Skyworks Solutions Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Good afternoon and welcome to Skyworks Solutions' First Quarter Fiscal Year 2024 Earnings call. This call is being recorded.

At this time, I will turn the call over to Raji Gill, Vice President of Investor Relations for Skyworks. Mr. Gill, please go ahead.

[Rajvindra S. Gill, Vice President, Investor Relations at Skyworks Solutions]

Thank you, operator. Good afternoon, everyone, and welcome to Skyworks' first fiscal quarter 2024 conference call.

With me today is Liam Griffin, our Chairman, Chief Executive Officer and President; and Kris Sennesael, Chief Financial Officer for Skyworks. This call is being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at skyworksinc.com. In addition, the company's prepared remarks will be made available on our website promptly after their conclusion during the call.

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 complete reconciliation to GAAP.

With that, I'll turn the call over to Liam.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Thanks, Raji, and welcome, everyone.

Skyworks continued to execute well during the first fiscal quarter of 2024 despite a volatile macroeconomic environment. We delivered revenue of $1.202 billion. We posted earnings per share of $1.97 and generated $775 million of operating cash flow. Free cash flow was also a record at $753 million, or a 63% free cash flow margin, which reflects strong working capital management and moderating capex intensity.

Let's review both near and long-term secular trends in our end markets. After two challenging years across Android ecosystems, we see signs that the industry is stabilizing. Excess supply conditions are abating and inventory levels in the distribution channel and at the OEM level are normalizing. Customers are starting to restock inventory, albeit gradually, as supply and demand dynamics improve and new phones are introduced into the market. Moreover, we've made strategic investments in product development, positioning us to compete for design wins and share gains focusing on highly integrated platforms for the leading mobile OEMs. We are pleased with our competitive positioning and technology road map and are poised to return to growth when the markets recover.

Within broad markets, we see crosscurrents, but many factors are moving in the right direction. In consumer IoT, we believe that we are past the bottom as inventory levels in the channel have normalized and demand signals are improving. Furthermore, we are executing on the upgrade cycle to WiFi 6E and 7. We see significant design win momentum across our retail, carrier and enterprise channels. These systems carry substantially higher dollar content because of the addition of the new 6 gigahertz band and the inclusion of bar filtering technology. We expect wireless infrastructure and traditional data center will remain a headwind throughout 2024 as OEMs continue to digest excess inventory. Despite this, we remain bullish on several new product cycles, including major design wins in Ethernet for high bandwidth networks and 400 gig and 800 gig optical module upgrades.

Lastly, automotive and industrial markets are experiencing a near-term inventory correction. However, we see opportunities for growth in our automotive business driven by higher adoption rates of connectivity in the vehicle along with growing EV penetration, driving demand for our power isolation products. Taken together, we anticipate December quarter represents the bottom in the broad markets business. There are several long-term secular growth dynamics that leverage our differentiated technology, including the proliferation of intelligent edge-connected IoT devices, automotive electrification and advanced safety systems, and AI-enabled workloads driving cloud and data center upgrades. Each of these trends require intricate connectivity engines underlying the need for speed, ultra reliable low latency performance.

In addition, 5G technology is expanding beyond the smartphone into more use cases in broad markets including private cellular networks in factories and stadiums, customer premise equipment supporting Verizon and T-Mobile, and multi-band automotive telematics and wearables, to name a few. We also remain bullish on the long-term RF content story in smartphones. Coupled with growing 5G penetration, we see increasing levels of complexity and content with each new generation. For example, 5G Advanced is driving higher RF content, including the addition of satellite bands, 4x4 MIMO on the downlink and uplink, higher bandwidth, more carrier aggregation, upgrades to WiFi and GPS, and other innovations.

Lastly, we are energized about the prospect of generative AI migrating to the smartphone, sparking a potential major upgrade cycle. As the performance bar rises every year to support AI-enabled phones, the complexity requirements of RF will continue to increase, driving the need for more integration, lower power consumption, smaller footprint and spectral efficiency. 5G is the ideal standard for on-device AI applications as it takes advantage of lower latency, faster transmission speeds and higher frequency ranges. In addition, AI-enabled workloads are driving demand for high-speed connectivity for data-intensive infrastructure and cloud operates, accelerating the demand for our high-precision timing products.

