Skyworks Solutions, Inc. (SWKS) Earnings Call Transcript

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Skyworks Conference Call. [Operator Instructions] Thank you. Mitch Haws, you may begin your conference.

Thank you, Rob. Good afternoon, everyone, and welcome to today's conference call. With me today are Liam Griffin, our President and Chief Executive Officer; and Kris Sennesael, Chief Financial Officer. Earlier today, we announced the acquisition of the Infrastructure and Automotive business of Silicon Labs. The press release and the related transaction slides can be found on our website. Before we begin, I would like to remind everyone that our discussion will include statements relating to future results, expectations, benefits and timetables that are or may be considered forward-looking statements. Please refer to today's press release; and recent SEC filings, including our annual report on Form 10-K, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. With that, I will turn the call to Liam.

Thanks, Mitch. And welcome, everyone. I'm pleased to announce that Skyworks has entered into a definitive agreement to acquire the Infrastructure and Automotive business of Silicon Labs in an all-cash asset transaction valued at $2.75 billion. Over the past 2 decades, Silicon Labs has developed its Infrastructure and Automotive business into a leader in each of its target markets, providing best-in-class solutions to a highly diversified customer base. The acquisition encompasses the full technology portfolio of the business, including power and isolation, timing, broadcast and additional complementary product lines. The business fits squarely with our strategic priorities to expand our market reach, accelerate revenue diversification and drive industry-leading profitability and cash flow. This is a compelling acquisition for Skyworks. The Infrastructure and Automotive business is proven, competitively well positioned and highly profitable, with leadership across several high-growth segments. Its strong financial profile makes it immediately accretive to Skyworks and accelerates the path to achieving our target financial model. Importantly, this transaction will further diversify our revenue stream by significantly expanding our broad markets footprint. Additionally, the end markets are additive to Skyworks, and together, the combined company is expected to address a market opportunity approaching $20 billion annually. Finally, both Skyworks and the I&A team share a culture of innovation, technology leadership and customer engagement that stretches back over nearly 2 decades. And looking at the elements of the I&A business model in more detail. The acquisition will accelerate Skyworks' expansion into many of the new and most important industry and growth segments, including electric and hybrid vehicles, 5G wireless infrastructure, optical and data center. The resulting revenue stream is well aligned to address these fast-growth, high-volume segments with a strong pipeline of design wins. Leveraging our extensive customer reach, scale and worldwide manufacturing expertise, Skyworks is well positioned to capture this multibillion-dollar opportunity. For those of you who have followed Skyworks, you have seen extraordinary growth in our broad markets business. The portfolio today generates in excess of $1.2 billion in revenue on an annualized basis and as we have expanded our solution set across more than 5,000 global customers. The addition of the I&A business is highly complementary, adding profitable revenues and an innovative suite of products in high-growth end markets. Post closing, our annual revenue will exceed $5 billion, with broad markets comprising approximately 40% of our total revenues. This transaction also expands our customer and application space. The business brings a highly complementary set of new products serving a broad array of blue chip customers. In fact, the top 10 customers account for just 30% of the revenue, and more than 4,000 customers make up the remaining 70%. Skyworks will be uniquely positioned to address this combined market opportunity. Importantly, the combination of our unique technology platforms and broad customer reach enable us to drive significant cross-selling opportunities. And finally, we are pleased to welcome the Silicon Labs I&A management team and the more than 350 employees who have been instrumental in creating such a strong franchise. The senior leadership team brings over 85 years of combined experience, and we look forward to leveraging their unique expertise across Skyworks. Together, we share a rich culture of innovation, design excellence and deep customer engagement. I will now turn the call over to Kris to discuss the financial details of this transaction.

