Silicon Laboratories Inc (SLAB) 2002 Q1 法說會逐字稿

Good afternoon. Thank you for joining the Silicon Laboratories' first quarter 2002 earnings release conference call. Today's call is being recorded at the request of Silicon Laboratories. All participants will be able to listen only until the question and answer portion of the call.

And to ask a question, please press star, one. I would now like to turn the call over to Christie Stout. You may begin.

Thank you. Good afternoon. This is Christie Stout, director of corporate communications at Silicon Laboratories. Thank you for joining us today to discuss the company's financial results for the first quarter of 2002. The financial press release is now available on our Web site which is www.silab.com.

This call is being simulcast and will be archived on our Web site at streetevents.com. There will also be a telephone replay available approximately one hour after the completion of the call at 877-675-5901 until May 22.

We have with us Nav Sooch, chairman and CEO, John McGovern, chief financial officer, and Dan Artusi, chief operating officer. Now to summarize our results, John will give a more detailed financial presentation and then Nav will close the presentation with a discussion of our current outlook and guidance for the second quarter.

Dan will join Nav and John in a question and answer session after the presentation.

As we begin, let me make a comment regarding the safe harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments and presentation today will include forward-looking statements or projections that involve substantial risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call.

This information will likely change over time. By discussing the current perception of our market and the future performance of Silicon Laboratories and our products with you today, we are not undertaking an obligation to provide updates in the future. There are a variety of factors that we may not be able to accurately predict or control but could have a material adverse effect on our business, operating results or financial conditions.

The company's FCC filings identify important factors that could cause actual results to differ materially from those contained in any forward looking statement, and now I would like to introduce Silicon Laboratories' chairman and CEO, Nav Sooch.

Thanks, Christie. We're pleased to report that first quarter revenues increased 22 percent sequentially to $28.8 million from $23.6 million in the first quarter. Adjusting that income for the first quarter, excluding a non-cash charge, was $1.7 million, resulting in adjusted earnings per share of three cents.

This is our fourth sequential double digit increase in revenues, and our second sequential profitable quarter. We're especially pleased to see wireless revenues grow by 38 percent sequentially in Q1. Overall, our revenues this quarter represent a doubling of first-quarter revenues one year ago, and are on par with our biggest quarter, the fourth quarter of 2000.

However, unlike that peak quarter in 2000, our revenue stream now has a well-balanced mix of products and customers so we are less reliant on . I'll discuss our latest business developments after John reviews the first quarter 2002 financial information.

John?

Thank you, Nav. Our revenues of $28.8 million for the first quarter of 2002 represent a 22 percent increase over fourth-quarter revenues of $23.6 million. Gross margin for the first quarter was 58.1 percent compared to the fourth quarter level of $59.4 percent. Operating expenses, before a non-cash charge, grew to 14.7 million compared to $13.6 million in the fourth quarter of 2001.

Research and development expenses for the first quarter increased to $8 million. general and administrative expense was $6.7 million, which is sequentially than the $5.9 million reported for the fourth quarter. Adjusted net income for the first quarter was $1.7 million, resulting in adjusted earnings per share of 3 cents. This is sequentially level for the first quarter results but represents an improved operating level because of the year-end tax benefits enjoyed in the fourth quarter.

For the first quarter of 2002, net income, including a non-cash charge, was $356 thousand or one cent per share versus a net loss of $4.6 million in the comparable quarter of 2001. During the first quarter, our pro forma effective tax rate was 29 percent. The company employee count increased from 279 employees at the end of the fourth quarter to 300 employees at the end of Q1.

Our balance sheet remains strong, and the company was cash positive for the quarter. Cash and investments totaled $104.2 million at the end of the first quarter, an increase over the full quarter of $101.2 million. Accounts receivable continued solid financial performance at 42 days. Days of inventory at the end of the first quarter were 44, a significant improvement over one year ago.

Our continued new product roll out efforts drove capital equipment purchases to $8.5 billion in Q1. We have significantly expanded our in-house test capabilities with the addition of several new testers to accommodate the early ramp in volumes. We anticipate additional capital expenditures throughout the year as we continue to expand our test capacity in support of new product ramps.