Turning to our quarterly business highlights. We secured several design wins in infrastructure, including optical transport products with a major operator in India and timing devices for 5G small cells for private networks. We expanded the WiFi design pipeline with Cisco's enterprise access points, Linksys tri-band mesh router, and TP-Link's tri-band gaming router. We increased design win momentum in automotive, including telematics, infotainment systems and onboard chargers across the leading OEMs. Lastly, in emerging IoT, we delivered next-generation smart energy solutions with Google's Nest temperature sensor and Itron's residential gas meter

In summary, Skyworks delivered solid financial results despite a challenging macro environment. Our strong balance sheet, record cash flow and profitability reflect our resilient business model, diverse customer base, and technology scale.

With that, I will turn the call over to Kris for discussion of last quarter's performance and our outlook for Q2 of fiscal 2024.

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Thanks, Liam.

Skyworks' revenue for the first fiscal quarter of 2024 was $1.202 billion, slightly above the midpoint of our outlook. Mobile was approximately 71% of total revenue, an increase of 7% sequentially as we supported the ramp of new high-performance solutions at our largest customer. Android-related revenue with Google, Samsung and the Chinese OEMs grew modestly sequentially. Broad markets were approximately 29% of total revenue, down 18% sequentially, mostly driven by some specific inventory corrections in wireless infrastructure, automotive and industrial. Gross profit was $557 million with gross margin at 46.4% in line with expectations.

Gross margin was down 70 basis points sequentially, driven by an unfavorable mix shift resulting from lower broad markets revenue. Also, during Q1, we reduced our internal inventory by $193 million to $927 million, well below our target of $1 billion. Operating expenses were $191 million, below the low end of the guidance range. Given our ongoing focus on managing discretionary expenses while continuing to invest in our technology and product road maps. We generated $366 million of operating income, translating into an operating margin of 30.4%.

We incurred $7 million of other expense and our effective tax rate was 11.7%, driving net income of $317 million and diluted earnings per share of $1.97, which is $0.02 above the guidance that we provided during the last earnings call. Skyworks' business model continues to generate very strong cash flow. First fiscal quarter cash flow from operations increased to an all-time record of $775 million.

Capital expenditures were reduced to $22 million or less than 2% of revenue, resulting in an all-time record free cash flow of $753 million or 63% free cash flow margin. Strong profitability combined with great working capital management and lowering the capex intensity of the business drove the record cash flow numbers. Also, during fiscal Q1, we paid $109 million in dividends and repaid the remaining $300 million on our term loan. We ended the quarter with over $1 billion in cash and investments and $1 billion in debt, creating a net positive cash position and an optimal capital structure providing us with superior flexibility and optionality.

Now let's move on to our outlook for Q2 of fiscal 2024. We anticipate revenue between $1.020 billion to $1.070 billion. We expect our mobile business to be seasonally down, consistent with historical patterns, while in broad markets, we anticipate modest growth of the December bottom as inventory levels are normalizing in certain end markets. Gross margin is projected to be in the range of 45% to 46%, reflecting our seasonally weakest period of the year. We anticipate margin expansion during the remainder of 2024, benefiting from our disciplined management of our manufacturing and operational cost structure, both internal and external, along with higher factory utilization rates.

We will also benefit from a favorable mix shift as our broad markets business recovers and accelerates. We expect operating expenses in the range of $193 million to $197 million as we continue to make strategic investments in mobile and broad markets to drive share gains and increase diversification. Below the line, we anticipate roughly $4 million in other expense and an effective tax rate of 11.5%, and a diluted share count of approximately 161 million shares. Accordingly, at the midpoint of the revenue range of $1.045 billion, we tend to deliver diluted earnings per share of $1.52.

Operator, let's open the line for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And our first question coming from the line of Matt Ramsay with TD Cowen. Your line is open.

