Silicon Laboratories Inc (SLAB) 2003 Q2 法說會逐字稿

Hello and good afternoon, participants. Our conference is ready to begin. Hello and welcome to the Silicon Laboratories Second Quarter 2003 Earnings Teleconference. At the request of Silicon Laboratories, the conference is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Ms. Shannon Pleasant. Ma'am you may begin.

Thank you. 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 second quarter. The financial press release, reconciliation of GAAP to non GAAP financial measures and other financial measurement tables are now available on the investor page of our Web site at www.silabs.com. This call is being simulcast and will be archived on our Web site. There will also be a telephone replay available approximately one-hour after the completion of the call at 800-879-6480, until August 21st. I am joined today by Nav Sooch, Chairman and CEO, Dan Artusi, President and COO, and John McGovern, interim CFO. Now, will review our financial results, John will give a more detail financial presentation and Nav and Dan will review business activities of this quarter and provide guidance for the third 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 overtime. By discussing our current projection 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 effects on our business, operating results and financial conditions. We encourage you to review our S.E.C. filings that identify important factors that could actual results to differ materially from those contained in any forward-looking statements. Also, the nonGAAP financial measurements, which are discussed today and in our earnings release, are not intended to replace the presentation of Silicon Laboratories GAAP financial results. These measurements merely provide supplemental information to assist investors in analyzing Silicon Laboratories financial position and results of operations. However, these measures are not in accordance with or an alternative to GAAP and maybe different from nonGAAP measures used by other companies. Silicon Laboratories is providing this information because that may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations, and now I would like to introduce Silicon Laboratories Chairman and CEO, Nav Sooch.

Thanks, Shannon. Revenues in the second quarter were a record $69.1 million, a 68% increase over revenues for the same period in 2002. Adjusted fully diluted net income per share was 24 cents. For the fourth consecutive quarter, we achieved our target-operating model of 25% operating profits before noncash and other onetime charges. Dan and I will review the business developments in more detail after John McGovern reviews the financial results. John.

Hello everyone. Our revenues of $69.1 million for the second quarter of 2003 represent an 8% increase over the first quarter revenues of $63.8 million. Gross margin for the second quarter was 56.2%, the high-end of our mid 50% range. Following is the breakdown of revenues by product area for the second quarter. Wireless products represented approximately 51% of revenues; wire line products represented approximately 48% of revenues. Research and Development expenses in the second quarter increased as anticipated by $2.1 million, to $11.6 million, or 17% of revenues. This increase reflects additional engineering head count and related cost to pursue new product development. Selling general and administrative expense was $9.5 million or 13.7% of revenues, which decreased from the $10 million level in the first quarter, primarily due to lower legal expenses. GAAP net income in the second quarter was $10.9 million or 21 cents per share. Excluding a $1.2 million non cash charge for amortization of deferred stock compensation, adjusted operating income for the second quarter was $17.6 million, representing 26% of sales, up from $15.9 million or 25% of sales in Q1.

The resulting diluted net income per share; excluding the non cash deferred compensation charge was 24 cents. An increase from 21 cents in the first quarter. In the second quarter, our tax rate was 32%, as expected. Our balance sheet remains very healthy. Strong positive cash flow for the quarter offset the impact of the litigation settlement cash payment. As a result, cash and investments at the end of the second quarter totaled $131 million, essentially even with the first quarter balance. Accounts receivable returned to model levels at $32.3 million, with days sales outstanding increasing as expected to 42 days. Inventory remained essentially flat at $13.6 million with days of inventory improving to 40 days, which translates to nine annualized turns. Our balance sheet in the second quarter continued to be strong and liquid with cash, short term investment and accounts receivables representing 73% of total assets. I'll now turn the discussion back to Nav for a review of our business performance.

Thanks, John. Second quarter performance again demonstrated the strength of our business resulting from compelling products that serve a diverse set of markets. In the second quarter, our wire line business increased sequentially by 17%, rebounding from seasonal weakness in Q1 and experiencing strength in both the DAA and ISO modem products.

The Silicon DAA had a strong quarter as a result of continued adoption by PC manufactures. In the Second quarter our customer base expanded to include all of the major soft modem technology provided [Agier], Broad com, Conexant, Intel, Motorola, and Smart link.

