Skyworks Solutions, Inc. (NASDAQ:SWKS) Goldman Sachs Communacopia + Technology Conference 2022 September 13, 2022 6:00 PM ET
Company Participants
Liam Griffin – Chairman, CEO, and President
Conference Call Participants
Toshiya Hari – Goldman Sachs
Toshiya Hari
All right, we’d like to get started. Good afternoon, everyone. My name is Toshiya Hari, I cover the semiconductor and semi cap equipment space here at Goldman Sachs. Very honored, very pleased, very excited to have Liam Griffin, Chairman, CEO, and President from Skyworks with us this afternoon. Liam, thank you so much for being here.
Liam Griffin
Thank you, Toshi and the Goldman Sachs team for hosting today. Appreciate it and also a little bit of volatility today, so hopefully, we can get ourselves steady through that.
Question-and-Answer Session
Q – Toshiya Hari
And calm things down a little bit. So, again, thank you for coming, Liam. Before we spend more time on some of the longer term, strategic aspects of the business, I was hoping you could give us an update in terms of what you’re seeing in the marketplace today. It’s been a little bit over a month since you reported earnings and gave guidance for September, you guided revenue up in sort of the mid-teens. I think you spoke to December being up, just given the seasonality around your largest customer and what you’re seeing in broad markets. Any changes from a demand perspective, supply perspective?
Liam Griffin
Sure. Yes, I mean ecosystem for us saw, again, volatility today aside, we’ve really seen some great opportunities in our core businesses. We continue to do very well extending technology growth with some of the larger players in the industry really creating a reach now that goes well beyond what you would see two, three, four years ago. We made a lot of investments there too and a lot of capital — a lot of capital investments to put in those positions.
Our customer set has never been wider. By the way the breadth of our customer set has never been wider and the opportunity of technology growth with some of our larger customers have never been better, quite frankly.
And that’s come through with a lot of engineer, lab the fab work in crafting and curating some really unique solutions that can proliferate a number of end markets, that continues to be strong. We’ve also done a very good job, there’s more and more to go on diversification.
We know when the markets want to talk to Skyworks, there’s the mobile side, there’s the diversification side, I’ll tell you that both fronts are in very good position to grow and continue to deliver accretive earnings for us and growth.
On the broad market portfolio, we have tremendous set of diverse customers now that continue to grow, and continue to reach into new end markets. And then on the mobile side, there’s a lot of very unique technology investments that we’re making now, some have already — been already squared away that you’ll see in the next year.
And the opportunity for growth is there. Despite some of the headwinds in the market, we’re going to continue to put up topline strength. Our operating margins right now are in the 40% range, the EBITDA margins are probably like 40% to 42% actually, gross margins a little bit above 50%.
So, businesses solid. We certainly want to drive growth to a higher level, but what we’re doing today and the technology reach that we have and engagements with our key customers, give us a very optimistic view as we see the rest of the year going into 2023.
Toshiya Hari
Got it. Definitely want to come back to the broad markets and your I&A acquisition, which has been going really well. I did want to go through a couple of mobile questions and to kick off, how are you thinking about the smartphone market? I appreciate content tends to be the primary driver of that business, but we spend a lot of time talking about units. What are you seeing in the marketplace in the smartphone market overall? And what are you seeing in 5G specifically?
Liam Griffin
Sure. Well, the smartphone market is a very, very vital piece of technology, the smart smartphone industry is very critical to what we all do. And we continue to see opportunities to get better. We have very unique strategic engagements with customers that matter. We have great people relationships with customers that matter. And there’s a lot of collaboration around how to make things better, not how to make things cheaper, how to make them better, how to wow the outsized accounts.
So, we’ve done a lot of work inside Skyworks, developing bulk acoustic wave technologies, temperature compensated SAW filtering, our homegrown gallium arsenide RF, doing that in our own factories. And the ability to curate that and deliver unique solutions account-by-account is a differentiator and no one does that in our industry, one of the few companies that will do that all the way through a test — assembling test. And it comes with a lot of capital allocation, right, and a lot of investment in CapEx.