[Matt Ramsay, Analyst at TD Cowen]

Thank you very much. Good afternoon, guys. Liam, I wanted to ask a bit about the broad market's trends and it's obviously, as the name implies, a diverse business. I was a -- pleasantly, but I was a little bit surprised at the commentary that you had visibility for that business to be up so quickly. I guess in March it's been an inventory correction that's lasted a bit longer in some of your peers and in other companies, and we've seen industrial maybe get a little bit worse. So, I mean, if you could maybe expand -- I know you did some in the prepared script, but if you could expand a little bit on maybe some of the individual end-market trends you're seeing in broad markets, and maybe what the pace of this potential recovery starting from March and through the rest of the year could look like coming off the bottom? Thanks.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Sure. Absolutely. One of the interesting things here with our broad markets business is that there's so many opportunities that we haven't yet scaled. So if we look at the business, unlike some of the other mobile markets that are well defined and there's still great opportunities, we look at the broad markets as more of an open-ended play for us. We're leveraging the technologies that we know how to work with, we have a great set of customers and that continues to grow and expand. But yeah, I mean, the team has done a really good job. This has been a tough year across the landscape, across semis. We're happy to deliver some positive results here today and we do think there's a turn.

Again in that portfolio, it's very diverse, and mobile is a part of it but the lion's share is really diversified products with some really great names as well. And most of those broad market companies -- we have low share. There's still a tremendous amount of room to grow within those accounts. So I think those are some of the themes. We've been working on this for quite a while and finally putting up some meaningful top line leveraging that broad markets business. The other thing we continue to remind our customers and even the investors, a lot of the stuff we do in-house. So we're able to craft and curate specialty products, we have our own fabs. We do things a little bit differently and I think that helps our outcome.

[Matt Ramsay, Analyst at TD Cowen]

Got it. Thank you for that. I guess as my follow-up, and this is going to be a thematic that we talk about in the PC market maybe this year and then into next year in the smartphone market, as you alluded to sort of AI making its way into these products and potentially catalyzing a bit of an upgrade cycle. So I guess my question is, I mean, it's pretty straightforward for us to envision if you get air interface upgrades from 4G to 5G to what comes next, that can expand the RF TAM pretty meaningfully for your smartphone business. Are you anticipating the growth potential from AI and smartphones to be primarily a unit driver for the market and therefore for your company? Or are there things that you guys can do in AI-enabled phones that could meaningfully change the content? Or are we sort of waiting for the next air interface before the content could possibly inflect for the TAM again? Thanks.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, I think it's a secular opportunity. This is a really unique period for us and in the industry. The way we look at it, you look at AI and a lot of that is really intense servers, data center, and that's extremely important. Then you take it down kind of to the middle ground and then you're kind of in a different position. But getting that to mobile is going to be a challenge. It's going to be a challenge, but it will happen. The consumer wants that. The consumer wants to have that compute power in their hand, and it's not there yet, but we really believe that it will come.

And I think it's going to set up the industry for a whole range of new opportunities, still carrying radio frequency. So really excited about it. And again, we have the building blocks and then know how to do really interesting things and do it account by account as well. Not everybody wants the same solution. But we really do believe that heavy compute power has got to get matched up with something in your hand. That handheld device has got to step up, it's got to grow, it got to -- it got -- it needs to be faster, lower latency, and that's all good because those are problems that we can solve.

[Operator]

Thank you. And our next question coming from the line of Chris Caso with Wolfe Research. Your line is open.

[Chris Caso, Analyst at Wolfe Research]

Yes, thank you. Good evening. First question is about the Android market. Right now it sounds like that market has finally grown for you after several quarters of inventory correction. Can you speak to what your expectations are for that as you go through the year? I suppose at this point the inventory correction is behind us. What's your level of optimism of getting back to more normal growth rates in that part of the business?

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, Chris. Yeah, you're right. It's been a little bit bumpy through the ecosystems here, but we see green shoots here popping up in Android. We know how to make these products. I think there was a little bit of a soft spot there in the industry. The newer phones are coming up with a little bit more technology. We like that. And we can broaden that base. So we are going to -- in the prepared remarks, we commented on that, and you should expect more growth in the Android ecosystem as we go forward. These are products that we can execute to in the pipeline right now and give us continuing strength getting in going through '24 and '25.

[Chris Caso, Analyst at Wolfe Research]

Okay. As a follow-up on gross margins, if you speak to your expectations as we proceed through the year, one thing you mentioned is sounded like your internal inventory was below target. Should we -- read that to me and utilization starts going higher and what the effect on that will be on gross margins as we go through the year?