An approximate breakdown of first quarter revenue by area is as follows: wireline 19.6 million or 68 percent, wireless 9 million or 31 percent, and optical $300,000 or 1 percent. I will now turn to the discussion back over to Nav for a review of product development and the current outlook.

Thanks, John. We're pleased to continue our growth trend for our fourth sequential double-digit percentage increase in revenues, accompanied by profitability. We have diversified our business to reduce the impact of the actions of a single customer or product area. In the first quarter, represent 31 percent of overall revenues and included meaningful revenue contribution from the .

We're now in full production with the and shipped nearly 200,000 chipsets to multiple GSM handset and module customers in Q1. During the quarter, we announced that the first of several handsets from Samsung passed full type approval or FTA, which is a significant milestone in production readiness, that indicates that a handset is entering full production.

In addition to Samsung, we have three other customers who have passed FTA, including two leading module makers and eight additional customers who are at earlier stages of the design process with . We anticipate that will see significant volume during Q2 as new customers continue to ramp into production. We expect to ship well over 1 million chip sets in Q2.

This fast ramp is well ahead of schedule and has caused us to rapidly expand our manufacturing capability. As a result, we're still optimizing the cost structure for . We expect that gross margins for in the second quarter will be around 40 percent.

Long term, we expect that gross margins will improve to approximately 50 percent. This improvement will result from continued streamlining of our manufacturing processes, including improved yields, increased test equipment utilization and material cost reductions.

The RF Synthesizer business continues to grow, and we shipped 5 million synthesizers during the quarter. This growth is primarily among leading GSM handset manufacturers, but we continue to grow the synthesizer business outside of the GSM handset market as business increased in the , satellite radio and wireless LAN areas.

The wireless LAN business is part of the RF micro devices reference design, which has gained wide acceptance in Taiwan.

While is clearly an important area for us and we're very enthusiastic about its outlook, we remain excited about the technological leadership and revenue contribution from our other product areas.

The wireline products, led by the Silicon DAA, are continuing to grow and represent two-thirds of our business in Q1. We ship our DAA solutions to five of the industry's six soft modem suppliers, and DAA revenue growth in Q1 included continued penetration into leading , particularly in the portable sector.

This business will continue to be a strong revenue contributor as we roll out next generation DAAs and cultivate new customer designs outside of the PC space, including Panasonic fax machines, Nortel PBXs, Polycom video conferencing equipment and Pitney Bowes postal meters.

The ISOmodem continues to gain strong adoption among satellite set top box manufacturers. However, we anticipate that the higher speed ISOmodems, introduced in late 2001, will drive the product family growth and increase ASPs from $4 for the lowest speed parts to around $12 for the highest speed parts.

These higher speed products also serve a broader customer base. For example, there's a new home version of the popular cellular handsets in Japan that use the new service. The new phones use the ISOmodem for data capabilities to provide via a cordless phone the same features, like e-mail access, as are available in the cellular handsets.

We're pleased to see a number of new ISOmodem design wins such as this one beyond the satellite set top box market, including point-of-sale terminals, security systems and an router, which uses the ISOmodem as an alternate data channel.

As anticipated, the ProSLIC business declined in Q1, as shipments to for the DSL boxes were down. We expect , along with several other ProSLIC customers, to regain momentum and to be up sequentially in Q2.

In other wireline products, the Dual ProSLIC and the DSL analog front end are gaining traction with customers. The Dual ProSLIC has secured several design wins and should start to generate revenues in the second half of 2002. We're working with several partners with analog front end product and anticipate initial revenues towards the end of the year.

Revenues from our optical communications product area declined in the first quarter due to continued weakness in this market. However, we're pleased to be shipping from multiple product lines in this area. First quarter optical product revenues represent a combination of our transceiver and precision clock ICs.

We also introduced a new precision clock IC in the first quarter that adds forward error-correction capabilities.

Now for the outlook. We expect healthy increases in most of our product areas in Q2, led by the transceiver as multiple customers ramp into volume production. Therefore, we anticipate another quarter of double-digit sequential growth and expect second-quarter revenues to increase by 10 to 15 percent over first quarter. We anticipate adjusted earnings per share of 2 to 4 cents. We look forward to discussion of our second quarter results with you in July.

