Silicon Laboratories Inc (SLAB) 2002 Q4 法說會逐字稿

Good morning and thank you for standing by. I'd like to remind all participants that this call is being recorded at the request of Silicon Laboratories, Inc. If anyone has any objections, you may disconnect at this time.

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I'd like to introduce your conference host for today's call, Ms. Shannon Pleasant. Ma'am, you may begin.

Good afternoon, this is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the Company's financial results for the fourth quarter in fiscal 2002.

The financial press release is now available on our Web site at www.silabs.com. This call is being simulcast and will be archived on our Web site and at StreetEvents.com. There will also be a telephone replay available approximately one hour after the completion of the call at 800-759-4661 until February 22nd.

I am joined today by Nav Sooch, Chairman and CEO; Dan Artusi, President and Chief Operating Officer; and Russ Brennan, Chief Financial Officer. Nav will summarize our financial results. Russ will give a more detailed financial presentation and Nav and Dan will review business activities this quarter and provide guidance for the first quarter. We will have a question and answer session following the presentation.

Before we begin, let me 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 based these forward-looking statements on information available to us up to the date of this conference call. This information will likely change over time. By discussing our 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 that could have a material adverse effect on our business, operating results and financial condition. We encourage you to view our SEC filings that 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, Shannon. We're very pleased to report fourth quarter revenues of 60.2 million. A 16 percent sequential increase over Q3 2002.

Fiscal 2002 revenues were 182 million, which is a 146 percent increase over 74.1 million in fiscal 2001. Adjusted net income for the fourth quarter, excluding a noncash charge, was 11.1 million resulting in adjusted earnings per share of 22 cents.

This marks our seventh sequential quarter of double-digit revenue growth and the highest revenue level in the Company's history. During the second half of 2002 we also exceeded our operating model of 25 percent operating profits before taxes and noncash charges to continued execution and product innovation.

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

Thank you, Nav. Our revenues of 60.2 million for the fourth quarter of 2002 represents a 16 percent increase over third quarter revenues of 51.8 million.

Gross margin for the fourth quarter improved at 57.1 percent compared to the third quarter level of 56.1 percent. Operating expenses in the fourth quarter before noncash charges increased as expected to 18.6 million and 30.9 percent of revenue compared to 16 million and 31 percent of revenue in the third quarter of 2002.

Research and Development expenses for the fourth quarter increased to 8.4 million as new product spending increased as expected. Selling, general and administrative expense was 10.2 million, which increased from 8.7 million in the third quarter due primarily to additional legal expenses and variable compensation resulting from our strong operating performance.

Excluding certain noncash charges, adjusted operating income for the fourth quarter was 15.8 million, representing 26.2 percent of sales, which moved up from the third quarter level of 13 million or 25.1 percent of sales.

The resulting adjusted earnings per share for the fourth quarter was 22 cents up from Q3 earnings per share of 18 cents. Adjusted operating profit before taxes and noncash charges as a percentage of sales, again, exceeded our corporate goal of 25 percent.

For the fourth quarter of 2002, net income was 9.8 million or 19 cents per share. Including a noncash charge for amortization of differed stock compensation of 1.3 million that reduced EPS by three cents. This compares to net income of 429,000 or one cent for the fourth quarter of 2001.

During the fourth quarter, other expenses were 114,000 compared to 85,000 in the third quarter due mainly to the operating loss associated with our investment in Design Services, Inc. Our expectation is that Design Services expenses will increase slightly in 2003. This should be offset by interest income and should result in total other income in the $50,000 range each quarter.

During the fourth quarter, our effective adjusted tax rate was 29 percent. We expect our effective tax rate to be 32 percent in 2003. Our balance sheet remains strong. We were cash flow positive for the fourth quarter and the full year with cash investments totaling 115.2 million at the end of the fourth quarter in fiscal 2002 compared to 104.3 million reported at the end of Q3.

Inventory grew by less than 300,000 to 13.3 million and days of inventory improved to 46 days. Accounts receivable dropped slightly to 27.5 million as day sales outstanding improved to 41. During the quarter, we made payments totaling 2.4 million to extinguish our debt and lease obligations.

As a result of this strong liquidity, we ended 2003 with a balance sheet free of long-term debt obligations. We expect to have modest capital expenditures and investments in the range of $14 million during 2003, which should contribute to solid positive cash flow throughout the year.