Thanks, Liam. Turning to Slide 9 of the presentation, you can see a high-level summary of the transaction. As Liam mentioned earlier, we will acquire the Infrastructure and Automotive business of Silicon Labs for a total purchase price of $2.75 billion in cash. This transaction will be immediately accretive to Skyworks in terms of non-GAAP gross and operating margins as well as non-GAAP EPS, as we are adding a highly profitable business that was running at approximately $375 million in revenue in calendar year 2020. Through this transaction, we will acquire all the assets and IP necessary to operate the business, including over 350 employees and the senior team that have been running this business successfully for many years. In terms of financing, we will pay for this transaction in cash using approximately $250 million of cash from the balance sheet and approximately $2.5 billion of new debt financing. And we expect to close this transaction during the third calendar quarter of 2021, subject to the customary closing conditions and regulatory approvals. In terms of financing, we will issue approximately $2.5 billion of new transaction debt, including up to $1.5 billion of committed term loans and $1 billion in longer-term investment-grade bonds. That leaves us with a strong liquidity position of approximately $1 billion of cash on the balance sheet after the closing. Additionally, as part of this transaction, we will enter into a revolving credit facility of $750 million that will provide supplemental liquidity. And we expect that this transaction will further bolster the cash generation capabilities that Skyworks has demonstrated over the last 10-plus years. The $2.5 billion of debt financing results in a low pro forma financial EBITDA leverage at close of just above 1X. We expect to delever quickly in the first 18 months after close, as we will focus on repaying the term loan. We also expect to maintain our current dividend policy. However, as we focus on repaying the term loan, we will temporarily suspend our share repurchase program. And as we have demonstrated in the past, we do have a conservative financial policy and will remain committed to maintaining the investment-grade rating. So in summary, I am very excited about this transaction not only for all the strategic reasons that Liam has touched on but also from a financial point of view and the real value this acquisition will bring to our shareholders. This transaction will accelerate the path to achieving our target financial model, which includes driving above-market revenue growth and further improving our profitability metrics with a target of 53% gross margin, 40% operating margin and 30% free cash flow margin, so I remain confident that Skyworks is well positioned to generate strong cash flow and deliver strong returns to our shareholders. And with that, I'll turn it back to Liam.

Thanks, Kris. This strategically compelling acquisition will yield long-term growth, diversification and enhanced profitability for Skyworks. By leveraging our global sales channels, operational scale and deep customer relationships, we are well positioned to drive above-market growth while diversifying our revenues, expanding our margins and delivering strong returns in earnings and cash generation. With that, operator, we are ready for questions.

[Operator Instructions] Your first question comes from the line of Gary Mobley from Wells Fargo Securities.

I'll ask the first question which is probably on everybody's mind, perhaps if you can give us a sense of what the annual non-GAAP OpEx for these assets may be in the first full year of ownership; and related to that, whether or not you see this as being -- see an opportunity to maybe just squeeze out some OpEx synergies from that run rate.

Yes. First of all, this is an asset transaction, right? And so we are getting the necessary people and assets to run that business, but it comes fully synergized to us, so there is no overheads, right? So we have all the synergies day 1 with all the assets that we need to operate that business. We will actually continue to make further investments in that business to accelerate the growth. The OpEx run rate, it's on or about $85 million per year non-GAAP OpEx, but -- so this is a highly profitable business immediately accretive day 1 after close.

Okay. And just to finish the discussion, could you give us a sense of what your weighted borrowing rate may be? And I believe this might be a roughly 62% gross margin business. Can you confirm that?

Yes. So in terms of model, last calendar year, 2020, revenue was $375 million. In the December quarter, they did $97 million, and that's all public information. So they are on a $400 million run rate in terms of revenue and growing. The gross margins are on or about 60%. The operating margin, taking into account on or about $85 million of OpEx that we need to run this business, gets you close to 40% operating margins. And so again that's day 1 at close, and then of course, we will grow the business from there, so it's immediately accretive. We will finance this with approximately $2.5 billion of debt. It's probably too early to talk about the overall cost, but money is cheap right now. And so we think we can finance that in the low 2s, 2% to 2.25%, somewhere in that range.

Your next question comes from the line of Craig Hettenbach from Morgan Stanley.

Liam, can you just talk about the growth prospects that you see for this business? And maybe it would be in the context of what you would see more broadly in your broad markets business, how it might compare.