One of the benefits though, is a lot of that invested capital is now peaking. So, we should have be able to ride that curve as we look out in 2023, 2024 with the capital investments that we’ve made already. So, there’s some things there that are — don’t always show up in the P&L, but if you go behind the curtain and look at what we’re doing in terms of cash, and how we’re investing that and bringing in new technologies and solutions.
The larger customers, they want to see that, they want to partner, they want a company that says, listen, let’s work together to make something amazing and not worry about the nip-tuck of $0.05 here and there, we’re talking about big strategic moves, and how we can do that together. And I think it’s one of the things that has put us in a position to have such a strong mobile portfolio. It’s diverse and it’s very large, but it really was a homegrown technology, and with a lot of coaching and a lot of collaboration with our partners to get that right. And there’s tremendous upside from here. We’re nowhere close to where the market can be in terms of mobility.
Toshiya Hari
Got it. And then Liam, question on sort of the largest customer that you have. Understand, I don’t want to get too specific here, but I think the market tends to see that concentration on the P&L, and oftentimes discounts your stock. But in reality, you’ve executed really, really well. And you guys doubling down on that customer has been a home run.
You’ve got a lot of content in their high end phones, you’ve got the low band, you’ve got the diversity path, you’ve got ultra-high band. As you think about that relationship and the outlook over the next couple of years, what kind of growth — content growth are you contemplating?
Liam Griffin
Yes, I think you’re going to have a couple of things. We look at the physical device of a mobile phone and that kind of creates its own imagery and portfolio management play and that’s going to continue. But what we really believe and I think if we all look long at this, it’s the technology that really drives this, it’s not the physical device. So, over time, the wireless technologies as they improve in speed and latency and performance, you move into things like EV, right? You look at ADAS, the electrification of a vehicle, those vectors are in the sweet spot of what we do.
It’s wireless, right? We can call it whatever we want, but it’s essential, high performance, incredibly reliable technology. And that can play in so many end markets, happens to be smartphone-centric today, but think about all the opportunities that are coming forward in IoT, in automotive, in data center even, right. So, that part of our portfolio is just really starting to lift off.
And if you look at our mix, when we look at broad market and mobile, you can see that our broad market business has done really well. It’s about 40% of our revenue now. And we’re looking at a $5 billion, $5.5 billion Skyworks. Those are not small numbers.
But the core essential know-how and hard work that we built within wireless, whether whatever the end market code, the technology itself, the vector there is going to be really important. And we think we can take that technology and those vectors to multiple end markets and that’s part of our journey here.
Toshiya Hari
Got it. And then I guess shifting gears a little bit to more of the Android side, which has been problematic for not just you guys, but everyone from a near-term demand perspective. Based on what you reported in the most recent quarter, China as a region is down big time, right? But to your point on the call, it sort of derisked at this point, I think 8% or 9% of total revenue. How do you see that business going over the next couple of quarters? Are we close to trough? How strategic is China for you going forward? If you can kind of touch on those, that would be helpful.
Liam Griffin
No, that’s a great question. And I think there’s been significant changes in the markets in China across the board, not just wireless and not even in tech here, there’s a lot of things that have changed that weren’t anticipated.
For us, we’ve always been a higher end player, even in China and so when we look at the ecosystem that we play with and the key customers that we looked out of China, primarily the OPPO, Vivo, Xiaomi play, they started to erode a little bit and part of it was, in my view, we had these lockdowns or so many things going on in China and the very strong, still did well. The very, very strong players were able to endure that, the U.S. companies, for example, were able to endure some of that headwinds, but some of the smaller players in China, the OPPO, Vivo, Xiaomi that didn’t have enough financial muster to get through it, didn’t do as well.
Now, for the Skyworks team, we had anticipated some of this and we were significantly underweight in the OBX market and that was tactical. We did that for a reason. Are we able to take this scale and the production powder to larger customers? Google right now is a strategic customer for us now. That’s a new name actually, it’s not a new name in the industry, but for mobile, it’s a great company with great opportunity. Samsung, really good returns at Samsung, right?
