After the close last night, Skyworks (SWKS 84.55, +8.59, +11.31%), which supplies Apple (AAPL 174.23, +0.05, +0.03%) with radio frequency and communications components, reported 1Q19 earnings and revenue that was in line with the downside guidance it provided back on January 8. The company also issued downside guidance for 2Q19, which comes on the heels of AAPL's downside Q2 guidance (revenue of $55-$59 bln vs. $59 bln consensus) from January 29 as weakness in the Chinese mobile phone market is expected to persist.
Since AAPL accounts for an estimated 40% of SWKS' revenue,
its growth, financial results, and outlook are highly correlated to demand for
iPhones and successful future launches of smartphones. So, if AAPL is still
projecting soft conditions for its most important product, why are shares of
SWKS surging by over 10% this morning?
For starters, the slowing smartphone market in China is old news. AAPL cut its guidance way back on January 2, with SWKS following suit on January 8. Additionally, a slew of semiconductor companies that provide chips for mobile device OEMs also cut or issued downside guidance - most notably including Samsung (SSNLF), SK Hynix, and Qualcomm (QCOM) - in the weeks leading up to SWKS' report. So, in other words, investors have moved on from this bad news, focusing on a recovery in 2H19, as well as other major growth catalysts that could reignite growth for SWKS, including the upcoming transition and implementation of 5G technology.
Importantly, the move to 5G technology will not just impact mobile phone communications, but, it will spread across to many other end markets like automotive, IoT, healthcare, and AI. As a result, SKWS may finally be able to achieve some meaningful customer diversification.
For its part, SWKS certainly expressed bullishness about the upcoming 5G evolution and its prospects for the future by announcing a new $2 bln stock buyback program. The company doubled the size of its previous buyback, with management also citing its exceptional cash flow generation (which hit a quarterly record of $549 mln in the quarter) and rock solid balance sheet as supporting its needed R&D investments for new 5G technology.
To put it simply, the market is already well aware of the issues facing AAPL, SWKS, QCOM, and others in China. With demand expected to reach a trough in the Q2/Q3 timeframe, and with other emerging technologies expected to offset that weakness, investors are sensing a return to stronger growth in the not-too-distant future.
Closer Look at Q1 Results
For the quarter, SWKS posted EPS of $1.83 and revenue of $972 mln, down 7.6% yr/yr. Back on January 8, the company cut its Q1 guidance to EPS of $1.81-$1.84 from its prior guidance of $1.91, while lowering its revenue outlook to $970 mln from $1.00-$1.02 bln. So, its actual results came in a little better than it had projected a month earlier.
To nobody's surprise, the company commented during the earnings call that the decline in revenue (its largest yr/yr drop in over 5 yrs) was due to weak end customer demand in China -- see AAPL for more details. Overall, mobile represented 73% of revenue while the broad market category, including IoT, auto, infrastructure, was 27%. It is this broad market segment that SKWS is especially enthusiastic about as 5G technology begins to roll-out.
In fact, this quarter, broad market was up double digits on a yr/yr basis, helping to negate the poor performance in the mobile area. Currently, broad market is running at a sizable $1 bln annualized run rate. SWKS is clearly expecting even bigger things to come here.
Specifically, management spent a good portion of the call last night on the topic of 5G and its opportunities within it. Calling 5G "transformational", SWKS referenced its key partnerships across all smartphone and IoT customers, its history of success as a communications infrastructure provider, and its investments in its product portfolio in support of 5G as reasons why it is well positioned to capitalize. From a specific product standpoint, the company said that it has already secured a number of significant MIMO design wins with leading base station provides as they begin ramping to 5G. MIMO is a smart antenna technology for wireless communications in which multiple antennas are used at both the transmitter and the destination level.
In its earnings press release, SWKS issued downside Q2 guidance, forecasting EPS of $1.43 vs. the $1.51 consensus, and revenue of $800-$820 mln vs. the $851.5 mln consensus. That would represent a 17% dive from Q1, which is a bit more than the typical low-to-mid teens drop off seen in the seasonally slower Q2 period.
Again, SWKS reiterated that macroeconomic pressures will hit its Q2 results. That doesn't come as a surprise, either, as AAPL, SSNLF, QCOM and others have said the same. But, SWKS commented that is feeling much more optimistic about the second half of the year as it continues to rack up design wins.
To put it bluntly, Q1 was pretty dismal for SWKS and Q2 doesn't look a whole lot better. But, investors don't really care, since they are sharpening their focus on 2H19. In particular, enthusiasm regarding SWKS' growth opportunities outside of the mobile market, including 5G and IoT, is building. It's not just investors that are feeling charged up for what lies ahead. The company itself expressed enthusiasm through a convincing $2 bln share buyback program. Hence, why the stock is launching higher today.