The bad news for Irvine-based Skyworks Solutions Inc. is that the chipmaker’s fortunes, and sales, are largely tied to one very demanding customer.
The good news for Skyworks—by far the most valuable publicly traded tech company with headquarters in Orange County, with approximately $17 billion valuation—is that the customer in question is tech behemoth Apple Inc. (Nasdaq: AAPL), the world’s second most valuable publicly traded company with a $2.9 trillion market cap.
Skyworks provides components for Apple’s smartphones, tablets, desktop computers, notebook computers, watches and other devices, according to the local company’s latest annual report. Those components are used by Apple directly in their manufacturing, as well as by equipment manufacturers that work on behalf of Apple.
In recent years, about 60% or more of Skyworks’ revenue often comes directly and indirectly from Apple, regulatory filings indicate.
Reports over the past year have suggested that upward of 85% of Skyworks’ revenue from Apple comes from its work for the iPhone.
While the work with Apple has been a beneficial partnership for Skyworks, resulting in billions of dollars in sales in recent years, there are clear dangers.
The past year has seen numerous reports that Apple is developing its own internal chipmaking team, and it has established a hub in Irvine, a few miles from the base of another chipmaking competitor of Skyworks with deep local ties, Broadcom Corp. (Nasdaq: AVGO), to boost those efforts.
“I think Skyworks has got an extremely good relationship with Apple,” Piper Sandler Senior Research Analyst Harsh Kumar told the Business Journal on Feb. 8. “We don’t see any dangers in the Apple-Skyworks relationship.”
Elephant in the Room
Executives at Skyworks don’t actively promote the Apple partnership; usually just referring to the company as the “largest customer.”
That phrase turned up 10 times in an earnings conference call with analysts last month.
The name “Apple” wasn’t specifically mentioned during the call.
Skyworks executives in recent years have often cited the need to reduce the company’s reliance on Apple as a key priority.
That didn’t work out so well in the most recent quarter that ended Dec. 29, when Skyworks got 73% of its revenue from Apple, up from 66% in fiscal 2023 and 58% in fiscal 2022.
“The largest customer was approximately 73% of total revenue which is high, obviously, because the December quarter is the top quarter with the largest customer,” Chief Financial Officer Kris Sennesael told analysts on a Jan. 30 conference call.
“Obviously, when you look forward on a full-year basis or even in March, it will be well below the 73%.”
Apple’s business has kept Skyworks busy during a trying time for chipmakers, given the host of inventory and supply chain issues facing the semiconductor industry (see story, this page).
In fiscal 2023, sales for the company declined 13% to $4.77 billion. It reported fiscal first-quarter sales dropped 9.6% to $1.2 billion for the period ended Dec. 29.
Skyworks forecasts current second-quarter sales will also fall about 7% to 12%, or between $1.02 billion and $1.07 billion.
The company’s shares are off some about 12% over the past year; Apple’s shares have increased about 24% over that time.
Shares for Skyworks have fallen almost 50% in the past three years.
Skyworks executives suggest the chipmaker, and sector at large, is on the verge of a turnaround.
“We see signs that the industry is stabilizing,” Chief Executive Liam Griffin told analysts on a Jan. 30 conference call. “Excess supply conditions are abating and inventory levels in the distribution channel and at the OEM level are normalizing.
“Customers are starting to restock inventory, albeit gradually as supply and demand dynamics improve and new phones are introduced into the market.”
Record Cash Flow
While revenue fell, Skyworks reported a record operating cash flow of $753 million in the first quarter; its adjusted profit was $1.97 a share, topping the analysts expectation for $1.95. Sales were in line with expectations.
CEO Griffin remains bullish, citing several long-term secular growth dynamics that he says leverage Skyworks technology.
He sees “a lot of opportunity to go harder and stronger and more direct on the Android ecosystem” and for growth in the automotive industry.
The company’s been looking to expand its presence in the automotive industry; it paid $2.75 billion in 2021 for the infrastructure and automotive business of Silicon Laboratories Inc. (Nasdaq: SLAB).
Griffin said late last month that Skyworks has a “roster of incredible companies that we’re serving right now” including Cisco, Ford, Daimler and Alphabet division Nest.
“We anticipate [the] December quarter represents the bottom in the broad markets business,” Griffin said. “We are energized about the prospect of generative AI migrating to the smartphone, sparking a potential major upgrade cycle, as the performance bar rises every year to support AI enabled phones.”
Skyworks declined the Business Journal’s request to speak with CEO Griffin for this story.
Analysts don’t appear sold that the company is truly looking to diversify its customer base.
“Skyworks was much in vogue during the 2021 bull market. Shares traded at over $190 in the middle of that year,” said website Investor Place on Jan. 8. The price was trading at $102 as of last week.
“The highs were marked by public statements that Skyworks was going beyond Apple. You still see such stories, but analysts no longer pay attention to them,” according to the website.
Still, while analysts are predicting Skyworks’ revenue will fall 6.4% to $4.47 billion this year, they are also quietly becoming more bullish.
Since the Jan. 30 Skyworks report, the number of hold ratings has fallen from 17 to five and the number of buy ratings has more than doubled to 22.
Susquehanna analyst Christopher Rolland raised the firm’s price target on Skyworks from $120 to $125 and assigned a buy rating on the shares.
“The rating reflects expectations of improved gross margins following a period that appears to be the trough for Skyworks,” he said.
Mizuho Securities USA maintained a buy and a price target of $125.
“Margins to improve through 2024E with improved utilization,” analyst Vijay Rakesh wrote in a note to investors.
“This has been a tough year across the landscape, across semis,” Skyworks Solutions Inc. Chief Executive Liam Griffin told analysts on Jan. 30, at the time the company announced its latest earnings report.
“We’re happy to deliver some positive results here today, and we do think there’s a turn.
“Skyworks delivered solid financial results despite a challenging macro environment.”
Global semiconductor revenue declined about 11% in 2023 due to an inventory glut that stemmed from waning demand for high-performance chips, according to market research
Gartner Inc., which predicted semiconductor revenue will bounce back up this year with a 17% growth to $624 billion.
Consulting firm Deloitte also has a positive outlook for the chip industry this year, saying it could grow 13% to $588 billion.
“Led by generative AI, chip sales look to bounce back in 2024—but geopolitics could complicate growth in the semiconductor industry,” Deloitte said in its projections for this year.