Skyworks Solutions, Inc. (SWKS) posted a net income of $34.7 million or 19 cents per share in the third quarter of fiscal 2010, compared to a net loss of $18.7 million or 11 cents per share in the year-ago quarter. Excluding one-time items, but including stock-based compensation expenses, net income per share came in at 27 cents, in line with the Zacks Consensus Estimate.

Revenues of $275.4 million were up 44% from the year-earlier quarter and up 16% sequentially. The reported figure beat management’s guidance of 10% to 15% sequential growth and the Zacks Consensus Estimate of $270 million.

Skyworks continues to capitalize on three business segments — mobile Internet, vertical markets and analog components. Firstly, in the mobile Internet segment, smartphones are expected to grow by 3-4 times more than the overall cellular handset market, which is poised to grow at 8% – 10%. The increasing demand for smartphones continues to drive growth for the company as Skyworks is uniquely positioned as a supplier to all leading smartphone OEMs.

Secondly, Skyworks continues to make investments in systems applications and design within adjacent high margin analog segments (recent examples include smart grid and home and building automation applications) which are yielding solid results, as is evident from the top-line growth.

Thirdly, Skyworks is leveraging its standard analog catalog business to address a number of mature and emerging segments like automotive, avionics, satellite, medical, military and industrial. This business not only provides higher margins and a diversified customer base, but also annuity-like product life-cycles.

Margins

Gross margin (excluding stock-based compensation expenses) improved to 43.3%, up from 40.5% recorded in the year-earlier quarter and 42.3% in the previous quarter. The improvement in gross margin was driven by improved product mix (comprising a larger percentage of higher-margin vertical markets and 3G solutions), a volume ramp of new products, improved manufacturing efficiencies, yield improvements and significant material cost reductions.

Operating margin came in at 23.1%, up from 14.9% in the year-earlier quarter and 20.5% in the previous quarter.

During the quarter, Skyworks retired convertible debt of $20 million and invested $25 million in capital expenditures. Skyworks exited the quarter with cash and cash equivalents of $390 million, down $412 million from the end of the previous quarter.

Guidance

Going forward, Skyworks projects revenues of $300 million in the fourth quarter, up 8.9% on a sequential basis. Management expects a strong second half in 2010. Gross margin is expected around 43.5% – 44%. Operating margin is projected at 25%. Excluding stock-based compensation expenses and restructuring charges, EPS is expected at 37 cents per share.

Skwyorks aims to diversify its focus on new vertical markets and an expanded customer base. Earlier, the company was heavily concentrated in a few tier-one handset OEMs, but now supports handset manufacturers and smartphone providers. Skyworks also delivers highly-integrated solutions to key energy management suppliers such as Itron, Silver Spring Networks, Sensus, etc.

We remain encouraged by the company’s recent solid performance and guidance. Skyworks, which competes with RF Micro Devices (RFMD), Anadigics, Inc. (ANAD) and TriQuint Semiconductor, Inc. (TQNT) continues to outpace analog semiconductor market growth driven by momentum across mobile Internet, smart energy and diversified linear products applications.

Our long-term recommendation for Skyworks is Outperform supported by the Zacks #2 Rank (Buy).
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