SWKS.US (SWKS.US) Q4 conference call: Management says overall tight supply synergy and profit margins are the focus
The Zhitong Finance App learned that SWKS.US (SWKS.US) announced results for the fourth quarter of fiscal year 2026. Both revenue and profit slightly exceeded Wall Street expectations, but since investors were more concerned about the weak outlook for the first fiscal quarter after the merger with Qorvo, the company's stock price fell sharply in after-hours trading. According to financial reports, the company's non-GAAP earnings per share were $1.28, and revenue was US$1.05 billion, which was higher than market expectations of US$1.27 per share and US$1.04 billion in sales. The stock closed at $85.40 during the regular trading session and fell 16.98% to $70.90 after the session.
According to Sijiaxun, revenue for the fourth fiscal quarter increased to US$1,046 billion, which is higher than the median value in the guidance range. Non-GAAP diluted earnings per share were $1.28, which was 1 cent higher than the guideline median value. The gross profit was US$465 million, and the gross profit margin was 44.4%, in line with expectations.
The company claims that its independent business remains steady, with the mobile business accounting for about 60% of revenue and the broad market accounting for about 40%. Wide-market revenue increased 9% year-on-year in the quarter and increased by about 10% for the full fiscal year, driven by demand for data centers, Wi-Fi, and automobiles. Data center revenue increased 90% year over year.
At the time of the announcement of these results, Sijiaxun began operating on a larger scale after completing the merger with Qorvo. Management said the merger gave it a broader product portfolio and a more complete RF front-end platform for smartphones, while expanding its exposure to the faster growing industrial and infrastructure markets.
Comparison of performance and expectations
Sijiaxun surpassed expectations, but the advantage was small. Earnings of $1.28 per share were 0.79% higher than the forecast of $1.27, and revenue of $1.05 billion was 0.96% higher than the forecast of $1.04 billion.
This level of excess of expectations is generally insufficient to drive large stock price fluctuations alone. When investors focus more on the next quarter, markets tend to overlook minor upside surprises, especially in the semiconductor industry, where guidance and profit margin trends are usually more important than the quarter just announced.
In this case, slightly exceeding expectations was overshadowed by the company's outlook for the first quarter after merging with Qorvo. Management indicated that revenue for the December quarter was $1.8 billion to $1.9 billion, with a median non-GAAP earnings per share of about $1.25, which is slightly lower than the quarter just announced. This indicates that even with a clean quarterly performance, the market may still be preparing for a weak pattern in the near future.
The stock price reacted violently. Sijiaxun closed at $85.40 during the regular trading session, up 0.27% from the previous close of $85.17, then fell to $70.90 after the market, down $14.50 from the regular close, or 16.98%.
The after-hours price is still above the 52-week low of $51.93, but it is well below the 52-week high of $92.80. This sharp decline shows that investors are not relieved that profits have exceeded expectations, but are focusing on the recent pace of profit bridging, consolidation costs, and profit margin improvements.
Despite the sell-off, InvestingPro data shows that the stock may be undervalued at current levels, with fair value estimates pointing to potential upside. The company's price-earnings ratio is 44.09 times. InvestingPro suggests that Sijiaxun has raised dividends for 12 consecutive years and maintained a high shareholder return.
Vision and Guidelines
For the December quarter, Sijiaxun forecast revenue of 1.8 billion to 1.9 billion US dollars, with a median value of 1.85 billion US dollars. The company said that at the median value, the outlook includes about US$1.07 billion from the original Jiaxun business and about US$780 million from the original Qorvo business. This will be the last time the company provides this split data.
Management expects non-GAAP gross margin of 46% to 48% and operating expenses of $465 million to $505 million. The company also expects other income and expenditure of about 50 million US dollars, mainly from acquisition financing interest, with an effective tax rate of about 10%.
The company said it remains committed to achieving an annual cost synergy of at least US$500 million brought about by the merger, of which about two-thirds comes from operating expenses and one-third from sales costs. The operating cost synergy effect for FY2027 is expected to be approximately US$150 million, and full annualized revenue will be gradually released in the future.
Over the long term, Sijiaxun will still target a non-GAAP gross profit margin of 50% to 55%, an operating margin of 30% to 35%, and an adjusted EBITDA margin of 35% to 40%.
Here are the highlights of the conference call:
Management statement
Operator: Hi everyone, thank you for your patience. Welcome to the Sijiaxun earnings conference call for the fourth quarter of fiscal year 2026. Currently, all participants are in listen-only mode. We'll have a question and answer session later. If you need to ask a question at that time, press the asterisk key 11 on the phone and you'll hear an automatic reminder that your hand has been raised. To withdraw the question, press the asterisk key 11 again. Please note that today's meeting is being recorded. I'll now leave the conference to today's first speaker, Raji Gill, VP of Investor Relations. Please get started.