An approximate breakdown of Q4 and fiscal 2002 revenue by product area is as follows: Wireless product revenue increased year over year by over 350 percent and represented approximately 42 percent of revenues in Q4 and 46 percent of revenues in 2002.

Wireline product revenue increased year over year by over 80 percent and represented approximately 57 percent of revenues in Q4 and 54 percent of revenues in 2002.

I will now turn the discussion back to Nav for a review of product development and the business outlook.

Thank you, Russ. We're very pleased to report record financial results for the fourth quarter and fiscal 2002. Our strong performance this year was a direct result of robust growth from our wireless products and a healthy increase in our wireline revenues.

Our revenue mix in the fourth quarter and fiscal 2002 demonstrated our success in expanding both our customer base and our product portfolio. While revenue from existing products continues to grow, we're developing and introducing new solutions that leverage our core technologies into applications that further extend our technology leadership.

While our wireless business was down slightly in Q4, we are very pleased with the overall success of our Aero products. Excluding Wavecom, our Aero business grew 50 percent sequentially in the fourth quarter, underscoring the strength and diversity of our Aero customer base.

During the fourth quarter, the number of volume Aero customers increased to 11 including the addition of major handset manufacturers BenQ and Sagem, demonstrating Aero's success in both the OEM and ODM segments of the market.

Samsung continued to be a greater than 10 percent customer in the fourth quarter totaling 17 percent of revenues. Agere's recent announcement of $150 million GPRS partnership with Samsung is relevant to Silicon Lab as the Aero is designed in with every Agere baseband at a one to one ratio.

Our leading wireless IC's continue to be designed into the full range of handsets available worldwide. For example, our products are designed into multiple Samsung models including the S100 and S105. These are full featured tri-band handsets being offered by T-Mobile in Germany and the U.S..

The Aero is also designed to enter the recently announced , Samsung's mobile phone and digital camera combination. Other mid to high end models include the S300 series being marketed throughout Europe and the T408 and T500 handsets being marketed throughout China, Singapore and Thailand.

We expect Aero to continue to and ship in volume to 13 customers in the first quarter. As expected, RF synthesizer revenues were up sequentially in Q4 and the transition of the synthesizer business to Aero is proceeding.

We expect Samsung to continue moving from the synthesizer to Aero, resulting in a crossover in the first quarter. The transition to Aero is expected to be largely complete by the end of 2003. The next generation Aero transceiver, the Aero Plus, was awarded six new design wins in the quarter, which brings the total handset design wins for the Aero and Aero Plus to over 65.

We expect the Aero+ to continue to gain momentum throughout 2003. The Aero2, which integrates the full transceiver into a single IC is on track to be introduced in the second half of 2003.

Q4 was an excellent quarter for all three of our wireline product areas. We continue to make solid progress in expanding our DAA market share and our ISOmodem and ProSLIC products are ramping nicely.

Year over year, DAA revenues increased by over 45 percent. ISOmodem revenues increased by over 200 percent and ProSLIC revenues increased by over 90 percent. The DAA continues to increase share in the PC and notebook markets, shipping to many of the major PC OEM's.

Growth in Q4 was also the result of additional business in China and the strength of the PC market during this period. In the fourth quarter, we announced the wideband ProSLIC, the first of subscriber line interface to integrate a dual mode wideband and narrowband audio codec and battery generation functionality into a single, low voltage CMOS IP.

The new wideband ProSLIC enables enhanced voice quality in voice-over IP applications. The dual ProSLIC is gaining momentum in Central Office, and applications. We expect meaningful revenue from dual ProSLIC design wins beginning in the second half of 2003.

The ISOmodem business increased in the fourth quarter due to market share growth and expansion into emerging growth opportunities such digital video recorders. These applications take advantage of the global compatibility and higher speeds available in the latest generation ISOmodem products.

Overall, we continue to execute on next generation products adding functionality and breaking through traditional technology barriers. This provides customers with products that shorten their time to market and reduce their overall design efforts.

In 2003 we expect to introduce highly differentiated products that build upon our track record of innovation and . And now, Dan Artusi will provide an update on Silicon Lab's operations with regard to the strong growth of our business in the fourth quarter and fiscal 2002. Dan.