Motorola recently elected top model market & like this our Silicon DAA to complement their software solution. We expect meaningful revenue in early 2004. The Silicon DAA which has historically been a product fo*r the PC market is addressi*ng several new market opportunities. For example the voice DAA expanded our total available markets to also include voice over IP PBX and multifunction printer applications.

These large markets characterized by long life cycles represent approximately a 25 million unit per year opportunity and give us access to an entirely new customer base. We’*ve already acquired over 20 design wins in these new applications which we believe will contribute to the long term growth and stability of DAA revenues. The ISO modem products had an excellent quarter. New products adoption increased mix of higher speeds and expanded market share drove revenue growth.

We introduced the 24 '01 ISO modem in April which incorporates our third generation DAA and customer acceptance has been very strong. We supplied the ISO modem to leading set top box manufacturers EcoStar (ph) and Thompson & we added huge* network systems to our customer list during the quarter. The ISO modem list is expanding as we develope traction in the emerging opportunities industrial monitoring gaming and point of sale markets.

Combined these new opportunities add approximately 40 million units to our total available market per year. In the second quarter, the ProSLIC business was impacted by slower growth in DSL subscribers in Japan. We’re working towards further expansion of ProSLIC customs base. For example, in Q2 we announced that Lsi Logic selected the dual ProSLIC for voice over DSL residential gateway and office router reference design. The ProSLIC, coupled with our ADSL analog front-end, offers* a compelling solutions for low co*st voice over DSL products*. The* ADSL AFE, which is expected to begin contributing to revenue in the third quarter, is a very highly integrated AF*E in less than two and a half square inches of board space, which is one-third to one half of the board space required by competing solutions.

We are parting with providers of the GMT data pump like trend ship to deliver complete low cost DSL modem solutions. In regards to the wireless business, Aero revenues increased by 13% sequentially in the second quarter offset by expected declines in the synthesizer revenues. We added the rim black berry (ph) 7230 and 6230 wireless terminals to the list of Aero family design.

Including the edition of rim our volume customer totaled 16 during the quarter. Samsung was the only greater than 10% customer in the second quarter totaling 22% of revenues. We expect to experience growth among our volume customers as design wins hit production throughout the rest of the year. Our technology positioned in the GSM handset market remains very strong, particularly with the leadership position of the Aero family in integration and buildup materials savings. During the second quarter, we introduced the latest generation of our Aero transceiver family, Aero I. The industry's most integrated single-package transceiver, Aero I implements a triple band radio in only 1.2 square centimeters. The Aero I transceiver is based on our proven RF technology CMOS and has optimized for ultra small GSM/GPRS handsets and modules. This latest generation transceiver is fastly known and has been very well received by customers' resulting in the addition of seven new design wins during the quarter. Aero II, a single chip RF transceiver is scheduled to sample at the end of the year. Dan will provide more details in the wireless opportunity as part of his discussion.

Thank you Nav. Our stated corporate objectives are to drive revenue growth to solid execution, increase customer diversity and ongoing product innovation. During my visit with customers worldwide, I have confirmed that our product roadmaps a close scale line with the requirements and present very good opportunity for growth. In the wireless arena, we believe that our leading technology position and the market acceptance of the ODM model will drive demand for highly-integrated best in class solutions for the RF section of the handsets. Our pipeline of design wins in the GSM GPRS, handset markets, the strong in position after increase of our market share. Only 40% of our current Aero design wins are in production today, giving us a considerable upside. We continue to maintain our strong position at Samsung. In addition, it appears that our recovery is under way in the China handset market. Our assessment of customer order patterns indicates pent-up demand maybe driving active replacement of existing handsets with more full feature phones. Because we are in the earliest stages of production ramp with many of the suppliers to the China market. We stand to benefit from increased demand.

In the wireline business, the adoption of our latest generation products have given us a degree of ASB improvement. For example, our third generation Silicon VA optimized for PCI applications represented a modest, but growing portion of DA revenues in the second quarter. This new DA offers approximately 30% ASB improvement over the prior generation. We expect that the transition to the third generation Silicon DA will continue over the next 18 months. We also expect blended pricing increases as our ISO modem products next evolved. A higher speed ISO modem products represent just under third of ISO modem revenues in the second quarter. An adoption is expected to increase in applications like digital video recorders and gaming consoles. Looking to the future, we are making considerable progress in our new product pipeline and we continue to increase our R&D investment. Since the beginning of this year, we have increased our design engineer head count by 25%. We also continue to staff our new design center in France to take advantage of a high concentration of talent in that region. In the third quarter, we expect R&D to increase by $1.5 million to approximately 18% of sales as we continue to establish key projects. We are very pleased to see SG&A decline as expected in Q2, to 13.7% of revenue. We expect SG&A will total approximately $10 million in the third quarter. Operational efficiencies are clearly playing a role in our ability to maintain our mid 50% gross margin target, and we expect to achieve margins in this range in Q3. Our intention is to continue to tightly manage our expenses, while staying focused in R&D. Now, Nav will discuss the outlook for Q3.