Sure, Craig, absolutely. Well, I mean one of the things that we love about this portfolio is, I mean, it's really high-end assets here and high-end technologies. And I think one of the things that we can bring to market immediately is our scale, our operational reach, our customer reach -- and dovetail that with some of these incredible products that the I&A has developed. A very, very rich and complex portfolio in timing; another portfolio that's been doing extremely well in power and isolation, [ heating in ] electric vehicles, solar markets. And then automotive has been a big driver for them as well, so there's a lot of really interesting markets that we have a position in today at Skyworks but I think we can really pivot with the I&A portfolio. So we're really excited about it. The other thing, Craig, to think about here is the revenue streams in this business are very different than what we see in some of the classical mobile markets. We've got an uncorrelated revenue stream here with the Silicon Labs I&A portfolio. They have their own vector, a set of customers and end markets that they pursue that are different than what we have today but have some similarities when we go to customers, so it's going to be an incredible combination. We're really excited to turn the wheels on this, but again we really like this portfolio. We like the people. And the technology behind it is going to be something really special here.

Your next question comes from the line of Edward Snyder from Charter Equity.

Liam, you started by pointing out that the product line is relatively complementary to Skyworks, and it certainly looks like that, so we're just kind of wondering what kind of leverage do you think you can get in the broad market customers because they do sell into a little bit different base. If you go back to when you purchased SiGe -- I mean it was one of your best acquisitions in the space, period, largely because SiGe played into your existing customer base but too small to actually address some of your larger customers. And with Skyworks scale, that business just exploded, so I'm just trying to get a grasp on how you expect to grow this or what kind of leverage you get into either broad -- [ SLAB's ] products into broad markets or vice versa since SLAB has good automotive access. So maybe you could walk us through that.

Great segue. And you're right. I think one of the things that we do well at Skyworks is that we're really strong at penetrating customers deeply, going very, very deep and very wide with some of the leading players in the industry. What I see with the Silicon Labs portfolio are incredible green shoots into accounts that we haven't even pursued. So we look at their technology, the know-how that they have, the people skills and their customer relationships. They have more customers than we have. There's a broader bench of accounts that we can pursue. On the Skyworks side, the deep technology reach, the operational scale and the leverage that we have with some of the largest customers in the world are all going to come to bear for us in this transaction. So there are already things that we see in the portfolio and the timing portfolio that look very attractive; in the power portfolio; very attractive broadcast; engagements with EV manufacturers, meaningful ones; really exciting stuff; and also markets like 5G wireless infrastructure, where we share a portfolio with them today. So it's going to be a really important transaction for Skyworks. Our customers are going to love it. The people in our team really are excited about getting rolling on this thing, but stay tuned. I think this is going to be something really special for us here.

And if I could maybe. I mean, years ago, you actually had a baseband business. And then as the mobile business matured, it made sense not to be in that space anymore but also some transceivers. And SLAB did too. I mean [ we ] sold some of that off early on, but now you're picking up some of the radios that they're doing, into more nontraditional broad markets for Skyworks. Do you expect any -- first of all, is -- will there be any leverage, from what you used to do into the radio business, in mobile? And secondly, will this open up new markets for broad market for some of your mobile products, mostly the RF components?

Yes, I do see that, Ed. I think there's definitely technologies and products that we have in our suite today at Skyworks that we can lever through the channels that have been proven with the I&A team, for sure. And there's also going to be some collaboration around systems, if you think about our mobile business, our Sky5 platform, really which is a unique configurable engine where we bring all kinds of unique technologies and make it easy for the customer to digest and put to market. We see the same kind of potential here with the Silicon Labs I&A portfolio, where there may be some points from the Skyworks team leveraged with the technologies that we see in I&A; and products that could result that are very different, very special and highly profitable and the kind of things that our customers really want. So that integration theme that we've run so well in mobile can absolutely play through in these broader market opportunities in I&A.

Your next question comes from the line of Craig Ellis from B. Riley Securities.

Liam and Kris, congratulations on the acquisition. This is a really high-quality portfolio that you're picking up here.

Thanks, Craig.