Mitchell J. Haws - Skyworks Solutions, Inc. Liam K. Griffin - Skyworks Solutions, Inc. Kris Sennesael - Skyworks Solutions, Inc..

Atif Malik - Citi Research Cody Acree - Drexel Hamilton LLC Bill Peterson - J.P. Morgan Toshiya Hari - Goldman Sachs & Co. LLC Ambrish Srivastava - BMO Capital Markets (United States) Wills Miller - Bank of America Merrill Lynch Edward Snyder - Charter Equity Research Mike Burton - Longbow Research LLC Craig A. Ellis - B. Riley & Co.

LLC Srini Pajjuri - Macquarie Capital (USA), Inc. Craig M. Hettenbach - Morgan Stanley & Co. LLC Vijay Raghavan Rakesh - Mizuho Securities USA, Inc. David M. Wong - Wells Fargo Securities LLC.

Good afternoon, and welcome to Skyworks Solutions Fourth Quarter and Fiscal Year 2017 Earnings Call. This call is being recorded. At this time, I will turn the call over to Mitch Haws, Vice President of Investor Relations for Skyworks. Mr. Haws, please go ahead..

Thank you, Ryan. Good afternoon, everyone, and welcome to Skyworks Fourth Fiscal Quarter and Year-End 2017 Conference Call. With me on the call today are Liam Griffin, our President and Chief Executive Officer, and Kris Sennesael, our Chief Financial Officer.

Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking statements.

Please refer to our earnings 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.

Additionally, the results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for our complete reconciliation to GAAP. With that, I'll turn the call over to Liam..

Thanks, Mitch, and welcome, everyone. The Skyworks team produced record results in Q4 in fiscal 2017, demonstrating our traction within the increasingly vibrant and profitable Mobile and IoT ecosystems. Let me begin with a few fourth quarter highlights. We delivered revenue of $985 million, up 18% year-over-year, and above our guidance.

We expanded gross margin by 30 basis points, and operating margin by 150 basis points sequentially. We achieved earnings per share of $1.82, up 24% year-over-year, $0.07 ahead of consensus. For the full year, we generated revenues of $3.7 billion, up 11%, with earnings per share of $6.45, up 16% year-over-year.

And we produced exceptional operating cash flow, $1.5 billion, up 34% from last year. In addition to our strong financial performance, we've significantly expanded the aperture of our design win pipeline. Last quarter, we broadened our reach across all premier customers.

Specifically, we powered Samsung's Galaxy and Note platforms, with proprietary DRx and SkyOne solutions, while adding GPS and DC/DC converters. We enabled Huawei's newest premium smartphones with low, mid and high band SkyOne, Wi-Fi, carrier aggregation, and proprietary SkyBlue power management solutions.

And we leveraged SkyLiTE and SkyOne across new platforms at Oppo, Vivo, Xiaomi, and Motorola. And across our broad markets, we delivered fully integrated Zigbee and ISM modules for Bosch home security and Cisco's smart lighting systems.

We commenced volume production of in-vehicle telematics at Hyundai, and launched wireless networking engines within DirecTV's 4K Genie receivers. We also supported Sonos' latest hi-fi speaker featuring Amazon Alexa.

And we introduced next-generation 802.11ax Wi-Fi solutions, enabling a fourfold increase in speed and supporting up to 50 simultaneous users.

We secured connectivity wins at DJI for virtual reality and drone applications, supplied precision GPS and antenna tuning for Fitbit's newest smart watches, and we unveiled high power solutions with leading base station customers for 5G MIMO deployments.

So to summarize, we delivered yet another year of record results, capturing strategic design wins across all key market segments, while strengthening our balance sheet. At a higher level, the ubiquitous connected economy is gaining significant momentum and enhancing the way we live, work, play, and educate. The growth opportunity is enormous.

Global mobile data usage is expected to grow five times between 2017 and 2021. IoT volumes are exploding, with 75 billion devices projected by 2025. And there is still the opportunity to connect the unconnected, which today represents over 2 billion people worldwide.

In parallel, the applications driving our business are expanding to now include connected homes, autonomous vehicles, artificial intelligence, augmented reality, wearables, as well as network infrastructure. And by definition, these applications would not be possible without fast, secure, power-efficient connectivity solutions provided by Skyworks.

As we've previously discussed, the equity market is recognizing this macro-tend as powerful, highly profitable and accelerating. In fact, if we look at today's top five S&P 500 companies by market cap, they are all demonstrating successful monetization of the rapidly growing mobile economy.

As a group, these five companies have created 2 trillion of incremental shareholder value since 2012, a clear testament to the strength of this industry.