So, there’s a lot of good stuff happening there and we’d like to play in those areas and those customers are also are much more appreciative of high performance. It’s not just the transaction, they want to do amazing things, they want to be the number one player.
So, we love that and we’d like to be at the table and help everybody to create a great, great outcome. But the OBX, pretty steep declines in that market. Fortunately, we’ve derisked that portion, would love to see it come back into das great, wonderful, we’ll be there. But, you know, I think our team did a really good job of navigating through some of those bumps.
Toshiya Hari
I appreciate that point about perhaps reallocating resources away from your Chinese customers. But when you think about the near-term demand dynamics, is there a point in time, is there a quarter where you feel like things bottomed out and start to turn for the better? Or is there a ton of uncertainty to make that call as it pertains to China specifically?
Liam Griffin
Yes, absolutely. I mean there’s no reason why there couldn’t be a comeback there. There’s no question about that. And also if you take away the brands, you still see a lot of consumption in China for the high end player here in the U.S. So, it isn’t — it’s not a case where there’s no appetite for wireless technology, it’s really about what kind of performance can you get? What will the buyer, the technology seek for? And what are they looking for, right? So, that’s kind of where it goes.
And it felt to me, what we saw was some declines — maybe some declining technology, not as interesting, yet the larger players, the more sophisticated players actually did better on a relative basis. That’s the way we saw it.
Toshiya Hari
Got it.
Liam Griffin
That make sense?
Toshiya Hari
Yes, that’s helpful. And then you just touched on some of the success that Samsung and Google. Can you kind of expand on that and kind of speak to what drove those significant wins?
Liam Griffin
Yes, everybody — it’s a very competitive market and customers go-to-market and go-to — and have their track that they want to pursue and the fortunate thing for us is that we’re a universal donor when it comes to this. And we want to help everybody to do great things in mobility and connectivity, whether it’s a handset, whether it’s IoT, whatever it may be.
And I feel like we are viewed from the customer side as a great company to partner with as we try to develop the solutions for our customer to make amazing products. So, we’re able to do that. And so — but the approaches that we take are very novel, we — it’s not one size fits all, we have to talk about what geographies you are going to roam and what’s important to your customer set.
A Google product is very different than a Samsung product and a Samsung product is different than another player in the U.S. But our approach is very customer-specific. It isn’t a platform that goes — it is a curated customer-specific solution. Now, there are elements of it that are core and that leverage our core technology, our bulk acoustic wave, our TC SAW, our homegrown gallium arsenide, our homegrown assembling and test in-house and our building. And again, 90% of our technologies are curated and built at Skyworks facilities. That’s a great, great opportunity to get flexible and so the conversations that we have truly are one-to-one account-by-account.
And taking into in respect for each — the needs for each one of our partners that we have and try to serve them in the best way possible. And very often collaborate in ways that make their company better and certainly for us to be able to serve. So, it’s a great collaboration. We work on that all the time. We’re a customer-first company for sure and again, the investments that we make in fabs with all the things that have been going on with supply chain, to have your customers come in and look at your facility that’s delivering billions of units a year and high speed, highly automotive, super, super, super high technologies. And our customers can come in and look at that and see it if there’s something that they want differently done, we can make it happen. So, there’s some unique stuff there that really cements a long-term engagement with the players that matter.
Toshiya Hari
Got it. Liam, you just touched on your ball technology, I remember five, six, seven, eight years ago, the lack of ball [ph] technology or the nascency of your technology, was it was a knock on you guys relative to some of your competitors? You’ve made a ton of progress, can you kind of walk us through that journey and what the outlook is going forward?
Liam Griffin
Yes, absolutely. So, filtering technologies are unique, right? They’re not classical semiconductors, right? They’re not silicon-based, for example. And if you look at the journey in mobile, early days, you could use a standard SAW filter, and then you could move up, with performance, you could overlay that with temperature compensation and make it more robust than the TC SAW. And that would bring you up into different levels of spectrum. But to get the highest levels of spectrum, you have to introduce a new technology and that’s bulk acoustic wave and it’s a different structure.