Thanks Dan. In the third quarter of 2003, we expect to deliver a sequential revenue growth driven by revenue increases in both our wireless and wireline businesses. We anticipate the revenues in the third quarter of 2003 will be in the range of $71 to $74 million, with GAAP earnings per share up 18-21 cents, and adjusted earnings per share of 21 to 24 cents. Now, I would like to provide you with some insight into the management succession planning at Silicon Laboratories. At the end of fiscal 2003, Dan Artusi will assume the role of CEO, and I will continue as Chairman of the Board of Directors. Dan has been directing day-to-day operations, since he joined Silicon Laboratories nearly two years ago, and this transition is a natural extension of his role. Dan has been instrumental in enabling the global expansion of the company, achieving record revenues and delivering strong profitability. I feel very confident that under Dan's leadership the solid and proven management team will take the company to our goal of a billion dollars in revenues. As Chairman, I will continue to play an active role in the company. Our long-term growth relies on our ability to expand our mixed signal technology leadership across a variety of new market. This transition will allow me to focus on what I do best, which is work with the management team to develop strategy for technology expansion and new product selection. 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. Participants if you would like to ask a question, simply press * 1 on your telephone key pads. If you hear your question answered and you wish to withdraw then you would press * 2. Once again that's * 1 to ask a question and * 2 to cancel. First question comes from Mark Edelstone of Morgan Stanley.

Good afternoon guys and congratulations again on another great quarter. Question relates to the gross margin in Q2. Was the improvement there all mix related or was that just due to some of the cost savings coming there as you out source some of the back end?

Dan Artusi#: It was both contributed to the improvement on the gross margin, Mark.

I guess if you were to just look at the increase quarter to quarter, could you put any kind ever percentage on what is coming from each factor?

Dan Artusi#: we have probably half and half contributing to the improvements.

Great, thanks a lot, guys.

Thank you. And our next question comes from Kalpesh Kapadia from C.E. Utenberg .

Congratulations. Quick question on wireless revenue now mention that would increase in line of the corporate growth in Q3. Would Samsung increase in line with the wireless growth would it be faster or slower because this quarter increased 13.5% which was faster than your overall growth.

We expect Samsung to grow nicely for us, and be a strong customer in Q3. We're not being very specific about what portion Samsung will contribute to our growth. Wireless looks like it will have quite a good quarter in Q3, because many of our design wins that we have are ramping in the third quarter, and longer term -- one of the points Dan made was that only 40% of the design wins that we have in terms of number of models are actually in production currently. So that leaves some room for growth.

Sure. And quick follow-up on that. Where would you put your unit market share in GSM space? I know you used to give out numbers in the past.

Yeah, we haven't done a real detailed analysis of unit market share lately. But you know, if we would do a rough estimate, it would be probably in the 15 to 20% range.

Thank you very much, and good luck.

Thank you.

Thank you, and our next question comes from Tore Svanberg from U.S. Bankorp Piper Jeffrey.

Good afternoon, first of all you mentioned the ADSLA/AFP starting to contribute the revenues in Q3, could you give us a little bit of a better sense on the ramp from there on, is this something that you know could very quickly become a high percentage of revenue or is it a slower ramp?

Well, we expect the ADSLA/AFP to start contributing revenues in Q3 here. We expect it to be a very nice product line for us. We don't expect it to be the kinds of revenues that, say, a Silicon DAA or an Aero transceiver have generated in the past, but hopefully, most of our new product lines will fall into that category as we just diversify and have more and more of them, but we think it will be a nice addition to the product mix that we have.

Very well, and also, question for Dan. You mentioned 40% of your wireless design wins in production, so obviously you have a lot of room here to grow into. Can you give us a little bit of a sense on how that remaining 60% would start moving into production? Are we talking about, your, 10% per quarter here or you know, help us understand a little bit the ramp of those design wins.