Meanwhile, the broad range of usage cases and expanding scope of newly connected platforms are creating an increasingly crowded radio spectrum, stressing network capacity and slowing data throughput. Our mission is to enable this data-driven world and alleviate the looming digital traffic jam.

This will require an inflection point in global communication standards, and that's 5G. 5G will represent a significant boost in speed, up to 100 times that that we see in 4G networks. 5G will offer extremely low latency, a requirement for mission-critical applications such as driverless cars, machine-to-machine, and robotics.

And 5G will be a key enabler to a massive rollout of IoT, greatly expanding network capacity and improving reliability. 5G will also spawn new and previously unimagined applications, while greatly enhancing the performance and utility of existing mobile platforms.

We will see this reflected in new unit growth in IoT applications and also across the global smartphone installed base. Keep in mind, the 5 billion subscribers today all operate on 2G, 3G, and 4G networks.

In order to make the leap to 5G, system architectures will require significantly more powerful connectivity engines to ensure the intense performance challenges are realized. This upgrade wave will create an enormous growth catalyst for the entire smartphone ecosystem.

And as a leader in unwiring the planet, Skyworks is well-positioned to capitalize, with extensive technology breadth and depth, strategic partnerships with all leading smartphone and IoT customers, differentiated system solutions enabling unmatched levels of integration and performance, all underpinned by our aggressive investments over the past two decades to expand our product portfolio, IP and scale.

As a result, we have the profitability, cash flow, and balance sheet to extend our leadership position. Our strategic R&D and CapEx investments will be pivotal as the scale and technology requirements around 5G intensify.

Finally, and most importantly, we are committed to delivering premium levels of profitability with above-market growth, while continuing to create sustainable shareholder value. I will now turn the call over to Kris for discussion of last quarter's performance and our outlook for Q1..

Thanks, Liam. Revenue for the fourth fiscal quarter of 2017 was a record $985 million, up 9% sequentially and up 18% compared to Q4 of last year, exceeding our guidance and consensus estimates. Gross profit was $502 million or 51% of revenue, up 30 basis points sequentially following 30 basis points of sequential improvement in the June quarter.

Operating expense were $123 million or 12.5% of revenue. As a result, we generated $379 million of operating income, translating into an operating margin of 38.5%, up 150 basis points sequentially. Our tax rate was 11.1%, driving net income of $339 million or $1.82 of diluted earnings per share, exceeding our guidance by $0.07.

Fourth quarter EPS of $1.82 was up 16% sequentially and 24% compared to Q4 of last year. Turning to the balance sheet and cash flow, fourth fiscal quarter cash flow from operations was $425 million, and capital expenditures were $85 million.

Dividends paid were $59 million, and we repurchased 1 million shares of our common stock for a total of $102 million. As this is the fourth and last quarter of fiscal 2017, let's also review our annual results. We delivered a record $3.7 billion of revenue, up 11% year-over-year.

Operating income was $1.4 billion, and net income was $1.2 billion, translating into $6.45 of diluted earnings per share, up 16% versus last year. In addition to the strong top and bottom line year-over-year growth, we generated cash flow from operations of $1.5 billion, up 34% from fiscal 2016.

CapEx for the year was $300 million, resulting in $1.2 billion of free cash flow or a 32% free cash flow margin. We returned 55% of the free cash flow to shareholders, with $215 million of dividend payments and $432 million in share buybacks, as we repurchased just over 4.6 million shares throughout the fiscal year.

We ended fiscal 2017 with a cash balance of $1.6 billion and no debt. Now moving to our outlook for fiscal Q1. We plan for revenue to be up 15% year-over-year to $1.05 billion, with gross margin expansion to the 51% to 51.5% range. Operating expense are expected to be $127 million.

Below the line, we anticipate roughly $2.5 million in other income, and a tax rate of 14.5%. We expect our diluted share count to be approximately 185.5 million shares. Accordingly, we intend to deliver diluted earnings per share of $1.91, an increase of 19% year-over-year, demonstrating our sustained operating leverage.

And with that, I'll turn the call back over to Liam..

Thanks, Kris. Skyworks enters fiscal 2018 with strong momentum. Our outperformance is being driven by a vibrant, dynamic Mobile ecosystem, one that rewards companies who can resolve architectural complexity with simplified integrated solutions. The value inherent in the connected economy is apparent in our results.

In the past five years, our revenues have more than doubled, EPS has more than tripled, and operating cash is up five times. In closing, our ambitious vision of connecting everyone and everything all the time has never been more relevant and exciting. That concludes our prepared remarks. Operator, let's open the line for questions..

Okay. Our first question will come from the line of Atif Malik with Citi. Please go ahead..

Hi, thanks for taking my questions, and good job on the execution. First question, the gross margins, Kris, if you can talk about what's driving the gross margin expansion into the December quarter, and then I have a follow-up..

