Skyworks Solutions, Inc.

Good afternoon and welcome to Skyworks Solutions' third 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' third fiscal quarter 2020 conference call. With me 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 end 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 includes certain 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 to Liam.

Thanks, Mitch, and welcome, everyone. Before we discuss our Q3 results, I want to briefly comment on the COVID-19 pandemic, which continues to impact families, businesses, and markets worldwide. I'd like to start by recognizing the tireless efforts of our talented Skyworks team as we've rapidly adapted and responded to a new working environment. We've implemented rigorous protocols designed to protect the health and safety of our employees, along with our valued customers and trusted partners. In parallel, we continue to deliver the vital connectivity solutions that people worldwide are depending upon to navigate the pandemic. Now we'll turn to an overview of our third quarter performance. Skyworks delivered results well above consensus in the June quarter, as our Sky5 platform gains traction, powering innovation in 5G applications at the leading smartphone OEMs and increasingly across our IoT customers. For the third quarter, we reported revenue of $737 million, nearly $50 million above our guidance. we achieved gross margin of 50.1% and operating margin of 31.3%. We posted earnings per share of $1.25, beating our guidance by 12 cents, and we generated strong operating cash flow, totaling $259 million in the quarter. Our momentum continues to improve, reflecting on our execution across a rapidly evolving business landscape. as well as the broadening adoption of 5G. A few data points highlight the growth of this critical technology. Globally, 5G subscriptions are continuing to grow with estimates approaching 3 billion over the next five years. 5G handset demand is accelerating across a diversified set of customers and geographies. In fact, in China, During the month of June, approximately 60% of all smartphones sold were 5G enabled. And a new 3GPP standard was also released, validating the extension of 5G technology into IoT, V2X, multimedia broadcast, and other services. Clearly, 5G, along with other advanced wireless technologies, such as Wi-Fi 6 and enhanced GPS, are spawning new usage cases and fortifying the backbone of an expanding connected economy. During the quarter, we secured key design wins across numerous applications, from the mobile phone to industrial IoT, automotive, cognitive audio, aerospace, and defense. Specifically in mobile, we are expanding our Sky5 platform across multiple flagship 5G models. at Samsung, Motorola, Oppo, Vivo, and Xiaomi. In addition, we are populating some of the highest performing 5G platforms that we'll be launching later this year. In IoT, we're enabling AT&T's tri-band gateways with our Wi-Fi 6 solutions, ramping indoor and outdoor access points at Aruba, Juniper, and Linksys. powering integrated connectivity in Amazon and Ring security systems, launching voice assistant solutions and mesh routers at Google, and we're leveraging our 4x4 MIMO and Wi-Fi engines and premium soundbars at Sonos. In addition, we delivered new cognitive wireless audio solutions, powering the leading gaming headsets. Now moving to the industrial space, We are supporting IoT platforms at Bosch and Gemalto and leveraging our GPS, circulator, and advanced filter solutions at leading aerospace and defense companies. And in automotive, we're capturing new designs with Sky5 at BMW, Ford, and other leading manufacturers. These wins demonstrate our market leadership, underpinned by a diverse and growing set of critical technologies, resolving increasingly complex architectures and preparing our customers for the performance gains demanded in 5G. During the pandemic, we have witnessed a sharp inflection in the usage case of our core technology, enabling a variety of work-from-home applications, online learning and education, media and gaming, at-home fitness, safe telemedicine, and a sustainable shift to touchless commerce. Given this increased demand for high-speed data consumption, networks are being taxed as never before. To illustrate how the pressure on the network is intensifying, on a typical day in just one second, there are 96,000 gigabytes of Internet traffic, 85,000 videos watched on YouTube, 84,000 Google searches, and 5,000 Skype calls. Now more than ever, always-on connectivity is paramount, creating a compelling market opportunity for Skyworks' proven solutions. Whether it's Zoom, Teams, FaceTime, telemedicine, or touchless home delivery, at Skyworks, our commitment is to make these connections seamless and efficient. Looking forward, we are not bounded by handset volumes. as our reach continues to expand across the IoT space, enabling a wide range of industries, applications, and customers, all benefiting from the performance and utility of our solutions. In short, our unique technologies have never been more valuable, essential, and critical, with an expanding opportunity set emerging in ways that we have never imagined. With that, I will turn the call over to Chris for a discussion of Q3 and our Q4 outlook.

