Can Skyworks Solutions Inc. Overcome the Smartphone Slowdown?

By Markets Fool.com

IMAGE SOURCE: SKYWORKS SOLUTIONS.

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The last couple of months haven't been kind to investors in semiconductor manufacturer Skyworks Solutions . Despite a solid fiscal first-quarter earnings report in late January, the stock has been stuck in reverse for quite some time and has shed more than 8% of its value year to date.

The downward slide has been caused by investors' concerns that a slowdown in smartphone sales would weigh on the company's near-term growth. That seems logical as Skyworks generates a sizable portion of its revenue and profits from the smartphone market.

So can Skyworks' business continue to thrive despite the slowdown? Investors should have an answer to that question when the company reports its fiscal second-quarter earnings results on April 28.

Quick stats on Skyworks Solutions

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Market Cap

$13.3 billion

Trailing P/E Ratio

14.3

Forward P/E Ratio

10.6

Dividend Yield

1.4%

Cash Balance

$1.2 billion

Long-Term Debt

$0

DATA SOURCE: YAHOO! FINANCE.

First, a review
Almost everythinglooked good when Skyworks reported its fiscal first-quarter 2016 earnings. Revenue jumped a strong 15% to $926 million and non-GAAP earnings per share leaped by 27% during the period. The stronger growth on the bottom line came mostly on the back of continued margin expansion as the company expanded its gross, operating and net margins during the period.

Skyworks also stated that it continued to make great progress during the quarter at expanding into new markets. It announced a number of design wins for its chips in a diverse set of growth markets such as security cameras, drones, and smart TVs. That's a double win for investors as it positions the company for continued fast growth and helps to diversify its business away from its dependence on smartphone sales.

Diversifying is especially important as the company is currently heavily dependent on Foxconn -- Apple's contract manufacturer -- for a huge chunk of its revenue. Sales to Foxconn comprised more than 44% of Skyworks' total revenue last year, making it by far the company's largest customer. That dependence hasn't been a problem as iPhone sales have been booming, but this could be the first quarter when that asset suddenly becomes a liability.

What to expect this quarter
As a result of the iDevice maker's softness, Skywork CEO David Aldrich had warned that growth for this quarter will be slower than investors had been accustomed to seeing.

Here's a look at what he believes the company will be able to produce this quarter.

Q2 2016 Q2 2015 Change %
Revenue $775 million $762 million

1.7%

Non-GAAP EPS $1.24 $1.15 7.8%

DATA SOURCE: SKYWORKS.

As you can see, sales growth of 1.7% would be3 a massive slowdown from the 15% that the company showed last quarter. On the bright side, management believes that margins will continue to remain elevated -- it is calling for gross margins in the range of 50.5% to 51%, a solid jump from the 46.7% that it reported in the same period a year ago.

Taking care of shareholders?
In response to the company's slipping share price late last year, Skyworks authorized an additional $400 million share repurchase plan. With shares trading for such a modest multiple, you would have expected the company to get aggressive with its repurchase activity last quarter, but that didn't happen. When pressed on the conference call for more information about the lack of repurchase activity, management stated that it was looking into potential M&A deals and wanted to be conservative with capital. It did say that the company remains committed to returning 40% of free cash flow to shareholders.

That could hint that the company could have something to announce on that front relatively soon, so investors shouldn't be taken aback if a deal is revealed with the earnings release. With more than $1.2 billion in cash on the books and no debt, it certainly has enough financial flexibility to make one happen.

The article Can Skyworks Solutions Inc. Overcome the Smartphone Slowdown? originally appeared on Fool.com.

Brian Feroldi owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Skyworks Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.