Yeah, so first of all, I'm pleased with the ongoing gross margin expansion. As we said in the prepared remarks, we added 30 basis point in June, we added 30 basis points in September here, and for December, we guide gross margin up between 0 to 50 basis points. And so, the way we do that is three elements.

Of course, more revenue, more volume helps with size and scale and fixed cost absorption, that's one. Secondly, we continue to drive operational efficiencies across all our operations and with our third-party suppliers. And then last but not least, we continue to make good progress on filter insourcing.

As a reminder, roughly 50% of the filters we use are being produced in-house, and 50% is purchased from third parties. We are moving towards a 75%/25% allocation there and making good progress in that. And so, when you combine this all, we continue to make good progress and moving towards our target of 53% gross margin..

Great. And then, Liam, your execution has been very strong. This year, you're outgrowing your peers on a tender basis, particularly in China with major OEMs like Huawei picking up your RF solution. If I look at – historically, your share in China has been mid 20s.

Can you talk about what your market share or the percent of your sales could be this year? And how much of this is permanent or in terms of share gains into next year?.

Sure, I'll try to give you as much color as I can here. Well, as you know, I mean, China has been a strategic market for us for some time. It's a growing market. It's also a market that not only produces product in country, it exports.

And as you've seen lately, they've also been a great consumer of global Tier 1 phones, so there's a lot that goes into that mix. For us, the theme that we're seeing right now and the theme that we're capitalizing on is this move towards higher-end performance within China.

Huawei is a great example, where we have mid band, high band, low band, SkyOne, DRx technology, power technology, really rich content, moving that to Oppo and Vivo and Xiaomi as well. So, the real theme for us is moving that content up, moving that performance level up.

And we're really happy to see that the consumer in China is up for that and asking for those products..

Our next question comes from the line of Cody Acree with Drexel Hamilton. Please go ahead..

Thanks, guys, for taking the question. Congrats on the progress..

Thanks..

Liam, if you could maybe just follow up on that last question. If we go back to statements that Qorvo made on their conference call, they were talking about a consumer movement in China toward middle-market phones, cheaper phones that have, obviously, lower RF dollar content. It's definitely different from what you just stated, I guess.

Can you maybe help us to square that a bit what you're seeing maybe versus their comment?.

Yeah, well, I think, both can be right. There's a low end, there's a mid end, and then there's a premium end. We participate in both the premium and the mid-tier, not so much in the low end. But where we're seeing real acceleration is when you look at $3 to $4 content 4G product moving up to higher end 4G that could be $6 or $7.

That theme is playing out very well. We still have participation in the mid-tier, but again, the driving theme right now is about getting global phones that are rich in content that can sell in China, can sell even outside of China. So that's where we're seeing the benefit. I mean, Huawei has been a class case study for us.

We've done extremely well with that customer. We've engaged early. We have incredible relationships and have been able to drive a wonderful set of products through their portfolio. And that's not changing..

Thank you for that. And then lastly, the Street has gotten pretty used to pretty inarguable beat-and-raise quarters out of you guys, and so a good September quarter but relatively in line December guidance.

And with the delay of a launch of your largest customer, what might that be doing to the December to March transition? And does maybe what might be considered a little lighter December mean we might see a little stronger March?.

Sure, well, here's what I can tell you, Cody. We have a process for our guidance. We look through our backlog position. There's not a lot of speculation. We have great visibility in the current quarter as to where we are.

And our job is to try to cement our designs with the right customers in the right markets, whether they're in mobile, whether they're in IoT or infrastructure. And the team has done a great job of putting great product with the right companies. And then it's up to the customers to actually deliver on the mix side on their end.

So, some of that is out of our control, but we have a balanced view with the Q1. We don't really have any guidance for you yet for March, but I wouldn't expect anything different than from kind of our normal signature there. But we go through that process every quarter and nothing has really changed..

Our next question comes from the line of Bill Peterson with J.P. Morgan. Please go ahead..

Yeah, thanks for letting me ask a question, and congrats as well on the quarter.

I guess, can you give us a feel as you've done in the past on the size of broad markets in the quarter as well, I guess, first is mobile?.

Yes, Bill, so broad markets was approximately 26% of total revenue. Our integrated mobile was 64% of total revenue, and the Power Amplifiers was approximately 10%. So, I'm definitely very pleased with broad markets at 26% of total revenue. So we actually exceeded more than $250 million of quarter revenue in broad markets.

So we've now over $1 billion in annualized revenue in that market. As you could hear from the prepared remarks, we have a lot of design win momentum in that segment. We experience a lot of growth in that segment and so that's definitely helping us to overall grow our business..