If you look at TC SAW, it’s a laminate kind of thing, right? You’re creating layers and layers and layers in your filter. If you think about bulk acoustic wave, it’s a vertical structure. Very, very different, really hard. That’s why you look at companies that offer that technology, get a premium and they should, because it’s really difficult to do.
So, what we did is we spent a lot of time in our own labs, working on a process that we built with our IP to create a really strong solution there. We have a long way to go. But we’ve made some exceptional progress on this. And bulk acoustic wave can be used in smartphones, it can be used in multiple applications that we see over the — even things like timing, really cool applications that we are just now knocking on the door. But we have the bulk acoustic wave technology today, bulk acoustic technology today, it’s largely going to high end smartphones, but we can scale that and bring it into other markets, too. So, lot what more to come there.
We — again, we did not want get over our skis and talk about how great the technology was until we made it the way we wanted to make it and we’re there now. So, we’re really excited about it, but there’s so much more to go. So, much more to go and many more markets that that we can bring that technology to.
Toshiya Hari
Got it. And then your earlier point from a from a CapEx perspective, it sounded like you’re past the peak from a ball spending perspective, is that the right–?
Liam Griffin
Yes, in general, yes. We’ve been a company that invests, I would say, aggressively in our own facilities, and it helps in the bulk acoustic wave investment with substantial. We’re — for the most part, most of the really hard things were getting through and now it’s just scale. We’ll continue to invest there and again, but the know-how with our technical team, our in house collaboration, ability to pull it — put it all together really matters.
So, I think to net it all out, the big dollars in CapEx right now are behind us. But of course, if things change, right, I mean, there’s opportunities for us to scale as we grow as a company, we would expect to be obviously, bringing out more capital as we go forward. But the big, big jumps in some of these markets that we really weren’t in, a lot of those hurdles have been already met. And that will flow through when you look at the free cash flow margins.
Toshiya Hari
Got it, makes sense. And then shifting gears a little bit. On the broad market side, it’s oftentimes a little confusing from the outside to appreciate what’s growing, what’s not growing.
Liam Griffin
Yes.
Toshiya Hari
Help us understand some of the near-term dynamics and broad markets. I know there’s a supply element in the near-term as well. So, if you can kind of summarize what you’re seeing in that business that would be helpful?
Liam Griffin
Yes, the broad markets business is SAW — has been really, really good and for a while, we really didn’t do a lot of breakouts on our business, we just kind of gave you the full complement of the revenue. But we — in the last year or two, we’ve been talking more about broad and mobile.
If you look at the portfolio right now, the broad markets business is growing at an incredible rate, a lot of opportunity, it’s about 40% of our business right now. And we’re roughly a five — we haven’t finished our fiscal, we’re in the five — 55 [ph] range for company, so a lot of dollars. So, if you look at it, you got a broad markets business, it’s about $2 billion plus, at today’s rate, with a very wide set of customers and applications can names and companies that we never would see names like Tesla, for example, going into the data center; Google on a data center, not just the handset, right, infrastructure business, incredible IoT opportunities, all of these things are building up this broad markets portfolio in ways that are really, really cool and very diversified. It isn’t just broad markets, because it’s not a handset, it’s broad markets and diverse. So, that helps too.
So, you think about a $2 billion highly diversified business. This is broad markets by itself with great technology know-how still leveraging all of those assets that we talked about in the fab, we can — we still do a lot of that crafting in the fab for broad markets. That makes for a very unique recipe for our customers. So, there’s a lot of that going on.
We did the I&A business, we acquired the I&A business from Silicon Labs that has been going incredibly well better than we have very high par to Skyworks. We’re pretty tough on ourselves internally. That portfolio is doing really well. And there’s some really unique elements to it where some of the products that they have are just exceptional, but they haven’t scaled. They haven’t scaled, they haven’t gone to the big, big names in the industry.
What we do? We go big game hunting, that’s kind of our thing at Skyworks and then we go downhill. So, we’ve learned a lot together and taking the best out of both of the portfolios, the core Skyworks and the great things that we got out of the I&A team. So, that’s going to be really cool as we go and so far, it’s been meeting its marks and exceeding its marks on the M&A side. So, that was SAW. Again, more to come on that, but we’re really happy with what we’re foreseeing so far.
