Silicon Laboratories Inc (SLAB) 2003 Q1 法說會逐字稿

Good afternoon, and welcome to the Silicon Laboratories first quarter 2003 earnings conference call. Your lines will be on a listen only mode until the question-and-answer session of today's call. This call is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to Shannon Pleasant (ph). Thank you, 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 first quarter. The financial press release, reconciliation of GAAP to non-GAAP financial measures and other financial measurement tables are now available on our Web site at www.Silabs.com. This call is being simulcast and will be archived or our Web site and at streetevents.com. There will also be a telephone replay approximately one hour after the completion of the call at 800-938-1164 until May 21st.

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 Dave will review business activities this quarter an provide guidance for the second 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 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 perception of our market and our 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 we may not be able to actively predict or control that could have a material adverse affected or our business, operating results an financial conditions. I encourage you to review our SEC filings that identify important factors that could cause actual results to differ materially from those contained in any forward looking statements.

Now I would like to turn Silicon Laboratories Chairman and CEO Nav Sooch. Nav?

Thanks Shannon. Revenues for the first quarter were, 63.8 million, a six percent sequential increase over the fourth quarter which resulted in adjusted fully diluted earnings per share of 21 cents. Over the last 12 months our business has more than doubled and for the third consecutive quarter we met our target operating model of 25 percent operating profit before noncash and special charges. I'll come back to go over the business developments after Russ goes over the financial results. Russ?

Thank you, Nav. Our revenues of 63.8 million for the first quarter of 2003 represent a six percent increase over 40 quarter revenues of 60.2 million. Gross margin for the first quarter was 31.6 percent, including the impact of the TDK settlement of 15.3 million. Excluding the impact of this charge first quarter gross margin declined expected to 55.6 percent compared to the fourth quarter level of 57.1 percent due to a larger mix of wireline-wireless revenues during the quarter.

The following is the breakdown of revenues by product area for the first quarter. Wireless product revenue represented approximately 54 percent of revenues in Q1. Wire line product revenue represented approximately 45 percent of revenues in Q1. Operating expenses in the first quarter including a noncash charge for deferred compensation of 1.3 million increased to 20.8 million. Excluding the impact of this noncash charge, operating expenses increased as expected to 19.5 million and 30.6 percent of revenue compared to 18.6 million and 30.9 percent of revenue in the fourth quarter of 2002.

Research and development expenses in the first quarter increased to 9.5 million as new product spending increased as expected. Selling, general and administrative expense was 10 million which decreased slightly from 10.2 million in the fourth quarter, primarily due to lower variable compensation offset somewhat by legal expenses.

For the first quarter of 2003 net loss was $1 million or two cents per share, including a noncash charge per amortization of deferred stock compensation of 1.3 million and 15.3 million in litigation settlement expenses. Shares used in the EPS calculation were 48.2 million due to the net loss, versus an adjusted fully diluted share estimate of 50.9 million. Excluding noncash charges for amortization of deferred stock compensation in the litigation settlement expense, adjusted operating income for the first quarter was 15.9 million, representing 25 percent of sales up slightly from 15.8 million or 26.2 percent of sales in Q4.

The resulting adjusted earnings per fully disputed share for the first quarter was 21 cents compared to fourth quarter earnings for fully diluted share of 22 cents. This change was due solely to the anticipated higher effective tax rate of 32 percent versus 29 percent in the fourth quarter of 2002. We expect the tax rate to remain at 32 percent for the balance of 2003. Adjusted operating profit as a percentage of sales again met our corporate goal of 25 percent for the third consecutive quarter.

During the first quarter other expenses were 319,000 compared to 114,000 in the fourth quarter of 2002, due mainly to the operating loss associated with our investment in ASIC (ph) Design Services Incorporated and a charge to write off our investment. We have decided not to continue investing in ASIC (ph) Design Services which will reduce other expenses to zero in Q2, 03 and result in total other income in the $350,000 range each quarter.