Okay. Thanks for that color. And I guess, if we look in the next year based out of your design win pipeline, I guess, which of the two between mobile and broad markets would you expect to go faster at this stage? And I guess, that's just kind of a content question as well for mobile but also just the pipeline you have for the broad market side.

Thank you..

Yes, so broad market in fiscal 2017 has been growing high teens full year, year-over-year. We expect that to continue to grow mid-teens, mid to high teens, so we definitely see a lot of growth there, but at the same time, of course, we are very bullish about our mobile markets as well and continue to see double-digit growth in that area..

Thank you..

Next question comes from the line of Toshiya Hari with Goldman Sachs. Please go ahead..

Great, thanks for taking my questions. My first question, I just wanted to follow up on the broad markets question.

I realize that this segment is exposed to many, many customers and many, many end products, but if you can point to some of the drivers in the quarter, and perhaps the areas where you have high expectations going into calendar 2018, that would be helpful. Thank you..

Sure, Toshi. It really is a broad set of applications and customers. I think one important point is the ability for Skyworks to create a broad and growing presence in the actual wireless topology. So we're offering Wi-Fi, 11ac, 11ax. We're offering Bluetooth, we're offering ZigBee, we're offering GPS.

There's really a wide range of topologies that we bring, and even cellular in some of these applications. So that allows us to manage opportunities and grow the business, whether it's short-data range devices, whether it's devices that demand a stronger signal, faster data rate, longer-range, premium Wi-Fi.

The customer set, we rattled off a few in the prepared remarks, continues to grow. There's connected home devices, there's security systems, there's more and more video applications that really drive a tremendous amount of content for us. So it's quite diversified.

There's customers with applications and then there's the breadth of wireless topologies that we bring that really creates the differentiation..

Okay, great. And as my follow-up, we've heard from Broadcom as it relates to their bid for Qualcomm, and I'm thinking you guys have spent some time at least brainstorming what the implications could be for the overall industry and for your business.

Perhaps you haven't, but in case you have, how should we think about the impact to you guys, what are the potential benefits, potential negatives when you think about a potential team-up between the two companies? Thank you..

Sure, well, it's very early to call the implications here, but one of the things I would say is it clearly shows the value and significance of this mobile economy that we've been talking about for a while. This is a really significant change in the way we work, live, play, monetize. So I think it speaks to that.

For us, we have great position with both of those parties. We do a lot of work with Qualcomm, we've had a lot of work with Broadcom Avago on Wi-Fi. So for us, I think that we would certainly be able to coexist with those folks.

But think again about the statement that I see on this is the value of mobile and the economy that's supported by it, and I think that's the big takeaway here..

Thank you..

Next question comes from the line of Ambrish Srivastava with BMO. Please go ahead..

Hi, thank you. And Liam, maybe if we could just stay with that theme of the high level, and since you've been on board, you have pretty much laid out your conviction on the business. And it sounds like you're – the change at least that I get is that you're not that interested in diversification just for the sake of diversification.

Is that the right way to think about how you view your business and, as you just laid out, the mobile economy as you highlighted in your prepared remarks? And then I have a quick follow-up..

Sure, well, I will say that my conviction in Skyworks and what we're doing is sound, and I'm really excited and happy about the execution of this team. And we've laid out a framework a few years back and even longer about what we want to accomplish. And I think we're doing quite well. There's more to do.

But what I think about really is, we can call it mobile, we can call it connected, but there's definitely a big change in this industry. It's cloud-to-client, it's driverless cars, it's IoT, it's 5G smartphones. There's no question that the opportunity in those markets is unmatched.

I don't see anything else in semiconductors, quite frankly that would compare to it. So we're really excited about that. And that's where you're hearing the dialogue and the conviction. Now, are there other things that could occur? Are there other potential partnerships or deals that could be made? Absolutely.

And the balance sheet and the cash generation really gives us more and more options to do that. But day to day, we love what we do here, and there's just so much great opportunities in front of us..

Okay. Thank you. And my quick follow-up, Kris, on the full year, could you – just for modeling purposes, how should we think about the OpEx trajectory and also CapEx? Thank you..

Sure, so for OpEx, there's no change there. We've said in the past, we are keeping our OpEx on or about 13% to revenue.

Of course, there will be some seasonal fluctuations quarter-to-quarter, but on a full-year basis, the target is 13% to revenue, so if you have double-digit top-line growth that allows us to make strategic events in R&D and sales and marketing to capture more value, which is out there in the market.

On CapEx, we are running high-single digits as a percent to revenue for CapEx in fiscal 2017, and you can expect the same in fiscal 2018. Here, again, we are making the strategic investments in our filter operation, not only expanding the capacity but also making technology investments to widen the scope of our technology.

And a similar thing is going on in our back-end operation, capacity expansion, as well as technology investments that we are making..

Okay. Thank you. Good luck..