Yes. We are looking at, for the next year, 18 months, this will continue ramping up. Each customer has different type of rollouts of their models. They have multiple platforms, some of these customers are ODMs, who in turn have different OEMs with different platforms. So these will continue rolling out. We are approaching 18 months since we introduced Aero, so we are at probably half of our life cycle for Aero, the original Aero. So that we are going to continue seeing a growth on these customers that we have out there.

Very well, and finally I know optical is only, but a percent of sales, but have you seen any renewed activity from your customers there or is it still fairly quiet?

It is still fairly quiet on the optical front. We are continuing to invest at a flat rate in R&D in that particular segment and we were really pretty excited about some of the new products that we were developing in that space and we believe that those will be compelling offerings, even if the market kind of stays in the stagnant state that it currently is.

Great, thank you very much.

Thank you. Our next question comes from Mark Grossman from Needham and Company.

Can you talk about what sort of turns business you need to make the guidance for the quarter and then what was that number in the last quarter?

Nav Sooch#: We haven't given the specific information on that in the past, but we have bounded the turns that is in the past and that has been that the last almost two years we have been running in the 15 to 25% turn range. The present quarter looks to be no different than other quarters.

Okay, in the wireless business, can you talk about the linearity of orders? Did you see orders fall off and come back or has it been (inaudible) over the whole quarter?

Nav Sooch#: Linearity of the company has been quite good for the past, again, several quarters. The wireless business has been similar to the corporate average, and we really expect the linearity in Q3 to really not be any different than it has been in the last quarter or two.

Okay, great, and last one you mentioned Hughes. What do you think the time frame for that business ramping up and becoming meaningful is?

Well, Hughes was a meaningful contributor in Q2.

Okay, Great. Thank you.

Thank you, and our next question comes from Jeremy Bunting of Thomas Weisel Partners.

Thank you very much. Dan, if you could just discuss first what the trends are in wireless component ordering out of specifically Asian markets, and which OEMs maybe coming along behind Samsung, which you expect to see ramping perhaps more significantly in the second half of the year? and I have one or two follow up questions to that, thank you.

Well, the first thing Jeremy is that we have seen like starting very fast out of the gate in China after all the travel was open and so on, we just got our marketing manager for wireless Asia coming back from three and a half weeks being in Asia, and he came back very excited about how all the ODMs, OEMs and contract manufacturers are positioning for the future. So it seems to be a quick uptake, a lot of interest on the color screens, and the more full feature phones. So all the ODMs are pushing the China market is obviously the local brands are making a big, big push, supported by in some cases some ODMs either local or out of Taiwan. I can't go into specific names on some of the OEMs but we've seen pretty much across the board a very strong up tick on the wireless guys in Asia. Following right behind the top four guys.

How is Aero plus?

Aero plus is very well received. Customer realize the savings by putting a crystal instead of a TCXO (inaudible) for a long time, a lot of interest customers put their own manufactures & algorithm calibrations in productions, a lot of design wins with the plus version. And then we also have the Aero I plus that is a single package that Nav referred to in his presentation and that one is also being very well received.

Okay. Nav, on the question of voice over IP, have sales begun to PBX markets, if you could comment on what refreshment which you're getting in PBX markets rather than just the DSL market, and what are the prospects for central office sales?

Well We have gotten several design wins in the PBX space both for the DAA as well as the ProSLIC. But these are not meaningful revenue contributors yet. But we would expect these to start contributing revenues over the next year or so. And I think the prospects for just overall voice over IP, voice over DSL type of products really start being a meaningful contributors to Silicon Labs revenues -- those prospects look very good. And we have really three different product lines that all stand to benefit from that. Our voice DAA, our PROSLIC devices, as well as our ADSL analogue front-end, all three of those would all benefit from more of this voice over broadband penetration.

Okay, and if I could ask you just one brief question on the succession plans. First Dan congratulations on the planned assumption of the CEO role, taking on both president, CEO and COO might be a bit of a stretch even for you. Are there plans to recruit a COO, a new COO and in which case and in what time frame?

Not at this time Jeremy. We have talked about that with Nav. We have brought the company to pretty significant size. If you think about the divisions last year, each one was larger than the entire company was when I arrived in 2001. So we have grown quite a bit. We have grown very nicely. We have put the systems in place. So that it was in a step function that we went through. So, I think that for the foreseeable future, we will continue the way we are now that would be Nav as the Chairman, myself as CEO.

