Skyworks Solutions, Inc.

Good afternoon, and welcome to Skyworks Solutions' fourth quarter and fiscal year 2020 earnings call. This call is being recorded. At this time, I will turn the call over to Mitch Haas, Investor Relations for Skyworks. Mr. Haas, please go ahead.

Thank you, Rob. Good afternoon, everyone, and welcome to Skyworks' fourth fiscal quarter and year-end 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 relating 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 for many forward-looking statements made today. Additionally, the results and guidance we will discuss include non-GAAP financial measures consistent with our prior 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. Skyworks delivered exceptional results in the fourth fiscal quarter with revenue and earnings well ahead of our guidance. Importantly, the momentum spanned across our entire customer base, mobile, IoT, automotive, cognitive audio, and infrastructure. In fact, revenues in our mobile and broad markets portfolios each grew 30% sequentially and generated double-digit growth compared to Q4 of last year. Now, looking at the quarter in more detail, we delivered revenue of $957 million. more than $100 million above the high end of our guidance. We achieved gross margin of 50.4% and operating margin of 35%. We posted earnings per share of $1.85, exceeding our guidance by $0.34. And we generated strong operating cash flow, totaling $267 million in the quarter. Capitalizing on years of investment in next technology generation products We are now both driving and benefiting from the rollout of 5G in markets around the world. Recent data points highlight just how rapidly this adoption is accelerating. 38 countries have already launched 5G networks, with more regions set to deploy. And already in 2020, 12% of the world's smartphones are 5G enabled, with projections of over 50% by 2023. Notably, the world's leading smartphone manufacturer has just now released its entire lineup of new 5G devices, a key catalyst underpinning our growth thesis. Although we are only in the early innings, 5G has arrived, ushering in a new and expansive set of opportunities. During the quarter, our solutions powered a broad set of use cases, from the newest and most innovative smartphones to industrial IoT, automotive, cognitive audio, and touchless commerce. Specifically in mobile, we accelerated the ramp of our Sky5 portfolio while supporting leading 5G smartphone launches, including those from Samsung, Oppo, Vivo, Xiaomi, Google, and other major tier ones. In IoT, we enabled touchless point of sale systems at Square, powered Wi-Fi 6 access points for Amazon, ramped Wi-Fi 6 solutions for advanced routers at Netgear and Asus, and launched residential gateways at Verizon and Telecom Italia. We also supported Facebook's newest Oculus VR platform, and we further bolstered our position in low latency cognitive audio solutions. powering wireless headsets at Logitech, Razor, and Sony, among others. Now, moving to the industrial space, we introduced embedded connectivity modules, enabling Fibicom's latest enterprise IoT architectures. We delivered critical medical applications at Boston Scientific and GE, and also supported wireless utility metering at ITRON and Census. In infrastructure, we secured multiple design wins in next-generation MIMO base stations and small cell installations. And finally, in automotive, we ramped telematic subsystems for BMW and Tesla and launched high-speed connected car solutions for Daimler and leading OEMs in Japan and Korea. These engagements illustrate the diverse and expansive nature of our portfolio. supporting a broad array of customers and applications. Fundamentally, our ability to execute and deliver on successive technology nodes fuels above market growth. This momentum is underpinned by increasing demand for our unique system solutions, differentiated by performance, integration, scale, and most importantly, customer value. Skyworks is well positioned to capitalize on the rapidly changing landscape with deep customer relationships established over 20 years, experience across multiple technology transitions, strategic investments in global scale, a seasoned and talented workforce, and finally, an efficient cash flow engine that funds continuous development of market-leading solutions. With that, I will turn the call over to Chris for discussion of Q4 and the fiscal year, along with our outlook for Q1.