Next question comes from the line of Vivek Arya with Bank of America. Please go ahead..

Hi. This is Wills Miller for Vivek. Thanks for taking my questions, and congrats on the results..

Thank you..

I guess, first, if I look at your December quarter sales growth guidance, it seems a bit below seasonal.

Can you just talk about the puts and takes there?.

So, for December, we are guiding up 9% sequentially and up – sorry, for December, 7% sequentially and up 15% year-over-year. I think that's a pretty strong guidance. It's really hard to look at what is normal seasonality when you compare 2017 or 2016 or 2015. The last couple of years has not been really normal.

So, again, 7% sequential, 15% year-over-year, I consider that a very strong guidance..

That's helpful, thank you. And just a quick one.

What was your largest customer as a percent of sales in the September quarter?.

So our three largest customers has not changed, obviously. It's Foxconn, Samsung, and Huawei. And so on a full-year basis, our largest customer is in the high 30s, approaching 40% of total revenue. Samsung is in the low teens, and Huawei is on or about 10%..

That's helpful. Thank you..

Next question comes from the line of Edward Snyder, Charter Equity. Please go ahead..

Thanks. Merced announced they went to Wi-Fi (28:07) each quarter there, which is an interesting development, given you guys have not done a lot of modules in that. I know a few, but not on this scale before.

Just generally, what are the ASPs of those modules in the typical $1 to $4 range for Wi-Fi module? Are they more like SkyOne? And where are you in the design pipeline with that? Are you sampling and qualified, designed in) or in production?.

With respect to Wi-Fi modules, Ed, was that it?.

Yes..

Okay. Yeah, I mean, we've been working higher and higher levels of integration with our Wi-Fi solutions from basically just single chip solutions to multi-mode devices to fully integrated systems. So we're along that curve right now.

We have some customers that are deeply engaged and are looking forward to a complete module, which would definitely enhance the ASP. And then we have some other customers that are halfway there that still look at integration beyond just the chip level. So, it's a work in progress.

I think one thing that does create tremendous advantage for Skyworks is our ability to integrate through Mexicali our package assembly and test, our ability to bring in filters now through our Panasonic deal, as well as our strength just at the chip level in Wi-Fi. So those elements are in place.

It's just about bringing them together, harmonizing them and then bringing them to market..

And then, Kris, if I could, last year, you had high channel inventory going into the – in the second half of the year, and it kept you from seeing any real revenue from a legacy product at your largest customer. That's got to be a tailwind this year.

Are we talking $10 million or $50 million? Can you give us a scale on that? And Liam, one more for you, there was a question about Broadcom and Qualcomm, I just want to follow up with that.

Are you seeing any serious comp today right now in the market, are you seeing any serious competition or any competition at all from RF360 on the RF/Analog side? By that, I mean, not the ET solution, which is tied to their base, and which they always claim is (30:00) RF360, but any components that you sell in the space, are you seeing anything from them?.

So Ed, I'll take the first one on channel inventory, that is very much normal. It's not high, it's not low, it's right where it's supposed to be..

Right. And then on the RF360, Ed, we really haven't seen much of a change. I know there's efforts for that product across the globe, but we really haven't seen anything substantial..

So they're not really a serious competitor to you today?.

Right..

Yeah. Thanks..

Next, we go to the line of Mike Burton, Longbow Research. Please go ahead..

Thanks, and congrats on the strong September numbers. Looks like you had a lot of ramps across your customer base in September.

Can you help us understand some of the pieces in the quarter a little better? You obviously had a ramp from your largest customer, but was Samsung and the China OEMs also up sequentially? And any color there for the September quarter, but also how you would expect them to trend into December would be helpful. Thanks..

Yeah, sure. Yeah, this was – Q4 was really kind of the early stages of launches for really the suite of top tier mobile players. And that will carry through in our strong December guidance here today.

It's great to see diversification across a higher set of customers that are all kind of adopting now variations on DRx and variations on SkyOne and some of the other what would have been kind of classic analog type product, our switching products, some of our antenna tuning products, GPS.

We're starting to see that portfolio really grow among the high tier. You saw a bit of it in the September quarter, and it really is kind of the leaders that will propel us here in the December quarter..

Okay, and then sorry if I missed it, but as we look at gross margins heading into fiscal 2018, what are some of the puts and takes we should consider or how should we think about modeling that going forward? Thanks..

Yeah, so we only guide one quarter at a time, and so we provide you with the guidance for the December quarter, 51% to 51.5%. And so, as I said in the prepared remarks, we're making good progress towards our target model of 53%, and so we'll, quarter after quarter, make further progress towards that target model..

Our next question comes from the line of Christian Sayaka (32:33) with Nomura. Please go ahead..