Raji Gill, Vice President of Investor Relations, Sijiaxun: Thank you, operator. Good afternoon everyone, and welcome to the Sijiaxun Q4 FY2026 conference call. This is also our first meeting since the merger with Qorvo. I am preparing to speak today with Phil Brace, CEO and President, and Philip Carter, Chief Financial Officer and Senior Vice President. The conference call was webcast and can be accessed from the investor relations section of the company's website skyworks.com. Additionally, the company's preparation statement will be posted on the website soon after the conference. We also published a new company overview presentation in the Investor Relations section of the website, outlining the combined company strategy, market, technology portfolio and investment highlights.
Before we begin, I would like to remind you that our discussions will include statements relating to future results and expectations, which are or may be considered forward-looking statements. Please refer to our earnings press releases and recent SEC documents, including the Form 10-K Annual Report, for risk information that could cause actual results to differ materially from any forward-looking statements made today. Additionally, today's discussion will include non-GAAP financial measures consistent with our past practices. Please refer to the press release in the Investor Relations section of our website for the full reconciliation schedule with GAAP. Explanation of the presentation method: Since the Qorvo transaction was completed on October 5, after the end of our fourth fiscal quarter, our September quarterly results were independent data from Cisco, while the December quarterly outlook was consolidated. Next, I'll leave the meeting to Phil Brace.
Phil Brace, CEO and President, Sijiaxun: Thanks Raji, good afternoon everyone. This is an important moment for the company. On October 5, we completed the merger of Sijiaxun and Qorvo, bringing together more than 60 years of innovation. We now have a larger scale, a broader technology portfolio, and an expanded manufacturing footprint, enabling us to continue to push the boundaries of what is possible. I would like to thank the staff on both sides. Continuing to deliver to customers while the two companies merged was a huge effort, and our team remained focused. This focus on execution continued throughout our last quarter as an independent company.
In the September quarter, Sijiaxun achieved revenue of US$1.05 billion, higher than the median value in the guidance range. Non-GAAP diluted earnings per share were US$1.28, which was 1 cent higher than the median guidance value. Operating expenses were controlled at US$237 million, close to the lower end of the guidance range, and repurchased US$107 million of shares at an average price of US$66.27. This quarter, demand in various terminal markets was healthy, and the order shipment ratio was strong. Timing and power products continue to be highlights, and participation in AI data center design continues to increase. Automotive and industrial design activity is also strong. On the smartphone side, we performed well during the most seasonal quarter, driven by the health needs of our biggest customers and partly offset by the well-known weakness in the Android market.
The broad market business will form part of our diversified growth market categories in the future, achieving revenue of approximately US$416 million, exceeding our expectations. Revenue for the quarter increased 9% year over year and increased by about 10% in FY2026, driven by strong growth in data centers, Wi-Fi, and automobiles, despite continued weakness in the consumer Internet of Things. Consistent with previous quarters, strong demand has been accompanied by a challenging cost environment. Investment costs are still a headwind for profit margins, and we expect this to continue. We are taking steps to mitigate these costs, including optimizing plant loads, securing long-term supply agreements, and continuing to increase prices in a timely manner. Looking forward to the future, we now have a full-stack RF front-end platform for the next generation of smartphones. The focus is clearly biased towards high-end devices, where the RF content is the highest, and this will also be the direction we will continue to focus on. The expansion covers four major long-term growth markets: physical AI, defense, infrastructure, and automotive.
A broader technology portfolio adds RF GaN, higher frequency capabilities, low-voltage power supplies, and wired broadband. The path to an attractive target financial model, Philip will detail. In the future, we will report business in two categories: smartphones and diversified growth markets. Smartphones include our previous mobile business and Qorvo's Premium Cellular Group. Diversified growth markets include our previous broad market business and Qorvo's high-performance simulation and connectivity and sensors group. This is a large and growing segment of the company, with higher than average gross margins and exposure to long-term growth markets. According to the consolidated test preparation criteria, smartphone revenue for the 2026 fiscal year was about 4.6 billion US dollars, down about 11% from the previous year, reflecting the expected decline in Android revenue and the content trends of the largest customers. A wider range of content per device should support more stable performance, as our reliance on a single slot decreases and content opportunities expand.
Looking further ahead, smartphones are becoming the main AI devices, and we believe this supports the continued shift to high-end phones. At the same time, RF complexity is rising again. 5G Advanced and subsequent 6G brought higher power, more transmission and reception paths, new spectrum and satellite connections, all of which required more filtering, more amplification, and more complex antenna solutions. More bands, more paths, and higher performance bring more opportunities for Cisco Communications. According to the consolidated exam preparation criteria, diversified growth market revenue for fiscal year 2026 was about US$2.9 billion, up about 12% year on year, and gross margin was attractive. Let me explain in more detail what diversified growth markets are about. Physical AI and connectivity edge, exceeding $1.6 billion in FY2026, covering edge connected devices, Wi-Fi access points and gateways, IoT devices, and industrial automation and robotics.