Thanks, Liam. Skyworks revenue for the fourth fiscal quarter of 2020 was $957 million. This is $117 million higher than the midpoint of the guidance coming into Q4. Revenue was up 30% sequentially and up 16% year over year, driven by increasing adoption of our mobile solutions, and rising broad market momentum. In fact, both mobile and broad markets revenue grew 30% sequentially and were up double digits compared to Q4 of last year. We established a new quarterly record of 295 million in broad markets revenue while greatly expanding our customer reach. Gross profit in the fourth quarter was 482 million, resulting in a gross margin of 50.4%. up 30 basis points sequentially. Operating expenses were 147 million, or 15.4% of revenue, demonstrating leverage in our operating model while continuing our strategic investments in support of future growth. We generated 335 million of operating income, translating into an operating margin of 35%. We incurred one million of other expenses, and our effective tax rate was 6.5%, driving net income of $312 million. Top-line momentum and execution on margins drove diluted earnings per share of $1.85, beating the guidance by 34 cents. EPS grew 48% sequentially and increased 22% compared to Q4 of last year. Turning to the balance sheet and cash flow, Fourth fiscal quarter cash flow from operations was $267 million and capital expenditures were $146 million. We paid $84 million in dividends and given our conviction in the underlying strength of our business, we repurchased 1.7 million shares of our common stock at an average price of approximately $140 per share for a total of $231 million. As this is the fourth quarter of fiscal 2020, let's also review our annual results. We generated 3.4 billion of revenue, with gross profit of 1.7 billion, resulting in a gross margin of 50.2%. Operating income was 1.1 billion, with an operating margin of 33.7%. Net income was 1 billion, translating into $6.13 of diluted earnings per share. Cash flow from operations was 1.2 billion and we returned nearly 1 billion to shareholders in fiscal 2020 with 307 million of dividend payments and 648 million in share buybacks as we repurchased 6.3 million shares throughout the fiscal year. And we ended the fiscal year with cash and investments of 1 billion and we have no debt. In summary, The Skyworks team executed exceptionally well despite a challenging environment, navigating the COVID-19 pandemic and headwinds from U.S.-China trade relations. We delivered strong profitability and cash generation, ended the fiscal year on a high note, and positioned the company for future top- and bottom-line growth as we enter the new 5G era. Now let's move on to our outlook for Q1 of fiscal 2021. We expect to deliver another quarter of double-digit sequential revenue and earnings per share growth in our first fiscal quarter. Specifically, we anticipate revenue between 1 billion and 40 million and 1 billion and 70 million. At the midpoint of 1 billion and 55 million, revenue for the quarter is expected to increase 10% sequentially and 18 percent year-over-year. Gross margin is projected to be in the range of 50.25 percent to 50.75 percent as we continue to drive profitability expansion. We expect operating expenses of approximately $148 million. Below the line, we anticipate roughly $1 million in other expense and a tax rate between 9 and 10 percent. We expect our diluted share count to be approximately 168.5 million shares. Accordingly, at the midpoint of the revenue range, we intend to deliver diluted earnings per share of $2.06, an increase of 11% sequentially and more than 20% on a year-over-year basis. And with that, I'll turn the call back over to Liam.

Thanks, Chris. Skyworks significantly exceeded September quarter expectations in revenue and earnings per share. capping off a fiscal year that tested and demonstrated the resilience and agility of our business. As 5G revolutionizes connectivity and proliferates in global platform launches, we are ramping our innovative Sky5 solutions across a rapidly expanding set of end markets. Clearly, Skyworks technologies are playing an essential role in today's challenging environment, enabling ubiquitous, reliable, ultra-fast, and safe connections. driving momentum across our portfolio while positioning our business for continued growth. Finally, our strong balance sheet and consistent cash generation provide a formidable platform for technology investment as we deliver premium returns to our stockholders. That concludes our prepared remarks. Operator, let's open the line to questions.

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. Your first question comes from the line of Vivek Arya from Bank of America. Your line is open.

Thanks for taking my question and congratulations on the strong results and the accelerating sales outlook. Liam, my first question is on your Q1 December quarter outlook. Where do you think we are in the 5G cycle when we look at the strength that you're seeing in December Is this kind of the run rate business and they can annualize from here? Does it grow from here? Just how much is 5G contributing to December and how much runway is there to grow off of these quarterly levels?

