Silicon Laboratories Inc (SLAB) 2002 Q2 法說會逐字稿

Good afternoon. Welcome to the Silicon Laboratories 2nd Quarter Earnings Conference Call. All participants will be able to listen only until the question and answer session of the conference. This conference is being recorded at the request of Silicon Laboratories. If you have any objections, you may disconnect at this time.

I would like to introduce the host for today's conference, Mr. John McGovern, Chief Financial Officer of Silicon Laboratories. Mr. McGovern, you may begin.

Thank you. Good afternoon. This is John McGovern, Chief Financial Officer of Silicon Laboratories. Christie Stout, our Director of Corporate Communications, is currently on maternity leave.

Thanks for joining us today to discuss the company's financial results for the 2nd Quarter of 2002. The financial press release is now available on our website, which is www.silabs.com.

This call is being simulcast and will be on our website and streetevents.com. There will be a telephone replay available approximately one hour after the completion of the call at 1-800-873-2066, until August 22nd.

Joining me today will be Nav Sooch, Chairman and CEO, and Dan Artusi, Chief Operating Officer. Nav will summarize our financial results, I will give a more detailed financial presentation, and Nav will close with a discussion of our current outlook and guidance for the 3rd Quarter. Dan will join Nav and me for 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 risk 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 our current perceptions of our market and the future performance of Silicon Laboratories and our products with you today, we're 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 that may have a material effect on our business, operating results and financial conditions. The company's SEC filings identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

And now I would like to introduce Silicon Laboratories Chairman and CEO, Nav Sooch.

Thanks, John. We're very pleased to report revenues of $41.2 million, which is a 43% sequential increase over $28.8 million in the 1st Quarter. Adjusted net income for the 2nd Quarter, excluding a non-cash charge, was $4 million, resulting in adjusted earnings per share of 8 cents. The higher than expected revenue increase resulted largely from a sharp ramp in Aero-transceiver shipments to industry leading GSM handset and module manufacturers.

This is our fifth sequential double-digit revenue increase. While the aero drove strong growth in Q2, we saw growth and continued customer penetration in other product areas, as well. The success of the aero is another validation of us being able to develop innovative mixed signal products.

We have now established successful businesses in several wireless and wire line markets, and expect to expand our product portfolio in these areas while continuing to cultivate new opportunities. I will discuss our business in more detail after John reviews the 2nd Quarter financials. John?

Thank you, Nav. Our revenues of $41.2 million for the 2nd Quarter of 2002 represent a 43% increase over 1st Quarter revenues of $28.8 million.

Gross margin for the 2nd Quarter was 53.2%, compared to the 1st Quarter of 58.3%. As anticipated, the lower gross margin was a result of increased mix of aero shipments. We are pleased with the progress we made on airo yield improvements as well as the productivity gains driven by higher volumes. We expect to make continued improvement on airo costs through the next couple of quarters.

Overall, we expect total corporate gross margins to increase slightly during the next few quarters.

Operating expenses before a non-cash charge grew to $16.5 million, compared to $14.7 million in the 1st Quarter of 2002.

Research and development expenses for the 2nd Quarter increased to $8.2 million.

Selling, general and administrative expense was $8.3 million, which is sequentially higher than the $6.7 million reported for the 1st Quarter. The significant increase in SG&A was due primarily to increased spending on patent litigation. We have an ongoing patent case with TTK, originally scheduled for trial this fall that, result made a flurry of activity last quarter.

The trial date for the case is now scheduled for next spring. Due to the schedule change, the patent litigation expenses for the 3rd Quarter ending in September are expected to be smaller. We remain confident about the merits of our case

Adjusted net income for the 2nd Quarter was $4 million, resulting in adjusted earnings per share of 8 cents. This is sequentially higher than 1st Quarter adjusted net income of $1.7 million, and adjusted per share earnings of 3 cents.

For the 2nd Quarter of 2002, net income, including a non-cash charge, was $2.7 million, or 5 cents per share, versus a net loss of $4.9 million or 11 cents for the comparable quarter of 2001.

During the 2nd Quarter, our effective tax rate was 29%.

The company employee count increased from 300 employees at the end of the 1st Quarter to 335 employees at the end of Q2.

Our balance sheet remains strong as cash and investments totaled $99.5 million at the end of the 2nd Quarter, reflecting capital equipment purchases of $7.7 million to increase test capacity.

Accounts receivable continued solid financial performance at 46 days. Days of inventory at the end of the 2nd Quarter were 37 days.

An approximate breakdown of 2nd Quarter revenues by area are as follows.

Wire line, $20.3 million or 49%.

Wireless, $20.6 million or 50%.

And optical, $250,000 or 1%.

I will now turn the discussion back over to Nav for a review of product developments and the current outlook.

Thank you, John. We're pleased to report the 43% sequential revenue increase this quarter, and are pleased with the overall strength of our technology and business. The fast ramp in aero revenues was accompanied by continued growth in the iso modem, pro slick and RF synthesizer products. Further more, we introduced the next generation of the DAA product family, setting the stage for future growth in that area. While aero is a bright spot in our product portfolio this quarter, we have a broad product offering across multiple technology areas that lend stability and strength to our business.

Wireless products more than doubled in the 2nd Quarter, and represented 50% of overall revenues. This growth was based largely on the sharp ramp in the Aero-transceiver, as we shipped over 2.5 million chipsets to a number of industry-leading GSM handset and module manufacturers, including Samsung and Wavecom. Wavecom is a leading module manufacturer that offers complete type-approved GSM solutions that are designed into emerging handset manufacturers in Asia, and innovative products including leading wireless PDAs.

In addition to these customers, who are in volume production with Airo, we have nine customers through full type approval. We're very pleased to see the aero gain momentum at such a fast pace. We believe this success is a direct result of our ability to reduce component count, board space and cost with our unique CMOS-based RF technology. We're the only supplier in high production with a CMOS GSM transceiver solution for the mobile handset industry, and we believe we have a substantial and sustainable lead on our competition.

Revenues from the RF synthesizer grew robustly in the 2nd Quarter, and we've now shipped over 25 million synthesizers. This business is primarily among leading GSM handset manufacturers, but we continue to have a meaningful business in the 3G, XM satellite radio, and 802.11b wireless LAN areas. We expect that revenues from both the RF synthesizer and the aero transceiver will see continued growth in 3rd quarter.

Wire line revenues grew 4% sequentially, led by strong growth in the iso modem and pro slick areas, which offset a slight decline in DAA revenue.

In the isomodem area, we won a number of new designs for our new higher-speed products. These higher-speed iso modems command higher ASPs, and will gradually contribute an increasing percentage of business. The new duel pro-slick products are now broadly sampling, and we believe they represent an important new growth opportunity for the company.

The duel pro-slick addresses the very large central office market, and commands significantly higher ASPs. We believe the product's unique CMOS architecture offers compelling size and feature benefits that should allow us to capture significant market share.

During the quarter, we introduced a full family of next generation DAA products. The product family now includes a solution focused on voice telephony applications, and a full range of products designed for V.92 desktop and notebook PC soft modems. These new DAAs integrate PCI interface functionality, reduce external component count, and command higher ASPs. These new DAAs are expected to start generating revenues in the 4th Quarter.

Revenues from our optical communications products area remained flat in the 2nd Quarter as we continue to be impacted by weakness in this market. We continue to believe that our unique CMOS based DSPLL architecture offers a compelling value proposition, and remain committed to our R&D investment in this space.

Now for the outlook. We expect 3rd Quarter revenues to reflect strong growth in several wireless and wire line product areas. Therefore, we expect another double-digit sequential growth quarter, with revenue growth of approximately 10 to 15% and adjusted earnings per share of 9 to 11 cents.

We look forward to the discussion of our 3rd Quarter results with you in October. John?

Thank you, Nav. We will now like to open the call for questions. Operator? Please review the question and answer instructions for our call participants.

Thank you. At this time, we are ready to begin the question and answer session. If you would like to ask a question, press star 1. You will be announced prior to asking your question. If you would like to withdrawal your question, press star 2. Once again, to ask a question, please press star 1. One moment.

Our first question comes from Mr. Jeremy Bunting with Thomas Weisel Partners. You may ask your question.

Thank you very much, and congratulations on an outstanding quarter. I wondered if you could share with us who your leading customers through the quarter were, and what their relative contributions to revenue were.

Okay, this is John. In the June quarter, the lead customer is Samsung, who was roughly a 15% customer, and Wavecom was just over 10% customer for us. There are no other greater than 10% customers.

Okay. Thank you. And could you discuss for us -- you mentioned some key new products we should expect to be drivers of revenue growth going forward. Could you discuss for us, though, do you expect that the aero product will continue to be the major area of growth for the second half of the year?

Yes, for the second half of the year, we -- we still expect aero to be a major growth driver. I'd like to take the opportunity to take just talk about the growth opportunities that we have for the aero product over the next -- really for the next couple of years. There is roughly three main contributors that we think -- in rough terms will contribute about equal revenue opportunities.

First of that is Samsung. We have about half of their business right now, and currently the majority of that business is still our RF frequency synthesizer. We expect that business to convert over to the aero. That will drive a higher revenue because the Aero is roughly 2X higher ASPs. So that conversion process at Samsung has started, and we expect by the 4th Quarter, the Aero-transceiver will overtake the synthesizer in revenue shipments to Samsung.

Our second and just as important factor -- or revenue opportunity for us is with module manufacturers, led by Wavecom. We expect them to be a significant growth driver because customers -- end customers are increasingly looking at complete, proven type-approved GSM modules as a way to cut costs and streamline manufacturing. So, we expect that segment of our business to be big growth.

And finally, we currently have sampled roughly 65 customers, handset and module manufacturing customers. We have 20 confirmed design wins with those customers, and that represents about 46 individual phones or module programs.

Of those 20 customers, nine of those customers are through the -- the full type approval process, and we expect all of these to start gradually going into production starting now. And we believe that aero will continue to grow probably for the next couple of years.

Good enough. Thank you very much. I appreciate it.

Mr. Mark Edelstone with Morgan Stanley. You may ask your question.

Hey, guys. Awesome quarter! A couple of questions following on that, Nav. I assume when you said 20 design wins, you meant 20 different customers. How many products does that represent so far?

Yeah, that was 20 different customers and that represents about 46 individual products.

And how many of those are now through type approval? You said nine customers had gotten through type approval so far, but how many products does that now represent?

I don't have an answer for that as to how many individual products have gone through type approval, but I would guess it is in the 15 to 20 range.

Okay. Do you have the numbers as to how many Samsung phones with airo unit are through type approval now?

I think that number is in the -- in the 5 to 10 range.

Okay, great. And then, can you walk us through then, what the ramp looks like relative to margins on the aero, and what you saw going through Q2, and what your outlooks like there for the second half of the year?

I will let Dan Artusi, our Chief Operating Officer, comment on airo margins.

Mark, the actual airo margins in the quarter were close to our original estimate. And as far as what we're doing for the improvements moving forward in the next quarter, there are three key elements on the margin improvement plan. Yield, test efficiency, test times and material costs. And all of those three are equally important on our efforts.

For the first two, obviously the significant ramp that we have, the number that we call the order of magnitude increased and our volume compared to Q1. That gave us the cycles of learning within the quarter to introduce improvements in the yield and to test -- test flow efficiencies.

And as you probably can imagine, we added a lot of test floor and doubled the numbers of testers dedicated to aero. That was a major execution effort to get to that.

Those improvements were implemented throughout the quarter and we are now expecting to see the full benefit in the September quarter. So, we are in to the quarter with a lot of the improvements already in place.

And third one is we are working with our vendors on continued material cost reduction.

Are you showing like five points of margin improvement in aero is reasonable here quarter on quarter in the second half of the year?

I think those numbers physically on airo are going to be in the ballpark of what's correct. I think what's more interesting, however, is that we expect a slight improvement in overall company gross margins going forward, and even though aero margins are improving more rapidly than that, the aero percentage of our total revenues is going to be a larger percentage. So that's going to be an offsetting effect. The net result of all those issues is going to be that overall margins will be slightly up for the next few quarters.

Okay. Good. And then the last question, John, can you quantify what the legal expenses were in the quarter? Or at least maybe the abnormal legal expenses associate we did TDK?

Well, certainly we had a big step up in the SG&A from the $6.7 million to the $8.3 million level, and a significant portion of that was related to patent litigation activities. Behind that we do have some other sales, marketing application expenses. But certainly the -- the patent litigation expenses were a big part of that.

Going forward, we expect, based on the timing of the lawsuit activities that our litigation expenses will be down from where they were in the June quarter to the September quarter, but we will have some expense in the September quarter in SG&A because as they go up, sales marking application new hires, some -- some of the sales levels will drive higher rent commission, and a little bit more spending and corporate marketing communications in the form of advertising space.

So, having said that, going into the 3rd Quarter we expect SG&A to be actually up a little bit, but declining as a percent of sales as we go forward.

Thanks a lot, guys.

Mr. Tim Anderson with Solomon Smith Barney, you may ask your question.

Yes, thank you. Congratulations on a great quarter, guys. Two questions outside of the line of logic on airo. I wondered, Nav, if you could talk a little bit about the duel pro-slick program, when that's going to ship for revenues, and an ASP number around that?

Yes, the duel pro-slick, again, targets the central office and long-haul segment of the -- of the voice market, which is a segment we really never addressed with our traditional single channel, pro-slick. That product is fully sampling now in what we believe as a production quality silicon. Design wins are taking place now. We believe that program will start contributing to revenues in '03.

The ASPs for the product are in the $6 to $7 range, which is roughly 2X of our single channel pro-slick. But much more importantly is that the market opportunity is literally 10 times larger than the original pro-slick was.

And if I can is ask on the DAA business, I think you said your next generation timing, you expected that in the 4th Quarter. Was that right?

That's correct. We expect to start making some revenue contribution from our newer DAAs in the 4th Quarter.

And lastly, if I look at the Yahoo builds that are occurring in Yahoo Japan, can you characterize how that business is going and when or if you see that trailing off in the next couple of quarters?

Yeah, we've experienced -- we've had our pro-slick product design into the voice-over DSL box that Yahoo sells in Japan. And I would characterize the last several quarters as being choppy. That business is up one quarter and then disappears next quarter and comes back and goes away. I would say we're going to see more of that type of behavior for the next several quarters.

Great, thank you.

Mr. Paul Brandis with Needham and Company, you may ask your question.

Yeah, hi guys. Nav, can you talk more about the synthesizer and where that business is going here in the near-term, from a unit perspective and maybe the units you actually did in the quarter? And the contribution between handsets and all other activities within that?

Yeah, we don't break out exact unit shipments for a product. But I can say that it was a very strong quarter -- quarter for synthesizers. Historically we've now shipped 25 million units. And while we expect the synthesizer eventually to give way to the aero, we've been generally quite impressed by how long the synthesizer has continued to grow.

At the beginning of the year, we really thought that in Q2, the synthesizer would see its biggest quarter. It is clear to us now that Q3 will certainly be much larger than Q2 for synthesizers. A lot of that is being driven by handset manufacturers that we've had design wins with for a long period of time, but have taken -- taken -- taken time to get in to production.

So, it's interesting that the design wins like this really do go into manufacturing. The business is certainly helped by our wireless Lan contributions, but I would characterize the synthesizer as being the vast majority is still GSM handsets.

And moving over to the aero for a minute. On the Samsung, you said you have about 50% of the overall business there, and that's from a synthesizer now converting to a full transceiver. Is that what you -- where you think your maximum sort of opportunity there at Samsung is?

No, I would -- we're certainly pursuing all of the business at Samsung, as well as with every other customer. But, when we think we have opportunities to increase our share at Samsung, but I think at this point it would be -- our expectation is that we will get at least -- we will get the half that we currently have with synthesizers converted over to airo, and everything else we might get is just upside.

And last question. Can you -- on the -- on the aero in terms of pricing pressure and competitive environment, can you give us an update there, in terms of where you're seeing pricing and what sort of price declines should we expect for the product over the next several quarters? And an update on the competitive environment, as well, please. Thank you.

Pricing for the aero, for GSM transceiver, it is roughly $3.5 to $4 ASP product. Really, the pricing situation is such that -- the customer is interested in the total cost on implementing a solution, including our chipset pricing plus the external components necessary with ours, versus what the competitor offerings plus the competitive bill of materials.

I would say that -- the major differentiator amongst all of the competitive offerings and Silicon Labs is that we are the only ones with a CMOS offering. With our CMOS approach, we have a fundamental cost advantage over the competition, plus we have a fundamental size of volume production advantage. We literally have the capacity from a wafer perspective in place to be able to do -- to be able to supply the world's needs for GSM tranceivers.

So, that's -- -- the CMOS advantage is enormous. And we also believe that the advantage we have in component counts is a major factor in customers deciding which transceiver to use. And we are, by far, the lowest component count transceiver on the market, requiring only 24 total components for a full transceiver solution. And what leaves out in the phone is the power amplifier as well as the base band technology.

So, we think from a board space, power, performance, component count, and cost perspective we are in the lead. So...

Arnab Chanda with Lehman Brothers, you may ask your question.

Yeah, thanks. A question about aero again, please. Given the strong ramp you've seen just from, you know, what you're talking about with Samsung and Wavecom, just curious as to some of your other RS [INAUDIBLE] customers such as, you know, Tiawanese ODMs like Bank Q, et cetera, that you were working with. Can you tell us what your relationship with them is, and whether that's an avenue to get into some of the more -- other handset manufacturers that are maybe using them as [INAUDIBLE] manufacturers. And I have a follow-up, thanks.

Yes, I believe the ODMs in Asia that have been actively pursuing business with Tier-1 handset manufacturers such as Motorola and Erickson, I believe over time will continue to have a larger and larger share of the overall handset business.

We've been participating in business with the ODMs through the frequency synthesizer, and I would say we have some design wins with the aero transceiver with these same manufacturers. I think all of the trends for more outsourced handset manufacturing, all of that plays -- plays to our advantage, and we believe that we've got the design wins in place to grow our business there.

Great. And if I can have one more follow-up, please. What -- if you look at your competitive landscape, there is obviously a lot of confusion going on by -- you're the only CMOS product, and obviously you have a cost advantage. In terms of process technology, where are you in terms of process technology in the transition to lower cost geometries? It sounds like you don't have to do that in terms of cost advantage.

And secondly, on the same note, in some cases you have, you know, some of the competitors offering direct conversion options. Can you shed light on why your technology is competitive or superior to that? Thank you.

First of all, the first part of the question, what is the process technologies we're using. In CMOS, we have a three-chip solution. One of the chips is in .31. One is in .25 and one is in .18. While you're correct that we don't necessarily need to move to a final line processes from cost reduction perspective, we have ongoing several programs which are intended to add features to our products. And we will do those feature additions in the context of newer process technologies. So, we will ultimately start moving to smaller and smaller geometries with additional features.

I'm sorry -- what was the last part of your question?

When you're talking about whether direct conversion...

Yes, regarding direct conversion, the biggest advantage from a customer's per perspective for direct conversion is the elimination of the IF soft filter -- the external IF soft filter. We have an architecture that we call near-zero IF, which also eliminates the external IF soft filter. So from the customers perspective,, there really is no -- no perceived difference from a component count perspective from that IF soft being eliminated.

But more importantly, there are several headaches associated with direct conversion. Namely it is more difficult to get a high-performing transceiver in a real-life high-volume manufacturing flow. And direct conversion tranceivers require a unique digital base band implementation to compensate for the inefficiencies in the direct conversion process.

Neither of those obstacles exist with our near-zero IF. Our product is readily manufacturable and also works with anybody's base band implementation. So, it's got the most widely available market opportunity.

Thank you, and very impressive performance, especially given these times. Thank you.

Mr. Carl Motie with Wachovia Bank, you may ask your question.

Thank you, most of my questions have been answered. A couple of questions about the wire line business. Would you expect your overall wire line revenue continue to grow in 2nd half versus the 1st half?

Yes, we would.

Okay, great. And one point of clarification on the aero gross margins. Did you say that the gross margin for the aero product is going to improve 5 percentage points per quarter for the next two quarters?

I think we were speaking in very general terms. I don't want to be specific enough to say that's what you should model. But we do expect an improvement from where we were in Q2, and I think the best way to handle it is that the net effect of that improvement and the impact that the volumes of aero will be higher, the net effect will be a slight improvement on overall corporate margins from where Q2 ended up.

Great, thank you. And then finally, the increase in inventory, was that mainly from aero?

This is John. Certainly aero contributed to that, as well as having adequate inventory on hand for all the other various product lines. Having said that, the days of inventory moved down from 44 days to 37 days. So, things are moving quite quickly through the inventory term at this point.

Thanks a lot.

Once again, to ask a question, please press star 1.

Mr. Jeremy Bunting with Weisel Partners, you may ask your question.

Thank you very much. Looking forward through say '03, '04 time frame, do you expect to get roughly equal business within wire line and wireless, or do you expect that with a great number of products being introduced this year in the wire line space, that wire line will trend back toward the greater portion of over revenues? Thank you.

Well, I always like to answer this question about three years into the future. Our expectation is that wireless in three to four years will represent about 50% of our business. So, as a -- about where it is today. The remaining 50%, we think will come roughly equally from wire line and optical. So, we do expect optical to really start growing significantly over the next couple of years.

I believe that between now and that three-year time frame, we will have an opportunity for wireless to get in excess of 50 for some period of time.

Okay. Thanks, Nav.

Mr. [Torris] Swanburg with U.S. Bank, you may ask your question.

Yes, good afternoon. nav, you mentioned for the next two to three years, it is feasible that wireless will be a higher percentage, or at least above 50. Does that change your gros margin outlook at all, or does it stay in the range of high 50s.

I think what we're indicating here is we would be slightly higher than we are now for the next few quarters. That would be a low 50s kind of number, and we think we can -- we can maintain that type of number as -- as the product mixes change.

Very good. And also, looks like you have quite a room for growth in your airo transceiver for handsets. But if we look at your IF transceiver and the development road map there, would it be feasible that you could also start shipping, or at least working on, rate of tranceivers for other areas in wireless, be it wireless Lan, GPS modules or bay stations?

While we don't comment on exactly any new programs, I think it is important to know that we are building a technology which is readily usable in a variety of different markets. Now, in general we look for market opportunities where we can have a unique, differentiated product and -- and that where we can bring significant advantages to market.

We are participating in the wireless LAN business today with our RF frequency synthesizer, but it's not clear to us that -- that we can make -- there are plenty of people serving that market quite adequately from what we can tell.

Very well. Thank you.

Mr. Mark Edelstone with Morgan Stanley. You may ask your question.

Probably for Nav or John, given the just breakout in revenues that you're seeing in the business right now, there's obviously an opportunity to significantly leverage your operating expenses. When you look at the model here for the this year and the end of next year, Nav, do you get a general sense as to where you think operating expenses can go as a percentage of revenues at this point?

Well, our focus is to get operating income to be at the 25% revenue level, and we think that that can be accomplished in the context of a mid to low 50s gross margin. So, we're looking at roughly 30%-type spending on operating expenses to -- to get us there. We think we can accomplish that in the early part of next year.

Okay. And then just a follow-up for John. The other income was down. Were there any charges in there, John, or was it strictly the interest income you're generating at the moment?

That reflects the lower interest rate environment that we're enjoying on our interest income.

Okay. So is that -- I guess that's now probably normalized? Are all your accounts now ratcheted down to the lower rates?

That is accurate, yes.

Great, thanks a lot, guys.

At this time, sir, there are no further questions.

Thank you for participating in the call, and we look forward to our next conference call in October.