As AI inference moves from the cloud to these edge devices, factories, and robots, our wireless connectivity, power management, and power isolation technologies bring more content opportunities to every device. Defense and aerospace, about $500 million, are driven by modernization, space and electronic warfare, and an ever-expanding constellation of satellites. We bring more than 35 years of experience in developing gallium arsenide, gallium nitride, filters, advanced packaging, and a Class 1A trustworthy contract quality. Our products are deployed in the air, land, sea, and space to support the radar, electronic warfare, sensors, and secure communications needs of all branches of the US armed forces and allied forces around the world. Defense customers are also increasingly partnering with us on power solutions to complement our GaN amplifiers to further strengthen our position. Data center and network infrastructure, around $400 million, is our fastest growing market, and we expect this to continue.
In AI data centers, we provide high-precision timing, power isolation from the power grid to the rack, and power management for enterprise-grade SSDs. AI inference is creating a new level of storage. Cars, approximately $340 million, continue to benefit from electrification, connectivity, autonomous driving, and infotainment increasing the content of each vehicle, from telematics and secure access to electric vehicle charging and battery management. We expect these trends to continue. Now update the progress of the integration. We got off to a quick start. The initial integration of the management team has been completed, the human resources systems have been integrated, and we expect the remaining IT integration to be completed in the first half of the 2027 calendar year. We remain fully committed to achieving an annual cost synergy of $500 million or more, of which approximately two-thirds comes from operating expenses and one-third from sales costs.
Operating cost savings will be realized first, and sales cost savings will be gradually released as we optimize our factory layout. We expect profit revenue to be gradually established in FY2027 and biased towards the second half of the year. What I'm most excited about is our expanded engineering capabilities. Our engineers are already collaborating to share ideas and combine technology with the goal of creating products that neither company can build alone. Next, I'll leave the meeting to Philip to present the fourth quarter results and the company's outlook for the first quarter after the merger.
Philip Carter, Chief Financial Officer and Senior Vice President, Sijiaxun: Thanks Phil, good afternoon everyone. Since the deal was completed after the quarter ended, our September quarterly results are independent data from Scarcun. For the fiscal quarter ending October 2, Sijiaxun's revenue was US$1,046 million. For the fiscal quarter ending October 3, Qorvo's revenue was US$937 million, including an additional week, bringing consolidated revenue for the September quarter to approximately US$1.98 billion. Starting with the February earnings call, we will only be reporting on a fully consolidated basis, using smartphones and diversified growth markets as revenue categories, so we will no longer provide detailed data from Jiaxun or Qorvo. In terms of Sijiaxun's independent quarterly results for September, revenue was US$1,046 million, higher than the median value of US$1,035 million in the guidance range.
The mobile business accounts for about 60% of revenue. Driven by the biggest customer's healthy sales in the strongest seasonal quarter, partly offset by the well-known weakness in the Android market, we remain focused on the high-end tier. The broad market accounts for about 40% of revenue, up 9% year over year in the current quarter and about 10% in fiscal 2026, led by strong growth in data centers, Wi-Fi, and automobiles. The largest customer accounts for about 62% of revenue, including non-smartphone products. The gross profit was US$465 million, accounting for 44.4% of revenue, in line with the guidelines. Investment costs are still a headwind. We are offsetting it through cost control and price increases, and gradually through manufacturing synergy as the factory layout is integrated. Operating expenses were $237 million, about $3 million lower than the guideline median value, as we continue to fund key R&D projects while strictly controlling discretionary spending. Operating profit was $227 million, and operating margin was 21.7%. Other income and expenditure was approximately $12.5 million, an effective tax rate of 10%, net profit of $193 million, and non-GAAP diluted earnings per share of $1.28, which was 1 cent higher than the guideline median value. Moving to the balance sheet, we had approximately $2.6 billion in cash and investments at the end of the quarter, and approximately $2.5 billion in debt, reflecting the approximately $2 billion acquisition financing we completed before the Qorvo transaction was completed. Turning to the December quarterly outlook, this is our first quarter as a consolidated company, and we expect revenue of $1.8 billion to $1.9 billion.
On a median basis, this includes approximately US$1.07 billion from Yuansi Jiaxun and approximately US$780 million from the original Qorvo. This will be the last quarter we offer that split. Since Qorvo did not provide guidance while the deal was pending, we wanted to clarify the starting point. Consolidated revenue for the September quarter was approximately $1.98 billion, including Qorvo's additional week of approximately $70 million. Our median outlook was down about 7% month-on-month, and about 3% after excluding an additional week. We expect smartphone revenue to drop by a double-digit percentage month-on-month, reflecting seasonality, the well-known weakness in the Android market (we are still focusing on the high-end tier), and an extra week for Qorvo in the September quarter.