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Yes, Chris. So I'm really -- when you look at gross margins, right, we did 46.4% in Q1. We still impacted there by underutilization, a little bit of a headwind from a mixed point of view as well. And that continues somewhat in the March quarter that we guided. But then when I look beyond the March quarter, we will see some really nice gross margin uplift in the remainder of the fiscal and the calendar year. Part of that is higher utilization because we will no longer have to focus on a reduction of inventory that is behind us. We reduced the inventory by almost 200 million in the December quarter. There is maybe still a little bit opportunity there, but we feel good about the inventory levels where they are right now. In addition to that, our broad markets business is going to grow faster than the mobile business and so that gives us a little bit of a mixed tailwind as well.

And then in addition to that, we will really benefit from all the cost reductions that we've done over the last 12 months. We really focused on taking out structural parts of the cost structure, we focused on operational efficiencies, driving yield improvements and test time reductions. And in addition to internal cost, we also start seeing some benefit from external cost. And so when you put it all together, we will see some nice gradual gross margins improvement after the March quarter.

[Operator]

Thank you. And our next question coming from the line of Christopher Rolland with Susquehanna. Your line is open.

[Christopher Rolland, Analyst at Susquehanna Bancshares]

Hey guys, thank you for the question. I guess first of all in broad markets, if you can -- you had some great color as to how you break those out into kind of subsegments. Would love to know kind of what those look like, how they're trending. And then also you alluded to the gross margin benefits as we move through the year. I don't know if you can talk to the broad markets' effect on gross margin as we move through the year.

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Yeah. So as it relates to broad markets, roughly 40% 45% is IoT, more consumer IoT, right, where we provide connectivity solutions in tablets and wearables and PCs, your home connectivity with routers and all the access points that tap into that. In that market, the inventory -- there has been an inventory correction for multiple quarters, but we are getting towards the end of the inventory correction there. In addition to that, we see strong growth in that part of the market due to an uplift in content as we transition from WiFi 6 into WiFi 6E and 7 type of solutions that has a substantially higher RF content of Skyworks inside.

The next 30% 35% is infrastructure, cloud, data center, enterprise networking. There is definitely an inventory correction going on in that part of the business that has started in the December quarter and will continue for a couple of quarters here. Nevertheless, there as well, I think in that market we're very well positioned with some key customers, including our timing solutions for data centers. And then the last part is 20% 25% is automotive and industrial. There as well, I think, we're well positioned, but you've heard it from many of our peers, there is an inventory correction going on. I don't think it will be a long drag out inventory correction. It's probably December, March, two quarters of an inventory correction.

And there again, we are very well positioned in that market. The connected car that eventually become an autonomous car as well as EV where we play with our power resolution solutions. And so again, when you put it all together, December is the bottom for our broad markets. We start seeing some sequential growth in March and beyond. And as you know, yes, those markets typically have a higher gross margin compared to broad markets, and that will help us to lift the gross margin.

[Christopher Rolland, Analyst at Susquehanna Bancshares]

Thank you for that color, Kris. You guys already talked about AI smartphones, but also you called out AI-enabled workloads driving cloud and data center upgrades. You also talked about 800 gig and this being an opportunity for you. Is that all related to your timing business from your acquisition, or are there other ways that you're leveraging infrastructure around AI as well?

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, largely through the infrastructure business that we have and some of the technology that we brought forth in our Silicon Labs deal that's driving new vectors for us at Skyworks in the industrial markets and the data center markets, and it's a really vibrant growth source for us. And there's a lot of room to grow there as well. So lots more to do. But we've been making some great progress in that area.

[Operator]

Thank you. Our next question coming from the line of Edward Snyder with Charter Equity Research. Your line is open.

[Edward Snyder, Analyst at Charter Equity Research]

Thank you very much. I'd like to touch on if we could, later this year, especially in mobile, it seems pretty clear at this point given your largest customer scramble to get their thing done by 2025, that most all attention is on that and that we're going to have kind of a -- I don't know best way to put it, but basically kind of a on-hold -- not on-hold, but repeat of what we've seen before, not -- nothing -- not much new in the new one, and the competition is clear. So basically, I would expect in the fall you're going to see more competition, or you already know it now?