Our balance sheet remains strong. We were cash flow positive in the first quarter, generating 16.1 (ph) million in additional cash and investments. Cash and investments at the end of the first quarter totaled 131.3 million compared to 115.2 million reported at the end of the fourth quarter. Inventory increased slightly to 13.6 million in days of inventory improved to 43 days. Accounts receivable dropped to 23 million as DSO improved to 32 days, due primarily to the transition of Samsung to a direct account in the resulting decline in distributor inventory. Our balance sheet in the first quarter continued to be free of long term debt obligations.

In April the Board of Directors amended the companies insider trading guidelines to allow for the adoption of rule 10B51 selling plans by the directors and offices of the company. We anticipate that many of our directors and officers will establish and enter into these plans during the second quarter. The additional quarterly supply from these plans is estimated to be in line with diversification strategies that have been in place over the last several quarters and should result in a more orderly distribution of shares. I will now turn it back to Nav for the business review. Nav?

Thanks Russ. We are please to report solid financial results for the first quarter. Our strong performance this quarter was a result of increased demand for our wireless product among existing and new customers. We're also extremely pleased with the growth we have delivered over the last few years. We're actively pursuing a growth strategy that will allow us to deliver continued growth going forward. In addition to the sustained revenue potential and virtually all of our existing product lines, we expect our growth to be driven by two factors over the next few years; increased dollar content in our current market and penetration of new applications that include markets beyond communications.

In regards to the first quarter, our wireless business increased by 37 percent sequentially as a result of both the expected ramp of existing customers and the addition of new customers. Demand increased from every existing volume Aero customer quarter to quarter clearly demonstrating the strength of our position in the GSM market. Samsung was the only greater than 10 percent customer in the first, quarter totaling 21 percent of revenues. While we continue to gain share at Samsung we have also expanded our presence among other major wireless customers.

During the first quarter the number of volume Aero customers increased to 14, including the addition of Compow (ph). Due to the many advantages of the Aero transceiver, OEM and ODM transept (ph) manufacturers are rapidly adopting our solutions. Total handset model and module for the Aero family increased from 67 at the end of the fourth quarter to almost 100 at the end of the first quarter. The Aero family offer the optimal solutions for a wide variety of handset designs.

For example, in addition to over 25 Samsung handset models our products are also designed into new offers from Sajim (ph), Legend, Panda (ph) and Sendo (ph). As expected, RS synthesizer revenues peaked in the fourth quarter and transitioned to Aero in the first quarter. The transition to Aero is expected to be complete by the end of 2003. The Aero 2, which integrates the full transceiver into a single IC is on track to be introduced in the second half of 2003.

As expected, our wireline business was down sequentially in the first quarter with all three product categories experiencing seasonal weakness. During the quarter, the Silicon DAA began shipping as part of Broadcom's recently announced win in Dell's Latitude series D lap tops. We current ship to virtually all of the first tier PC OEMs and we also added design wins which among tier two PC manufacturers. While we have an estimated 50 percent share of the PC modem market we are beginning to diversify and our DAA revenue revenues stream and gain momentum in the voice DAA market.

The SI 3050 voice DAA has garnered wide acceptance with 10 new design this quarter for both voice over broadband and PBX (ph) application,. Our ProSLIC family of products, the only click (ph) IP's available as seamoss (ph), added 11 new design wins, including two reference designs this quarter. For example, Motorola la has recently announced smart Gateway 857 reference platform, a residential gateway reference design, incorporates our ProSLIC.

The ISOmodem business is being driven primarily by the set top box market however, we are successfully diversifying the customer base to include other meaningful opportunities, such as electronic point of sale products, digital cameras and digital video recorders. These applications take advantage of the global compatibility and high level of functionality available in the latest generation ISOmodem products.