We expect revenue growth in diversified growth markets to be a low single-digit percentage month-on-month, despite an additional week in the previous quarter, with medium to high double-digit year-on-year growth according to the consolidated caliber, accounting for more than 40% of revenue, led by data centers and defense. We expect non-GAAP gross margins of 46% to 48%, reflecting a favorable structural shift towards diversified growth markets, including defense and infrastructure with higher margins. This is partly offset by the continued increase in investment costs, which we expect will continue. Over time, diversified growth market share increases, manufacturing synergy effects, factory load improvements, and price increase actions will support us in achieving our gross margin goals. We anticipate non-GAAP operating expenses of $465 million to $505 million, reflecting the company's continued investment in key roadmaps after the merger.
Including planned performance pay increases, we expect operating expenses to decline quarterly throughout the 2027 fiscal year starting at the December quarter level, as the synergy effect is realized. We expect the majority of profit gains to be realized in the second half of fiscal year 2027. We expect an operating cost synergy of approximately US$150 million in fiscal year 2027 and an annualized operating rate of approximately US$250 million to US$300 million at the end of the year. In terms of offline projects, we expect the median other expenses to be around $50 million, which mainly reflects the full quarterly cost of acquisition financing interest. We expect an effective tax rate of about 10% and about 241 million diluted shares. Based on the median revenue guidance of $1.85 billion, this corresponds to non-GAAP diluted earnings of approximately $1.25 per share.
As the synergy is realized, we remain confident in the profit potential of the combined company. Over the long term, we aim for medium to high-single-digit revenue growth, and achieve non-GAAP gross profit margin of 50% to 55%, non-GAAP operating margin of 30% to 35%, and adjusted EBITDA margin of 35% to 40% after completion of the transaction. Next, I'll return the meeting to Phil for his closing remarks.
Phil Brace, CEO and President, Cisco: Thank you Philip. Before opening up for questions, I'd like to thank our employees, customers, and partners. This is our first quarter as a company, and the team's energy has been outstanding. Engineers from both sides are already working together, and I'm looking forward to the future. After the merger, we are stronger than any independent company; we have more extensive technology, larger scale, and much more room for opportunity. I've never been more excited about the way forward. Operator, please be open to questions.
Q&A session
Operator: Of course. As a reminder, if you need to ask a question, press the asterisk key 11 on your phone and wait for your name to be called. To withdraw the question, press the asterisk key 11 again. To save time, limit your questions to one question and one question. Please wait while we compile the list of questions and answers. The first question came from Karl Ackerman of BNP Paribas. Your line is open, Karl.
Karl Ackerman, Analyst, BNP Paribas: Yes, thanks. Your broad market continues to perform well. Now that the Qorvo deal has been completed, how do you consider the long-term growth rate of the broad market as a consolidated entity? My question is, can you maintain a similar or higher growth rate of the high single digit to low double digit growth forecasts previously given for the December quarter?
Phil Brace, CEO and President, Cisco: Yes. Karl, Thanks for the question. I'm Phil. I'm glad you asked. This is an important part of the mix. I'm glad you mentioned it. If you look at the 2026 consolidated figures, we're talking about $2.9 billion, and physical AI is about $1.6 billion. Defense and aerospace 500 million, data centers and infrastructure 400 million, automobiles 340 million. For me, these are exciting areas of growth and new technology. Currently, quite frankly, all of these businesses are limited in supply, and demand far exceeds our supply capacity. So for the most part, we're doing our best. We're seeing a slight weakness in the Consumer Internet of Things, and I think we've talked about that, but in other markets, supply is really limited right now.
We will work to get as much supply as possible.
Karl Ackerman, Analyst, BNP Paribas: Got it. Thank you. If I may ask, I understand that supply shortages in broad markets were one of the challenges of the past. It sounds like September has narrowed down a bit. Phil, can you elaborate on your ability to obtain more wafers, substrates, or test production capacity, and what else you can do to further seize the demand opportunities facing a wide range of markets. Thank you.
Phil Brace, CEO and President, Cisco: Yes. I think you're right to point that out. Of course, we did a good job in the September quarter. We've improved. We are able to secure some extra supplies for our customers. Of course, our data center business grew 90% year over year. So this continues to grow very well, both in terms of timing and power products. This continues to be the direction of our efforts, right? As I mentioned, the market is tight and we are working hard. Our operations team spent a lot of time focusing on this for obvious reasons.
Operator: The next question comes from B. Craig Ellis of Riley Securities. Craig, your line is open.
Craig Ellis, Analyst, B. Riley Securities: Yes, thanks for asking. Phil, let me start by asking you a long term question. Can you frame it out how you view the long-term model of medium to high single-digit revenue growth, and discuss the expected contribution of smartphones and diversified growth markets — are we maintaining these attractive double-digit growth rates or are we likely to accelerate?
Phil Brace, CEO and President, Cisco: Yes, thank you for asking. If you look at the company we split up, we've been trying to make this clear. We have a smartphone business, which is still a major part of the business. We feel good about its expanded content position. We now have full access to the full RF front end stack, and we really should push for more stability there. I think this is one of the goals we're trying to achieve, which is to reduce volatility per device. We will be biasing our investments towards the high-end segment, where RF content is paramount. We have more content opportunities there. We're trying to get some stability there. So this will be the focus of this business, which really revolves around stability.
