Skyworks Solutions, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Skyworks Solutions is a leading designer, manufacturer, and marketer of analog and mixed-signal semiconductors, enabling wireless connectivity across various markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Skyworks Solutions (SWKS) operates within the semiconductor industry, focusing on the design and production of high-performance analog and mixed-signal semiconductors. These are crucial components that enable wireless connectivity, and you can find them in a variety of applications such as smartphones, internet of things (IoT) devices, networking gear, and automotive systems. Unlike other chip manufacturers, Skyworks focuses on these specific components within these larger ecosystems rather than a diverse array of chips.

  • Revenue Distribution:
    • Skyworks’ revenue is primarily derived from the sale of its products, which include: power amplifiers, filters, switches, and other radio frequency (RF) components.
    • The company categorizes its revenue into two main segments: Mobile and Broad Markets. The Mobile segment caters to the high-volume smartphone market, while the Broad Markets segment includes a more diverse range of applications (IoT devices, aerospace, communications). The majority of sales have traditionally stemmed from mobile (primarily smartphone) applications. The most recent 10K shows that Mobile represents 66% of revenue with Broadband representing 34% of revenue.
    • Geographically, Skyworks generates revenue globally, but a significant portion comes from North America, Asia, and Europe. In their 2023 10K report, no single customer accounted for 10% or more of revenue.
  • Industry Trends:
    • The semiconductor industry is undergoing constant innovation with increasing demand for greater connectivity and higher data-transmission speeds. The demand for IoT applications and the proliferation of 5G networks are expected to be key drivers for the industry in the coming years. These trends will require the increased usage of high-performance analog and mixed-signal components which Skyworks can benefit from. The increasing penetration of connected devices will also help them grow as more devices and equipment become interconnected, but that might also invite new entrants and competition.
    • Consolidation in the industry is another key trend, with large players acquiring smaller companies to expand their portfolios and capabilities. This creates both challenges (the more competition there is) and opportunities for companies like Skyworks to scale up.
    • Supply chain vulnerabilities and geopolitical tensions are also influencing the sector. Increased pressure from the US, Europe and China on technological dominance and influence, could lead to disruptions and increased costs in supply. All players in this industry are going to feel this geopolitical shift.
  • Margins:
    • Skyworks’ operating margin has remained stable over the past three years, and has averaged around 30% of revenues. This has been primarily due to cost controls and an average 46% gross margin. In 2023, the average gross profit was at 46%, selling, general and administrative expenses amounted to 12.2% of revenue, and a total operating margin of 32%. There are no signs of erosion in margins, and this shows a stable performance in this area.
  • Competitive Landscape:
  • The semiconductor industry is intensely competitive with a wide variety of specialized companies, with some being large global firms and others small, niche players. Skyworks competes with companies such as Qualcomm, Broadcom, and Qorvo, among others. * The company’s competitive advantage primarily stems from its proprietary technologies and design capabilities, which allow it to produce high-performance, highly integrated RF solutions. * The company also leverages a strong relationships with its customers, specifically original equipment manufacturers (OEMs) in the mobile and broad markets spaces.
  • In their 2023 10K, the company lists its competitors as: Broadcom, Qualcomm, Murata Manufacturing, Qorvo, and other domestic and foreign companies that are developing competing products.
  • What makes Skyworks Different?
    • Skyworks has a specific focus on radio-frequency semiconductors, while many competitors in the industry operate across different types of semiconductors. This specialization allows Skyworks to develop a niche expertise and target specific markets such as mobile (primarily smartphones) with its products. Skyworks also emphasizes their R&D, which should help them continue their edge. The company has historically focused on delivering high-performance, energy-efficient, and compact solutions for their customers. Furthermore, they focus on specific parts of the smartphone ecosystem (RF) instead of diversifying across other parts of a smartphone.
  • Other relevant info:
    • Skyworks’ products are used in a vast array of applications from consumer electronics to critical infrastructure and defense. This exposure helps them to have more predictable revenue and helps create stability even if one market falters.
    • A trend is that there are greater amounts of radio frequencies (5G, Wi-Fi, and similar technologies), which makes their products necessary. Their products also help make these technologies better.