Overall, we are applying our mixed signal expertise to create first of a kind innovations for an expanding set of target markets. Broad scale set of our world class engineering team will allow us to address applications that extend our mixed signal innovations into exciting new market opportunities. Over the next several years, this further diversify indication of our product portfolio will broaden our customer base and lead to continued growth. Now Dan will talk about our business operation. Dan?

Thanks Nav. In the first quarter, we executed on several major operation goals, to further support our growing customer base. The transition to outsource debt (ph) is reducing our cycle time, and allowing us to achieve cost savings and support our mid 50 percent gross margin targets. Our goal is to have the majority of our products tested offshore and shipped directly to our customers.

In the first quarter we completed the implementation of our new Adexa enterprise-wide supply and demand management system. This project which was executed in only 20 weeks is an integrated planning (ph) system that compliment our business to business strategy and more closely links Silicon Laboratories to our suppliers, distributors and customers. The supply and demand management system, an integrated business to business strategy, allow us to expand the scale and complexity of our business while leveraging the resources we already have in place. In addition, even as our product portfolio broadens, this efficiency will allow us maintain or improve our inventory turn, which were better than 8 in the first quarter.

SG&A expenses decline slightly in the first quarter of 2003 to $10 million and 15.7 percent of revenue. In the second quarter SG&A expense is expected to decline again due to lower legal expenses and drop below 15 percent of revenue. R&D expense spending increase in the first quarter to 14.9 percent of revenue as a result of tooling cost and expansion of our engineering team. We plan to increase R&D investment of over $2 million in the second quarter as we focus additional resources on the 13 development project we have in place. 6 of which are not yet fully staffed. Approximately half of this projects are extension of existing applications and half are focused on new application opportunity. We expect this project to be completed throughout the next 18 months.

Design engineer headcount which grew by eight percent in the first quarter is still expected to increase by 40 percent by the end of the year as we completed this staffing of our various development projects. We are also currently out meant our engineering resources with third party engineering services an support agreements that result in additional expenses not directly tied to headcount increases. Our goal in the coming quarters is to make further improvements in our operating efficiency by continuing to execute on our new product development plans. Nav?

Thanks, Dan. Now for the outlook. In the second quarter of 2003 we expect to continue to deliver sequential revenue growth driven by revenue increases across all three of our businesses; wireline, wireless and optical. We anticipate that revenues in the second quarter of 2003 will be in the range of 66 to 68 million with adjusted earnings per share of 20 to 22 cents. Q2 GAAP earnings per share which will include a non-cash charge are expected to be 17 to 19 cents. Shannon?

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.

Thank you. At this time if you would like to ask a question, press star followed by one on your touch tone phone. All questions will be taken in the order received. I will announce you by name when we are ready for your question. Again, press star followed by one. If you wish to withdraw your question, please press star followed by two. Again, star followed by one. Our first question comes from Jeremy Bunting and please state your company name.

Thank you. I'm with Thomas Weisel Partners. Nav, you just mentioned the expansion of both current products into new markets and you referred to the ISOmodem products, but you also discussed the sort of generally entering non-communications markets. I was wondering what timeframe that you felt that would play over and is that going to require a significant route (ph) in the development expense by which I would categorize that as growing development expenses at a greater rate than the top line?

I would say we are going to add new markets beyond our existing markets gradually over the next several years this will be an ongoing exercise, and what we are really doing there is leveraging what we believe is a unique feel (ph) sense that Silicon Laboratories has and that is our mix signal design expertise. We have people that are capable of essentially developing leading edge products in virtually any segment that we choose to pursue.

So we view our total addressable market as really the entire mixed signal market of semiconductors, which is something over 25 million. We're going to be focused on the high performance segment of that market, and these are businesses that you don't enter into overnight, however, it's a gradual process, it's a gradual rollout of new products. With respect to R&D increases, we are committed to some R&D increases. Dan mentioned roughly over $2 million increase in Q2 over Q1. That is to pursue the projects that we have already identified and some of those are a new market - new markets.

Okay. Is it also possible in an environment like that to sustain 25 (ph) percent plus operating margins.