We see that as we enter the 5G Advanced and 6G markets, content opportunities will emerge, and more bands, more filters, and more capabilities will be put in place. But in the long run, given the size and scope of the business, we see it as a low single-digit grower. This is our plan. This truly represents high-end growth and RF content opportunities, which are offset by normal factors such as normal integration and price compression. This is how we look at it. The diversified growth market does have four pillars. We talked about physical AI and the connectivity edge, which is currently the biggest part of this business, and is really open to areas such as Wi-Fi, which are good growth segments for us. You see expanding fields such as industrial automation. Defense is a new part for us.
There are real supply constraints there, and I think this type of technology will continue to be an important part in this state of the world. Data centers are our fastest-growing segment. We haven't seen any slowdown in this area. That would also limit supply. We seem to be at a sweet spot in the automotive sector, involving connectivity, infotainment, electric vehicle charging, etc. So, we feel good about the business mix, and we think it supports the growth outlook there. Frankly, we'll try to surpass it, but I think I'm comfortable with that growth outlook now.
Craig Ellis, Analyst, B. Riley Securities: Great. Then ask a question and ask either you or Philip Carter to answer it. Help us understand how you view the path to 50% to 55% gross margin levels. How much comes from sales? How much comes from the structure? What are some of the cost savings from entering the model later in the synergy capture period? Thank you.
Phil Brace, CEO and President, Cisco: Yes, I'll start first, then Philip Carter can add. I think it's a combination of all of these factors. What I think you'll see is that as we continue to make the diversified growth market grow faster than smartphones, you'll see a good structure, which should help increase gross profit margins over time. You'll also see some of the effects of factory integration and other actions. So, I'd say it's a mix of all of these factors. We also have a number of personnel-related actions in this area. I would like to point out that, as I mentioned in my report, this is an inflationary environment. So we do have some headwinds against each other, and we will continue to work to mitigate them.
But that's how we look at it. I don't know, Carter, if you want to--
Yes, that's exactly right. I would like to mention one last point. In the smartphone sector, we are seeing a better structural shift towards high-end devices, as our intention to exit the low-end Android market declines. Yes, that sums it up.
Operator: Next question comes from TD Cowen's Krish Sankar. Krish, your line is open.
Krish Sankar, Analyst, TD Cowen: Yes, hello. Thanks for asking. Two, I have two questions, short term and long term. My first question was shorter, congrats on closing the deal. Looks like your biggest customer decided on RF content in the first quarter of the calendar, and the deal was only completed a month ago, but they probably knew about this deal, and I'm just wondering if this will change their content distribution process this time around, given you're a much larger, much larger RF supplier? What do you think of the future? Then I have a long term problem.
Phil Brace, CEO and President, Cisco: I'm Phil. I'll answer that. No, I don't think their allocation process will change. I do think we're clearly their bigger vendor now, but I don't expect the biggest customers to change their practices. It's still a competitive market for us. I expect this to continue to be the case; we just need to keep executing and delivering. I'd like to say that since we have a diverse portfolio of products, the seasons may be slightly different from what we've seen in the past because some products load in different locations.
I think historically, we'll try to better discuss future seasonal patterns because based on that, there's some variability compared to what we've seen in the past. Then I'd like to reiterate that we now have more content per device, and this should really result in less fluctuation because we have more stability and less single-slot fluctuations, which is exactly what we're trying to push for.
Krish Sankar, Analyst, TD Cowen: Got it. Very helpful. That's a long-term question. I think you mentioned the $150 million synergy for fiscal year 2027, with an operating rate of 250 million to $300 million at the end of the year. I'm just curious what do you think of these synergy effects? How are they distributed between sales costs and operating expenses, and how does the rationalization of the manufacturing layout affect?
Phil Brace, CEO and President, Cisco: I think we mentioned that about two-thirds of the total $500 million is related to operating expenses, and about one-third is related to sales costs. When you consider operating expenses, we commented on the IT integration system in preparation for the speech, and the HR system is complete. Much of this is a matter of time, that is, IT milestones will be achieved in the first half of 2027 as we merge and integrate ERP systems, etc. So in terms of operating expenses, I expect SG&A to be realized first, research and development later, then sales costs will begin immediately. However, most of the sales cost benefits will be realized near the end of the period, as we talked about factory consolidation, etc.
Operator: The next question comes from Morgan Stanley's Joe Moore. Your line is open.
Ella, Analyst, Morgan Stanley: I'm Ella, representing Joe Online. Thank you so much for the question. Now that you're a company and dividends were cancelled last quarter, how do you consider capital allocation between buybacks, deleveraging, and strategic mergers and acquisitions?
Philip Carter, Chief Financial Officer and Senior Vice President, Cisco: I would say, we do remain flexible. We prefer share buybacks. But with acquisition financing, we also want to build a cash balance to look forward to the future. We will maintain discipline in value-added mergers and acquisitions, which can increase gross margins and diversify our base. But we remain flexible. We're excited to see Moody's upgrading us to Baa3 investment level and Fitch stabilizing our outlook. Glad to see that. But as we move forward, we have maintained some flexibility.