?

Thank you, Nav.

We would now like to open the call for questions.

Operator, please review the question and answer instructions for our call participants.

Our first question comes from Paul Brandeis of Needham & Company.

Hi, guys. Can you talk about the , and in terms of, you said, meaningful revenue, so I'm assuming that the $300,000 to $500,000 to $1 million in revenues in the first quarter? And secondly, can you talk about the gross margin impact? You said you're working on getting up margins on that product to the 40 percent range in the second quarter and...

Hello?

Operator, are you there?

Mr. of Morgan Stanley, your line is open.

Hey, guys, can you hear me?

Yes, we can, Mark. All right. I'm not sure what happened to the other call there. But first off, congratulations on the great quarter.

My first question is, can you just walk us through some of the steps that you're implementing to improve the margins on , and what the time line would look like for those improvements?

Sure. I'm going to direct that question to Dan Artusi, our chief operating officer, Mark.

All right.

Hi, Mark. Basically, we're focusing in three areas. The number is yield improvement. The is a chip set made out of . Of those three , two of them are already in the 90 percent and above range of yield. So one of the chips that is a receiver, that's the one that we're focusing on, the yield improvement. We are working on that. We have already seen improvement early in the quarter, in the first few weeks of this quarter.

The second area is equipment utilization, even though we are adding capital equipment we continue to work very, very hard to improve the utilization. Right now we're working 24 by 7 on the factory and we want to increase our utilization and equipment. And obviously, the third one is material input costs. We continue working with our partners to optimize the material input costs.

Dan, do you have a sense as to what the appropriate time line is like to get the gross margins up to 50 percent?

It will probably toward the end of this quarter, starting next quarter.

OK. Thanks.

We need to learning. We did the units through the facility to get the data to continue to make the improvements.

I would characterize it as, we're 40 percent as expected in Q-2. And then, we'll see graduate improvement after that, you know. And I think we can get the 50 percent by the end of the year, we're going to be pretty satisfied.

OK. That seems pretty reasonable.

Also just given the opportunity that you have with and the sales market that you look like you can secure, can you kind of give us your sense based on the design windows that you've been able to secure so far, what the size of opportunity looks like here versus what you've seen so far with the synthesizer product?

Yes. We ship our synthesizer. Last quarter we did roughly 5 million synthesizers shipped. The vast majority of those were sold to cellular handset. And our expectation certainly would be that over time we could convert most of those customers over to transceiver customers and hopefully add some additional new customers as we go.

So roughly the synthesizer alone represents, perhaps, a 10 percent market share in the overall cellular handset. Our expectation for is -- that would be the floor for our market share of . And our design that we have today would probably indicate that we're going to exceed that somewhat.

Great. Thanks a lot, guys.

Our next question comes from of Needham & Company.

Yes. Hi, guys. Sorry about that before. I don't know what happened.

I just wanted to follow-up on the gross margin question, in terms of, you know, as wireless continues to grow as an increasing percentage of overall revenues, can you give us a perspective of where you see company overall gross margins, you know, say, 12 to 18 months out as wireless continues to take increasing share of the company?

Yes. I think gross margins now, clearly, have a measure of overall product mix that's a factor now that didn't use to exist in our business a year ago.

Our expectation, I would say to answer the question, about three years out is that wireless represents roughly 50 percent of our overall company business, and wireline and optical would split the other 50 percent evenly. If that were to be accomplished, we believe, that the company would come in the 60 percent overall mix. Clearly, in the next 12 to 18 months wireless is ahead of our optical business. And so, in the next 12 to 18 months we're going to be somewhat shy of that 60 percent objective as wireless as a larger contributor.

Secondly, on the -- in terms of -- can you address any kinds of issues in the competitive marketplace for the , Samsung -- excuse me, connection seems to be making some significant progress in that front. Can you address the overall market situation there?

Sure. The existing incumbent vendors in the transceiver space are and and there are relatively new three or four new entrants in this space. devices that are in this space roughly two years ago. Silicon Labs entered it last year. , relatively new entrance, about a year ago. And most recently micro devices was an entrant.