Well, our goal is 25 percent operating margins. We have delivered that now for three consecutive quarters. We believe on average in the future we will be able to deliver that 25 percent, but we believe that there are will realistically a band around that 25 percent of plus or minus two to three percent in any given quarter.

Okay. Thank you very much.

Thank you. Our next question comes from Mark Edelstone. You may ask your question and please state your company name.

Hey, guys, it's Mark Edelstone. Once again another great quarter. Just wanted to get an update if I could. You gave a little bit more detail on the number of models, the products you've been signed into for Aero. Can you give us an update of how much customers have designed Aero in and with the 14 you have got now that were in production in Q1, what does that ramp look like as you go through the rest of the year in terms of just numbers of new customers turning on?

I think the number of customers that have designed Aero is perhaps a little over 20 now, maybe 25, and, you know, we had 14 of those customers in volume production in Q2. Our expectation is that that number will gradually increase, but more likely increase in the second half of this year. We don't expect a significant change here in Q2 as it takes from design wins to when a customer ramps in the production is roughly a 6 to 9 month window and we have had a flurry of design activity I would say, over the last three to four months and that's going to translate into new handsets and new customers starting to ramp in the second half of this year.

And Nav, just a follow on there, with your comments you made earlier that you saw the crossover between synthesizer and transceiver in Q1, I'm assuming there you were referring to revenues. If that's the case, do you expect the transition in units to be here in Q2?

We actually - with respect to Samsung in particular is what we were talking about revenue cost over in Q1, we also had a unit cost over as well in Q1. So we feel that the transition is more than halfway complete at Samsung and will be complete by the end of the year.

Okay. Sorry, Nav, I guess I was referring to what it was like for the company as a whole.

Company as a whole we're roughly at the 50 percent point.

And again that was in revenues for the quarter?

No, I'm sorry. In units. Revenues is well ahead in Aero now.

Okay. Great. Thanks a lot, guys.

Our next question comes from Arnab Chanda. You may ask your question and please state your company name.

Lehman Brothers. Congratulations again. I have a couple of questions. First of all, if you could talk about a little in the wireless business, when do you expect to see contribution from the following (ph) generation of Aero, whether it's Aero plus and Aero two, and then I have a follow-up.

We expect to see our revenues from Aero plus in the second half of this year. Our Aero two product, which is a single chip offer will be sampling here in the second half of this year. But we wouldn't expect revenue contribution from that product until next year

Thank you. A follow-up question about the ISOmodem. Did you see -- you had some business from DSL - I think Ambed (ph). How is that business or - are there some trends going on there where one portion of the business is up versus down, if you could talk a little bit about that?

Actually our ISOmodem does not have a present as is in the DSL segment. I believe you're referring to our ProSLIC product that's designed in some voiceover DSL offers for Japan. And that business has been, I would say steady over the last four (ph) quarters.

Great. Thank you for the clarification. And then one last question. In terms of the - coming back to the Aero products once again, in terms of process technologies, where are you right now and where do you plan to be with Aero and Aero plus? Thank you.

The existing process technology for Aero are .35, .25 and .18. There's actually three different shifts that make up the Aero chip set. The Aero two product will be a single chip in .13 micron, and in seamoss (ph):

Thank you very much.

Thank you. Our next question comes from Karl Motey. You may ask your question and please state your company name.

Wachovia Securities, thank you. You mentioned your optical business, you expect that to grow. Is there any particular trend that you're seeing there overall or there a short term inventory sort of replenishment going on in key customers. If you could just sort of clarify what's going on in the optical segment. Thank you.

Our on cal business has been quite small for the last couple quarters and it has actually been growing for the last couple of quarters and we expect it to grow again in Q2, however, it's going to be slight modest when you look at the entire revenues of the company. The reason it's starting to grow is really has, I believe, very little to do with the overall market and a lot to do with the fact that we have some compelling products that were designed in over the last year, year and a half, and those products are now in production and customers are starting to ramp with us.