Toshiya Hari
Yes, I guess on that point with the I&A acquisition, I guess, what specifically has surprised you to the positive side? And to the extent they’re things where there’s still scope for improvement, what were those things?
Liam Griffin
Yes. Yes, there’s a lot there. First of all, really impressed by the roster of customers, if you just think about the number of counts — customer counts [ph], high quality, there’s a lot of customers that are now, Skywards customers. There’s a lot of markets that we haven’t been in that they’re introducing us to. There’s some places where we’re both in there together, but with different applications. Their timing business is really good. Power isolation and automotive, really, really, really good.
They’ve got some interesting things in audio, they’ve got some interesting things in vehicles. Really cool stuff that we — and so what we’re doing is the same kind of approach at Skyworks, we want to hunt down the most important things and grow them.
It’s nice to have diversification, but you also want to have the ability to grow in a meaningful way. So, there’s been great collaboration with the original Skyworks team and bringing in A&I, the DNA of the big game hunter works very well, when you have a technology, that’s great, but you haven’t taken — right. So, we’re taking some of the really special high performance technologies and opportunities that they brought to us and we’re taking them everywhere, and meeting customers that have never really met that team. So, it’s going to be great.
And leveraging the capital assets that we have too, it doesn’t snap right away, it’s going to take time, but the big investments that we have in Mexicali, in Japan, all these facilities that we own, we’re going to bring that technology here, we’re going to bring it inside Skyworks, we won’t have to go to TSMC every day, or global foundry, we can do a lot of that stuff ourselves. So there’s some really cool things that came about and some, some upside surprises on the SLAB deal. And it’s, you know, it’s really kind of left brain right brain kind of thing here. And when matched up together, it’s been exceptional partnership and we look forward to more as we go forward.
Toshiya Hari
Got it. So, it sounds like in the near-term, it’s more of a cross-sell go-to-market kind of thing from a synergy standpoint, longer term, it’s in sourcing as well as manufacturing, but–
Liam Griffin
Well, yes, but it’s also in R&D. So, if the cross-sell is the end, but there’s also core research and development work going on with some really smart people from the original core Skyworks team and the SLAB team getting together and working on solutions.
So, the cross-sell, yes, that’s good and that’s easy. But there’s also some really good technical work, where — and there’s some really smart engineers that came through that deal as well and we have a great team too. But the collaboration there has been exceptional.
And I’ll be honest with you that wasn’t something that we looked at in the deal and said, this is the reason why we’re doing it. We’re looking at the opportunity, we’re looking at the revenue, looking at EPS, wonderful, but the people side and the know-how really strong, better than we expected.
Toshiya Hari
Got it. And then maybe talk a little bit about the automotive opportunity, I think you called out that business — that part of your business being record high in the quarter, the breadth and the depth perhaps in that business and the outlook on a multi-year cadence?
Liam Griffin
Yes, so, we haven’t done a lot of breaking out the portfolio in terms of dollars, but I’ll give you a ballpark range. We’re hundreds of millions of dollars of automotive revenue, I just tell you that. And I couldn’t tell you that two years ago, but that’s where it is. And the engagements within the vehicle are actually quite diverse. There’s a lot of wireless stuff that you’d expect, right, especially when you’re getting into your ADAS and other drive — other kinds of things.
There’s also some rich timing solutions activity going on there that we work on; power isolation within automotive, big market for us, but the dollars — for us, we look at a couple hundred million dollars, but there’s a lot of growth from there and I think again, the partnership with the SLAB I&A team helped us because it’s just a different way to think about where to go and how to go.
But that’s going to be a meaningful driver for us. We’re really just getting started on this and we’re already putting up a couple hundred million dollars a year. And I would tell you that that’s probably going to be one of the fastest growth areas for us as a company.
And, of course, as you get into autonomous driving, the need for connectivity and wireless technically [ph], zero latency, super high performance, no failure, right? That’s the kind of stuff, when you have that legacy. And that’s kind of our thing that we’ve been doing in wireless, you got to take that to the next level. And we’re the right kind of company to go do that.
