No major fireworks out of Skyworks Solutions (SWKS) after hours so the stock is mildly up premarket. When I bought Skyworks I mentioned the group of 4 [May 12, 2009: Beginning Skyworks Solutions (SWKS)

I've never owned Skyworks Solutions before but in the late 90s I traded all 3 of its major competitiors - ANAD, TQNT, RFMD.

If you ever want a laugh just pull up a 10 year chart on any of those 3 to see how everyone was a genius back around 1999. SWKS is more of a cylical play than what I normally prefer but it is best of breed of this group of 4, and gives me another way to have exposure to smart phones taking market share from regular cell phones; it also has some good China exposure.

Skyworks is a bit more broad in exposure than the other 3, but in the past RFMD and TQNT generally have been jockeying for 2nd place in this group and ANAD many times bringing up the rear. TriQuint actually had a better report (vs expectation) than Skyworks last night, and RF Micro Devices (RFMD) reports tonight. Anadigics (ANAD) reports next week so if you are the gambling type you might jump into RFMD today if it can do anything similar to TriQuint which is up 6% premarket.

One of the big themes going forward if you look for secular growth (which is what I seek) is the next generation buildout of wireless. Basically we are going to repeat the late 1990s all over again except instead of landline its going to be via air waves. Remember, as we wrote in this piece - the United States is usually 4-6+ years behind the Japanes and South Koreans... to see our future we can already look at theirs. [May 25: NYT - In South Korea, All of Life is Mobile] Since we also have a few oligarchs in our telecom space (dominated by a few giants) the rollout has been very slow but eventually the technology is coming. Speaking of which...

  • AT &T (T) the largest U.S. phone company, posted second-quarter profit that beat analysts’ estimates after customers spent more to check e-mail and surf the Web on mobile phones.
  • “The day’s coming where data is going to be bigger than voice,”...“It’ll be a driving force for the entire industry.”

The obvious plays are the Apples (AAPL), Research in Motions (RIMM) and Palms (PALM). But there is a whole ecosystem below them - from chips to equipment to storage. We have Starent Networks (STAR) as one example of vendors who should benefit.

If all goes well we can enjoy a Fed induced NASDAQ Bubble 2.0 over the coming 12-36 months, led by this group. Pets.com v2.0 might soon be at a theater near you.

I'll edit this post with earnings color from SWKS and TQNT during the morning... I am not going to chase into these stocks right now after large moves, but I am heartened to expand my watch list of candidates.

EDIT 10:15 AM

Let's start with TriQuint which had an excellent report; remember revenue is the only line these companies cannot create smoke and mirrors around - the full report is here.

  • Revenue for the second quarter was $169.1 million, up 42% from Q1 ’09 and 33% from Q2 ’08. Revenue in our handset and military markets enjoyed sequential growth of 56% and 25%, respectively.
  • Net income for the quarter was $3.9 million or $0.03 per share. Non-GAAP net income was $11.5 million or $0.08 per share. (I hate non GAAP but that is what the Street uses) Non-GAAP financial measures exclude stock based compensation charges, a charge for the anticipated settlement of a derivative lawsuit, which was not projected in our previous guidance, and certain charges associated with the acquisition of WJ Communications.
  • Gross margin for the second quarter of 2009 was 32.3%. On a non-GAAP basis, gross margin was 33.2%, up from 21.0% in the prior quarter. Gross margin increased due to improved factory utilization. (that is a massive increase)
  • Signed $50 million Strategic Agreement with China’s ZTE
  • Our gross margin improved significantly over the first quarter with increased factory utilization and flat inventory.

  • I see sustained demand in the 2nd half of 2009 for handset and defense products and continued recovery in the health of our networks market.”
  • Inventory turns improved to 5.2 driven by factory cycle time reductions. Accounts receivable grew with revenue and DSO improved slightly to 58 days. Cash, cash equivalents, and investments remained constant at $99.4 million as of June 27, 2009.

Outlook

  • The Company estimates that third quarter 2009 revenue will be between $170 million and $180 million. Non-GAAP gross margin is expected to be about 35% and non-GAAP operating expenses are expected to be in the $46 million to $48 million range. Third quarter net income is expected to range between $0.05 and $0.07 per share and non-GAAP net income is expected to range between $0.08 and $0.10 per share.
  • As of today the Company is 89% booked to the midpoint of revenue guidance for the third quarter.