Great. Thank you.

Our next question comes from Tore Svanberg (ph). You may ask your question and please state your company name.

Yes, good afternoon, Piper Jaffray. Maybe I can ask Jeremy Bunting's question a little bit differently. If we look at the 25 billion dollar market that Nav, you mentioned, and how you are attacking that market, is the strategy here to go after more of a standard product type technology or are you moving some of those R&D projects more into ASICS (ph)?

As I mentioned I think in my text, we expect two factors to drive our growth over the next few years. The first is we expect that in our existing markets that we're currently addressing we expect our dollar contest to increase. That means and these many cases, these products will tend to be application specific and they will tend to be in many cases customed (ph) for a particular customer, and at the same time what we're expecting to do is to add totally new markets to our portfolio and those will tend to be standard products, they will tend to be broader customer base and that those bring, and that combination we believe will yield the kind of diversity and sustained growth that this company is capable of.

Very well. Thank you. And it looks like Samsung was a clear growth driver for you this quarter. If we look at Q2, do you expect Samsung to grow faster than the corporate average?

We expect Samsung to be a nice strong customer again for us in Q2. We don't necessarily see them exceeding the kind of percentages of the revenue for the total as they did in Q1, but we expect them to be in the same ballpark that they were already in.

Excellent. And finally if you could give us an update on your team of PA, you know, where you stand with sampling and expectations for production.

We have a policy not to comment on speculation regarding future products.

Okay. Thank you.

Again, if you have a question, please press star followed by one on your touch tone phone. Elvira Scotto, you may ask your question, and please state your company name.

Hi, from Needham & Company. Can you give us a quick update on what's happening over there at Wavecom (ph)?

Well, from our perspective, waive come is a customer of our Aero transceiver. Their business was in Q4 was down significantly from Q3 from us, and we expected that in Q1 that their business would pick up over the levels that occurred in Q4. We saw that increase in Q1. We also note that Wavecom (ph) made an announcement with TCL (ph) about a press release regarding new products of Wavecom (ph) that are designed in TCL (ph) phones, and we believe that that has some upside potential there that we continue to manage that situation conservatively. We do believe that our shipment levels that we made in Q1 to Wavecom (ph) were less than their consumption rate.

OK, thank you.

Thank you. Jon Hegranes (ph), you may ask a question and please state your company name.

Baldwin Anthony (ph). Besides the synthesizer to Aero, which you touched on, are the transitions to next generation products going as expected along with price increases?

I would say that you know, there's some of our products that are transition, say the synthesizer going to Aero the transition. Single channel ProSLIC going to a dual ProSLIC is not a transition, that's an addition of a new product. The same with the ISOmodem, our low speed ISOmodem businesses will continue while we have the addition of higher speed ISOmodems. I would say all of that is on track with kind of expectations that we had set previously which is that these are not some overnight one quarter type of ramps. These tend to be the -- it takes two to three years and we believe we're in the early phases of those as we have seen the newer generation products have gotten traction, have started generating revenues and generated larger revenues this recent quarter than before.

OK, great. Nice quarter:

Thank you. Our last question comes from Karl Motey. You may ask your question and please state your company name.

Thank you. Wachovia Securities. Could you comment on the competitive landscape in the RF space and RF transceivers, what you're seeing out there? Are there any more or less competitive offerings out there in the last 6 months?

I would say that the landscape really has not changed significantly in. The offerings are largely the same now that existed in the past. Most of them are centered around processes that are either silicone germanium or by seamoss (ph). We are the only ones that are actually (ph) in seamoss (ph). That has not changed. There's been repackaging of some existing products into modules that those offerings exist and our opinion is that the cheapest way to manufacture a cell phone is to place the kind of components like Aero directly on a PCB (ph) board. So I would categorize it as no significant change.

Great, thank you.

Thank you. Speakers, you making ahead with concluding comments.

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