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We have downgraded our long-term recommendation on Skyworks Solutions, Inc. (SWKS - Analyst Report) to Underperform from Neutral based on its fourth quarter 2012 results.

Skyworks Solutions reported a net income of 44 cents per share in the fourth quarter of fiscal 2012 (excluding acquisition-related charges but including stock-based compensation expense), beating the Zacks Consensus Estimate by a penny.
Although the results were marginally ahead of the estimates, the company’s guidance was disappointing, and margins continue to be under pressure. 
For the fourth quarter of 2012, gross margin came in at 42.9%, slightly down from 43.2% in the previous quarter and 44.7% in the year-ago quarter. Operating margin came in at 24.6% versus 23.6% in the previous quarter and 27.2% in the year-ago quarter.
Going forward, Skyworks expects revenues of approximately $450 in the first quarter of fiscal 2013, up 14% year over year and 7% sequentially, driven by new platform wins and design momentum.
Gross margin is projected at around 43.0%. Management expects gross margin to improve as the company benefits from current capital investments and ramp up of margin accretive products like SkyOne, SkyHi along with its portfolio of high-performance analog products. Operating margin is anticipated to be approximately 25%. Skyworks expects earnings per share of 54 cents in the first quarter.
However, 7 out of the 8 analysts covering the stock have reduced their estimates for fiscal 2013 leading to a decline in annual earnings estimates. 
For 2014, earnings estimates have declined significantly as 2 out of 4 analysts have reduced their earnings estimates in the last few days. 
Our Take 
The weak economic environment will adversely impact demand at customers leading to a contraction in growth rates. We are also a bit wary of the ramp up at Samsung given the macroeconomic uncertainty.
As other handset players such as RF Micro Devices (RFMD - Snapshot Report) and TriQuint Semiconductor (TQNT - Analyst Report) gear up to capitalize on the increasing demand for smartphones, we expect pricing pressure to intensify in the market leading to a decline in margins.  
Our Underperform recommendation is supported by a Zacks #4 Rank, which translates into a short-term rating of Sell. 

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