Thank you, Nav. 2002 was a year of tremendous growth for Silicon Laboratories. And we have evolved our organization accordingly to allow us to support the rapid ramp of our products and the diversification of our customer base.

In order to support growing demand, we increased our out source test capacity in the fourth quarter. So we're testing ASC Korea.

This transition allows us to benefit from reduced cycle time by locating logistic support closer to a large percentage of our customer base. We believe that with the cost savings we can achieve from this model in addition to other cost reduction efforts, we should be able to maintain our mid-50 percent gross margin target through 2003.

In the fourth quarter, we began the implementation of an integrated supply chain system linking our partners, customers and suppliers, increasing our visibility and allowing us to pro-actively respond to supply chain fluctuations.

Improvement in our operation systems allow us to scale our operations sufficiently and benefit from increased automation of our business processes. R&D spending increased this quarter as a result of packaging, and wafer costs. Our development continued on several new products and we expanded our engineering team.

We continue to add resources to our engineering team to support approximately 13 new development projects currently in place. We increased our wireless engineering resources by approximately 40 percent in 2002. And we intend to increase our total R&D resources by approximately 40 percent in 2003.

In Q4 we also added resources to our customer support and sales organization. Particularly in Asia where we expanded our presence in China to compliment ongoing expansion throughout the rest of the region.

At the end of fiscal 2002, our total headcount was 364 compared to 343 at the end of the third of 2002 and 279 at the end of 2001. Our improved manufacturing efficiencies combined with additional engineering and sales resources positioned us well to support customer expectations in 2003. Nav.

Thanks, Dan. Now for the outlook. Like many successful semiconductor companies, Silicon Labs has developed a solid business characterized by our product depth, a broad customer base and the breadth of markets we serve. The diverse nature of our business allows us to continue sustained growth for the long-term.

In the first quarter of 2003 we expect to offset typical seasonality with new product ramps and continued market share gain. As a result, we anticipate that revenues in the first quarter of 2003 will be flat to up five percent sequentially with adjusted earnings per share of 19 to 21 cents, excluding the impact of a noncash charge.

Q1 GAAP earnings per share, including the impact of a noncash charge that reduces EPS by three cents are expected to be 16 to 18 cents. With our continued market share gain and new product ramps, we're excited about our prospects and expect to deliver healthy year over year revenue growth in 2003.

We look forward to the discussion of our first quarter results with you in April. Shannon.

Thank you, Nav. We would now like to open the call for questions. Operator, please review the question and answer instructions for all 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, please press star one on your touch-tone phone. You will be announced prior to asking your question. To withdraw your question, you may press star two.

Once again, to ask a question, please press star one. One moment for our first question. Our first question comes from Jeremy Bunting of Thomas Weisel Partners. Sir, you may ask your question.

Thank you very much. Congratulations on a great quarter and a great outlook, too, gentlemen.

A couple of questions here. First, Nav, if you could comment on what you expect to be the primary areas of seasonality in the March quarter? And blended in with that, what you expect to be the key revenue drivers in Q1?

And if you could follow that up with discussing what you expect the time frame to be from a transition from Aero, Aero+ to an Aero2. Is that going to be a six month ramp or a year ramp or so on? If you could discuss that for us I would appreciate it. Thank you.

Sure. In terms of seasonality in Q1 -- we expect seasonality in the majority of our wireline businesses. We expect to offset that seasonality with growth in our wireless business. And so that is comprehended in the guidance that we've given about five to up. Sorry, zero to five percent of sequential revenue increase.

With respect to the Aero and transitions from Aero to Aero+ and Aero2. I'd like to first state that we believe that we're through one year of a three year ramp in our Aero product line. We have a couple of years of very exciting revenue growth ahead of us in that area.

We believe that the Aero+ will start contributing revenues in the second half of '03 and the Aero2 is really a 2004 revenue contributor.

Great. Thank you very much.

Our next question comes from Timothy Anderson of Salomon Smith Barney. Sir, you may ask your question.

Great. Thank you. Congratulations on a great quarter, guys. A couple of just real quick questions.

First, I wanted to ask a housekeeping question. I believe you indicated that your effective tax rate was 29 percent for the fourth quarter. Did I hear that right?