Thanks, Liam. Skyworks revenue for the third fiscal quarter of 2020 was $737 million, which is $47 million higher than the midpoint of the guidance coming into Q3. Revenue was down 4% year-over-year. However, excluding why we related revenue in both Q3 of fiscal 19 and fiscal 20, revenue was up 2.5% year over year, despite the negative impact from COVID-19. Gross profit in the third quarter was $369 million, resulting in a gross margin of 50.1%. Operating expenses were $139 million, up slightly year over year, as we continue to prudently manage OPEX while making the necessary investments in research and development to accelerate future growth of our business. We generated $230 million of operating income, translating into an operating margin of 31.3%. We had $2.3 million of other expenses, mainly driven by Forex losses, and our effective tax rate was 7.5%, driving net income of $211 million, or $1.25 of diluted earnings per share, which is 12 cents above the midpoint of the guidance. Turning to the balance sheet and cash flow. Third fiscal quarter cash flow from operations was 259 million. Capital expenditures were 72 million, resulting in 187 million of free cash flow. On a trailing 12 month basis, our free cash flow margin is 32%. We paid 73 million in dividends, and repurchased approximately 670,000 shares of our common stock at an average price of $87.42 for a total of $59 million. During the first three quarters of fiscal 2020, we have repurchased 4.6 million shares, and during the last 12 months, we have returned 84% of the free cash flow back to the shareholders through a combination of dividends and share buybacks. We ended the third fiscal quarter with cash and investments of 1.2 billion, and we have no debt. Now let's move on to our outlook for Q4. We expect double-digit sequential revenue and earnings per share growth, driven by the strong demand for our market-leading solutions. Specifically, we anticipate revenue to be between 830 and 850 million. We expect gross margin in the range of 50 to 50.5 percent and operating expenses of approximately 142.5 million. Below the line, we anticipate roughly 1 million in other income and a tax rate of 9.5 percent. We expect our diluted share count to further reduce to approximately 168 million shares. Accordingly, at the midpoint of the revenue range, we expect to deliver diluted earnings per share of $1.51. Lastly, given our confidence in Skyward's strategic outlook and strong cash flow generation, we announced a 14% raise to our quarterly dividend to $0.50 per share. And with that, I'll turn the call back over to Liam.

Thanks, Chris. With 5G gaining traction, we are now at the cusp of a multi-year upgrade cycle. one in which Skyworks is uniquely positioned to outperform. Our Sky5 platform provides tremendous flexibility to our customers, purpose-built to be baseband agnostic, while powering the most innovative 5G handsets. In addition, these same 5G solutions are now expanding across industrial and automotive applications. And as complexity intensifies, we are aggressively adding to our enabling technologies. with ongoing investments in both TC-SAW and bulk acoustic wave filtering. In fact, we just exceeded shipments of 150 million BAW-enabled modules, and we see strong momentum for this technology in both mobile and broad markets. Our proven ability to advance key connectivity protocols, delivering higher speeds and lower latency across 3G, 4G, and now 5G. positions us well to capitalize on rapidly evolving market opportunities. Indeed, our mission of connecting everyone and everything all the time has never been more relevant. Finally, the strength of our balance sheet and cash generation capabilities allow us to accelerate the investments that fuel long-term profitable growth while enabling Skyworks to deliver premium returns for our stockholders. That concludes our prepared remarks. Let's open the line for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Given time restraints, please limit yourself to one question and one follow-up. And your first question comes from the line of Vivek Arya from Bank of Montreal, or America, sorry. Your line is open.

Thank you. Yes, Bank of America. Thanks for taking my question, and congratulations, Liam and Chris, on the strong results and execution. Liam, I'm curious, what drove the $50 million or so upside in the quarter, in the June quarter, and what's driving the strength in September? I ask that because, you know, a few weeks ago, one of your competitors had mentioned the possibility of a delay in one of the flagship 5Gs. So I was wondering if you were impacted by that or by, you know, any potential, you know, kind of supply-related or, you know, trade tension-related pull-ins by any Chinese customer. So just give us a sense for, you know, what the upside kind of tells us about the true state of, you know, demand and your progress with customers.