Financial Analysis

  • Revenue:
    • Skyworks has demonstrated consistent revenue growth over the past several years (except for 2023 which experienced a 13% drop). Historically, the major drivers of growth were its mobile segment, which benefited from the expansion in smartphone sales and connectivity. *In fiscal year 2023, the company experienced a revenue decline compared to previous years, reporting $5.1 billion in net revenues compared to 2022 revenue of $5.7 billion- a 13% drop in annual revenue.
  • Gross Profit:
    • Skyworks has maintained an excellent gross profit margin, averaging 46% in the past three years. This has helped them to maintain consistent operating profitability.
    • In 2023, the company reported a 46% gross profit margin which is only a slight drop from 47% the year before. This shows great operational efficiency.
  • Operating Expenses:
    • The company’s operating expense has risen slightly over the past few years, but has been within control for the period. Most of the operating expenses are Selling, general and administrative expenses, which are 12.2% in the recent 2023 10K.
  • Net Profit and ROIC:
    • Despite the revenue decrease, the company has consistently reported net profits. Net income for the year ending September 30th 2023 was $1 billion, representing a net profit margin of about 20%.
    • The company has achieved impressive returns on invested capital (ROIC) historically. The return on invested capital remains near 20% even if good will is not excluded.
  • Cash Flow:
    • Free cash flow was $1.2 billion in 2023 and $1.6 billion in 2022, which shows the company’s ability to generate cash from its core operations.
    • Skyworks also has a strong liquidity position, with a cash and investment balance of roughly $1.4 billion as of September 30th, 2023.
  • Debt:
    • The company has consistently maintained a solid balance sheet with low levels of debt. This shows that they have a solid amount of liquidity to take advantages of growth and opportunities.
    • In 2023, long term debt was only $0.8 Billion, which is very low for the scale of operations.

Moat Analysis

Moat Rating: 3/5 (Narrow Moat): Skyworks possess a narrow moat driven by a combination of intangible assets, switching costs, and scale advantages. However, the rapid evolution of technology and intense competition in the tech space keep it from being a wide moat company.

  • Intangible Assets: Skyworks benefits from having a unique intellectual property portfolio and patents that give its products an edge. However, other large semiconductor firms have lots of similar patents, and as these patents expire or become invalid through legal action, it may become more difficult for the company to rely on this moat.
  • Switching Costs: Skyworks benefits greatly from switching costs as its products are embedded deep into its clients’ supply chains. By maintaining high levels of reliability and quality, many customers prefer to buy the product from a company they already know and use. As stated previously, the customers for this technology often use long production runs which further insulates Skyworks’ moat.
  • Economies of Scale: As one of the larger players in the semiconductor industry, Skyworks benefits from its large and extensive production capabilities to reduce its costs. This allows them to keep prices competitive and generate above average returns. However, the manufacturing space can be more capital intensive and requires constant innovation and improvements, and this makes the moat less durable and more difficult to maintain.

Risks to the Moat and Business Resilience

Skyworks’ long term business potential faces several risks that could diminish their moat and returns:

  • Technological Obsolescence: The technology sector is constantly evolving. If Skyworks is slow to adopt or develop new technologies that gain popularity, they will face heavy competition. Although Skyworks has many long standing relationships, its success depends on being at the cutting edge of technological advancements. If those relationships break down or another company takes the leading edge, there are no guarantees that Skyworks will remain competitive.
  • Competition: The semiconductor industry is incredibly competitive. New entrants that develop similar but better and cheaper technology can quickly erode Skyworks’ profits. There is also risk from consolidation, as other bigger players can acquire smaller, more innovative companies, and use the advantages and technologies to compete.
  • Customer Concentration: While no single customer represents more than 10% of sales, the reliance on a select few large customers could create risk. Large tech customers have immense power over their suppliers, and can dictate prices and margins by leveraging competitors. Should a customer decide to switch suppliers or reduce their volumes, Skyworks’ results would be severely impacted.
  • Dependence on Smartphone Market: For several years, the mobile (primarily smartphones) segment has made up the vast majority of Skyworks revenue. The smartphone market is very cyclical and is also very competitive. As the smartphone market becomes more competitive, the demand for their products may come under pressure from other, similar types of competitors. If Skyworks is unable to grow or expand in its Broad Market segments, it might see stagnant returns for a long time.
  • Trade and Geopolitical Risks: The semiconductor industry is global, and is therefore susceptible to risks due to geopolitical instability and trade tensions. For example, the ongoing US-China trade war has led to the increased volatility of sales of several companies with operations in China and other similar regions. Likewise, instability, wars or changing geopolitical landscapes can impact manufacturing as well, or reduce the predictability of supply chains.
  • Geographic Concentration: Over 70% of Skyworks’ revenue comes from outside the US (primarily in Asia) in 2023. There are clear risks with such geographic concentration as changes in laws, or instability could impact their ability to generate income from certain regions.

Understandability Rating

Understandability Rating: 2/5: Skyworks, while not too complex, does require some industry knowledge to fully understand the details of their business operations and competitive dynamics.

  • While it is easy to see that they are a semiconductor company and the type of products they sell, it becomes quite difficult to understand the market and how they develop and maintain a competitive edge. The technology can get complex, and it takes a significant effort to discern the intricacies and differences between their components compared to those of competitors.
  • Their financial statements are relatively straightforward; however, the effects of changes in pricing, competition, and technological disruptions may not always be immediately apparent, requiring further insight and analysis to understand.

Balance Sheet Health

Balance Sheet Health: 4/5: The company has a healthy balance sheet with low debt and a high degree of liquidity, with substantial cash reserves.

  • Their strong cash flows and ample cash reserves makes them well-positioned to weather downturns. The company has historically been very conservative with its balance sheet, having low debt and high levels of liquidity. These factors are all positive, and makes the company very resilient financially.

Latest Developments and Management Commentary

  • In the most recent earnings call (October 2023), Skyworks highlighted a few key talking points. In Q4 of the 2023 fiscal year, despite the decrease in revenue, the company saw growth in some of their product lines, including Wi-Fi and the Internet of Things (IoT). They are anticipating growth in those market segments in 2024 and going forward. They are also anticipating new design wins that should propel their revenue in coming quarters. They also expect to continue to invest in R&D to maintain their technological advantages.
  • There are risks however, as Skyworks does expect some continued weakness in the Android space due to reduced sales there. They also anticipate some market volatility going forward and are expecting a very gradual recovery in demand in many of their sectors. Furthermore, the company intends to slow down share buybacks until their leverage level is back to historical levels of 1x Net debt to EBITDA.
  • Management is also putting more emphasis and efforts towards cost cutting to improve margins and profitability. They are also pushing more focus on design wins outside the mobile smartphone segment to generate more long-term stable revenues.
  • There is increasing competition from Chinese manufacturers in the RF sector, which may impact Skyworks margins going forward, but management believes their technological expertise and their relationships with large manufacturers will give them an edge to stay competitive.
  • Skyworks’ business has been influenced by the broader economic environment, most notably the supply chain disruptions related to COVID-19. Their CFO also noted that their gross margins remain strong at 46%, and their operating profitability continues to be strong which is what will drive future performance.

Skyworks’ management is focused on long term growth, and seems to be taking all the steps necessary to protect their business and maintain a competitive advantage going forward. The management is also focused on improving operational efficiency to enhance profitability in the future.

Conclusion

Skyworks operates in a critical industry enabling wireless connectivity. While the company is very competent in what it does, the nature of the market, supply chains, and increasing competition makes it a medium-risk business. Although it has a narrow moat, there are potential ways for this moat to widen in future if the company is able to properly execute its strategy and adapt to the changing landscape. The company’s balance sheet health and financial metrics also show great signs, and management is focused on long-term sustainable growth. However, as an investor, one must take into account all the threats and understand that a solid investment can still be subject to risks.