Yes, you did, Tim.

OK, Russ. Thanks. I wondered if you could give us a little bit of color about the Wavecom situation? They've built some inventory. They appear to have struggled a little bit. I wanted to get your thoughts as to how that's playing out. As well as I did want to just have you review for us your 10 percent customers.

OK, first of all, let me just start with the 10 percent customers. We only had one 10 percent customer and that was Samsung at 17 percent.

With respect to Wavecom, our business -- as we had anticipated and projected in our guidance for the fourth quarter -- was down substantially in Q4 from Q3. We don't believe at the current levels that we ship to Wavecom that our shipments are representative of their ongoing business level. So we believe that there was a significant amount of inventory correction that did take place.

However, we are cautious with regard to our Wavecom expectations. And we've taken a conservative view with respect to Wavecom's revenues and that's comprehended in the guidance that we've give of zero to plus five percent.

Great. Thanks.

Our next question comes from Arnab Chanda of Lehman Brothers. Sir, you may ask your question.

Thank you. Number one, sort of a financial question and one more product related. If you could give us a sense of how you expect your margins to sort of play out in '03? Obviously, you ended up reporting much higher than you may have expected originally.

Should we assume the margins relatively remain at the sort of 57 percent or do we expect to come on a little bit lower than that? Then I have a followup. Thank you.

Sure enough. Basically, we performed above our range here in Q4 of '02. We would expect that the margins would go back to our model rate of roughly 50 -- in the mid-50 percent range. And that would take place over time in calendar year '03.

Thank you. And then a followup question. Nav, you talked about a two year exciting growth opportunity in Aero that's still there. Obviously, people always want more.

So, the question is, do you have other strategies in the RF side or the wireless business? Or other areas in wireless that you would like to share with us to get a sense of where you would be looking for growth next? Thank you.

Sure. You know, I would like to say that we have a broad perspective at Silicon Labs. We are targeting several markets. I don't necessarily want to go into everyone of those new markets.

But as Dan mentioned, we have 13 development projects that we're pursuing currently. And many of those are in existing markets and many of those are for newer markets.

So, we're quite convinced that with the talent that we have at Silicon Labs and the level of innovation that we're able to bring to our products, that we will be able to sustain growth for quite a bit longer than just two year Aero outlook. And we believe our RF expertise is applicable to many different areas.

Great. And are you wedded to CMOS or would you explore other avenues but other processing only as or if necessary?

Yes, on that front, no we're not wedded to CMOS; however, our approach is simply we try to use the most cost effective process technology to serve at a particular market. So we look at a particular market and decide, this is an attractive market, the first thing we look at is CMOS, because that is the most cost effective, most efficient process technology to use.

And to date, we have not found a reason to go outside of CMOS. So, you know, we've been able to do things in CMOS that other people just didn't think were possible.

That's exactly right. Thank you very much and congratulations again.

Our next question comes from Mark Edelstone of Morgan Stanley. Sir, you may ask your question.

Good afternoon and phenomenal quarter, guys. I had a few quick questions if I could.

The first one, Nav, can you kind of put into perspective for us the 13 programs you have underway today? Can you just compare the number of magnitude -- however you want to measure it -- of the amount of overall design effort you have going now versus what you've had at the company in the past?

Sure. You know, obviously, the 13 programs we have today is the largest number that we've ever had. To put it into perspective, we introduced six products last year. So, this is quite a bit more.

So, rough way to think about where we're spending our resources -- it's about equal number of products in wireless and wireline. And less than both of those areas in optical. That's kind of how you should split up the 13.

And what would be the rough time line we should think about for the introduction of those 13 programs underway now?

Well, you know, some of those will not be introduced in '03. Some of those will be '04 introductions. So, you know, I think the way to think about it is these products will be released throughout the year and throughout next year. I think, you know, at this stage we're large enough and have gotten far enough away from our initial inception that the product introduction doesn't necessarily come in waves anymore.

OK, thanks. And then just a clarification. You were referring to the Aero crossover in Q1 and I wasn't sure if you were referring to Samsung or for the Company overall?

We were referring to Samsung in that comment.

And was that units or was that revenues for Samsung?

We were referring to revenues.

When would you expect the unit crossover for the Company as a whole?

