Silicon Laboratories Inc (SLAB) 2003 Q4 法說會逐字稿

Hello and welcome to the Silicon Laboratories fourth-quarter results teleconference hosted by Ms. Shannon Pleasant. All participants will be on listen-only until the question-and-answer session. (OPERATOR INSTRUCTIONS) This conference call is being recorded. If you should have any objections, you may disconnect at this time. I would now like to turn the conference over to Ms. Pleasant.

Good afternoon. This is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the Company's quarterly financial results. 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 website at www.SIlabs.com. This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 800-841-3979 until February 23rd.

I am joined today by Dan Artusi, President and CEO, and John McGovern, interim Chief Financial Officer. John will discuss our financial results and Dan will review business activities for the quarter and provide guidance for the first quarter. We will have a question-and-answer session following the presentation.

Before we begin Monday, 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 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 review our SEC filings that identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Also, the non-GAAP financial measurements which are discussed today 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 an alternative to GAAP and may be different from non-GAAP measures used by other companies. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. Now I would like to introduce Silicon Laboratories President and CEO, Dan Artusi.

Thank you, Shannon. I am very pleased to report outstanding results for the fourth quarter and fiscal year 2003. Fourth-quarter revenue increased for the 11th consecutive quarter to a record $110 million, a 32 percent sequential increase over third quarter. Revenue for the full fiscal year increased by 79 percent to a record $325 million. Execution was a strong theme for Silicon Laboratories in 2003. Our impressive revenue growth is evidence of an expanded customer base and further market penetration. We also hit the ground running with the acquisition of Cygnal through a very rapid integration, and now we are open for business. I will talk more about the business developments after John reviews the financial results.

Thanks, Dan. Our revenue of $110 million for the fourth quarter is an 82 percent increase over the same period in 2002. As we outlined during last quarter's call, we are grouping revenue into two categories to better reflect the nature of our business -- broad-based mixed signal revenue and mobile handset revenue.

Broad-based mixed signal revenue includes our silicon DAA, ISOmodem, ProSLIC, DSL Analog Front End, clock chips, optical transceivers and CDRs, satellite radio tuner, RF synthesizers for non-handset applications, and MCU products. The mobile handset revenue includes the Aero transceiver family and the remaining percentage of synthesizer business still shipping into handsets. We believe this breakout better represents the growing diversity of our business.

In the fourth quarter, broad-based mixed signal products represented approximately 46 percent of revenue, compared to 51 percent in the third quarter. Mobile handset products represented approximately 54 percent of revenue, compared to 49 percent in the third quarter. For the full fiscal year 2003, broad-based mixed signal and mobile handset products both represent approximately 50 percent of revenue.

The `stub` period from the Cygnal acquisition date, which closed December 10th, is included in Silicon Labs revenue and totaled $768,000. The Cygnal revenue on a pro forma stand-alone basis for the fourth quarter would have been 2.6 million and 7.5 million for the full year. Gross margin for the fourth quarter was 54.1 percent, even with the third quarter. Research and development expenses in the fourth quarter were 14.9 million, or 13.6 percent of revenue. Selling, general, and administrative expenses were 12.6 million, or 11.5 percent of revenue.

GAAP operating income for the fourth quarter was $28.9 million, or 26.4 percent of revenue. Excluding a $1.3 million non-cash charge for amortization and (ph) deferred stock compensation and a onetime charge of 1.6 million of in-process R&D related to the Cygnal acquisition, adjusted operating income for the fourth quarter was $31.8 million. This represents 29 percent of sales and the sixth consecutive quarter that we have met our target operating model.

The year-end reconciliation of our effective federal income tax rate resulted in a 29.5 percent tax rate for the full year and a Q4 tax rate of 26.4 percent. Increased R&D tax credits and the favorable tax treatment of the exercise of employee stock options contributed to moving this rate down. We expect the tax rate to be 31 percent in 2004. GAAP net income for the fourth quarter was $20.9 million, or 39 cents per share. Diluted net income per share, excluding the non-cash deferred compensation charge and in-process R&D, was 44 cents.