I mean, we’re a trusted name, when you think you’re thinking about wireless connectivity, reliability, the speeds, the latencies, the craftsmanship, and the know-how, I think that is going to be a differentiator for us. And that’s revenue that hasn’t happened yet. That hasn’t happened, that’s on the com, but in today’s world, $200 million, $300 million of automotive, and for us is a definitely in the cards. So, — and that’s something again, we weren’t doing much of that a few years back.
Toshiya Hari
And just doing the long design cycles in automotive, I would guess you’ve got pretty decent visibility on a multi-year view, is that fair say or–?
Liam Griffin
It is, it is and like — and we’re still from a market share position, this holds a lot of room for us to go. I mean, this is far from the stature [ph] and this is new stuff for us. But it’s got a pretty strong vector in terms of opportunities.
So, within broad markets, there’s a lot of really cool things we can talk about, really cool stuff. Some of its WiFi enabled, some of the some of that could be long haul stuff, even the infrastructure markets now are getting a little bit better for us too. But automotive, I would say, over the next three to five years could be one of the bigger drivers for us overall.
Toshiya Hari
Got it. Then on consumer WiFi, I think there’s this perception that you guys are over-indexed to that market. And you know, that markets been inflated through the pandemic, and that’s a risk going forward. How would you then kind of address that?
Liam Griffin
Yes, I will. I don’t know how it works with everybody else in this room, but when WiFi is down, it’s a problem in my house to tell you that much. But I mean, it’s still — there are necessary technologies and they’ve gone through their own cycle where we’re seeing WiFi 6, WiFi 7, 7E, 6E, there’s a lot of need for that. And you can look at WiFi as its own cycle, the way you look at 2G, 3G, 4G, you can still get some lower end kind of consumer edge WiFi, and then you can go off to really industrial-grade high speed WiFi, you go all the way up to a 6E solution.
And the appetite for WiFi, the way we see it is still pretty strong. And it has its own cycle similar to a mobile phone type of cycle. So, there’s a lot of dollars to be to be earned there. We have a really good position, we have a real — and no shame in that, we have really good position in that portfolio. It is growing, the usage cases on WiFi are very strong growth, with all the key players in the industry and it can go anywhere from — you can go from low end WiFi that could have at the airport or something go to really industrial-grade enterprise-grade WiFi with redundancy in speeds and latency very, very different as we get into consumer device. We can play through all of that. So, that’s an element within our diversification theme within the broad markets business.
Toshiya Hari
Got it. And Liam, I think supply has been still an issue in broad markets, what are the key pain points today when you expect them to ease? And where are you at from a supply perspective?
Liam Griffin
Yes. In general, we’ve done better than most in the whole supply chain world that we’ve gone through this year and still — we’re still dealing with it, right? And so why would we be better than that? Well, we put a lot of investment in and we have our own facilities, we’re unique to do that — are unique.
And so with that, we are able to kind of navigate some of the challenges, right. But the lion’s share 75% to 80% of the of the product is made in a Skyworks facility, homegrown, whole thing, and we may be limited sometimes just by — sometimes our customers, our customers got 98% of their bill of material ready and 2% of it isn’t there and that 2% could be a problem from — it could be a company, I don’t even know, it doesn’t — it could be a fab issue, could be a downstream fat issue, could be a piece/part problem on the other end, and the customer is saying, hey, I got everything I need, I can’t finish my product, because I’m waiting for this guy over here.
So, that’s the kind of supply chain problem that we’ve had this year. It’s been more around making sure our customers get a complete solution. And we can provide everything that we can do to make it complete, but if there’s some tangential technologies that are short, and that that’s happened, it makes it really hard for the customer, right.
So, I think that’s cleaning up a little bit. We haven’t had too much internal flux and change. But at the same time, when you’re running a fab, you don’t want to turn it on and off, right. You want that to run at a steady pace and high performance. So, a couple of things, headwinds there were customers, like I said, they had orders, they had a delay because they couldn’t get the rest of the materials, that kind of thing stopping and starting.
