Skyworks Solutions retains 'BBB+' rating, outlook revised to negative at Fitch
Investing.com -- Fitch Ratings has confirmed the Long-Term Issuer Default Rating and Senior Unsecured Ratings for Skyworks Solutions (NASDAQ: SWKS ), Inc. at 'BBB+'. However, the Rating Outlook has been revised from Stable to Negative, as announced on Thursday, February 13, 2025.
This adjustment in the Rating Outlook is due to Fitch's concerns about escalating competition among radio frequency (RF) suppliers. Skyworks' recent guidance to lower chip content in Apple (NASDAQ: AAPL )'s next-generation smartphone, its largest customer, is a significant factor in this change. The anticipated decrease in chip content could result in structural share losses for Skyworks, which may outweigh the company's conservative financial policies.
Skyworks' customer concentration risk is highlighted by the intensifying competition in RF sockets for iPhones. The revenue from iPhones accounts for half to two-thirds of Skyworks' consolidated annual revenue. However, top RF smartphone suppliers are increasingly competing for each other's previously unchallenged market share. Skyworks has predicted a content share loss in the next generation iPhone, which will reduce shipments to Apple by 20%-25% starting in the fourth quarter of fiscal 2025.
On a positive note, Skyworks is diversifying its long-term revenue through the growth of connectivity solutions in a wide range of applications other than smartphones. These include datacenters, internet of things (IoT), industrial, and automotive applications. These sectors, which made up 31% of Skyworks' revenue in FY24, are expected to drive the company's return to positive revenue growth in fiscal 2027.
Despite the forecasted decrease in revenue, Skyworks' public commitment to maintaining an EBITDA leverage target below 1.0x is seen as conservative for the rating. This commitment helps to mitigate the high technology risk, customer concentration, and investment intensity. Skyworks plans to use its Free Cash Flow (FCF) for share repurchases and smaller acquisitions, with larger debt-funded deals being less likely due to increased regulatory scrutiny.
Skyworks' internal manufacturing and diversified supply chain are competitive advantages that the company leverages in non-smartphone markets. Its vertical integration allows Skyworks to differentiate with specialized internal manufacturing capabilities, supply chain resilience, and strategic relationships to develop advanced technologies across a variety of applications.
Skyworks is expected to maintain high levels of investment to support its technological lead and internal manufacturing capabilities.
Fitch views Skyworks' credit profiles as in line with peers Broadcom (NASDAQ: AVGO ) Inc. (BBB/Positive), NXP (NASDAQ: NXPI ) Semiconductor N.V. (BBB+/Stable), and Qorvo Inc (NASDAQ: QRVO ). (BBB+/Stable).
Factors that could lead to a negative rating action or downgrade include loss of a major customer or design slots, or a loosening of commitment to financial policies. On the other hand, improved diversification or an increased addressable customer base could lead to a positive rating action or upgrade.
As of December 27, 2024, Skyworks' liquidity was solid, supported by $1.8 billion of cash and cash equivalents, and an undrawn $750 million revolving credit facility expiring on July 26, 2026. Fitch's forecast of $400 million to $600 million of annual FCF through the forecast also supports liquidity.
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