Ella, Analyst, Morgan Stanley: Great. My second question, from a high level, if we look ahead to two to three years, what would the success of the merged company look like, and what milestones should we focus on?
Phil Brace, CEO and President, Cisco: Yes, thank you. I think looking ahead to two to three years, I would expect investors to say that we have achieved the operating rate of those synergy effects. I expect to see our diversified growth market continue to grow faster than the smartphone business, thereby making our business more diverse. I think we should be on track to achieve our business model goals, which is 50% to 55% gross profit margin, 30% to 35% operating margin, and 35% to 40% adjusted EBITDA margin. So, a more diverse company, attractive growth segments, excellent financial profile, synergy achieved, and then go all out.
Operator: The next question comes from Jim Schneider of Goldman Sachs. Jim, your line is open.
Jim Schneider, Analyst, Goldman Sachs: Good afternoon. Thanks for asking. I'd like to ask about the inventory levels of your customers, including your biggest customers and the broader Android market, and maybe initially talk about your expectations for smartphone revenue trends in the March quarter.
Philip Carter, Chief Financial Officer and Senior Vice President, Cisco: Yes. Hey Jim. I'm Philip Carter. Yes, we usually only guide one quarter, but looking at the current quarter, we are roughly tracking expectations at the end of the previous quarter in terms of Apple's revenue. We have seen a month-on-month increase in Scarce's largest independent customers. Therefore, as far as units and sales volumes of the largest customers are concerned, there is really no change in the market situation. But that's what I'm saying.
Jim Schneider, Analyst, Goldman Sachs: Great. Thank you. Then maybe a little more detailed. Clearly, the consumer electronics terminal market is weak for various reasons we know. Can you talk about the consumer IoT portion of the broader diversified business and how much headwind it represents in this quarter or guidance? Thank you.
Phil Brace, CEO and President, Cisco: I don't think we'll go into that kind of detail. Jim, if you look at the edge segment of physical AI connectivity, we look there, the Wi-Fi segment continues to grow very well. That continues to grow well. This is offset by other things out there, iPads and other consumer devices, consumer-facing Wi-Fi access points, etc. So there's a lot of different stuff out there, and I think this is ongoing, but our Wi-Fi continues to grow well, and there are other weak parts there.
Raji Gill, Vice President of Investor Relations, Cisco: Yes, I'm Raji. Just add it. With the independent caliber of Scarlett alone, our broad market business grew 10% year-on-year, despite the weakness of the Consumer Internet of Things. Our growth engines, whether Wi-Fi, data centers, or automobiles, grew more than 25% year over year. So we're seeing massive growth in these markets. As a consolidated entity, we have confidence in the long-term growth rate of a diversified growth market, driven by defense, data centers, and automobiles. So we're excited about the growth trajectory of that business.
Operator: The next question comes from Edward Snyder of Charter Equity Research. Edward, your line is open.
Edward Snyder, Analyst, Charter Equity Research: Thanks. According to your reports, it appears that the largest independent customer base of Cisco is declining by about 12% per year. If you subtract the broad market, it's probably slightly better than that, about 10%, which is interesting because the unit declined much more year over year due to staggered releases. This seems to indicate that maybe your content on the models released this year is slightly better than last year. I just wanted to clarify that. Given the different launch plans, this seems like an indication that I know you're not guiding March, but why shouldn't I expect you to perform better than seasonal in terms of at least your biggest customers during March?
Phil Brace, CEO and President, Cisco: Yes, Ed, thanks for the question. I'm sure you'll appreciate the subtlety of my answer, right? It's very difficult. We can't actually review individual SKUs. I think we're sticking with what we said before about content and content combinations. The guidelines reflect our views for the current quarter. As you know, depending on how specific models are shipped and sold and how time unfolds, that's how things unfold. Our guidance reflects what we believe is the quarterly situation, and we will continue to do so. We really can't comment on how the model will evolve or individual SKUs and circumstances. We can't comment.
Edward Snyder, Analyst, Charter Equity Research: Okay. But over the past few quarters, you said you expected the fiscal year to be relatively flat, right? Am I understanding it right?
Phil Brace, CEO and President, Cisco: Yes.
Edward Snyder, Analyst, Charter Equity Research: Okay. You seem to be doing better at this stage, given everything in this area. I'm just saying that you haven't changed your fiscal year guidelines. We just have to see how the results develop. This is probably what we should --
Phil Brace, CEO and President, Cisco: Yes, I think that's fair. Look, there's a lot of turmoil. I mean, you know, there's a lot of turbulence in the market on this topic, and I think we're just trying to guide one quarter at a time. We feel good about where we are. We are confident in our technical foundation. We've had great feedback, and we'll continue to guide you step by step, quarter at a time.
Operator: The next question comes from RBC Capital Markets' Srini Pajjuri. Your line is open.