I'm sure Qualcomm is going to talk about it a lot on Wednesday. So I'm trying to get a feel for the profile of your mobile business in the second half of the year. Sounds like it might be weaker than we normally seen since Qualcomm share got to come out of somebody. If you could maybe characterize or just -- without getting into too much detail about, what should we look at in terms of the mix in the second half? You already talked about broad markets being much stronger. Mobile, by implication, is going to be a little bit weaker. And is that mostly just organic growth or is it going to be some share loss or how do we think about that? And then I had a follow-up, please.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, well, of course, we're deeply engaged with mobile in all angles, right? So we have a broad set of technologies that are applicable to multiple customers, including the largest. And that's our craft, that's the largest part of our portfolio. We're growing across other markets, but certainly to know how that we have in RF, the ability to do things in-house, as you know, and the vectors that we put forth to drive this company. So we're all over it at every angle and we're continuing to work on market share and new innovations, delighting our customers, lowering current consumption, expanding the reach, doing a little bit more in the Android markets that we've kind of hinted around that, we're going to continue to execute there, and still drive the best performance solutions that we can.

[Edward Snyder, Analyst at Charter Equity Research]

Okay. Then maybe I could follow up from a different angle here. You're going to grow in Android. You've kind of been under earning there for several years, I think, on purpose because you've done very well outside of that market. R&D is going up to -- in order to address the products because different product market. But margins typically are lower in that whole market. Competition is a lot more intense. One, should we expect to see revenue growth in the second half -- it's a little early, but revenue growth second half of the year, whether it's on inventory snapback or new product wins in Android, try to take up some of that slack. And then, Kris, maybe you can articulate how that -- how you're going to offset the margin, the natural margin dilution of Android over, say, the US customer, and then, of course, all mobile dilution against broad markets in the second half if you could, please. Thanks.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, so -- yeah, we're with you on that. So there's a lot of opportunity for us to be more aggressive across the Android ecosystem. It's not just China. You get names like Google and Samsung that are tremendous opportunities that we can drive. We're built for this kind of stuff. And we have an end-to-end process that we continue to improve and refine at every turn. It helps our customers, it helps our gross margin, our utilization. We have incredible factories, home-grown stuff that we have here in Irvine, that really is the solution of choice, as far as I know, with our technology know how and the ability to be flexible and customizable to each account. And I think that's an asset for us, and I think we'll continue to drive that portfolio.

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Yeah. As it relates to gross margin, the gross margin profile of our mobile customers is on or about the same. And part of that is because we are somewhat selective. We are not sliding down in the mid or low end of the market. We stay at the high end. We stay at a high-performance part. And in that part of the market, you compete based on performance. It's not a price competition. You compete based on performance. And again, that's why gross margins are somewhat the same in -- with all the customers in that segment.

[Operator]

Thank you. And our next question coming from the line of Gary Mobley with Wells Fargo. Your line is open.

[Gary Mobley, Analyst at Wells Fargo & Company]

Hi guys, thanks very much for taking my question. I want to start out with a quick housekeeping question. What was the mix of revenue from your largest customer in the quarter?

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

The largest customer was approximately 73% of total revenue, which is high, obviously, because the December quarter is the top quarter with the largest customer. And given that the broad markets was bottoming out in December, you get to honor about 73%. Obviously, when you look forward on a full-year basis or even in March, it will be well below the 73%.

[Gary Mobley, Analyst at Wells Fargo & Company]

Okay. Thank you, Kris. I want to ask Ed's previous question in perhaps a more direct way. Doing the math, it would indicate that your Android-related mobile customers are trending now at about a $400 million annualized rate, or at least that was the case for the December quarter. But in the past fiscal year '22, I believe that level was closer to $800 million. And so my question is, if we see a rebound in the Android market, and based on your design win footprint that you currently have today, can we expect that segment of the -- of your business to bounce back to the previous level?

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, absolutely. We've got, as I said, a lot of opportunity to go harder and stronger and more direct in the Android ecosystem. We absolutely have the technology to make it work, we have to scale, manufacturing scale and know how to get it done. So, yeah, I mean, it's certainly a play for us there and I think we'll take advantage.

[Operator]

Thank you. And our next question coming from the line of Karl Ackerman with BNP Paribas. Your line is open.

[Karl Ackerman, Analyst at BNP Paribas]

Yeah, thank you. Two questions, if I may. On mobile, your largest customer is down on a seasonal basis in March. But at the same time, given your improving execution within Android, does Android grow sequentially in March? How do we think about that within mobile, please? And I have a follow-up.

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Yeah, Android is kind of flattish, flattish slightly up into March.