It’s getting better. It’s definitely getting better. I don’t think we’re through it. And Skyworks isn’t the only company that’s dealing with a lot of these headwinds, but I would look at where we are now. It’s definitely improving.
We also won a lot of customers through this thing. That wasn’t the intention, the intention wasn’t to try to solve all of our partners that have had problems, that’s not really the goal. But when things went wrong, we were the firemen that would go in and fix things we’ve done that. And we’ve been very collaborative with our customer set, and being really open about paths that they wanted to go if there’s an issue, and we’ve had conversations about what’s the best place to go now, if this went this way. And it’s made us a better supplier to our customers. So, that’s going to continue to go.
But we’ve also — we’ve always had a really strong operational edge at Skyworks and I’m proud of that, there’s nothing wrong with that at all. That’s important. At the end of the day, these are physical products that have to work together, and in the efficient and unified as you deliver a complete solution. So, we do a little bit more of that hard head worked than most companies in the space, but it’s another reason why the engagements with really important customers stand tall every year.
Toshiya Hari
Thanks for that. I’m going to pause here, we have about eight minutes left. Any questions from the audience? Raise your hands if you have a question. If not, I’ll keep going.
I guess in terms of how to think about profitability, your gross margin profile has been extremely stable throughout the ups and downs, OpEx leverage has been really, really good. As you think about some of the levers that you can push and pull and some of the mix dynamics and so on and so forth. How are you thinking about gross margins, operating margins over the next couple of years?
Liam Griffin
Yes. No, that’s a good question. I mean, we have a pretty strong position today. But we definitely want to improve. I think I would say the metric that we’d like to get after the first is gross margin. I mean, we have been and be very honest, we’ve been hanging around the 50%, 51% range, 52% in that ballpark.
OP margins have been steadily strong and so 40% — and by the way, we can run that business fine at that level. It’s not — we’re not starving the company. We’re developing world-class products, great people, great talent, making strategic investments in our fabs, all that’s there. So, that’s not — we’ve had some people say, well, your gross margin — well — what 40%, that’s really fine, we can do it, we — this is a high scale, we know how to do that.
By getting at the gross margins, I think that that we know we’re working. And we have great vision on what we can do and how we can handle it. It’s been — this year has also been kind of mucked up a little bit with pricing. That part of the whole supply chain issue, you had a lot of craziness in pricing. We got — we have some partners, I’m not going to name who they are, just contracts, right? We would not — we would never — as long as I’m the CEO, I would never do that, but that was done to us.
But we dealt with it. We figured it out and it created a gross margin headwind, in some cases, but the fact that we had the vast majority of our technology in our house, we were protected.
Now, you got a few little windows that are open every once in a while, you got a problem here, because this supplier couldn’t give it to me, or this supplier will give it to me without 3x price increase, it’s something crazy, right? That kind of stuff had been banged around.
That’s going to clean up, it’s almost done. And that’s when we can get a really good clear view on what our capabilities are on the GM line. Stay vigilant on the OpEx line, there’s no reason we were totally comfortable with that, hit the GM line a little harder, we can do that.
And I think coming through the supply chain issues and the headwinds and the inefficiencies of the market that we’ve all seen, the physical market, not the stock market, we’ve all, in this in this ecosystem, had to kind of deal with it a certain way. I think that’s going to improve pricing. And I think it’s going to improve for the whole industry, the Skyworks aside, I think we’re going to get back to a healthier position. But the pricing dynamics got a little wonky.
We were not a company that would go in and raise price. We had a few little things that we had to do but very, very little compared to what would been pulled on us. And we were able to navigate through that which is in a way it’s a testament of our ability to sort of endure some hardship on — upon the cost side, but we got through that. We don’t want to go through that again, but we’ve learned a little something from it too.
Toshiya Hari
Can we see partners, breaking contracts, you mean jacking up pricing?
Liam Griffin
Yes.
Toshiya Hari
The kind of figures, okay. And then you’ve been cash flow generative throughout, you just talked about perhaps capital intensity peaking and moderating a little bit? How should we think about allocation of cash and capital going forward? You just closed the I&A acquisition, you do talk about diversification further. So, M&A, investing in the organic business, steady growth and dividend buybacks, how do you think about the puts and takes?