Srini Pajjuri, Analyst, RBC Capital Markets: Thank you. I also congratulate you on closing the deal. Phil, a question about gross margin. Regarding the internal factory, now as a consolidated entity, can you give us some idea of the level of utilization and where you expect it to go? Similarly, you talked about tight supply and cost inflation. What are your thoughts on passing on some of the cost increases, particularly in a rapidly growing market?
Philip Carter, Chief Financial Officer and Senior Vice President, Cisco: Yes. As you can imagine, as two independent companies, you can only optimize the layout to a certain extent. But as a single consolidated company, we can do much more in terms of technology, reduce our footprint, and improve utilization. So we're going through this process, as Phil mentioned in his statement. Integrating factory layouts, reviewing technology, and merging takes longer. Regarding the cost of passing on, Phil talked about cost headwinds. We're seeing this continue. In diverse fields, we are able to transfer more quickly and over time. In the mobile smartphone sector, this is even more challenging because those are annual contracts, sometimes two-year things.
It's a bit harder to pass on costs in that market, and we continue to see these cost headwinds coming season by season. But yes, as Phil mentioned, we've signed some deposits and prepayments with some suppliers to lock in costs and secure production capacity to reduce some shortages and headwinds. That's what we're doing today.
Srini Pajjuri, Analyst, RBC Capital Markets: Thank you. So ask Android. Obviously very weak, as we all know. Qorvo is quitting some low-end Androids. I'm curious where we are in this process, maybe qualitatively speaking about Android currently accounting for roughly the percentage of mobile sales, and then if Qorvo is still leaving the lower end of this business, where do you think the Android business has bottomed out? Sorry, thank you.
Philip Carter, Chief Financial Officer and Senior Vice President, Cisco: Yes. Great question. Yes, looking at the Android business, and Qorvo's business in particular, we are leading Qorvo to drop 17%. Excluding an additional week, a 10% drop. Among them, the Android business declined by more than 20% month-on-month, right? So we're seeing a decline in Android business. Looking ahead to 2027, as can be seen so far, it seems that the Android sector may be bottoming out. In the future, it should account for less than 10% of our overall smartphone business. So we do think that visibility bottoms out in the upcoming fiscal year, and this will increasingly be a smaller portion of our revenue.
Operator: The next question comes from Barclays' Tom O'Malley. Your line is open.
Kyle Bleustein, Analyst, Barclays: Hey guys. I'm Kyle Bleustein, representing Tom O'Malley. Thanks for asking. I'd like to learn more about some gross margin targets. Your guide expanded significantly to the 50% to 55% range. When I consider the overall market, there are many cost increases and varying pressures from memory. I want to take a look at the short term. Can you comment on the gross profit margin for FY2027 and consider some pressure on the market?
Philip Carter, Chief Financial Officer and Senior Vice President, Cisco: Yes. I'd say, as Phil mentioned before, in the early part of FY2027, we were quarterly at a time, but at a high level, I'd say early 2027, where prices increased later in the fiscal year because costs came early, and early profit margins were lower, but as the 2027 fiscal year progresses, we'll start to see expansion. In addition to that, as we just mentioned, the structural shift between the low-end Android business and the rest of the smartphone business will continue throughout the year. Furthermore, the gross margin of diversified businesses is higher than the company average and will continue to expand at a low double-digit rate over time.
This combination will increase our profit margins, and then as we exit this year into 2028 and beyond, the synergy effect will begin to actually improve our gross margin, which is how we reach our 50% to 55% gross margin target.
Kyle Bleustein, Analyst, Barclays: Thanks. My question is, I think you'll comment earlier on the phone that the content of each device is rising. I want to confirm, is this the test preparation standard for the merged entity? When you add Sijiaxun and Qorvo, does the content grow beyond the existing basic mix? Based on this, when do you consider some of the 5G Advanced reviews, when will they be superimposed? How big is the increase in content likely?
Phil Brace, CEO and President, Cisco: Well, I think our overall SAM increased because we added new capabilities, right, antenna tuners, PMICs, products we don't have today. So the SAM on every device has increased, so naturally our content has also increased. Looking ahead, I'd say, for the first time in many years, we're starting to see content coming smoothly, with more transmission bands, more reception bands, more satellite bands, and more power devices. So we're seeing fine with the content, and more filters we haven't seen before. This is offset by consolidation, competitive dynamics, etc. We need execution to deliver, but that's how we look at the future.
I think the other part, because we have more slots per device, single slot volatility should be drastically reduced, which should provide more stability to this business, and I think this is very important.
Operator: The next question comes from Bank of America's Vivek Arya. Your line is open.
Vivek Arya, Analyst, Bank of America: Hi. Yes, I'm Vivek. Thanks for asking. You've mentioned opportunities to merge companies, but I'd like you to elaborate on the specific opportunities you're most excited about on iOS and Android, and where the biggest upside compared to each is. Thank you.