Hi, good afternoon, gentlemen. Thanks for letting me ask a question. I just want to first dig into the tax rate on this quarter. It clearly came in materially lower than your guidance. And I'm calculating it to roughly a 5% benefit to EPS this quarter.

Can you just delve in a bit deeper as to what happened this quarter on that tax rate and where – and if we should expect this to flow through for fiscal 2018? Thanks..

Right, so we did beat on an EPS line with $0.07, $0.02 of that was operational benefits, higher revenue, and $0.05 came from a lower tax rate. The tax rate came in at 11.1% in Q4, and on a full-year basis it was 12.8%. That's the non-GAAP tax rate.

That tax rate came in slightly below what we expected as we did some fiscal year-end true-up calculations. And we had a slightly more favorable mix between our domestic and foreign income. And that drove a little bit of a lower tax rate for fiscal 2017.

For fiscal 2018, we provided guidance for Q1, 14.5%, and we also do expect on a full-year basis the tax rate to be on or about 14.5%. That obviously does not take into account any potential benefits from tax reform. It's too early to call that.

But fiscal 2018 is slightly up from fiscal 2017, mainly as a result of a reduction in tax deductible stock-based compensation expenses..

That's helpful, thank you. And then I just want to pivot back to the China market for a quick second. I've been hearing from some investors that there's actually been some de-specing going on in the RF content as you've seen some other pricing pressures from memory, display, so on and so forth.

This is in clear contrast to what you guys are describing on the call right now and saying that you're seeing content increasing especially in the mid-end tiers.

Can you maybe try and just, I guess, maybe try and describe if you have been seeing this trend in the market at all or maybe try and reconcile the differences from what I'm hearing to what you're saying? Thank you..

Sure, sure, yeah. Well, I mean, China is a very broad, broad market with a lot of companies, a lot of customers. There are some mid-tier and low-tier players that are selling on price, and maybe de-specing is a way to get there in lowering their prices.

But what we are seeing is – and our focus has been on mid to high, and on that segment, we see a push for performance. We're also seeing more and more China players like Huawei that will build a global phone that will carry frequencies and content that can be used globally not just specifically to China.

And again, the next set of players starting to move up, Oppo, Vivo, Xiaomi are also are moving up from, in some cases, a lower base of content. And there can be de-specing in other areas. It doesn't rule out that that possibility exists in certain markets and certain customers.

A great deal of mid-tier and low-end phones, they get built in China, get exported to emerging markets that may not have the same demands for performance. So it's possible that could be happening. In the area of focus that Skyworks is interested in, we continue to see the performance push..

Excellent. That's helpful. Thanks, guys..

Sure..

Next question comes from the line of Craig Ellis, B. Riley. Please go ahead..

Thanks for taking the question, and nice execution in the quarter, guys. Just a couple clarifications at this point. First, Kris, you mentioned that you expect internal filter sourcing to get up to 75%.

Over what time period would you expect that to occur from where we are today at around 50%?.

So we were at 50% a quarter ago, we are now somewhat halfway on towards our 75%. So we should be there in early 2018..

Okay, thanks. And then, Liam, oftentimes at this time of year, given the design win visibility which you have, which is around 18 months or so, you have a pretty good sense for where content is shaking out for the coming year.

So the question is, one, can you just qualitatively speak to content gains that you've seen now that all the major handsets have been announced in the back half of the year? And two, what's the content gain potential for broad markets next year both in Tier 1s and in some of the lower tiers where it seems like there's a good mix-up dynamic playing out to your favor?.

Sure, that makes sense. Yeah, so this is what we're seeing. And we have pretty good visibility now with the players. There's definitely going to be some early elements of 5G stepping into this market by 2018 into 2019. We talked a lot about 5G here in the opening comments, and as you know, this will be kind of additive to existing 3G and 4G engines.

So you could have connectivity solutions, 3G, 4G, and then augmented with new content around 5G, new frequencies, new filtering, and in many cases, MIMO implementation as well. So there's a great opportunity there. It will take a while before it's fully implemented, but that is on the roadmap today. It's going to be a big driver on the mobile side.

When you look at IoT, Craig, what we're seeing is a couple things. We're seeing a much broader proliferation now with more and more applications that we're able to address, whether it's with a Wi-Fi device or a Bluetooth device or embedding GPS for location, we're getting a broader set of applications.

And we're also starting to see applications that we've already had step up through an upgrade. For example, smart watches that now carry cellular technology or a streaming media device that was a 2x2 MIMO for Wi-Fi that now carries nine streams of Wi-Fi to enhance speed and data rate. So, it's really twofold.

It's the continuation of broadening the IoT reach, and then there's kind of the upgrade cycle within the IoT applications. So all that is opportunities for us looking forward..