Sure. Well, the upside came from a number of opportunities that we're able to execute upon largely the initial launch of 5G products, much through China, with some of our partners that we mentioned, Samsung, Oppo, Vivo, and others. We also had some nice penetration in our Wi-Fi portfolio, our Wi-Fi 6 launches. They were beneficial to us, but there was still a great opportunity in core mobile to grow. We did have to combat some supply chain issues, to be fair, But we started to improve through the quarter with acceleration through the last month of the quarter. That's now propelling us into Q4. So, you know, we're very comfortable with where we are right now. I think the team did a good job still navigating the COVID-19 headwinds for sure, but executing well through our factories and delivering what our customers need.

Got it. And for my follow-up, you know, does – how should we think about then seasonality going into December? Because I imagine that, you know, this year is perhaps more special because there are these, you know, big 5G ramps. But, you know, there is also all the disruptions because of COVID and the macro headwinds because of COVID. So how should we think about your December quarter seasonality given all these puts and takes?

Sure, sure. Now, obviously, today we guided our Q4 quarter, but as we start to think about December, you know, based on the traction that we're working and the demand for this 5G technology, which is still just tremendous, we think that the December quarter should be strong for us. You know, and that will come across with a number of customers, but we have some really powerful design wins that we've created today. We talk a lot about content reach here at Skyworks, and I think you're going to see that when you look at some of the new launches that will happen at the end of the year. So we're very well positioned for it. As we've always talked about, complexity is our friend. The technology bar is high. That's exactly what we want to see, and we'll be able to demonstrate that through 5G handsets here in the second half for sure.

Thank you.

Your next question comes from the line of Toshi Ahari from Goldman Sachs. Your line is open.

Hi, guys. Thanks for taking the question, and congrats on the strong results. I guess my first question is on broad markets. Chris, if you can help out by sort of sharing what percentage of revenue came from the broad markets business in the quarter. And I guess more importantly, Liam, you talked about a number of businesses within broad markets and kind of the design ones there, but What were some of the key drivers in Q2? And if you were to highlight one or two perhaps, and what's the outlook into September in broad markets?

Yeah, so broad markets revenue in the June quarter was approximately 31% of total revenue. As a result of that, broad markets was approximately flat on a sequential basis compared to the March quarter there. Looking forward into the September quarter, we do see an acceleration of the business there, and we do expect in the September quarter our broad markets to be up double digits on a sequential basis.

Yeah, Toshi, and just a little bit of color on customers and design wins. You know, a lot of new customers brought under our umbrella here this last quarter. More design wins with names like Sonos. Did some really good work with AT&T on Gateways. Design wins at Honeywell. Infrastructure designs with Ericsson and Fujitsu. So, you know, a very broad reach of broad markets. And then also our audio portfolio is starting to gain some momentum here. We've got some great wins with cognitive audio in some of the gaming platforms. So, you know, a pretty diverse portfolio in broad. There's a lot more we can do on the top line. We're going to be up strong in Q4 in broad markets. And the customer roster continues to grow.

Got it. Thank you for that. And then a quick follow-up on Ball. You talked about exceeding the $150 million mark recently. I think a couple of months ago you put out a press release on passing $100 million, so you're clearly seeing good momentum there. I'm curious, what are some of the key applications where you're seeing the ramps at your customers and For context, I was hoping you could provide roughly what percentage of your business today is BAW. I imagine it's still pretty small at this point, but if you can kind of share how big or how small at this point BAW is, that would be helpful. Thank you.

Sure, sure. Well, the way that we look at our technologies, filters of any kind, whether it's TC-SAW or bulk acoustic wave, they're going to be enabling technologies that will go into a system solution like a Sky-5 technology. So we're addressing that right now. There were times where we were procuring that with third parties or actually trying to develop solutions with a different technology node to try to compete with BAW. Now we have it in-house. Now we have it within our own factories. It gives us a great deal of flexibility, certainly in the cellular world. You know, our reach extends with bulk acoustic wave technologies. We've got design winds and ultra-high band pads. We've got some design winds in other areas. And, again, 150 million units is great, but there's so much more market share out there for us to go get. So it's early innings. I'm happy with the team's progress. We've invested in the technologies deliberately and carefully over the years to be ready for this. And I think the team is accelerating really well. We've got a lot of traction with customers, a lot of interest, and that design wind pipeline should fortify here over the next six to 12 months.