[Karl Ackerman, Analyst at BNP Paribas]

Got it. Thanks. Thanks for that, Kris. At the same time, I do want to touch on mobile one more time. It's been asked in several different ways, but I guess I'll try it again. You are less tied to China than peers, but are you seeing any changes to the competitive landscape in China? I asked because there are anecdotes supporting China RF suppliers winning content in low band SAW and TC SAW. But at the same time, as you indicated earlier, Kris, you're not necessarily competing in that particular area of the market. So if you could just highlight the competitive landscape of what you're seeing in China, that would be very helpful. Thank you.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, I mean, the OBX players we do some reasonable business there. We could probably do a little bit more on the Android side, but we really don't step down much further there. We're not in the low end at all. We could be, but I think we generate a better outcome for our customers and our shareholders to drive that mid and high end. So it's something we can do. But I think the way our business runs, I think we're more accretive as a company going down the playbook that we have today.

[Operator]

Thank you. And our next question coming from the line of Vivek Arya with Bank of America Securities. Your line is open.

[Blake Friedman, Analyst at Bank of America Securities]

Hi, this is Blake Friedman on for Vivek. Thanks for taking my question. I just wanted to focus on opex. It seems spending has returned to levels seen prior to the industry downturn. So I was curious how we should think about the trajectory of opex in the remainder of the year.

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Yeah, so as it relates to opex, I think we did a good job in the December quarter at $191 million. We are guiding with a little step up in March to $195 million. Keep in mind that this is the start of a new calendar year and so you get a reset of the social chargers and some of that that kicks in. In addition to that, we are going to continue to invest in our technology and product road maps. We feel good about our position with our mobile players. As Liam articulated, we have plenty of opportunity in our broad markets and we're going to continue to invest. Now we're going to do it the Skyworks' way. We focus on efficiency, effectiveness, we're not wasting any dollars here. And so -- but yeah, we're going to continue to invest, and so opex will continue to gradually move up in the remainder of the fiscal and calendar year.

[Blake Friedman, Analyst at Bank of America Securities]

Got it. And then kind of quickly circling back on some of your comments. I know the broad markets business, it's a key initiative for Skyworks and just with the business kind of returning to this cash positive level and generating pretty strong cash flow from here. Just curious how you think about M&A and anything in particular you guys would look to add to the broad markets assets.

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Yeah, first of all, the cash flow is outstanding and it's definitely something that we focus on. And so we generate a ton of cash. As you have seen in the last couple of quarters, we have used that cash flow, of course, to continue to invest in the business. We pay our dividends every quarter and we have been paying off the term loan that, as you probably know, had a variable interest rate and was getting a little expensive there. But we're done with that. And so now, again, looking forward, we have -- we will continue to drive a very strong free cash flow. It's not going to be every quarter, 63%. We feel we have a sustainable plus 30% free cash flow margin on a fiscal or calendar year basis, but that's generating a lot of cash.

And of course we want to put that cash to work. We have optionality. We can switch on the buybacks or we can be active from an M&A point of view. And as you know, we -- yes, we focus on becoming a more diverse company despite the fact that we like the mobile business, but we focus on becoming a more diverse company in part through organic investments in that business. But we have the optionality to accelerate that through M&A, and we're working that.

[Operator]

Thank you. And our next question coming from the line of Thomas O'Malley with Barclays. Your line is open.

[Thomas O'Malley, Analyst at Barclays]

Hey, thanks for taking my questions, guys. I just wanted to understand the underutilization charges into the March quarter. Obviously gross margin is being guided down slightly, but you're seeing broad markets step up. So that mix should help you. Where are you seeing more of those underutilization charges? Are those as a percentage basis coming more on the mobile side or more on the broad market side?

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

So, no, it's not really tied to one of the businesses. But we have been bringing down the utilization of our factories in part because the revenue is down year-over-year, but also because we have been focusing on driving down the inventory, right, we are taking our medicine now, we're not just building inventory to protect the gross margin. Now it takes a little bit of time for those underutilization charges to hit the P&L. It goes through an inventory cycle, right? That's why you continue to see slightly down gross margins on a sequential basis into the March quarter. But again, we have confidence that March is the bottom in terms of gross margin, and you will start seeing gradual improvements after the March quarter.