Okay, thank very much.

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

Nice quarter in such a difficult environment. I have a few questions, if I may, couple are oriented towards wireless. First of all, if you can talk a little bit about you know what the ASP difference would be versus Aero versus the Aero plus and Aero II and secondly, if you are seeing any you know, TCL obviously went away as a customer, it seems like things are getting a little bit better there or are you seeing them return or is that already embedded in your guidance? Thank you.

First question was regarding the ASPs. The entire Aero family ASPs really are about -- are roughly the same for each product offering. Aero, Aero plus, Aero I and II, they're of course they're delayed in time frame from when they were actually introduced, and so therefore, they follow the overall pricing trends of the transceiver market, which we've state in the past has been roughly 15% to 20% annual decline. So we expect all of these products to pretty much fall on those same pricing trends. They are all ideally suited for a unique customer in the sense that if anybody's interested in ultra small board space, they would be leaning more toward the Aero I, which has been the latest offering. So that's -- that puts the pricing framework out there for you. The other piece of it, of the -- as it impacts margins, would be that Aero II, we expect the cost structure of Aero II to be substantially lower, approaching a factor of 2 less than the existing Aero family. So we're extremely well positioned to cope with the market pricing in this industry.

The second part of your question was regarding TCL. We've never said that TCL was a direct customer of ours. TCL has been a customer of Wave Com, who was a customer of ours. Wave Com was - again on the customer list of ours - and they were not a 10%, the only 10% customer we had for the company was Samsung. We don't comment about any individual components but we expect them to be a reasonable and good customer going forward.

Thank you. And then one follow-up question. You know, given sort of all the projects you're working on if you could, A, talk a little bit about some new products, you've talked I think of or there was some talk of (inaudible) amplifying and CMOS. What do you think the long term growth rate we're talking about a three-year time frame that the company could grow at we have seen it do 100% plus last year in a tough market. If you could shed some light that would be great.

We haven't talked specifically about our new products that we're developing other than this one we've mentioned the Aero II, which is certainly on the list of the new products that we've mentioned, with respect to power amplifiers people have certainly asked that type of question before and we have been consistent in our response and that is we don't comment about speculation about future products. And we're really not going to do that until products get announced. With respect to our -- what we have said about our new products that we are developing is that we believe that they'll, combined, will at least double the total addressed market for Silicon Laboratories products. So that's a big number in itself. Long term in the three to five year horizon we think the company can operate, can grow at a 30 to 50% growth rate, in that range.

Thank you very much, and congratulations again.

Thanks.

Thank you. And our next question comes from Brian Modoff of Deutsche Bank.

Couple of questions. When you talk about what's your view on wireless and higher modulation products, you know, edge and obviously it's Aero* 2, can you give us an idea what you're thinking in terms of percentage of revenues Aero II could be in '04, and in W CDMA, what you can planning on W CDMA another way to ask the previous questioner's question, in wireless, what technologies are you focusing on in terms of new features to capture in your products, in at least in wireless perhaps you may want to talk about that more broadly as well. Thanks.

Okay. So starting with the modulation trends, certainly, we see GSM and GPRS as being the volume driver of units for the next several years. We believe Edge will become an important unit driver. We intend to offer a transceiver for Edge and due from time, sometime next year we believe is when it's important to have one. But we don't believe that it will be a substantial unit driver till at least 05. And wide band CDMA is also something that we intend to work on. But we also believe that that's really several years out before becomes an important unit driver.

Okay.

With respect to wireless, our expectation is to grow in a couple of different dimensions. One is, we believe our market share can grow significantly from where it is currently. We believe that the -- some of the customers that we have in this space, Samsung being one of them, position us well to take -- to grow as they take market share. And I believe the ODM segment will also collectively take market share of this space. So we're positioned to grow well in that dimension and the other dimension we believe we can increase our dollar content per hand set. And you know, we're not being very specific as to what form that will take, but that is the stated goal we have.

Let me ask it this way then. Are you thinking more RF capture, are you thinking in the other direction, A to D and into the base band?

We're not being specific.

Directionally at least? Thanks guys, nice quarter.

Thanks Brian.

I'm afraid at this time this does conclude the question and answer portion of the conference. I'd like to turn the conference over to Ms. Shannon Pleasant for closing remarks.

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