over that spectrum.

And our last question comes from the line of Harsh Kumar from Piper Jaffray. Your line is open.

Yeah, hey, guys. Thanks for squeezing me in. Two questions as well. Liam, one for you. There's a lot of debate on whether the first generation of 5G handsets in the U.S. will be millimeter wave capable. Clearly, they'll have some subsects. I was curious where the sky works and you guys staying on that thought process. And then also, how is your preparedness for millimeter wave at this point? And I had a follow-up.

Sure, Harsh. Well, you know, millimeter wave, it's an interesting technology. It's an interesting technology and it has some benefits. You know, theoretically, it has tremendous speed and latency opportunities. But at the same time, you know, there's some drawbacks. It's expensive. It draws a lot of current. You have line of sight impediments there. So it isn't something that we're seeing today. We're working with all these customers where it's going to be a kind of a standard offer. It may be a great technology for, you know, high density areas, whether college campuses or going into a stadium and you need, you know, some really high speed connection over a short distance that's unimpeded by any objects, it's possible. But there's some challenges. Now, over time, that could evolve, and maybe there's a way for the technology to evolve and make it cost-effective and also performance-effective. But, you know, right now, it's a little bit out of the aperture. A lot of our customers are not looking at it right now. Some are. We do have some small incremental bets on millimeter waves. And as we've talked about, you know, we have our own fab, so we can run some of the technologies that we need to. if that starts to blossom. But, you know, we talk to our customers and that's where we get our cues. And we share information about technology to help them. But at this point, I don't think it's going to be a significant element in 5G, at least for the next year.

Understood and very helpful. Thank you, Liam. And then I think at the beginning of the call, I think Vivek had asked a question on content increases. and I believe you answered a lot of stuff, but I think you might have skipped that part. I was curious what, you know, ex-Wi-Fi upgrades and other kind of things like, you know, Bluetooth upgrades that might be happening on the RF side, just pure cellular content increase in 5G over 4G, what are you guys seeing? Would you put that as in line with historical or greater than that, or... Even if you want to give a number and be generous with us, we'll take that.

No, it's going to be more than, okay, I'll tell you, it's going to be higher than the 3G to 4G upgrade. That I definitely believe. And again, it's because the content, the physical content and the specific devices that are necessary to build the 5G solution, that incremental value is bigger than the incremental value that went from 3G to 4G. That's an absolute fact. Now the question is, Who is best positioned to capitalize? You know, we have an incredibly broad reach. We have engagements with all the customers. We have the unique technologies that we've noted, not just for capacity, but as Chris said, technology. So we love that. So we think there's going to be a meaningful multi-dollar opportunity. We've talked about it in our presentations. You know, maybe $5 to $7 or more incremental from 4G. And then the capture on that is all about how do you execute How do you provide the best solution to your customer and how you bring that to market on time? So those are the factors, and that's the stuff we love to do. I mean, that's the strength of our company.

Ladies and gentlemen, that concludes today's question and answer session. I'll now turn the call back over to Mr. Griffin for any closing remarks.

Thank you all for participating on today's call. We look forward to seeing you at upcoming investor conferences during the quarter. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation. Thank you.