[Thomas O'Malley, Analyst at Barclays]

Helpful. And then just on the moving pieces for the back half of the fiscal year, sounds like Android is getting better. Typical seasonality on the -- on your largest customer side in mobile. But I just want to get a feel for what you guys kind of are looking at in terms of the reacceleration of broad markets. If you look at March for your guidance, kind of up slightly, you're still down 20% year-over-year. Do you think that kind of exiting your fiscal year, are you looking to kind of be growing year-over-year or just can you give us any kind of color on the pace of recovery there? Just because I know things are improving. But just how quickly is something that I think is a little more difficult to wrap our heads around. Thank you.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, sure. There's a lot there, but I think I get your point. So we definitely believe there's going to be more acceleration in revenue in the broad markets. We have a roster of incredible companies that we're serving right now, from a Cisco to Ford, Daimler, Nest, we talked about before, Google company. It's a very diverse set of products and customers in the broad markets portfolio. And that's what we like. Each one has their own vector and we're continuing to nurture that and grow into that. And it's also a great opportunity on the sales side because we do have quite a bit of revenue in mobile, but the number of accounts that we haven't served yet is still very, very high and that's a great opportunity for us to go after.

[Operator]

Thank you. And our last questioner in queue coming from the line of Quinn Bolton with Needham. Your line is open.

[Quinn Bolton, Analyst at Needham & Company LLC]

Hey guys, thanks for taking my question. There's been a couple of call -- questions call on the call that seem to be alluding to perhaps you guys may be losing content at your largest customer in the second half of the year, and I haven't heard you guys specifically address that. Can you give us any thoughts as you look in the second half, how you're feeling content-wise at that largest customer? And then I've got a follow on for Kris on the gross margins.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Yeah, I think we have a great position with our largest customer. Nothing really is concerning on that point and we know exactly who we are and who they are and we have great partnerships and we'll continue to drive success.

[Quinn Bolton, Analyst at Needham & Company LLC]

Okay. And then for Kris, you've kind of talked about the gross margin drivers and potentially pretty quick recovery post the March bottom. I'm just kind of curious, is there -- can you give us any sense how quickly can you get back to 50%? Is that something you think you can do in the calendar year '24? And does it require you to get to a certain revenue level to get rid of some of those underutilization charges? Or are things like product mix a much bigger factor as well as the cost reductions you've taken to getting back to that 50%, so it tends to be maybe a little bit less driven by a certain revenue level? Just-- what's the best way to think about getting back to 50%?

[Kris A. Sennesael, Senior Vice President & Chief Financial Officer at Skyworks Solutions]

Yeah, I mean, we guide only one quarter at a time and there's a reason for it, right? There's a lot of puts and takes that go into the equation. But again, we have confidence that March 45%-46% guide is the bottom. We will start seeing gradual improvements from there. We obviously want to get as fast as we can back to the 50%, right? And then once we get back to the 50%, we're not going to stop there. Our long-term target model calls for 53% gross margin, and we believe we can do that. There is no structural impairment in the business that will prevent us that. But obviously, yes, we need revenue growth and we need to get better factory utilization that in combination with all the cost efficiencies internally and externally that we have been working on and will continue to work on, give us the conviction that we will get back to the 50% in a reasonable amount of time, and then we're going to keep driving it towards our target moment of 53%. But we'll provide an update on a quarter-by-quarter basis.

[Operator]

Thank you. And ladies and gentlemen, that concludes today's question-and-answer session. I'll now turn the call back over to Mr. Griffin for any closing comments.

[Liam K. Griffin, Chairman, Chief Executive Officer & President at Skyworks Solutions]

Thank you all for joining. Look forward to seeing you at upcoming conferences. Thanks.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Rajvindra S. Gill, Vice President, Investor Relations
• Liam K. Griffin, Chairman, Chief Executive Officer & President
• Kris A. Sennesael, Senior Vice President & Chief Financial Officer

Analysts

• Matt Ramsay, TD Cowen
• Chris Caso, Wolfe Research
• Christopher Rolland, Susquehanna Bancshares, Inc.
• Edward Snyder, Charter Equity Research
• Gary Mobley, Wells Fargo & Company
• Karl Ackerman, BNP Paribas
• Blake Friedman, Bank of America Securities
• Thomas O'Malley, Barclays PLC
• Quinn Bolton, Needham & Company LLC