And your next question comes from the line of Craig Hattenbach from Morgan Stanley. Your line is open.

Yes, thank you. Liam, just to follow up on that on BAW, can you just talk about, you know, today kind of positioning within the receive path versus transmit path and maybe how that evolves for you kind of over time in the next few years?

Sure, Craig. Well, I mean, the application for BAW can be, you know, in many different segments. We can go UHB. We can go mid-band, high-band. We actually have opportunities in our Wi-Fi modules as well. So there's a lot of growth that we can capture. Now, certainly some segments are more challenging than others. But when you start to look at 5G, you're also dealing in 5G with a TDD, time division duplexing, which does create some unique opportunities for bought and for our technology. So we'll see some growth there. technologies that have been in handsets, and then new technologies that are 5G only we can capture with BA. And then we can also deploy the technology in other markets, like I said, Wi-Fi and some other adjacent markets. So it's a great technology to have under our roof. As I said, we've been cultivating it for a long time. We understand the mechanisms. We understand what filters belong in what frequencies and what spectrum. But you should expect more from us, and we'll continue to update you.

Got it. Thanks. And then just as a follow-up, just since it's been a little while since you completed the Avnera acquisition in broad markets, we'd love to get an update on just how that's performing, you know, what being part of Skyworks has helped in terms of perhaps your scale and reach and just any update there.

Sure, sure. Great question. Well, we had a really exciting, I'd say, you know, six months here with Avnera and the acceleration of of the technology has been incredible. We're seeing some great lift now in products like gaming headsets, high performance audio. We're moving into technologies now that have not only just audio itself, but really the voice synthesizing, right? Thinking about voice as a interface is a very, very powerful thing. Looking at what we're dealing with with the pandemic and touchless commerce and touchless transactions, some really good stuff. Having said all that, our momentum has accelerated. You know, we don't have BU by BU. We basically don't report by segment on BU's, but we have a really strong portfolio in the AIS business, what we call AIS. And it's been this last quarter was the best quarter we've had so far. And we expect that to continue to grow over the next several quarters. But really good momentum there.

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

Hey, guys, thanks for my question. Nice results. We I'm curious that this latest restriction on Huawei does seem like SMTs and I think they're going to shift to emerging solution. I'm just kind of curious what you've seen. Either I think maybe update us. I think Huawei is very small for you. Is there any opportunities I guess with them and then as we look out, you know, maybe the box could gain some share. Have you seen anything change in terms of positioning once that restriction happened?

Yeah, Blaine, it's still an interesting dynamic. On one hand, the exposure that we have has really come down quite a bit. So as a result of the trade ban, our revenues with Huawei have come down. Not at zero, but they have come down. We've been able to offset that with more position here, increasing position with the European players, the Nokias, the Ericssons, even Fujitsu on infrastructure. Most of the Huawei business for us on the infrastructure side. So it has been a headwind. But at the same time, we've been able to do quite well with other players in China, Oppo, Vivo, Xiaomi. Again, we continue on the infrastructure side to diversify with Ericsson and Nokia. And I would say that the worst is behind us right now with respect to Huawei. They certainly were a large customer for us, but it's been slowly coming down. And we've been able to offset that with design wins in other markets and adjacent spaces. So I think we've weathered that storm, but it has been a bit of a headwind, but it's been a bang.

Gotcha. And then maybe it's another question on Android. Just curious your perspective on the trajectory of the market. You mentioned 50% 5G. I think it's been coming at the expense of 4G. I do think there's some mid-range phones coming later in the year. I'm just kind of curious as you look to the back half of the year, your perspective on the overall handset market, obviously 5G content, is good for you either way. I'm just kind of curious your perspective as to whether you see this market re-accelerating in the back half.

