Skyworks Solutions Inc. SWKS delivered second-quarter fiscal 2018 non-GAAP earnings of $1.64 per share, which beat the Zacks Consensus Estimate by 4 cents. The figure improved 13.1% from the year-ago quarter but declined 13.1% on a sequential basis.

Revenues of $913.4 million were up 7.2% year over year but down 13.2% sequentially. The reported figure missed the Zacks Consensus Estimate of $914 million.

Both earnings and revenues came ahead of management’s guidance. The better-than-expected performance was driven by worldwide demand for its wireless communications engines. The results reflected Skyworks’ growing clout in the connectivity solutions and 5G markets. Meanwhile, the company’s solutions continue to capture strategic design wins across the broad markets.

Adoption of Connected Home Solutions: Key Catalyst

The emergence of connected homes, autonomous vehicles, artificial intelligence (AI), augmented reality, wearables and network infrastructure presents significant growth opportunity for Skyworks’ connectivity solutions.

In the quarter, Skyworks powered connected home and virtual assistant systems at Bosch, Amazon, GE, AT&T/DIRECTV, Netgear, Sonos and Google.

Across broad markets, the company ramped Wi-Fi, fully-integrated Zigbee and Thread devices for Nest’s portfolio of video doorbells.

Further, management is elated that world’s largest automotive manufacturer leveraged its connectivity solutions.

Other Developments in the Quarter

In the wearables segment, Skyworks supported Forerunner fitness smartwatches for Garmin. The company also enabled Honeywell’s LTE handheld enterprise hubs. The company witnessed additional design wins for its high-speed mesh networks at Belkin.

The company partnered major European network infrastructure suppliers to support small cell deployments in the quarter including Verizon, AT&T, Vodafone and T-Mobile. It furnished massive MIMO solutions to India’s largest network carrier.

The company launched a new suit of network-driven solution that supports wireless 5G networks, called Sky5. Notably, Sky5 solution is a platform that deals with revolutionary 5G applications. Across high-performance computing markets, Skyworks has commenced volume production of SkyOne Ultra.

The company witnessed dominant mobile customers leveraging its precision antenna tuners, DRx modules, SkyOne and SkyBlue which aided the top line.

Margin Details

Non-GAAP gross margin expanded 30 basis points (bps) on a year-over-year basis and contracted 70 bps sequentially to 50.7%. The year-over-year improvement can be attributed to higher revenues and unit volumes, improving operating efficiency and filter in-sourcing.

Research & development (R&D) expenses, as percentage of revenues, increased 120 bps year over year and 240 bps sequentially to 11.7%. Selling, general & administrative (SG&A) expenses expanded 70 bps from the year-ago quarter and 140 bps sequentially to 4.9%.

As a result, non-GAAP operating margin contracted 40 bps on a year-over-year basis and 310 bps sequentially to 36.3% in the reported quarter.

Balance Sheet & Cash Flow

As of Mar 30, 2018, cash & cash equivalents were $1.88 billion, up from $1.68 billion in the previous quarter. Cash flow from operating activities was $434.2 million, up from $360.8 million in the previous quarter and $228.7 in the year-ago quarter.

The company declared a cash dividend of 32 cents per share in the second quarter, payable on Jun 12, 2018. It paid dividend of $58.4 million and repurchased 1 million shares for a total of $111.7 million.

Skyworks Solutions, Inc. Price, Consensus and EPS Surprise

Skyworks Solutions, Inc. Price, Consensus and EPS Surprise | Skyworks Solutions, Inc. Quote

Guidance

For third-quarter fiscal 2018, revenues are projected to be in the range of $875-$900 million. The mid-point figure is anticipated to miss the Zacks Consensus Estimate of $941.9 million.

Non-GAAP earnings are expected to be $1.59 per share, up 1.3% year over year and down 3% sequentially. The Zacks Consensus Estimate is currently pegged at $1.65.

Gross margin is expected in the range of 50.7-51%, relatively flat sequentially. Operating expenses are also projected to remain flat sequentially.

Conclusion

This Zacks Rank #4 (Sell) stock is currently plagued by trade restrictions imposed by the U.S. government on ZTE. Management anticipates that it will hurt third-quarter revenues by $25-$30 million.

Furthermore, the near-term softness witnessed across leading smart-phone customers keeps the analysts cautious. Overdependence on Apple AAPL for revenue generation continues to be a major headwind for the company. The company generates around 40% of its revenues by selling radio frequency chips, which are used in iPhone devices. Sequential decline reported in iPhone unit sales is likely to impact its performance, going forward.

However, management remains optimistic on Skyworks’ expanding product portfolio and new customer wins to keep revenues churning and help its gross margins improve to achieve long-term target of 53%.

Key Picks

A couple of better-ranked stocks in the broader technology sector are Western Digital Corporation WDC and Mellanox Technologies, Ltd. MLNX, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Western Digital and Mellanox are projected at 19% and 15%, respectively.

Today’s Stocks from Zacks’ Hottest Strategies

It’s hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 – 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we’re willing to share their latest stocks with you without cost or obligation.

See Them Free>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Western Digital Corporation (WDC): Free Stock Analysis Report
 
Skyworks Solutions, Inc. (SWKS): Free Stock Analysis Report
 
Apple Inc. (AAPL): Free Stock Analysis Report
 
Mellanox Technologies, Ltd. (MLNX): Free Stock Analysis Report
 
To read this article on Zacks.com click here.