Liam Griffin
Yes, there’s a lot more opportunity now than there was a year ago, if you think about it, right and think about valuations and opportunities. We’ve always been great with shareholder returns or the buybacks and dividends and great, we’ve been doing that for a long, long time.
There’s some opportunities now too with M&A given where valuations are, opportunities are. I would also say the confidence in our team, the way that we handled the transaction, the I&A transaction has been great. And hats off to the guys in Texas on that too, really smart, engaged people that were working with us on it.
So, I feel like we have a lot more choice now. The financials in the company are outstanding. I mean if you look at the numbers, I mean look at the free cash flow margin, look at the EBITDA margin, all of that, what’s not outstanding is the multiple today, quite frankly, right, so — and that matters.
That’s my job and our team’s job to do better on that front. But everything’s available right now. I mean it’s — the upside of the situation is choice now, we have choice. We have we have the ability to do more on buybacks, more on dividends, more on M&A. I think M&A, given some of the things that are popping up now, could be a little bit more interesting than it was six months ago.
And we’re — we would be ready to do something if it makes sense. But again, we’re going to be cautious, we’re going to be smart about it, and we’ll work through it. And we also want to continue to grow the business internally. So, it’s actually not a bad decision at the end.
Toshiya Hari
Great. And then I guess in terms of M&A, what do you look for in a company or in a business? What are some of the top three things that you sort of have to tick the box, if you will?
Liam Griffin
Yes, I would say, we want growth and we want purpose in the technology, we want growth, but we want growth that has vibrancy, that has legs, it’s going to be around, it’s going to be relevant. That’s important. I think it’s really important.
We don’t want — we don’t — we will not do deals just to create more topline, there needs to be something strategic, that we really are intrigued and are really excited about because it’s hard — transactions are hard, everybody knows — everybody in the industry knows that, even good deals are hard to do.
But conditions are moving around now to create potentially some different opportunities. And our financial position is very strong, despite what we see in multiples today, the business is strong, the opportunity is strong. And I think we have more choice.
Toshiya Hari
Got it. Is there is there a sharp focus on reducing mobile exposure or is that not necessarily — you talked about liking that market–
Liam Griffin
Yes, I would not — I would definitely not reduce mobile exposures itself. But I would like to see the business grow to a level where mobile would be lower as a percentage. So, we would want — we don’t want mobile — we don’t want mobile smaller in absolute dollar; as a percentage, that’s fine.
Toshiya Hari
Sure. That’s what I meant.
Liam Griffin
You got me? But we also have — I — what happens every year is we do really, really well, a lot of these mobile guys, the broad market business is doing great. But the mobile business is big and design wins there move the needle quite a bit. And the vectors that we’re seeing and not just with the largest customer, but the need for the technology — go back to the very beginning of this thing.
The technology that we’re talking about is essential, it’s vital, people cannot live with. This is really important stuff and it’s going to get more and more difficult. And it’s going to create more and more end applications that we can populate. So, we’re excited about it. But again working on the broad market side, got a great taste of that this year and feel really confident about what we can do as we go forward.
Toshiya Hari
Awesome. In the last 60 seconds plus, anything that we may have missed or based on all the one-on-ones and meetings that you’ve had with investors, anything that we collectively have appreciate or–?
Liam Griffin
Now, what I would say, honestly, for take this mobile broad market hat off for a moment and just look at the business as it is today, the growth rates and we were at $3.1 billion in revenue in the COVID area, and now we’re at like $5.5 billion. Okay, so this is a business that can grow. This is a business that can generate cash. This is a company that has unique technical assets that are very, very different than our peers.
We have some of the best customers in the world and we know how to delight them every day. And we can go with customers that are startups and uplift their business and create an opportunity.
And our teams are fired up about demonstrating that. We know what our stock price looks like and our valuation should be and we’re looking to see that really change as we get through with 2023 and beyond.
Toshiya Hari
Awesome. Liam, thank you so much, thanks for the time.
Liam Griffin
All right. Appreciate it.
Toshiya Hari
Thank you all.
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