Yeah, you're right. I mean, 5G is going to be an inflection for all segments. So, obviously, at the highest end, we're going to have the most complex technology and, you know, the richest level of content. But if you think about it on a relative basis, many of the opportunities that we have in China and even at Samsung, the the return on the content is significant. So you could be looking at platforms that, you know, in a 4G world may be offered $4 to $5 for us. In a 5G world, it could be $8 to $10 or even $15. So on a relative basis, there's more of a pop-up in some of the mid- and lower-end platforms than there may be in the larger ones. Now, the larger ones, of course, can have more units and can be a little bit more dense. But we've done quite well with populating the China brands. We're doing much better at Samsung right now because we've set our sights on the high-performing technologies, the 5G solutions, and kind of really stepped a little bit away from 3G and 4G there. And that's worked out great for us. It gives us a chance to really demonstrate the technology prowess that we bring. So we're going to have a nice combination in that area. But I think now it's kind of meshing together. And one of the things that we do well as a supplier is just to create the right solution for the right customer. So a Sky5 engine for one customer may be very different than what we do with someone in China or somewhere in Korea.

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

Yes, thank you. Good evening. I wonder if you could give a little more granularity about what you're talking about with regard to Sky5. and where you're seeing traction on that. And given that Sky5 is a higher end product where you'd be competing more against Qualcomm modems where obviously they're trying to get their RF there, how that's helping you to compete against Qualcomm's own RF solution?

Yeah, Chris, I think one of the things to remember, and I know you've been following this for a long time, is that the technology inflections have always been a challenge. 2G to 3G was years ago, but that was a challenge. 3G to 4G was much harder, but the leap from 4G to 5G is really significant, and I think anyone in this industry would agree with that. And so one of the things that has allowed us and positioned us to be ready and, you know, at the precipice of all this is that we've been working on these markets for years. This has been our bread and butter. You know, working in wireless technologies, cultivating and crafting the right enabling solutions, you know, bringing in our own TC saw, bringing in our bulk acoustic wave, leveraging our own gallium arsenide in Boston and L.A. We're crafting this stuff. So when we go in, we call it Sky 5, but that Sky 5 could have 8 to 10 permutations depending upon the customer need, depending upon the baseband. So we want our products to be baseband agnostic. They can work with Qualcomm, they'll work with MediaTek, whoever. And that's an important thread for us. So I think that's what makes us unique. And there's some great solutions out there, point solutions, but what we've been seeing is our customers want to pick the very, very best solutions and create their own architectures and really not just run off of a baseband reference design. So that's the way we see it. We understand the complexity in 5G. It's more than just the product itself. It's the people engagement. It's the FAE engagement, ensuring that the know-how that we have at Skyworks can transfer over to our customers and put them in position to win.

Thank you. For a follow-up, I guess the question on use of cash and, Liam, how you're positioning the company. over the next few years and, you know, you're starting to see the fruits of the 5G cycle. You know, it sounds like you guys are really confident in your ability to generate cash from that. How are you going to use that cash and, you know, sort of position the company beyond this cycle? You know, this historically runs a couple of years and, you know, what are you thinking after this? What's the sort of longer term plan beyond this 5G cycle?

Yeah, so first of all, I think we're very well positioned from a balance sheet point of view. We have $1.2 billion of cash, no debt. We will continue to generate a lot of cash, despite the fact that we make major investments advancing the technology. We will continue to invest in R&D, as you can see in our operating expense level. We will continue to invest in our factories as well. with our CapEx which is running on or about 10% to revenue. Most of the cash that's being generated is being returned back to the shareholders, a combination of our dividend program and we've just increased our dividend by 14% as well of course as continue to be active from our share buyback program. But, yes, we are continuing to make major investments, advancing the technology on all the levels, in our power amplifiers, our filter business, TC Saw, and more and more Saw Bar, as well as driving those complex integrated solutions.

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

Thanks for the question. This is Seth on for Tim. I was wondering if you could give us a little bit more call on gross margin. It seems to come in a bit lighter than we would have expected at these revenue levels. If there's anything additional to call out there.

Yeah, first of all, I'm pleased with the gross margin performance in the June quarter. We did 50.1%. We guided on or about 50, so we beat that just by 10 basis points. And so we just guided September to be up sequentially into the 50 to 50.5%. So making some good traction at improving the gross margins. Part of that is of course driven by a richer mix with more 5G products into our overall mix. There is a little bit of a headwind as a result of COVID-19. There is some disruption in the supply chain, logistic costs, as well as in our own factories. But I will continue to work that and I assume that over time that headwind will go away as well. And then we will continue as we grow the top line, as we continue to execute on our cost reduction actions, as we see more and more 5G as the overall mix, we will continue to make further improvements on the gross margin towards our target of 53%.