Great. Thanks, guys..

Next question comes from the line of Srini Pajjuri with Macquarie. Please go ahead..

Thank you. A couple of clarifications, I guess, just starting with that 5G topic. When do you think that'll be meaningful, Liam? And then before we get to 5G, obviously 4G premium has been driving your content for such a long time.

What are the incremental content opportunities within 4G in the premium segment? I mean, do you think we'll continue to see tailwinds for content here before we get to 5G or do we take a little bit of a pause and then a step function increase when we go to 5G?.

Sure, no, that's a great question. So I think we're going to see a continuation here as we evolve from 4G to 5G. It won't be necessarily a step function, and I don't think we'll see a pause. And within each opportunity or each customer, they have their own story.

I think that the winners in this market are the ones that are adopting performance-driven technology, customers that are adopting DRx-like systems that greatly enhance the downlink speed. We're seeing applications where we could have two or three DRx modules on the receive chain.

That's really mirroring what we've been doing in transmit with SkyOne, low, mid, and high band. And most of our customers are somewhere along that continuum from a couple of modules to five or six modules.

So there's a lot of work that we can do in 4G to grow our content and grow our business by populating existing customers with new technology and then also winning with some new accounts within mobile.

And then when you look at 5G from an IoT perspective, one of the big, big drivers is creating that network capacity that can handle all of these devices. There's just going to be such a dispersion of devices, up to 25 billion or so by 2020 that we're going to need a new network to deliver those frequencies and deliver that data.

So that's just another opportunity for connectivity through a number of different protocols, it could be Wi-Fi, it could be ZigBee, it could be cellular. But there's really going to be quite a massive upgrade cycle in the IoT space as well..

Great. Thanks for that clarification. And then one – another clarification on the M&A front. You talked a little bit about diversification, but I guess, in the past, you did try to diversify a few years ago. That didn't work out.

Given the strong balance sheet as well as the strong cash flow you're generating, maybe you could remind us what your M&A strategy is going forward.

And if you don't find attractive opportunities out there, what are the plans with the cash? And what are the cash usage priorities?.

Sure, sure. Yeah, as I said earlier, we really do feel great about the outlook in the business that we're pursuing and the markets that we're pursuing. At the same time, we're up for diversification as long as it enhances the franchise. We're not as interested in things that are just totally adjacent on a different vector to diversify the portfolio.

So, we got a great management team, we know how to enhance businesses, we've done a few deals that have turned out fantastic for us. Our joint venture with Panasonic, which is now a wholly-owned entity in Japan, has brought tremendous filtering technology. We did a deal for Wi-Fi with SiGe in 2012. That's been a home run.

So the deals that we do are very careful and thought through, and we want our team to be able to execute on the entity that comes in. We'll continue to have that kind of a mindset as we look at potential opportunities going forward..

Yeah, let me just remind you, we have $1.6 billion of cash on the balance sheet. Half of that is onshore, half of that is offshore. We do have a very strong cash innovation capability with a free cash flow margin of 30%, 30-plus percent, but keep in mind that half of that cash is being generated onshore, half of the cash is being generated offshore.

And so currently, our stated goal is to return 40% to 50% of that total free cash flow back to the shareholders through our dividend program and share buyback program. Actually, last year, we did 55% of total free cash flow, which means 100% of all the onshore cash generation was returned back to the shareholder.

And we will continue to execute along that strategy..

Great. Thanks, guys..

Next, we go to the line of Craig Hettenbach with Morgan Stanley. Please go ahead..

Yes, thank you.

Just wanted to follow up on the topic of gross margins, and just given some of the recent trajectories there, your target of 53%, do you think it's just a matter of maybe it takes you longer to get there or how do you kind of frame the bridge to today and timeline of getting to 53%?.

Yeah, no, we – first of all, we've never specified a timeline where we said we will continue to make quarter-after-quarter progress towards that target. And so, we continue to do so. I said we did 30 basis point in June, 30 basis point in September, we expect to do anywhere between 0 to 50 basis points in December.

And so, it's a lot of hard work, but we continue to add more value in our products, in our solutions and at the same time continue to drive down the cost. And a combination of that will help us to get to that 53% gross margin..

Yeah, Craig, and the other thing just to keep in mind is that as our business is moving more and more towards these highly integrated, unique, custom solutions, the margins benefit.

It's not only fewer competitors, but we're getting paid for the value-add, the engineer-to-engineer work, working within our customers' ecosystem to cement these really challenging – resolving these really challenging problems with elegant, some integrated solutions. So that's a theme that will continue.

If we look out into 5G and some of these more complex markets, that's really going to be the strike zone of what we do at Skyworks. So we should be able to see margin benefit from that, in addition to looking within the company internally to become a more efficient operator..

