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Coverage Initiation: Skyworks Solutions
Value Line is initiating coverage of Skyworks Solutions (SWKS) in The Value Line Investment Survey. The company was formed through the merger of the wireless communications business of Conexant Systems, Inc. and Alpha Industries, Inc. on June 25, 2002. Following the merger, Alpha, the surviving entity, changed its name to Skyworks Solutions, Inc.
The company makes analog and mixed signal semiconductors, with standard and custom products supporting the automotive, broadband, cellular infrastructure, energy management, industrial, medical, military and cellular handset industries. Skyworks’ product lineup includes such things as amplifiers, attenuators, detectors, diodes, directional couplers, front−end modules, hybrids, infrastructure RF subsystems, mixers/demodulators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, receivers, switches and technical ceramics, among others.
The company owned four manufacturing facilities at the end of 2010. Three of the facilities (Woburn, MA, Newbury Park, CA, Adamstown, MD) were in the United States, and one was in Mexicali, Mexico. In addition to these facilities, the company uses the services of other chip fabrication facilities, called foundries within the industry, for the production of many of its chips. These outside providers would be difficult, though not impossible, to replace if there were any disruptions in service. That said, its in-house facilities tend to focus on its more complex offerings using gallium arsenide, while the foundries with which it partners tend to focus on its silicon based chips.
Skyworks’ products are aligned around cellular handsets and analog semiconductors. Management believes that these two product groups offer material growth prospects as the use of high-speed mobile products, such as smart phones, is increasing the demand for highly functional handsets and the infrastructure to support those handsets. In the handset space, the company offers highly customized power amplifiers and front−end solutions that fill needs from entry-level products to multimedia platforms and smart phones. On the analog semiconductor side of the business, Skyworks offers over 2,500 different linear products to a highly diversified non−handset customer base that includes infrastructure, automotive, energy management, medical and military providers.
One of the company’s distinguishing characteristics is the mix of its product breadth with its extensive customer base. In fact, the company has relationships with most of the major players in the handset business, including such companies as LG Electronics, Motorola, Nokia (NOK), Samsung, Sony Ericsson (a joint venture of Sony (SNE) and Ericsson), Research in Motion (RIMM), and HTC. In the linier space, the company works with such companies as Landis + Gyr, Sensus, Itron (ITRI), Siemens (SI), and Northrop Grumman (NOC). That said, in 2010, three customers each accounted for more than 10% of revenues. The loss of any of those customers would materially affect revenues and earnings.
As with most technology industries, the company’s products and markets are subject to ongoing technological changes and advances. As such, the company spent 12.5% of revenues on research and development. Moreover, Skyworks attempts to maintain close collaborative relationships with its customers to identify market demand and help to target its development efforts. That said, after a product has been developed, tested and manufactured, a customer may need up to six months to integrate, test and evaluate the product and up to an additional six months or more to begin volume production of equipment that incorporates the product.
Such lengthy product cycles increases the risks of research investments, as products could be canceled or scaled back within the testing and implementation phases—regardless of how much Skyworks has spent on its research efforts. This spending is not optional, however, because chip prices tend to decrease over time as older chips become obsolete. In addition, both of the company’s product lines are exposed to significant competition. Although Skyworks has many material relationships, it needs to maintain those relationships if it is to continue to expand and prosper. Part of this process is the customer-focused research and development efforts noted above, but also speed to market, quality, and price, among others.
Subscribers interested in monitoring Skyworks Solutions should watch for Value Line’s quarterly updates on the company in The Value Line Investment Survey, while keeping an eye out for Supplementary reports when breaking news hits.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.