Thanks, and just as a follow-up, I was wondering, you have some good color on China, excuse me, China smartphones. I was just wondering if you could give us, you know, maybe a little more color on kind of revenue kind of trended in June, percent of revenue or any other details and kind of what the demand looks like specifically from China going forward. Thank you.

Yeah, so China, overall China revenue is approximately 23% of total revenue. Mostly of that is Oppo, Vivo, Xiaomi, There's very little Huawei left. And then, of course, some other smaller Chinese customers. As Liam indicated before, 5G is really kicking off in China. And so we have great relationship with those customers. There is a big step up in content in those 5G phones compared to the 4G phones. And as a result of that, our revenues with the Chinese players is up on a year-over-year basis and is expected to further accelerate strongly into the September quarter.

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

Thanks a lot. Liam, 150 million ball-enabled modules, which is very good. The ball in those modules, is that all manufactured by Skyworks, or do you still source from other suppliers as it makes sense for your manufacturing plan? And, you know, given your discussion of 5G, it sounds like a lot of that would be coexist and receive side filters, which is right up your power alley. Have you started shipping production shipments yet of ball duplexers? And then I have a follow-up, please. Sure.

Well, the good news is that it is all organic under our roof now. So we've been working on this for quite a while. Our team's been doing a great job. We've got some great technologists working, not only in the labs, but also in the factories to get this right. So that technology is still early innings. 150 million units is great, but you and I both know that there's a billion units out there to be captured. So we're a long way to go, but the technology looks good right now, and it's been endorsed by some really important customers. So that's good. And the second part of your question is also true. So, you know, we're leveraging not only VAW on the transmit side, but the diversity receive technology is equally important in bringing downlink speeds up. So we're going to be able to populate both ends with bulk acoustic waves. So we're really, you know, looking forward to executing there. And we've got some great traction now, and we're going to be seeking out more customers as we move forward.

But most of that is on the receive side, giving you strength in DRX.

Yeah, it is today, but I think we're going to broaden that reach and start to also look at the TX chain, Ed, and I think we have some design wins with customers there too, but the lion's share of the print today has been on the DRX side, but we certainly can take that technology and drive it in the transmit chain. We've got customers that want us there as well, and with our Sky5 solution, we can create some really unique, highly performing engines that make it very simple for our customer to use in a 5G spectrum. So it's going to be a really important technology for us. And as I said, early indications are strong.

But isn't it the case that the transmit's coming to you rather than you going to transmit, given what's going on in 5G, especially with China Mobile and the dual connectivity they're looking at? It sounds like transmit's starting to show up in the DRX section, which would actually make it much easier for you guys to address kind of a BAU duplex without trying to go head-to-head with a VAGO or a Corvo.

Yeah, no, no, you're right on that. That's correct. That is correct. So that's going to create another door for us to drive technology as well. Yeah, with some of the partitioning that we see in those 5G solutions, there is some unique opportunities that are opening up as well.

Your next question comes from the line of Gary Mobley from Wells Fargo Securities. Your line is open.

Hey, guys. At the risk of being accused of asking you guys a softball question, I want to ask about your relative performance on the mobile unit versus the market. So if my math serves me correct, you drove 2% year-over-year growth in the first half of the calendar year 20, and that's against the backdrop of maybe a 20% unit decline in mobile handset units. Can you, in rank order, sort of Walk us through how you've been able to manage so well against a tough market and, you know, in particular with respect to share games and content growth.

Sure. That's a great question. So I'll try to go high level and maybe get a little more detailed as we go through it. So I think the underpinning catalyst for growth here is the 5G inflection. And it's really – that's the genesis of this. So what you get there is if you look back, you know, 2018 and early 19, everybody's phone was either 2G, 3G, or 4G. 5G just didn't exist, right? The technologies were being readied. They were almost to market, but they hadn't yet launched. So the initial stages of 5G launch now are starting to show up. They showed up in our Q3, and they're going to show up strong in Q4. And so with that, we have known content. known content, customizable stuff that we created specifically for 5G that will start laying in to these platforms. And the 5G additive is incremental to what you already have. So you already have a 4G phone that has whatever the content you want to call it, $8 or $9 in print, maybe $15. And then you add 5G as an incremental engine on top of the 4G engine. So that's really important. So it's you're going to have a device now in 5G that still carries 3G, carries 4G, and then carries the incremental high complexity, high performing 5G engine. So that's a big deal. And we are still very early in this cycle. This is very early. You know, some of the most compelling platforms have not yet launched. And we know that they will. So we have a lot to look forward to. So that's one of the most important things. And we think about how that growth profile looks. You know, we cited a few stats that said, look, Over the next five years, we could have 3 billion subscribers carrying 5G technology. Today, that number is really low. It's in a couple of hundred million units. So there's really much to do in capturing the opportunity in 5G. In addition to the handset, there's great usage cases now in IoT and some of the other markets that we've seen. The work-from-home markets are showing a need for much faster technology that could be delivered with 5G or Wi-Fi 6. So some really interesting themes that are coming together right now at this time that could propel our business significantly.

Okay, appreciate that. As my follow-up question, I wanted to ask about the emergence of the mid-tier price point in China. So China's been great in the first half of the year, perhaps driving 250 million 5G units in 2020 globally. But I'm curious to know, you know, your relative positioning as the mid-tier portion of the 5G market in China opens up. and how that compares to where you're positioned at the same sort of price tier in 4G.

Yeah, I mean, so we have had a very good reputation and position, you know, with the players in China, the Oppo, Vivo, Xiaomi names for the most part. They've done very well and had a great partnership. We've been able to leverage our 4G solutions extremely well. And when we get into 5G, one of the things that, really is unique for Skyworks is that the breadth of our technology and the knowledge base that our team has in developing these solutions, we've become a really good partner for the China brands to launch these technologies. 5G is very difficult, I said it already, but having a partnership with Skyworks, not just on the hardware, but actually on the FEE side, the people side, to get these products to market and get them to launch. We've been great at that and it's allowed us to really you know, line up and be very close to the names that matter. So we think there's a great opportunity in China. It's already happening now, but there's still, as I said, if you look at total units globally and where units could be in five years, there's a huge upside.

Your next question comes from the line of Craig Ellis from B. Reilly FBR. Your line is open.

Yeah, thanks for taking the question, and nice job on the execution, guys. Liam, I wanted to go back and just understand the module business a little bit better. So it looks like shipments were up about 50% in the last quarter. We're at $150 million. But from the press release, it looks like you're shipping BOM modules to both integrated mobile and broad markets. So can you give us some sense for how that splits out now? And is your ramp BOM module significantly over the next – four to six quarters, how does that split play out? You know, we've got the huge units in integrated mobile, but ultimately IoT units in broad markets will be even bigger. So how do you see that playing out intermediate to long-term?

Yeah, yeah, no, that's a good question. So, you know, right now, for the most part, you know, we're probably 80% 5G mobile with our bulk acoustic wave solutions. And again, those solutions are integrated in Sky5. We are seeing a growing opportunity and technologies like Wi-Fi, where using filtering within our integrated Wi-Fi solution creates a great technical performance. So that's an opportunity. But I will say that if you think about, you know, the number of units that we produce, just as a statistic that we've said before, we manufacture about 8 billion T-Seasaw filters a year, about 8 billion. And our VAW modules, we're doing great. We did 150 million. It could be more than two filters in a device potentially. But the difference between where we are in technologies like TCSaw and where we are in VAW, it's incredible the opportunity that we're going to have. We're still crafting the technology. We're happy with what we've done so far, but there's just so much more to go. So there's going to be a clear line of sight in mobile because the mobile device print today has VAW. And if there are sockets that are there right now that we could address. As we move into IoT in some of the broad markets, it will be a kind of a teachable performance for us. We're going to basically try to power some of these solutions that maybe weren't wireless before. Maybe they were wired. We try to create technologies that will unwire them. Maybe we do more in Wi-Fi. leveraging bulk acoustic waves. So there's going to be much more individual market-specific solutions that will go to the IoT space. But then back in mobile, which we know so well, and we're under the hood with every customer, those opportunities we can see directly today, and it's on us to go out and capture it.