We believe that that could happen in the Q2 time frame, potentially.

OK, great. And then just one final question. If I take your comments on Wavecom and try to extrapolate, it would seem to me that the rest of your business grew something on the order of 30 percent sequentially. Can you just confirm that that's in the right ballpark?

No, we actually stated that our Aero business without Wavecom grew 50 percent sequentially.

No, I'm sorry, Nav. I was saying about the whole Company.

Oh, about the whole Company as a whole? Yes, a little bit shy of 30 percent, I would say.

OK. Thanks a lot, guys, and once again, congratulations.

Once again, to ask a question, please press star one. Our next question comes from Elvira Scotto of Needham & Company. Ma'am, you may ask your question.

Hi, guys. In terms of the next gen DAA, is that on track with early revenues expected in the first quarter? And also, in terms of the higher speed ISOmodem, is that -- will that eventually replace the lower speed ISOmodem? Or is that additive market?

OK, with respect to the next gen DAA, yes, we do expect early revenues from that in the present first quarter that we're in now. We expect that ramp to continue throughout '03. And as we said earlier, we believe that by the fourth quarter we think half of our DAA revenues would likely come from the next gen DAA.

With respect to the higher speed ISOmodem -- both are all incremental revenues to the lower speed ISOmodem.

OK. Thank you.

Our last question comes from with Pilgrim Baxter. Sir, you may ask your question.

Hi, guys. I actually have three quick ones if I could. I'll give them to you one at a time.

The first one -- on the customer side. Can you tell us again who are going to be the new customers in Q1 that you're shipping to on the wireless side? Customers who didn't take product on Q4? And within that answer, are you shipping anything directly to without going through Wavecom?

On the first question, you know, we've mentioned that we have 11 volume Aero customers in Q4. We expect that to grow to 13. At this stage we're not going to announce those additional customers. We'll do so when it's appropriate.

With respect to , I would say that we are pursuing and have ongoing with several handset manufacturers in China. We have nothing concrete to report there yet.

OK. The second question, just more broadly. Can you give any qualitative feel for your comfort level -- you had guided in the fourth quarter to, you know, to the guided range and came nicely above that. Can you just give us a qualitative feel for how you feel about the zero to five percent guidance into Q1?

Well, in general we feel quite good about our guidance. We're confident in that zero to five percent and we believe that we can achieve that.

One moment.

Do you have any further questions, operator?

Yes. , your line is open.

Hi, I'm sorry. I think I may have gotten cutoff. Do you guys -- can you give us anything more concrete -- bookings, coverage levels or backlog or anything -- into Q1 versus what you had into Q4?

No. We've given backlog analysis and we don't necessarily believe that that is a consistently accurate predictor and that's why we don't do it.

But in general, we've had a business in the past couple of years where our business has been modest. And I would characterize Q1 to be not different.

OK. And one last quick one. Can you detail on the non-wireless business -- on the wireline side -- the ASP opportunities that you have? And the DAA and the ProSLIC side as those next generation products ramp throughout the course of '03?

OK. With respect to DAA -- this is for our based DAA's -- we believe that there's roughly a 35 to 40 percent increase that comes from our next generation offering. And this ASP increase actually saves our customers money because it eliminates an external chip that they would normally have to purchase along with eliminating several discreet components.

So that's the ASP story on the DAA. With respect to the ProSLIC -- the dual ProSLIC is roughly a 2X ASP increase over the single channel ProSLIC. And again, like the higher speed ISOmodems, the dual ProSLIC is incremental revenues. It does not replace the existing single channel ProSLIC.

Terrific. Thanks very much, guys. Great quarter.

Thank you. Our next question comes from Jeremy Bunting of Thoms Weisel Partners. Sir, you may ask your question.

Thanks again. Yes, Nav, I was wondering if in the broader sense you could us your perspective on where we stand with the great promise of the market as a whole? Clearly . What do you think the prospects for that market are for 2002? Not necessarily specifically for Silicon Labs, but as a market as a whole?

Well, we believe that that market's going to be quite healthy and starting to really gain share. We have one anecdotal piece of evidence. Dan Artusi here just recently plugged in an phone in our offices here and was raving about it.

All right. OK. Thank you very much.

Operator, are there any other questions?

At this time there are no further questions.

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