Sure. Yeah, great question. Well, let me start by saying we saw a bit of the 5G ramp in Q4 and actually a larger part of that with our APAC customers. And so far, it's been going great. We have been winning business. We've been expediting products. The demand has been incredible, and so we're really thrilled about that. But it's also very, very early in the cycle. So our Q4 period, which accelerated rapidly towards the end of the quarter and brought momentum into Q1, our Q4 period was typically led by the APAC region. As we move into our fiscal Q1, it's led by Tier 1 customers. And in both cases, we're very well balanced and well positioned. In addition to that, we round out with a great set of plays here in IoT and in broad markets. So really good strength that's moving into from Q4 and into Q1. And again, very, very early in the overall 5G landscape.

And for my follow-up, Liam, given the delayed start at one of your large customers, how should we think about the seasonality as we go into calendar Q1? Should we expect to see this strength sustain into calendar Q1? Just how, you know, conceptually, what visibility do you have into Q1? And if you could, you know, have any, you know, color around 2021, that would also be very helpful. Thank you.

Sure, sure. Well, as you see, coming off our Q4 guidance, our Q4 delivery, which was $100 million above consensus and $200 million sequentially, just to make sure we get that right. And now if we go into Q4, we're guiding about 10% at the midpoint. We feel comfortable with that. It's diversified across customer bases. There's certainly a couple of flagship players that are leading the charge, but we are working very quickly to get these products to the customer, and we know that the demand is there. So we feel very good about our outlook and look forward to delivering more as we go forward.

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

Thanks a lot. I'm wondering, Chris, if you can give us an idea of what's assumed for the December guidance for broad markets, and then I also have a follow-up. Thanks.

Yeah, so we're definitely very pleased with what we see in our broad markets, and just to talk maybe first a little bit about September quarters, right? It was approximately 31% of total revenue. It was just shy of $300 million of revenue in the quarter, which is a new all-time record for broad markets. As Liam just indicated as well, it was up 30% sequentially, which is almost $70 million of incremental revenue that we saw into the September quarter. And so we are back to double-digit year-over-year growth in the September quarter. In the December quarter, so our Q1 of fiscal 21, we expect further sequential revenue growth in broad markets. So we will end up with a new all-time high in the December quarter. And so that translates into very, very strong double-digit year-over-year growth for broad markets. In broad markets, the strength that we see is really across the board. And, of course, it's in part driven by some strong demand for our wireless connectivity solutions, supporting work from home, play from home, learn from home, commerce from home, everything from home, right, or from any place. We also saw a really nice rebound in our industrial IoT as well in our automotive business. And we also have really good and great positive momentum in our cognitive audio business. And then last but not least, the infrastructure business supporting the build-out of 5G networks. And so when you put it all together, our broad markets business is doing really well, all-time records in September and guiding to an all-time record in December.

Thanks a lot, Chris. And then I guess my second question is on gross margin. There's very little incremental margins dropping through year-over-year in September. And if I look at the December guidance, it's like – you know, the drop through is not really, you know, much above what the overall, you know, margin levels are. And you're not too far away from the revenue that's assumed in the financial model, but we're still, you know, 250 basis points below on, you know, gross margin. So can you talk a little bit about what's going on there? Is it simply just mixed? Thanks.

Yeah, first of all, I'm pleased with the gross margin in the September quarter at 50.4, up 30 basis points sequentially. And so we have been hinting at that, that quarter over quarter, we will continue to make steady progress at further gross margin improvements. And so we are guiding 50-25 to 50-75. So again, up sequentially into the December quarter. Keep in mind that we still have some headwinds as a result of COVID-19 with social distancing and extra cleaning and sanitation and some disruption in the supply chain here that is hitting us. And so we expect over time to see further improvements there on the gross margin towards our target model of 53%.

Your next question comes from the line of Toshiya Hari from Goldman Sachs. Your line is open.

Hi, guys. Thanks for taking the question and congratulations on the strong results. Liam, how would you characterize or assess inventory today, both at Skyworks as well as at your customer base? Obviously, there's a big concern that some of your customers might be pulling in a little bit. Any thoughts there? And then I've got a quick follow-up.

Yeah. You know, honestly, we were working our tails off to deliver. You know, we had customers that were late on a lot of orders scrambling to get these parts out. So our inventories are very low. Our DSOs are down significantly. It has been, you know, a breakneck pace operationally to deliver into this great cycle. So those have been the biggest challenges. There were some, you know, I think further back, we had some bumps with COVID issues in our own factories that, you know, created a little bit of difficulty in the supply chain. I think that 90% of that is bias. And, you know, we're well positioned to continue to bring up the top line. But we had this Q4 and coming into Q1, it's been very aggressive demand. A lot of that is unique to us. It may not be to the total market, but for the things that we do, great portfolio right now, work-at-home portfolio that Chris mentioned, but really catalyst, whether it's Zoom video or Peloton or browsing real estate on your phone. The move towards connectivity is real. It's sticky. It's going to stay with us. Then in the 5G handset side, great position with the leaders in China with a tremendous amount of technology-rich content gains crafted in-house, and then also some very compelling solutions with our largest customer. Again, highly customized, crafted in-house that are just now moving out into the customer. So, you know, it's been a – we waited for this for a long time. We've invested in this for a long time. We've been talking about 5G for quite a while, and we were very articulate and clear about our ability to win, and that's what we're doing right now. We're winning. Okay.

Got it. Thanks for that, Liam. And then, Chris, I just wanted to double-click on gross margins. Again, we're not seeing a ton of leverage here in the model. And I was hoping you could elaborate a little bit on sort of the headwinds that you're seeing that's sort of offsetting the increase in revenue. Is it customer mix? Is it mix between insourced product versus outsourced product? Is it COVID? We're hearing wafer pricing might be going up a little bit just given the tightness. Anything you can add there would be super helpful. Thank you.

From a pricing point of view, it's business as usual. We don't see anything special there. And so, again, the way we improve our gross margins, it's threefold. It's continue to bring new, high-added value products to the market, especially as 5G is becoming a larger part of our portfolio. We do have a tailwind there. In addition to that, of course, we continue to drive operational efficiencies, but as I pointed out, due to COVID-19 and the pandemic, there are some inefficiencies today in our own factories as well as in the supply chain and the logistics. And unfortunately, that's there. It's not going away quickly, but hopefully in a couple quarters down the road, we will see some benefit from that as well. And then, yes, there is always mix. And mixed changes, as you know, broad markets has a higher gross margin compared to our mobile segment. And definitely the mobile segment is going to grow a little bit faster into the December quarter. So when you put it all together again, we will continue to make further good progress at improving gross margins.

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

Hey, good afternoon, and congrats on the results. Just wanted to go back to a prior question. I just want to make sure I heard the answer correctly. As you look into the December quarter, just some comments on whether you expect Android to be up. Historically, that's been a down quarter for a lot of China, but obviously with 5G and content, it may be up. I just wanted to understand what you were saying into December on the Android world.

No, we see increase across the board, right? In mobile, at all accounts, in broad markets at all accounts. So yes, of course, the large customer will be up sequentially. Samsung will be up sequentially. The key China customers, Oppo, Vivo, Xiaomi, will be up sequentially. There's one exception, of course, and that's Huawei. As you know, based on the new export restrictions, we are no longer allowed to ship past September 14. As a result of that, the Huawei revenue in Q4 was actually slightly below expectations at on or about 3% of revenue. And so in the December guide, we did not include any revenue for Huawei. Despite the fact that more recently, we did get a limited license to ship certain products to Huawei, but we are still figuring it out with the customer, which products they need, which products they want. And so we did not include that into our guide for the December quarter.

Yeah. I'm sorry. I just wanted to add one more to that. I think when you look at the Android cycle, that really kicked off in Q4, where I think the larger tier one is more of a December quarter play. So very good position in Android, which will stay with us. Launched a little bit sooner in 5G. A lot of great solutions there. A lot of embedded media tech play as well. That will continue to roll. And then you have more of the December quarter being led by the top players.

Thanks. And then maybe just to follow up on the September quarter, you haven't always beaten by a huge amount, so it was a nice beat. I was just curious what you pointed to as surprising you most to the upside in the September quarter.

Yeah, you know, just really steep acceleration in 5G and also an incredible sticky set of opportunities in broad markets. The broad market business is Not only did it set a record for a quarterly record, but it really had some incredible diversification with many, many new customers. And, you know, we're really excited about that. We have a whole set of green shoot opportunities that we have consummated over the last couple of months that will continue to drive revenue for us into the future. So that was a great benefit. You know, some of those things with the pandemic, as hard as it's been, there's been some opportunity that's come about, and that's one area that's certainly benefited.

Your next question comes from the line of Chris Caso from Raymond James. Your line is open. Chris Caso, your line is open. Your next question comes from the line of Carl Ackerman from Cowan & Company. Your line is open.

Good afternoon, gentlemen. Liam, if I may go back to China handsets, clearly Huawei has been impacted from U.S. trade restrictions. I know it's difficult to handicap, but with the election tomorrow, there seems to be a growing investor interest in how you may be positioned if Huawei were to procure smartphone components from U.S. suppliers. So I guess how do you balance the enthusiasm you have for the order book versus making sure inventory across the supply chain remains balanced?

Sure. Well, first of all, Huawei, as Chris just indicated, is a very, very, very small piece of our business right now, very small. And we don't expect there to be any upside going forward. However, as Chris mentioned, we did get a license from Commerce, and there's a door opening potentially for more opportunities. We had a great position with Huawei a few years ago, and they were our number two customers. So we know how to work with them. And they were a company that were more of a high-end player, appreciated the integration that we provided and the technologies that we provided. So unfortunately, the trade issues separated us and also separated some of our peers. But if that door opens up and we're able to deliver again, we're right back at it. There's nothing lost. But in the meantime, we're moving forward. We're working with all the other players in China that we mentioned, the Android ecosystem. and others. So we feel like we're very well balanced and hedged on that. If there's an opportunity, that's great. We know how to sell to that. We know how to design in. But we feel like a lot of that business has been redistributed, and we've been able to catch it on the other end. So we're not too concerned about it, but we'll certainly stay vigilant if opportunities emerge.

Understood. Thank you. Chris, for my follow-up, if I may, I know it's not usually your practice to comment beyond a quarter. but it appears your mobile business will grow high single digits in calendar 2020 when overall units should decline double digits. With expectations that 5G smartphones should increase from roughly 200 million phones this year to perhaps 500 million next year, is there a fundamental reason why your content perhaps could not be as significant next year? Thank you.

No, I'm not going to really comment on the units. I mean, we definitely see strong adoption of 5G, but we will see what the units, how that all plays out. On the flip side, yes, we do have very strong content increase and content gain. As 5G being introduced in the phones, it's adding a lot more complexity. It's adding new bands. which are being layered on top of the existing 2G, 3G, 4G technology, and that adds a lot of complexity. And that's, again, what Liam has been indicating. We've been investing into that for many years. We have our PAs, our filter business, our capability to integrate all of that into our integrated solutions. And that's where we see really a big opportunity for Skyworks as more and more 5G adoption will happen over the next couple of years.

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

Thanks a lot. Liam, it was very clear from our turn down of your largest customers flown. You've really knocked the ball out of the park on this. You had 10 modules in the current version. Last year, you had six. And I know some of the big content increases you're experiencing there and probably in China, given China Mobile's requirements, have pulled power amplifiers into what is traditionally a receive-only DRX section, which you dominate. My question is, Given China Mobile's requirements for many more bands, or several more bands, than we in most of the industry expected, pulling in what I would consider to be out-period 5G content into the current period, and the inclusion of greater functionality in this broadcast, Miami and D.C., etc., I'd like to get your opinion about where we're going to see the growth next year. I'm sure the Univine game is going to work in everybody's favor. We're going to see more phones using 5G next year. But Maybe you could help us out with what you think the content increase would be, because it sounds like you're capturing a lot of that in this first glut of 5G phones, both in Asia and in the flagship phones coming out this year. And I'm just kind of scratching my head what we can expect from a content point of view in the next year or two. And then I have a follow-up, please.

Sure. That's a good question. Well, you know, as much as we're encouraged by the results that we've been putting forth and the content that we've gained, there's so much more out there, Ed. Tremendous opportunities that we haven't captured, new solutions that we're inventing right now that are going to be very different than what we have today. You know, we're under the hood with all the customers and all the players, and one of the things that we do is we look and listen to see where the problems are. How can we make our parts better? How can we make Sky5 better? And we continue to do that. And that's the way we gain our content. A lot of it is just really getting in there under the hood, shoulder to shoulder with the best engineers in the world from Skyworks and our customers. And we try to figure it out together. And oftentimes, a solution is born. So I think the technologies that we're seeing now, first of all, we all know, everybody on this call knows that this is the early innings of 5G, early innings. And we think 5G today in 2021 and 2020 is going to be different in two or three years. And there'll be a 6G. So there's a lot of work to be done, continuous work. Our customers are constantly pushing us. They want faster, they want more data, they want lower current consumption. And that, that, uh, you know, wheel, that technology wheel continues to turn. So as much as we're happy with what we've been able to do so far, there's just so, so much more that we can do. Uh, so I, I feel very comfortable that early innings in 5g, you're getting a read on that now from us. We can do a lot better. We think the adoption is going to go up faster and faster. We think the usage cases are going to continue to grow the same way they did in 3G and 4G. So I'm not too concerned about it. I think for us, it's about investing in the right markets. It's about raising our technology bar and then executing with our customers. Those are the key elements for us at this point.

Okay, that kind of meshes with my second question because one of the things that we did pull from this is just in your – And your largest customer has flown. It was a stunning increase in the complexity, especially the antenna system. They went from six antennas to 13 on this phone.

Yeah.

Which I know, and I saw that they pulled in a lot more antenna switching control content from Skyworks, which is, I know you've played there before, but it wasn't a huge area for you. And a lot of the stuff is being pulled into modules. So doesn't this play into the gross margin story? Because there's so many different ways this could go. If you look at what Ultra Wideband is doing in the phones, et cetera, they're throwing so much into the Hanson side of it. Is it more of a share gain from a module player's point of view? I would say you and Core will probably be predominantly because the phone's getting so much more complicated and going so many directions that they're turning to you guys to really just start integrating more of this. And is that where, not just the content, but also where the opportunity for gross margin starts to play out given this kind of a system in a module at this point versus just RF components? Thanks.

Yeah, I agree completely, Ed, with that comment. I think we're getting into a world now where Things are getting very complex. You can look at it from band count, antenna count, DRX, transmit, receive, very, very complex. And our customers have a tremendous job on their end. So the burden on players like Skyworks is let's go solve this. Let's go work it. And to try to configure in a platform an integrated solution is just much, much better for the customer. It's difficult for the suppliers, but we are getting paid for that. And I think it's a unique set of technologies that we're seeing in 5G. We know there's more to do. It's one of the reasons why we've been an investor in our own fabs, whether it's BA, whether it's TC, SA, whether it's BGA capacity and packaging, all of these things, bring us the opportunity to deliver what our customers want uniquely, each one having their own needs and satisfying those at every point. So there's a lot to do. We love doing it. And, you know, again, early innings, But there's plenty of upside from here that we've got to just go earn.

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

Hi. Thank you very much. Excuse me. Sorry, Chris. You seem to be especially popular today, so I'm going to stick with you as well. Just scratching my head a little bit on the gross margin side. If I look back at the last time you had a billion dollar in REV, You had a 51.2% gross margin. If I have the quarter right, that's September 18. The broad market business was a little bit smaller. And then you talked about the positives and, sorry, the headwinds and the tailwinds. So on the headwind, you mentioned COVID-19 costs and some other inefficiencies that you're working to remove. And then the positives are... better, higher advanced products. So that should be incrementally positive for gross margin, as well as your broad market business is growing. Now it should cross the $300 million mark next quarter. So is it fair to assume that the COVID-related cost is about 100 bps, and that's kind of the headwind that the margin is facing? And once we get past that, just a couple of quarters, then we should see gross margins come back to more in line with historical, and then given that broad markets is getting bigger, that should help gross margin to get to your 52% target.

You think about it the right way, Ambrish, and so I've talked about that before. Yes, the COVID-19 headwind is in the 75-200 basis points range, but we'll come down over time here, and so we're working it hard to every quarter, and so there is definitely upside from that. And then you list all the other elements there that we see as well that give us conviction that over time we will continue to further improve the gross margin.

Okay. And then my quick follow-up is really, again, on the broad markets business. Could you just help us understand how is the business looking More in terms of where are you seeing the growth opportunities? And it's a $1.2 billion plus annual revenue down rate, fairly large business. And how has it changed from two, three years ago? Liam, maybe it's a question for you.

Yeah, two or three years ago, a lot of it was pretty narrow. It was mainly low-end connections, GPS, early Wi-Fi, and some infrastructures. And if you look at the portfolio today, it is really diversified. We've got players like Ring, Netgear, Amazon, Sonos. Of course, one of our larger customers does a lot of work in broad markets. Names like Google we have, Facebook, really cool applications. We have an audio business that had a great quarter, thinking about gaming, technologies like that, with good margins as well. Even though some of these products sound consumer-oriented, the technologies that we bring are not. We've actually grown the business in automotive and defense, working with more IoT partners like Fibicom that we mentioned. Again, access points and routers with Wi-Fi 6 coming in right now. Some of the new applications that we've seen through this difficult pandemic I think are going to be quite sticky when you look at whether it's work from home or work from anywhere. We're seeing those usage cases continue to grow. So we think that that is a move up that is sustainable. We don't think that that's a quarterly bump. We think that's a sustainable move. And invariably, we're going to start to see more and more wide area connections with 5G connecting some of these devices. So if you look at broad markets today, much of the connectivity is Wi-Fi and Bluetooth and GPS, with still some customers that are adopting 5G. But over time, I think you're going to see 5G converge going beyond the handset and basically spreading into a number of applications, the car, the factory, some of the consumer options as well. And we're extremely well positioned there. I think that's one of the unique things about Skyworks. We can take the connectivity from low data rates to very, very high data rate, and we can customize it by application. So that's an important part. And again, the customer reach in broad markets continues to extend. We'll report more next quarter if you look at more design wins and more players that we bring in. But it's definitely stepping up on its growth path, and we're really happy to see that.

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

Yes, thank you. I guess first question would be regarding use of cash, and obviously that cash flow is increasing given what's happening now. Any changes in your approach to that on what your plans are for the cash flow?

No, no changes there. I mean, we continue to deliver very strong free cash flow, and we continue to return all of that back to the shareholder, a combination of our dividend program as well as our share buyback program. So we've been very active from a buyback point of view and continue to be active there. That still leaves us a billion of cash on the balance sheet with no doubt, and so there is optionality from an M&A point of view.

Got it. Thank you. Just as a follow-up, with what you're seeing in China and given the inability of Huawei to procure components, maybe you could talk a little bit about what what you're seeing out of those customers, and is it right to assume that some of the strength you're seeing at Oppo, Vivo, Xiaomi is them kind of stepping in and filling the void if Huawei is still unable to get components, and that continues as you go into next year?