That's really helpful. Then the follow-up question, it is related to the near term that you're seeing and then longer term. So clearly the business is growing very robustly right now and you've got very strong guidance for the September quarter and you're seeing very good trends seasonally in the December quarter. The question is this, as we look at the longer term performance of the business before industry ran into trade and entity list and COVID buzz saws, yours was a business that could do a billion dollars plus per quarter. As you look at your, your pipeline and your design wins that, you know, at this point should be extending well into next year. Do you feel like you're starting to get the visibility for when the business can get back to that $1 billion a quarter level, or is that really going to come to you as you work through things in the first half of next year? Thanks, Liam.

Yeah, no, that's a great point, and we were there, right? We know how to play at the $1 billion a quarter level, and certainly the opportunity in front of us, I think, is is actually much more favorable and conducive to what we do now than it was three years ago. And I say it because these technologies that we've been talking about are really difficult. 5G is hard to do, really hard to do. And you have to have great people with experience, but you also have to have the technologies. It's not a fabulous play. You've got to craft the stuff. So I think the fact that we're going into an inflection that requires daunting technological performance from your factory to your FAEs right to the customer's installations That's going to play well for us. That's going to play well. And we wouldn't be where we are if we didn't put the 20 years of work into this technology, years and years of work. And now that work is starting to really flow in the right direction for us. So we're looking forward to that. And I think over time, you know, that the revenue is going to take care of itself. If we just continue to knock out the design lens, we know the content's been increasing. And the other thing is, you know, I talked about it in the prepared remarks, the usage cases around connectivity right now are really important. And I don't think this is going to go away when we hopefully clear this pandemic. I think there's going to be some lasting behavior around connectivity and wireless performance, and it's going to be used by the masses. So we really, you know, that's something that we weren't thinking about a year or two ago, but we're starting to see that now as a new theme around our portfolio, and it's something that could be quite positive for Skyworks.

Our last question comes from the line of Carl Ackerman from Callen. Your line is open.

Hey, good afternoon, gentlemen. I appreciate you letting me ask a question. I wanted to focus first on just kind of the near term. What sort of visibility do you have into orders for the second half? I ask because while production plans seem extremely strong, I think there's some investor consternation that improving production plans may fall on weaker consumer demand over the next several quarters in the context of just the challenges that we've been seeing with COVID-19. So, again, how do you handicap that in the context of your inventory depletion and gross margin expectations over the next several quarters?

Yeah, so we have very good visibility into demand right now, and we don't take that lightly at all. I mean, we understand... the volatility that we've all seen with the COVID situation, and we continue to see it. But we have a very strong backlog position right now with some core technologies. You know, we have to go ahead and execute all that. But looking at where we are now and looking at other periods of time, we're in very good position to execute through the second half of the year. I'll let Chris talk a little bit more about the inventory situation.

I feel very comfortable where the inventory level is right now, given that we just guided a very strong sequential growth into September, and we expect further strong sequential growth into the December quarter. We have been level loading our factories. in order to drive maximum usage of our capital equipment and in trying to minimize our capital expenditures. And so most of the inventory that we have is based on backlog and firm orders that we have on the books. So there is very little risk for E&O. And so I feel really good about where we are from an inventory point of view. being able to serve our customers as the business continue to grow in September and December.

Great. And for my follow-up, if I may, you know, you are baseband agnostic, but I'd love to hear your thoughts on the growing content opportunity at MediaTek that would seem to be a healthy driver for you charting low- to mid-tier 5G handsets over the next year or two. Thank you.

Yeah, absolutely. I agree. MediaTek is one of the key players for us, you know, in the baseband agnostic world. We're doing a lot of good work there. You know, we've got great performance on a number of their new platforms. And as you know, they're a great feeder system into China and even other emerging markets. So we've got, you know, some of our platforms are $6 to $8 in MediaTek right now that are growing. We've done a great job with them in 4G, and we're now helping them in 5G. We've got not only do we have transmit chain, but we have some really good DRX received side technology that we talked about on a different question. And their volumes are starting to pick up in 5G. So MediaTek, you know, they've been around for a while, but they're starting to really emerge again as a leader in the emerging markets and in the China landscape. So they're supporting a lot of the names that we talked about, Oppo, Vivo, Xiaomi. Very often you have that MediaTek baseband. inside those solutions, and we have a great alignment with the MediaTek basement as well. So they've been a great partner for us, and we see momentum on their end.

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 conferences.

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