Skyworks Solutions (SWKS) is trading modestly lower despite reporting what it appears to be a solid Q3 (Jun) earnings report and dividend increase. In case you're not familiar, Skyworks is a supplier of wireless semiconductors. The company sees as its mission to connect everything, everywhere, all the time, and it does this with its wireless connectivity products.
SWKS says it's really at the heart and the center of the mobile economy, and the mobile economy is one of the fastest growing sectors in the global economy. Companies like Apple, Google, Twitter, Facebook, Snapchat, Uber, they are all driven by the mobile economy, and that is all driven by the wireless connectivity engines that SWKS puts in multiple devices. Apple (AAPL) is its largest customer at about 40% of revenue.
Obviously, smartphones are the major part of the mobile economy, but there are billions and billions of other devices that are also connected to the Internet or that are connected through wireless engines. It's called IoT (Internet of Things) devices. SWKS uses the example when you're at the airport and watching the NBA Finals on your phone, you don't like is to see the buffering. It's all really driven by higher data speeds, more bands, stitching together bands, better single conditioning etc. SWKS provides the wireless connectivity technology via its IP and technology portfolio. It has 3G, 4G, and now is moving into 5G LTE products. It also has Wi-Fi chips, ZigBee, Bluetooth and other connectivity plays including GPS.
SWKS is very successful in mobile/smartphones, which is roughly 75% of revenue. The other 25% of its business is what it calls Broad Market and the vast majority (roughly 70%) of this segment is IoT although other areas include defense, infrastructure etc. Its Broad Market segment has grown nicely in the past few years and it's now at a $1 bln annual run rate.
The company concedes that FY16 (Sep) was a little bit of a challenging year, but it's back to double-digit top-line growth this year (FY17). SWKS has been able to expand its gross margins. A couple years ago, they were in the mid-30s, and now they are in the low 50s. SWKS is driving towards an operating margin of 40% and it's getting quite close.
As you can imagine, SWKS generates a lot of cash and has huge margins. It currently has a sustainable 30-plus percent free cash flow margin. In FY16, SWKS generated approximately $1 bln, and this year will be more than $1 bln. SWKS returns roughly 40-50% of that cash back to shareholders in terms of dividends and share buybacks. Finally, the balance sheet is in great shape with a lot of cash ($1.44 bln or $7.74/sh) and no long term debt.
Turning to the Q3 (Jun) results, non-GAAP EPS rose 27% YoY to $1.57, which was above prior guidance of approx. $1.52. Revenue rose 19.8% year/year to $900.8 mln vs prior guidance of $890 mln. In terms of guidance for Q4 (Sep), SWKS sees non-GAAP EPS of $1.75 and revenue of $980 mln. Both are above market expectations. Non-GAAP Operating margin improved to 37.0% in JunQ from 36.5% last year. In addition, SWKS upped its quarterly dividend by 14% to $0.32/sh, which computes to an annual yield of 1.2%.
On the call, SWKS said it is still in the early innings of a massive sea change as data explodes; global data usage is expected to grow 7x from 2016 to 2021. Over 3 bln people are still not connected worldwide. An analyst noted that industry sales data out of China has been a little soft and wanted management's take on that. SWKS said that China has spots of weakness, but more in 3G, the high end where SWKS operates is solid. In MarQ it was more of a challenge for SWKS but they saw improvement in JunQ. SWKS said on the call that, in Q4 (Sep), it expects broad market revenue of $250 mln, or a $1 bln annual run rate.
In sum, the stock is trading modestly lower despite the earnings beat and dividend increase. It may be that the stock had run $10 in the past month or so. So perhaps there had been hopes for a larger beat. However, the longer term drivers for the stock appear to remain in place. The upcoming iPhone 8 launch this fall could be a nice catalyst for SWKS if it's a big seller.