Yeah, Chris, that's some of what we're seeing. So obviously we're agnostic to base bands and customers. We want to win with everybody. Huawei had been a major customer for us for a long while, and we just indicated earlier in the Q&A here that they've obviously gotten a lot smaller due to trade, and it's great if they come back. We're ready to go, but what we are seeing is a redistribution of that technology. Obviously, the China market still loves cell phones. The global market does as well, and we're able to fortunately, with some changes in our design and certain things that we need to do to to calibrate for the customer. We've been able to move a lot of that technology to the Oppo's, to the Vivo's, to the Xiaomi's, even Samsung as well. And if things change at Huawei, that's fine. That's great. We'll step right in and work with them. We have no problem with that. There's no customer issue. It's more trade related. But I think the need and the desire to have a 5G phone is very real everywhere. And certainly we want to serve China the best we can.

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

Thanks very much for sneaking it in and congratulations on the strong revenues, guys. So I hopped on a little bit late, so apologies if this has already been asked, but Liam and Chris, can you provide some color on the relative strength that you would expect in the business going into the fiscal first quarter And then the follow-up to that is how should we think about how the second quarter could perform relative to normal seasonality and what would you characterize normal seasonality as in this environment?

Sure, sure. Good question. You know, as we had said earlier in the call, you know, we had a really strong acceleration of design wins that, you know, we've been working on for years and investing in and started to really see that lift off in the back half of Q4 and resulted in a $200 million sequential gain, $100 million beat the consensus, so a lot of momentum there. And as we entered Q1, our current quarter, we continue to see that. We've got some great catalysts with the leading player in the market right now with some incredible technologies that are just being launched. The China market adopted a little bit earlier, and we've been shipping well to that ecosystem, Oppo, Vivo, Xiaomi, also partnering up with MediaTek to try to get that full market that full pie of opportunity across APAC and doing very well with that. So our factories are humming. Our teams are executing. The inventories are really lean right now. We're shipping overnight in many cases with our customers. So that's kind of where we see it. So when we look at the March quarter, it's a little bit too early to give you a guide on that. But if you just look at where we are, you know, 200 million sequential. We got it up 10% for Q1. You know, we feel pretty good about the position. We also recognize, and I think we've mentioned this earlier, but it's true. These are the early innings of 5G. This is really the first, you know, quarter or so where these technologies are available. In many cases in the U.S., there's still some products that people want and can't get yet, and that's going to happen. So there's a lot more to go, and the complexity is going to continue to move up, and the opportunity is going to continue to move up, And the adoption rate, which is extremely low right now, is going to move higher and higher every year. So there's a lot to do in the future. And, you know, we feel like we put up some really good performance here now, but we have a lot more to go as we move into 2021.

Yeah, that's really helpful, Liam. And I agree that we're in the very early innings. And the follow-up question relates to that. So broad markets is annualizing at a billion dollars, far faster than I thought. So good for you and the team. But with 5G smartphone units, I think – based on most industry observer forecasts, likely to increase 2x in 2021 and then doing the same thing in 2022. Is it possible for broad markets to pull in either additional programs in existing end markets or new end markets with new programs or new customers so that it could keep pace and keep the same level of revenue contribution on a relative basis or Over the next couple of years, would we expect Mix to swing significantly towards integrated mobile? Thank you.

Yeah, no, that's a great, great question. At the numbers this last quarter, actually 30% sequential on each, so it had some really good balance. And if you look at what the market's bringing to us now, there's a tremendous amount of Wi-Fi opportunity, GPS opportunity, and still some cellular opportunity that is going into broad markets. So I think you've got two distinct portfolios that share a common supply chain and often can share a common technology that we can drive to. So, you know, over the long term, we want to be the connectivity leader in any application, and we can take that application, whether it's a gaming headset or it's a cellular infrastructure or whether it's in defense or automotive. All of those end markets really are targets for us. and we could certainly do better, but we are pleased with what we've been able to do in the last quarter or two, and look forward to a great 2021.

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 talking with you at upcoming conferences during the quarter. Take care.

Ladies and gentlemen, that does conclude today's conference call, and we thank you for participating.