Got it. Thanks.

And Liam, as a follow-up, as you think through 5G, you mentioned some early phase coming in, just even intermediate term, are there particular areas that excite you that from an R&D perspective, you'd look to be more opportunistic in terms of how you're evaluating where you're spending R&D?.

Yeah, no, absolutely, I think couple things. You're going to see a wide range of new frequencies that will come about above 3 gigahertz, up to 6 gigahertz and beyond. That's going to create tremendous filtering opportunities. There's also some topology shifts from today, a 4G world, which is largely FDD, frequency-division duplexing.

In 5G, a great deal of the frequencies will be in a TDD zone, time division, so our TC SAW product can play very, very well, even on high frequencies there. And then the level of integration and the amount of noise and interference within these modules, within these handsets is going to be unbelievable.

And that requires very crafty solutions from companies like Skyworks to resolve it. So it's going to create a tremendous benefit to the consumer and a great uptake in speed and improvement in latency, but a lot of challenge for players like Skyworks. So we're looking forward to that..

Got it. Thank you..

Next, we go to the line of Vijay Rakesh with Mizuho. Please go ahead..

Yeah, hi, guys. Just on the SAW, TC SAW, I was wondering if you could give some color of how your fiscal 2017 grew year-on-year from a SAW, TC SAW perspective, and how would you see fiscal 2018 given the cadence of 5G TDD? Thanks..

Sure. Yeah, well, we don't – as you may know, we don't sell any of that product discretely, so there's no specific revenue tied to SAW or TC SAW directly. However, you can certainly intimate that we are moving our portfolio up in frequency. We're leveraging our TC SAW now to 2.5 gig and potentially higher over the next couple of quarters.

We're looking at all the different nuances in 5G. Again, I've mentioned FDD has a certain standard. TDD has a certain standard. There's implications for filtering. There's implications for switching and how we handle our SkyOne and DRx solutions. All that will come together.

I think the important point though is that we have that flexibility, we have a very broad portfolio, all the way from gallium arsenide to switching to packaging and tests in Mexicali, selecting our own filters in-house.

And occasionally, if we need to partner with whether it's a filter vendor or a strategic supplier for silicon, we have that in place. So it's going to be all about flexibility and managing the various configurations that we may see with our customers so as these 5G challenges build..

Got it.

And if you look at fiscal 2018, if you were to prioritize between the carrier aggregation picking up or .11ax or TDD for 5G, how do you look at what the drivers were for fiscal 2018 from the RF side?.

Yeah, well, I mean, carrier aggregation is kind of in the middle innings right now and continuing to grow. And that's a sure thing. I mean, there's no question about the adoption on that. It's very hot and it's let get it done as fast as we can. 11ax is a relatively new standard in Wi-Fi. It has tremendous benefits in speed and performance.

We'll be there. I think it's really about how that rolls through access points and routers and other end user applications for the most part, so I think those are important.

And then the filtering that we discussed, we'll continue to add to our portfolio filters, stretch the frequencies a bit, improve the yields within our factories, and try to grow that through a number of customers..

Our next question comes from the line of David Wong with Wells Fargo. Please go ahead..

Thanks very much.

In your mobile products division, what areas do you think offer the most – what types of products offer the most opportunity for content increases in handsets? And where are you investing to build products?.

Sure, yeah. What we're seeing, again, is the mid-tier players that want to grow into high global Tier 1s or global Tier 2 brands. Huawei was a great example. Names like Oppo and Vivo are great examples. We're seeing companies like Samsung that have a great high-end portfolio, still hundreds of millions of phones that are in mid-tier that were moving up.

And so the way that we're doing it is really to provide enhancements in our transmit chain solutions, which would be our SkyOne product line, trying to give them more output power and create a more efficient solution.

We're working hard with our DRx solutions, which have been adopted by some strategic customers that have realized great benefit in improving downlink performance. That technology has not been fully populated so there's quite a bit of opportunity for us to go out and submit new wins there.

And then you look at some technologies like Wi-Fi and power management, we have great product and our adoption rate has not been substantial through certain markets and is growing. So we're seeing more and more Wi-Fi now embedded in smartphones throughout Asia, the U.S. has been pretty solid.

And we're starting to see just some more advancements in our power portfolio. So all of that is coming together. We look at a name like Huawei, on the Mate 10 phone, where we have $9 or more of content. That's kind of the benchmark that we'd want to see across the entire mobile space..

Great. Thanks very much..

Okay. Ladies and gentlemen, that does conclude our question-and-answer session. I'll now turn the conference back over to Mr. Griffin for any closing comments..

Thanks, everyone. Appreciate you participating on today's call. We look forward to seeing you at upcoming investor conferences and other events during the quarter. Thank you..

Okay. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect..