Silicon Laboratories Inc (SLAB) 2002 Q3 法說會逐字稿

Good afternoon and thank you for standing by. Welcome to the Silicon Laboratories third quarter earnings conference call. All participants will be able to listen only until the question and answer session. This conference is being recorded. If anyone has any objections, you may disconnect at this time. I'd like to introduce your conference host for today's call, Mr. Russ Brennan, Chief Financial Officer of Silicon Laboratories.

Sir, you may begin.

Good afternoon. This is Russ Brennan, Chief Financial Officer at Silicon Laboratories. Thank you for joining us today to discuss the company's financial results for the third quarter of 2002. The financial press release is now available on our Web site, which is www.silabs.com. This call is being simulcast and will be archived on our Web site and streetevents.com. There will also be a telephone replay available approximately one hour after the completion of the call at 888-446-2544 until November 22nd.

I am joined today by Nav Sooch, Chairman and CEO, and Dan Artusi, Chief Operating Officer. Now, we'll summarize the financial results, I'll give a more detailed financial presentation, and Nav and Dan will review business activities this quarter and provide guidance for the fourth quarter. We will have 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. The 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 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 a control that could have a material adverse affect on our business, operating results and financial condition. 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. Nav?

Thanks, Russ. We're very pleased to report revenues of 51.8 million, which is a 26% sequential increase over 41.2 million in the second quarter. Adjusted net income for the third quarter, excluding a non-cash charge was 9.2 million resulting in adjusted earnings per share of 18 cents. This marks our sixth sequential quarter of double-digit revenue growth and the highest quarterly revenue level in the company's history.

I'll discuss our third quarter business developments and the outlook for the fourth quarter after Russ reviews our third quarter financials in more detail. Russ?

Thank you, Nav. Our revenues of 51.8 million for the third quarter of 2002 represent a 26% increase over second quarter revenues of 41.2 million. Gross margin for the third quarter improved to 56.1%, an increase compared to the second quarter level of 53.2%. operating expenses before a non-cash charge decreased to 16 million dollars compared to 16 ½ million in the second quarter of 2002. Research and development expenses for the third quarter decreased to 7.4 million, due mainly to lower new product mass costs. Selling, general and administrative expense was 8.7 million, which increased minimally from the 8.3 million for the second quarter. We expect both R&D and SG&A to increase meaningfully in Q4.

Adjusted operating income for the third quarter was $13 million and 25% of sales resulting in adjusted earnings per share of 18 cents. This is 125% higher than second quarter adjusted per share earnings of 8 cents.

For the third quarter of 2002, net income including a non-cash charge was 7.9 million, or 16 cents per share versus a net loss of 36 ½ million, or 79 cents for the comparable quarter of 2001. During the third quarter, other expenses were 85 thousand versus 210 thousand of income in the second quarter, due mainly to the operating loss associated with our investment in ASIC Design Services, Incorporated. ASIC Design Services is a private company currently with 4 employees engaged in the design and development of proprietary networking ICs. The company was funded by Silicon Laboratories with a $1.3 million initial investment in the second quarter. Our expectation is that these expenses will continue in the same approximate range in the fourth quarter and into 2003.

During the third quarter, our effective tax rate was 29%. The company employee count increased to 343 employees at the end of the third quarter, from 335 employees at the end of Q2. Our balance sheet remains strong as we were cash positive for the quarter with cash and investments totaling 104.3 million at the end of the third quarter, as compared to 99 ½ million reported at the end of Q2.

Both accounts receivable and inventory have increased as a result of the robust revenue growth and our readiness to fulfill customer demand. Accounts receivable continued solid financial performance and edged up to 50 days. Days of inventory at the end of the third quarter edged up to 52. An approximate breakdown of third quarter revenue by area is as follows. Wireless, 28.4 million or 55 percent. Wire line, 23.3. million or 45 percent and optical was less than one percent of the company's total.

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

Thank you, Russ. We're pleased to report the 26 percent sequential revenue increase this quarter. Which - and clearly this included strong growth from our wireless product and a healthy increase in wire line revenues led by the ISOmodem.

The revenue mix this quarter, again, demonstrates our ability to deliver best in class solutions across the communications market. While our existing products revenues continue to grow, we're developing and introducing new solutions that extend our technology leadership in all product areas.

Wireless product revenue grew by 38 percent in Q3 as both RF Synthesizer and Aero Transceiver business grew significantly. During Q3 we also introduced the Aero+ Transceiver. The Aero+ integrates the digitally controlled crystal oscillator or DCXO, which eliminates the need for expensive discreet including a voltage controlled crystal oscillator.

Overall this solution saved handset manufacturers more than one dollar in total bill of material costs. The Aero Two, which integrates the full transceiver into a single IC, is on track to be introduced in 2003. Revenues from the RF Synthesizer continue to grow in the third quarter and we've now shipped over 30 million synthesizers.

This business is primarily among existing design wins at leading GSM handset manufacturers, but we continue to have meaningful business in the XM Satellite radio and 802.11 B wireless LAN areas. The RF Synthesizer has enjoyed a longer than expected revenue ramp, which points to the inherent ability of analog products to sustain long life spans.

We expect that over time, the majority of GSM handset synthesizer customers will convert to the Aero, doubling our . This transition, which already has begun, should be complete by the end of 2003. Like the synthesizer, we expect the Aero to have an extended life span and to continue to be a leading product for Silicon Labs in the coming years.

who has been a greater than 10 percent customer for the last two quarters, is transitioning to use Aero in a majority of its module products. The transition is proceeding well, however, contract manufacturers currently have excess inventory of Aero that will impact our Q4 shipment.

Based on current forecast, we believe that business is healthy overall, and we expect our shipment to return to normal level in Q1. Overall, the Aero Transceiver has been adopted by 20 unique customers into 56 different handset and module designs.

In addition to , industry leaders like Samsung, , and have already passed full type approval with Aero design and are shipping product in volume. We've grown this business from three volume customers in Q2 to eight volume customers in Q3. We expect to ship Aero in volume to 11 customers in the fourth quarter.

Wire line revenues grew 14 percent sequentially, led by the ISOmodem products. The original low speed ISOmodem business continues to grow, particular among satellite set top box manufacturers. We're also gaining new design wins with the higher speed ISOmodems in several new applications, including point of sale terminals and personal video recorders. The higher-speed products command higher ASPs and by the 2004 timeframe, we expect revenues from the higher-speed products to surpass those of the original low-speed solutions.

In the fourth quarter, we expect ISOmodem revenues to increase based on continued market share growth among set-top box design and shipments into new personal video recorder customers. ProSLIC revenues increased during the quarter as business continues to grow in the voiceover IP space. In particular, wide acceptance of voiceover DSL products in Japan has been a key driver of ProSLIC business.

In addition to the business supporting the Japan DSL service, which we've previously discussed, is now shipping the ProSLIC and DSL boxes for Japan and KDDI. We also announced recently that Matsushita selected the ProSLIC for use in the new Digiport PBX system. Each of Matsushita's analog line card contains 16 ProSLICs which enable analog telephones to be connected to the PBX system.

The dual ProSLIC is gaining momentum in central office, line card and router applications. We expect meaning revenue from these design wins beginning in the first half of 2003. In Q4, we expect ProSLIC revenues to be up sequentially, based on continued volume shipments into voiceover IP and PBX applications.

Our DAA business remains strong as we continue to gain V.90 modem market share. During the quarter, began shipping latitude notebook PCs with soft modems based on Silicon Lab's DAAs. This business complements our activity with desktop computers and underscores our growing penetration into tier one PC OEMs. Fourth quarter growth from the DAA will be supported by additional business in China and transition of impelled modem business from a transformer-based design to Silicon Lab's DAA solutions.

And now, Dan Artusi will provide a brief update on Silicon Lab's operations with regard to the strong growth of our business this year. Dan?

Thank you, Nav. We have experienced a period of tremendous growth in the last three quarters, particularly among our wireless solutions. To support the growing demand for our products, we increased our in-house space capability significantly. We have also increased our outsource desk capacity and we have begun testing a portion of our Aero shipments offshore.

The capital expenditures associated with our internal test expansion impacted our gross margin, which was 53.2 percent in the second quarter. As we increased our manufacturing efficiencies, margins improved to 56.1 percent in Q3. Our goal is to sustain gross margins in the mid-50 percent range in Q4. At our current healthy operating level, we were able to increase expenditures to support continued business growth. We significantly grew our presence in Asia in the third quarter, with additions to our Tokyo office and a new sales office in Shanghai. These offices are focused on supporting our customer base in Asia and on growing new customer relationships, particularly in the wireless space.

We'll be adding to our sales force in Asia and increasing engineering headcount in the wireless and wireline areas in the fourth quarter, in support of new products and customers. As first mentioned, our R&D spending decreased this quarter as a result of lower and costs. The second quarter reflected a period of increased activity resulting from revisions and derivatives, which is a normal part of the engineering cycle.

In the third quarter, these activities from several products, resulting in lower math and wafer spending. We're now poised to see increased R&D spending in Q4, as we intend to take on several new products and expand our engineering team.

Our hiring activity, along with increasing manufacturing and test capacities, position us well to support our customers' demand for products in the coming quarters. ?

Thanks, Dan. Now, for the outlook. Despite the inventory correction with Arrow in Q4 that I mentioned earlier, we expect the diversified business we've built at Silicon Labs to deliver solid growth this quarter, led by the Wireline products. We expect fourth quarter revenues to increase approximately 10 percent over third quarter, with adjusted earnings per share of 17 to 20 cents. We look forward to the discussion of our fourth quarter and full year 2002 results in January. Russ?

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

Thank you, sir. At this time, if you'd like to ask a question, please depress star, one. You will be announced prior to asking your question. To withdraw your question, please press star, two. Once again, if you'd like to ask a question, please press star, one. One moment please.

Our first question comes from of Thomas Weisel Partners.

Thanks very much, and congratulations on an outstandingly strong quarter. Could you just run through who your greater than 10 cents customers were, please. And I have a follow up question.

Yes, I can. Our greater than 10 percent customers this quarter were Samsung, at approximately -- slightly under 18 percent, and Wavecom, at approximately 15 percent.

Thank you. One of the surprises, at least from my standpoint, is that sales would be -- synthesizers themselves seem to continue to grow. Are you seeing that perhaps some of the new phones which you expected to transition into the Arrow products are perhaps not coming on into production as quickly as you expected, or is there some other phenomenon going on here?

Yes, we've been pleasantly surprised with the fact that the RF synthesizer continues to grow. We believe the reasons for that are that some of the customers that had originally designed in the synthesizer well over a year ago are actually bringing those products to market and we're seeing revenues from those customers, as well as the life span of models that were originally -- that have the synthesizer in it, those models are having longer-than-expected life. So those two factors contributed to the synthesizer growing again in Q3 over Q2. Originally expected Q2 to be the highest synthesizer revenue quarter, and we currently expect that Q4 will actually surpass Q3 for synthesizer revenues.

Was the synthesizer growth at the same rate as Arrow, or was Arrow faster growing during the quarter?

They were approximately the same.

Thanks very much.

Thank you, our next question comes from of Morgan Stanley.

Good afternoon, guys, and congratulations on a great quarter. Can you give us a sense as to what the unit volumes were like for both and Synthesizer in the quarter?

In general, we don't like to give exact units, but I think we can kind of characterize some of these things for you. The was in Q2, we had mentioned it was over 2 ½ million units, that was up significantly in Q3. The Synthesizer we did not give an exact breakdown but it's, I think it's safe to say that the Synthesizer was roughly 2X larger in units over . So the vast majority of our customers that used GSM solutions from us are shipping with Synthesizer as opposed to the .

OK. Great. And then, in the quarter, was WavCom your largest customer, again?

During Q3, yes, WavCom was our largest customer.

And can you try to put into some quantifiable terms how much additional inventory you think they have?

Sure. We believe that WavCom has more than half a quarter's worth of inventory on hand. So as a result, our expectation is that WavCom will be less than a 10% customer in Q4. However, we believe that this is simply an inventory correction and based on forecasts that we have received from WavCom, we believe that their overall business is quite healthy. Forecasts remain strong and we believe that we'll return to normal shipment levels to WavCom in Q1.

And can you give us also a rough idea as to what percentage of the they represented in the quarter?

They were, I would say, more than half.

OK. And then, with your guidance and with Synthesizer growing, the other business growing as well, was your expectation that the units would be flat, or actually decline in the fourth quarter?

Yeah. At this point we know that we're adding new customers to , for example, we're going from 8 volume customers to 11 volume customers and the vast majority of those customers are increasing their units with us as they ramp their products further. So those will offset the decline that we will see at WavCom and our expectation is that the numbers, when it's all said and done, will be roughly in line with what we saw in Q3.

OK. Great. One just last question, if I could, for Dan. What percentage of the test do you expect to be done offshore in the future when you've got it fully ramped over there and can you give us a general sense as to what kind of cost savings that move provides for you?

Our target market is to have approximately 80% of our testing for done offshore in Q4. We'll be testing the entire chip set. We're starting in Q3 as I mentioned before in the call. And we'll continue pushing that.

And relative savings, do you do that, Dan?

I don't have the projections right now on the savings. Obviously, we are using contract test houses. These, the big improvement has been for us to do the capital avoidance on the testers.

OK. Great. Thanks a lot, guys.

Thank you. Our next question comes from Pesh Kapadia of Unterberg, Towbin.

Good afternoon guys. Question on Aero, you had three customers going to eight in Q3. Would you be able to name any of the additional customers volume production?

The announced customers for Aero have - the ones that we've formally announced have been Samsung, , and . In general, we're working with leading OEM's that serve top tier cell phone manufacturers as well as some other European OEM's directly.

As always we refrain from revealing the exact customer names until our customer's products are on the market and we expect to be able to formally add to those four names over time.

And so you mentioned in earlier question, that your Aero units would be roughly the same in Q4 from Q3 despite the inventory issue at ?

That's correct.

On the gross margin side, if your revenue growth is driven by wire line business which is historically a higher gross margin business, should we expect at least similar growth margins in Q4 - Q3?

Yes. Our goal on growth margins, as Dan mentioned earlier, is that we expect that they will be in the mid 50-percentile range in Q4. I would not expect any upside above the Q3 numbers at this point and we'll see what the final numbers settle out as the mix comes in for the quarter.

Thank you.

Thank you. Our next question comes from Timothy Anderson of Salomon Smith Barney.

Thanks. One quick question and congratulations on the quarter. Was wondering if you could give us a little bit more color on the synthesizer business?

You've mentioned for a couple of quarters now about the cannibalization of Aero and the synthesizer. What I was hoping you could give us is some characterization of the mix between products that are handset focused with the synths and products that go into other areas like 802.11 and XM radio.

Sure. The vast majority of our synthesizer business is with GSM handsets. I would say that that's approximately, say, an 80 percent type of the total. The remaining 20 percent - these are ballpark numbers, are going to be in the wireless LAN as well as XM radio.

We do have - we do actually count a portion of 3G handset business in that 20-percentile component. So the vast majority is handsets.

And one quick question, I don't remember and forgive me if I'm going over something you said, but when we look at the SG&A outlook you had modest little increase. How should we think about that going forward? Flattish or continuing to rise with sales?

I would model it with continuing to rise with sales and to - as we had mentioned previously, both R&D and SG&A will have meaningful increases up in Q4.

Great. Thank you.

Thank you. Our next question comes from Arnab Chanda with Lehman Brothers.

Hi. Couple of questions. If you could talk a little bit about what you expect for your wireless business as we go into 2003, you know, sort of whether we should see continuous customer as well as multiple product ramps within a customer? And how we should model, you know, those numbers and then I have a follow up.

Well, we can't give specific guidance on 2003 yet. Our visibility has not really changed much from prior quarters. So, we'll be happy to give detailed guidance on Q1, in particular, at the next quarterly call. I would say, overall, we're pretty enthusiastic about our business. Virtually, in every single product line, we're expecting to gain share. We're expecting new design wins to ramp. In particular, in the wireless space, I think the big transition that will take place is that we'll go from, say, in the Q3 quarter that we just finished, where roughly two-thirds of our units were Synthesizers, I believe at the end of next year, the vast majority will represent Aero transceivers.

So that will be the transition that'll be taking place. That'll be a welcomed transition because it comes with higher ASP. And that's largely the financial model, I think, that investors should pay attention to.

Also, just one other question about the gross margins. Should we assume that, you know, with the increases in volumes we should see gross margins continue to trend up or is there a level above which, you know, it will pretty hard to exceed?

Yes. I believe that gross margins, as Dan had mentioned earlier - we're expecting gross margins to be in the mid-50 percentile range in Q4. I believe that the numbers we achieved in Q3 were unlikely to surpass those kinds of numbers. And beyond that, it'll play out next year, depending upon the mix of our overall product line - will determine where the overall margins come in. But it's difficult to give guidance beyond Q4 at this point.

Thank you. Great quarter.

Thanks.

Thank you. Our next question comes from of Needham and Company.

Hi, guys. A couple of quick questions. What is your take here on the competitive environment, you know, within the handset market and to sort of ASP pressure - where do you see - you know, what's been going on with ASPs and where do you see those trending?

Yes. The landscape is quite competitive in the handset components business. It's always been competitive and we expect it to remain competitive. We're quite comfortable, however, that we have a unique value proposition. And that is that we have a offering whereas everyone else has a token or bipolar offering and we believe that with our approach we have a fundamental cost structure advantage that ultimately will allow us to make money, that allows us to make money today and will continue to do so and remain price competitive in this industry.

So, in terms of ASPs for your Synthesizer and Aero products, I mean, have they been relatively stable or trending down marginally, quarterly?