The big distinguishing feature that we have is that we're the sole provider in that space. And we believe that that lends a substantial cost advantages, integration advantages, size advantages and, of course ability to supply in much, much larger quantity. Those types of advantages. And that appears to be being validated by the customer base.

Great. Thank you very much.

Our next question comes from Jeremy Bunting of Thomas Weisel Partners.

Thanks very much.

Would it be right in thinking to ask the product rolls out that your option , including, obviously, the synthesizer products, because it's obviously part of that chip set, that the opportunity you prefer is probably two and a half times greater than it is now or is it more than that?

The opportunity for is clearly larger. Just to put it in perspective, our synthesizer -- we have synthesizers that sell for $2 that are our most integrated, highest functionality synthesizers. And then we have synthesizers that sell for about $1, which are less functionality offerings. So the average value that we have in is roughly in the $1.75 range.

The transceiver includes a synthesizer as part of it. And we expect the ASPs of to be in the $4 range. So it's roughly a two and a half -- two to two and a half larger concept.

That's what I thought. Thank you.

Could you just give us any customers who are over 10 percent of revenues?

Sure. There were three customers who were over 10 percent of revenues. And that was , , and Samsung.

And finally, with the products, with the wireless products, these are exclusively sold into Asia and you manage to European or U.S. markets yet?

Yes. As we mentioned, we have 12 design wins on the . Those span, I would say, customers in U.S., Europe, as well as Asia. And we did make volume shipments to customers in Europe, as well as Asia last quarter and we expect to do so again this quarter.

(Inaudible) thank you very much.

Mr. of Lehman Brothers.

Thank you. One housekeeping item. What did you say your DAA revenues were this quarter, again, please?

We didn't specifically breakdown revenues by individual products, like DAA, for example. We did indicate that our wireline revenues were $19.6 million, which includes the DAA, the ISO modem and the our intention is that, as long as one product does not dominate our overall revenues, we're not going to breakdown individual revenues by product.

If one product in the future does become a significant piece, we'd be sure to highlight that.

Great. Another question then about . Actually, two questions about . First of all, I think you were originally expecting the ramp to start occurring maybe June, getting into the third quarter. describe what changed there, why has that happened earlier. Is that just conservatism on your part, or greater success with the customers, or something else that I don't know about?

And then secondly, I have a question about your -- if you could list some of your ODM customers that you ship to write now, the RFs in the product and starting to in the GSM, that would be great thank you.

OK. First part of the question, one of the reasons for the earlier than expected ramp on , I think our sense is that at least our particular customers in this space are doing quite well in general the customers that we have in this space, in GSM phones, are generally the customers for example like Samsung that are taking market share.

We have a couple of customers that make GSM modules which are found in a lot of new developing products, like for example the hand spring trio uses a module. And some Asian phone makers would tend to use modules to get into the market quickly. So I believe we're participating in a growing segment of the overall handset market, but I believe that's largely responsible for our earlier-than-expected ramp.

Second part of the question was who are our ODM customers for our existing synthesizer business. Some of our customers we formally announced have been Sony, , Samsung, Mitsubishi. Those are the few that we have formally mentioned. So there are some others as well.

John, one last question. You -- speak a little bit about the versus non- issue. First of all, do you think can address the entire market as it exists today? Is it going to be more when you get towards, you know, a smaller geometry? And secondly, what does it take for some of the confederates to come up with a product and what do you think are the barriers, the timeframe, that you'd have the leadership in that market? Thank you.

First of all, the question can address the entire GSM handset market? And the answer to that is absolutely yes. We see absolutely no reason why we will not -- why our existing product today can't address every single handset opportunity. The second part of the question regarding competition -- we are the only transceiver provider on the market.

As I've mentioned before, I believe that industries in the analog-mixed space for the last 20 years, there have been several industries that have started off with bipolar offerings. And then eventually, a offering becomes available, and once that offering becomes available within the next couple of years, that ends up dominating that market.

A couple of businesses where that happened is Ethernet transceivers. Another large one is magnetic disk-drive . So our expectation is that will be the dominant process technology for cellular handset RF transceivers. Our lead -- our perception is that our lead on our competitors is at least two to three years. The fact is we have been shipping, working in this RF space for cellular handsets for the past five years.