This was a complete blowout, and unlike the stocks people are getting excited about simply because they managed to cut so many jobs and shrink to prosperity this is growth. The gross margin expansion was immense as utilization rose. Handset sales surged obviously and more inroads into China. As for outlook, being 90% booked to midpoint of guidance assures they are going to make the number - a number far higher than analysts have estimated.

So this quarter, analysts were in for 3 cents on $146M in revenue. They did 8 cents on $169M. Again we live in a 1x exclusion world so non GAAP it is.

For next quarter they are guiding to $170M-$180M in revenue (analysts at $159M), with EPS of 8 to 10 cents (analysts at 8 cents) with gross margins steady. There could obviously be an upside surprise to revenue considering there is almost a month and a half left in the quarter for new bookings. But they key here outside of orders is utilization rate... that's how they keep the gross margins up. The stock is not that cheap on 2009 estimates which surely will be moved up from 15 cents to somewhere in the low to mid 20 cent area, but if they hitch to that China dragon the 41 cents for 2010 will be they key driver (i.e. it will be moved up over time) So this is one we want to latch onto if the NASDAQ is ever planning on going down again ... we're heading to 12 days in a row here.

id=BLOGGER_PHOTO_ID_5361663363691026578 EDIT 10:40 AM

Let's look at Skyworks which was solid but not anything like what TQNT just put up. Still a beat with raised guidance... in a legitimate fashion rather than chopping thousands of jobs and cutting benefits. Full report here.

  • Revenue for the quarter was $191.2 million, an 11 percent sequential increase when compared to the second fiscal quarter of 2009 and exceeding the Company’s guidance of $182.0 million.
  • Non-GAAP operating income for the third fiscal quarter was $28.6 million, up 35 percent from $21.2 million in the second fiscal quarter. Diluted non-GAAP earnings per share for the quarter was $0.16, $0.02 better than consensus estimates.
  • On a GAAP basis, operating income for the third fiscal quarter was $21.5 million versus an operating loss of $3.7 million in the second fiscal quarter. GAAP diluted earnings per share was $0.12 as compared to a $0.03 loss in the prior quarter. (remember GAAP doesn't count to anyone but accountants) ;)

Gross margin were better than TriQuint but in line with expectations - flat sequentially

  • Expanded non-GAAP gross and operating margins to 40.5 percent and 15.0 percent, respectively (40.2 percent and 11.3 percent on a GAAP basis)

Cash flow positive

  • Generated $140 million of cash flow from operations on a fiscal year-to-date basis

They list a whole bunch of product wins raning from Intel (INTC) to Broadcom (BRCM), also some power management wins. This is a group of names I've looked at a few times the past 2 quarters (never written a piece about them on the blog) Symbols for these guys are ESE & ITRI. Not familiar with Neptune - might be private.

  • Ramped production with ESCO Technologies, Itron and Neptune to meet growing worldwide demand for smart meter readers.

So as you see from the list below, they are in all the key secular growth markets (very few around excluding government transfer payments) we want to have exposure to.

“Skyworks exceeded all key financial targets in our third fiscal quarter driven by program strength spanning analog, smart phone, netbook, 3G infrastructure, mobile video and energy management applications,” said David J. Aldrich, president and chief executive officer of Skyworks..”

Outlook

  • “Although we remain cautious on the macro-economy, our expanding product, market and customer footprints are setting the stage for a much stronger back half of 2009 for Skyworks,” said Donald W. Palette, vice president and chief financial officer of Skyworks. “Specifically, we expect revenue for the September quarter to be up 10 percent sequentially with a 17 percent operating margin and non-GAAP diluted earnings per share of $0.19. ”

Overall, they beat the all important analyst guestimate by 2 cents, 16c v 14c. For the next quarter analysts are in for 17 cents on $196M in revenue; the company looks like it will beat both those easily. The 60 cents for 2009 will probably be something closer to mid to upper 60 cents, so at $12 we are talking under 20x forward estimates for a company that is actually growing rather than slashing people in the parking lot to make the numbers. Normally I'd find that value to be rich or fair but since we are now paying 30x forward earnings for consumer discretionary companies who are shrinking I suppose it's dirt cheap. Let's put it this way, SWKS is far cheaper than Starbucks... whose actually growing of the 2?

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We'll look to get back a larger stake in this name on the next NASDAQ correction which I believe Goldman Sachs (slash) Larry Summers have scheduled for Labor Day weekend.

Long Skyworks Solutions, Starent Networks in fund; no personal position