Yes. I would say the ASPs are trending down in this space. They have always trended down and we don't see any changes in that - in that environment.

OK. And can you talk about your next generation - your new DAA product - your outlook for that and, you know, when we can expect to see revenues ramp there?

Sure. Our next generation DAAs have added functionality to our original offering. One of the products offers a PCI integrated onto our DAA as well as they remove several external components which allows for the modem solution to be substantially smaller and more cost effective to build. The net result for Silicon Labs is that we're able to actually get a price premium while the customer actually ends up saving, overall, money. So it's a win-win situation for everyone. That product has been introduced, it's been widely sampling, it's been designed in.

We expect quarterly revenues from that in Q1 of next year. And our expectation is that by Q4 of next year, that the new -- next generation DAAs will -- will have larger or equal revenue contributions to the existing DAAs.

Thank you.

Thank you, our next question comes from of Morgan Stanley.

Yes, I had just two follow up questions. One was, can you review what the gross margins were for Arrow in the quarter?

Again, , we don't break down gross margins by product line. Clearly, with the improvement that we made in the cost structure for Arrow, that played a role in our improving our overall corporate gross margins by about three points. It's , but I think at this point, while we still have further cost reduction efforts left on the Arrow, we believe it's unlikely that these further improvements will result in overall corporate gross margin improvements.

OK, but in other words, at least, Nav, if you hadn't had the improvements, then, from Q2 into Q3, your gross margin would have been 53 percent is what you're suggesting.

Well, I wouldn't say that all of the improvement was due to Arrow. Arrow was a meaningful contributor.

OK. Just last question -- when you look at your overall product portfolio, you guys clearly look like you'll be benefiting a lot from weighted ASP expansion in pretty much every product line except maybe optical, since there's not a lot of revenues there. Can you just give us a sense as to what kind of weighted ASPs you think we might see increase in the next, let's say 12 months in the divisions?

Well, I can't claim to have done a calculation on weighted ASPs, but I can tell you that, in general, and we can go by each product line, we can give you the ASP trends with our newer offerings, in the modem, in general, the ASPs are doubling, roughly, with our higher speed modems, compared to our lower speed modems. Same is true for the product line. They're roughly doubling. In the DAA, our expectation is ASPs will increase by roughly 30 percent over the older DAAs.

In the -- with the Arrow, with the synthesizer going to Arrow, that's roughly a 2x. So by and large, the number 2x is getting repeated a fair amount here.

OK, great. Thanks a lot, Nav.

Thank you. Our next question comes from of .

Hi, do we expect Wavecom -- I mean, in your initial comments you mentioned that Wavecom would come back as a big customer in Q1. Do we expect that to happen after the transition is over?

Yes, we do. We expect Wavecom to return to normal shipment levels from Silicon Labs in the first quarter.

Thank you.

Thank you. Our next question comes from of Thomas Weisel Partners.

Yes. Thanks again. What do you think the time frame is for, of your initial customers using the initial products to migrate to and what impact does that essentially have on gross margins and on the ASP for the single chip versus the chip set? Thank you.

These are customers that transition from to , or ?

I'm sorry, either or, excuse, because there'll clearly be a transition at some point to both products. I was wondering what time frame you had in mind and what the relative ASP difference could be?

Well, for the functionality that we have in is improved over because we integrate the CCXO component. We are able and expect to charge a slight premium for that, that certainly will allow us to hold our ASPs firm as customers transition. I would say, while we are shipping in reasonable volumes to at least one customer today, we expect that that transition to begin gradually over the next couple of quarters. Then our expectation with is that again, we will, the will have the same functionality that the had. And the expectation, again, is not necessarily to use the cost, to use that as a means to offer a lower price. If, the value proposition is substantially lower board space and substantially lower component count, but we don't expect to start contributing revenues until the end of '03 at the earliest.

OK. Thank you very much.

Thank you. Once again, if you'd like to ask a question, please press *1. Our next question comes from Karl Motey of Wachovia Securities.

Thank you. Regarding WavCom, and the timing of when you would start shipping to them again, would you anticipate that to be late Q4, early Q1? Or later in Q1? Thanks.

We're actually shipping some units to WavCom in Q4. So it's not that everything has been turned off completely. And we expect that the inventory situation will be completely eliminated by the time we exit Q4 so we expect to be back strongly in Q1.

Great. Thank you.

Once again, if you'd like to ask a question, please press *1. One moment please. Sir, at this time, there are no more questions.

Thank you for participating today. We look forward to our next conference call in January. This now concludes today's call.