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Morningstar | Skyworks' BAW Filter Announcement Bodes Well for its 5G Position; Maintain $113 FVE

Skyworks Solutions reported solid fiscal fourth-quarter results in line with our expectations. Although the near-term revenue growth picture appears weak as the company anticipates a decline in Apple iPhone unit sales and soft smartphone demand in China, we continue to like the firm's long-term competitive position in radio frequency chips. The very pleasant surprise, in our view, was the company's disclosure that it is sampling Bulk Acoustic Wave, or BAW, filters for use in its upcoming integrated 5G products, Sky5. The firm's lack of in-house BAW expertise has been a longtime risk, in our view, as BAW filters are best suited for higher wireless frequencies (generally at 2 GHz or above) and newer 5G bands will likely be in these higher frequencies. Although Skyworks may be up to 18 months away from delivering in-house BAW filters, we're incrementally more positive about Skyworks' 5G position. We will maintain our $113 fair value estimate for narrow-moat Skyworks and view shares as meaningfully undervalued.

Revenue in the September quarter was $1.01 billion, up 13% sequentially and up 2% year over year. Sales were ahead of Street estimates and at the high end of the firm's prior guidance. For the December quarter, Skyworks expects flattish revenue, which would represent a 4% year-over-year decline, again attributed to soft unit demand for the iPhone and smartphones sold in China. The firm hinted at another year-over-year decline in the March quarter with typical seasonal weakness, but the firm anticipates a return to year-over-year growth in the second half of fiscal 2019, in turn delivering full year growth despite a slow start. Although these fiscal 2019 expectations are below our prior estimates, we remain bullish on Skyworks' content gains and pricing power on 5G RF content in the years ahead.

Looking at the September quarter, broad-market chip sales rose by 10%-plus on a year-over-year basis, thanks to rising connectivity in non-smartphone applications and Internet of Things devices. Higher sales levels enabled adjusted gross margins to rise 30 basis points sequentially to 51.2%. Skyworks also fared well on the operating expense front as adjusted operating margins rose 130 basis points sequentially to 37.6%.

Regarding Skyworks' BAW announcement, the company incorporates BAW filters into its integrated products today, outsourcing BAW from discrete filter manufacturers such as (reportedly) Taiyo Yuden. The company's newfound BAW capabilities will likely reduce the importance of its BAW partnerships over time, although the shift won't be sudden as the company won't rip out the third-party BAW filters used in existing products. We note that Skyworks partnered with discrete SAW manufacturers for many years before acquiring Panasonic's SAW filter business and focusing on temperature-controlled, or TC-SAW products. Skyworks now outsources only a minority of its SAW filter needs, while building the rest in house, and will likely use even more in-house TC-SAW over time.

For further insight into the 5G RF landscape, please refer to our October 2018 special report "Filtering the 5G Radio Frequency Landscape."