Our synthesizer that we've been shipping, that we shipped five million units of last quarter is still the only really high volume RF component that's shipped in using a process. So we have a substantial lead we believe the difficulties in being able to do these ultra high-performance mobile transceivers with , the challenges are numerous. And we believe we have substantial IP position in this area.

OK. Thank you congratulations.

Again, to ask a question, please press star, 1.

Our next question comes from of Wachovia Securities.

Thank you.

One question about the wireless LAN opportunity. When can we expect that product line or that market to start ramping into volume shipments for you?

Well, we did have volume shipments of our wireless LAN RF synthesizer in Q1. That synthesizer is a subset of a reference design that has a RF solution on it. We expect that business to continue to grow, really throughout this year.

And then on your DAA business, in the press release you mentioned going into portable, the portable sector. I'm assuming this is a relatively newer market for you. How much would you say this increases your total available market for your DAA product line?

Well, in reality our silicon DAA has always had an element of notebook business and portable business as part of our revenue stream. So I would not characterize it as a substantially new change. However, we have -- several of our soft modem partners have won significant notebook business with several leading OEMs in Japan, as well as in the U.S. So the business will grow, but I would not characterize it as a dramatic increase of our target market.

Great. Thank you.

Our next question comes from of Morgan Stanley.

Hi. Yes, guys, just two questions on expenses.

First one, obviously you did a great job in getting the tax rate down. Should we assume that 29 percent is a good number here for the rest of this year and next, John?

Yes, 29 percent is a good number to use for this year, in 2002. For 2003, I think moving the tax rate up to something, let's say 32 percent, would be more appropriate during the '03 period, simply because the ratio of our R&D tax credit relative to the size of the future operation, we would expect that to edge up from 29 in '02 to 32 in '03.

OK, great.

And then, Nav, what's your just general plan here as revenues are really accelerating and you've obviously got a lot of control over how you spend that incremental revenue? What should we be thinking about in terms of incremental expenses, both at the R&D line and the SG&A line as sales ramp?

Yes, our expectation is that we'll have modest and steady increases in SG&A, as well and R&D, for the next couple of years. So we expect to add head count in virtually all areas, but not at the same rate that our revenues would be increasing.

So is there some kind of algorithm we should be thinking about here, maybe like, you know, half of your incremental gross income dollars or something falling to the operating income line? Or how would you suggest we think about...

Yes, I think that that's in the right ballpark, .

OK. And do you have a target now as to where you think you can take both R&D and SG&A as a percent of sales, say by year end?

Yes, our expectation would be a little bit north of 40 percent for the combined spending by year end.

That's it? So like that's a fourth-quarter run rate?

Yes.

OK, great. Thanks a lot.

Our next question comes from of Thomas Weisel Partners .

Nav, if you could just discuss for us just a little bit more about the DAA applications in the telephony areas that you mentioned. things like PBXs, faxes, and what the time frame for expansion into those areas might be. Thank you.

Excuse me, the time frame for revenues?

Yes. Yes.

OK. Yes, you know, throughout our DAA offerings we've had a number of additional opportunities that have been available for us to address with our silicon DAAs, and things like Panasonic's fax machines and some other things like PBXs have had DAA design wins. But that business has always been I guess overshadowed by our total PC business.

I think going forward that business is likely to still be a subset of our total business, but I think we'll have a larger -- perhaps a larger percentage, maybe as large as 15 to 20 percent of our total business, and a lot of that's going to be geared -- of our total DAA business that is -- and that's going to be determined -- one of the factors will be a new voice-targeted DAA that we'll be offering laster this year.

OK. Thank you very much.

Again, to ask a question, please press star, 1.

Our next question comes from of Wachovia Securities.

On the ProSLIC product, you mentioned that you expect to start growing again. So can we assume that product line to continue to resume its sequential growth starting in Q2?

Yes. We believe Q2 will be sequentially up for the ProSLIC over Q1. We don't expect it to get back to Q4-type levels, Q4 of last year, but we do expect continuous growth for that business probably for the rest of the year.

Great. Thank you.

Sir, at this time we have no further questions.

Thank you. This now concludes our call.