Phil Brace, CEO and President, Cisco: Well, one of these things, I think a few weeks ago, we had the opportunity to bring together the best and brightest engineers from both sides. These are areas that we will not be able to talk about during the waiting period, and the reason is obvious. We brought the best engineers together for the first time, and I have to say, I'm really excited about the energy in the room. I think we have the broadest, if not the broadest range of RF talent in the industry. We now have the ability to have a complete RF signal chain. So I'm really looking forward to the opportunity for our customers to have a more comprehensive solution. I think it's still early.
This is something we haven't really talked about; let's call it product collaboration, upward collaboration, and revenue collaboration. When we underwrote this deal, frankly, it was based on cost synergy, and I'm really excited to see what the engineers will come up with. Then we have the same opportunities to diversify our growth markets. Imagine we could expand into a few other products in defense and aerospace. How can we expand the mix there? So, I think there are plenty of opportunities. It's still early. Honestly, I don't want to be too hasty when talking about this because I want engineers to go through a cycle of innovation and get feedback from customers. But I'll say, early on, I was very optimistic about the possible results.
Vivek Arya, Analyst, Bank of America: Awesome. Thank you. Given that your biggest customer recently reached a long-term agreement with a competitor, since you now have a full front-end stack, are your mid- to near-term addressable TAMs still the same? Are there any slots that merger companies can compete in that Skaxun or Qorvo can't compete on their own?
Phil Brace, CEO and President, Cisco: I think we think this is somewhat related to previous developments. That business will always be a competitive one. The competitive environment continues to exist there. Obviously, with the competitive environment, the number of suppliers in this area has changed. However, it's still a competitive environment, and we still need to execute and deliver. Our customer, the biggest customer, won't suddenly hand over the business to us because we have merged now. We need to keep winning it, winning it every day, and we have thousands of people working hard to do it.
Operator: The next question comes from Susquehanna's Christopher Rolland. Your line is open.
Christopher Rolland, Analyst, Susquehanna: Thanks for the questions, everyone, and congratulations on closing the deal. I think my first question is that Qorvo has been in a state of uncertainty for some time during the regulatory period. What do you think the acquired asset, and the pros and cons since it was actually in an uncertain state, which businesses may have improved a bit and which have deteriorated a bit because we haven't received any Qorvo updates during that time?
Phil Brace, CEO and President, Cisco: Yes, I would look at it from a senior level perspective, and I wouldn't necessarily describe it as better or worse. I'm just talking about what we've seen. Obviously, there are some things. I think overall, when we look at it, it's been less than a month now. What I'm most excited about is the defense and aerospace aspects. I thought that was super exciting. What I'm most excited about is the smartphone's RF side combination, and what can we do together there. I think that's really great, there are lots of fun opportunities. We knew there were a few things to do there because we had more RF signal chains at another major customer, so we knew there were a few things we could do. So I'm excited about it.
I think in another area, if you look at it, the other thing that happened is that the Android market has changed quite a bit since we announced the deal more than a year ago, right? There is a shortage of memory, the Android market, there is a lot of turmoil in that field. This has been widely discussed for years. So I'll say, we're seeing that part of the business speed decelerate faster, and in the end, it's actually not bad. This is a richer business structure. So I don't mind this shift. In fact, I might like it. It's just a dynamic change, right? That's all I'm saying.
Christopher Rolland, Analyst, Susquehanna: Great. So let's get into the modeling details a little bit so I can understand. So if I understand correctly, in the December quarter, there was little or no synergy, so that should be a clean base, especially operating expenses. Then I think you're saying that to exit this year, we should use the $250 million to $300 million synergy as the exit rate. So, I think this leaves very little in terms of operating expenses, maybe $50 million after this fiscal year, if I understand correctly. Finally, with regard to one-third of the cost of goods sold, should we put it all in fiscal year 2028, or how should we deal with it?
Philip Carter, Chief Financial Officer and Senior Vice President, Cisco: Yes. I'm Carter. Starting with the operating cost synergy, in your opinion, yes, when you see that we expect $150 million to roll over the year, that's definitely back-end loading. We do see a path where operating expenses can fall quarterly throughout the year, including performance pay increases during our year. So we saw earnings improve as they progressed throughout the year. Regarding cost of goods sold synergies, yes, I think they are after this year — there will be some cost of goods sold synergy this year. They may be overshadowed by those cost increases, but we are taking action and acting decisively to ensure that we closely monitor all costs in the cost of goods sold. It's just that they're overshadowed by the increases Phil talks about. But operating expense synergies, and you'll see them grow over time.
Yes, I think you're accurate.
Christopher Rolland, Analyst, Susquehanna: Okay, interesting. Thank you.
Operator: Now I want to return the meeting to Phil Brace for his closing remarks.
Phil Brace, CEO and President, Cisco: Very good. I'd like to thank everyone for attending the conference call today, and we look forward to seeing you all at various meetings this quarter. Thank you.
Operator: That's the end of today's program. Thanks for participating. You can now disconnect.