Our very healthy balance sheet points to the strength and sustainability of our business model. Cash and investments at the end of fiscal 2003 increased significantly to $190 million, including $6 million from the Cygnal acquisition. This is a sequential increase of $47 million over the cash balance in the third quarter. Accounts Receivable totaled $48 million, reducing Days Sales Outstanding to 43 days. Inventory increased to $34 million, with days of inventory at 66 days. These calculations are based on a 14-week quarter. We are well-positioned with both and finished goods inventory to satisfy continued demand in the first quarter of 2004.

Capital expenditures were a modest 18.6 million in 2003 and will be approximately 20 million in 2004. This low CAPEX requirement clearly reflects the benefits of our fabulous (ph) business model. I will now turn the discussion back to Dan for a review of our business performance.

Thank you, John. Every one of our product areas experienced increased quarterly and year-over-year revenue growth in 2003. Our business was very good across the board as we increased customer penetration and expanded into new markets. First, let's talk about the product lines that make up the broad-based mixed signal business.

The silicon DAA and ProSLIC both increased year-over-year by approximately 40 percent. The DAA productline completed its fifth year of high-volume production in 2003 and is clearly still in its prime. The DAA continued (ph) to share in the PC market, particularly in notebooks, where its very small size and global compliance are unmatched. The DAA is also benefiting from a strong sales synergy with the ProSLIC in voiceover IP applications. The broadening of our ProSLIC customer base is a key achievement for 2003. We have now secured ProSLIC design wins with many of the major voiceover broadband CD suppliers. During the fourth quarter, the ProSLIC won major designs at the largest voiceover cable modem provider, also at the leading telecom equipment provider, and at an established CP provider in Asia for new gateway design for the China market.

The ISOmodem business increased again in the fourth quarter as the next-generation devices and high-speed versions gained broad acceptance in set-top boxes and personal video recorders. During the fourth quarter, we began to see increased designing activity outside the U.S., adding major designs wins in South America, Europe, and Asia.

Products in our development pipeline are also opening up new market opportunities. During the fourth quarter we introduced a complete satellite radio tuner. The satellite tuner leverages our proven RF technology, currently adopted by virtually 100 percent of XM radio receiver manufacturers. Implemented in CMOS, the new tuner will double our content of the satellite radio materials. Offered with most GM cars to date, satellite radio presents a high-volume opportunity over time and gives us a foothold in the automotive market.

Finally, the newly acquired microcontroller products have enormous potential. We rapidly ramped the sales and distribution channels for these products. Chip revenues and development kit orders reached record highs in the December quarter. We believe that the combination of high-performance analog coupled with the high-speed 8051 CPU creates a differentiated offering ideal for a broad range of customers and markets.

Switching gears, our mobile handset business had a fantastic year, more than doubling revenues from 2002 to 2003. In only 24 months of volume production, the Aero transceiver family has not only proven to be technically superior to competing solutions, but our estimates indicate it has captured over 20 percent market share. Aero is still the only CMOS transceiver in production, offering the most highly integrated RF solution for GSM GPRS handsets. Aero volume customers in production totaled 34 at the end of 2003, up from only 11 in the fourth quarter of 2002. These customers include the premier names in the handset industry, such as ODMs like Arima, Fen Q (ph), Chi May (ph) and Kunpao (ph); Smart Phone manufacturers like palmOne, HDC and Rim; and OEMs like Samsung, Sagem, Sendo, and most recently NEC. NEC's full feature N900 phone, designed for distribution in Europe and Asia, is just ten millimeters thick and the size of a credit card. This phone is a great example of the Aero I value proposition when you look at the extreme space constraints, performance requirements and complete feature set.

Clearly, we have also benefited from the success of the ODM model. During the fourth quarter, new phones were introduced by both Motorola and Sony Ericsson that incorporate Aero. The rush to develop more complex, feature-rich handsets have been driving demand for Aero I and Aero I+, which in total accounted for more than 10 percent of the Aero family revenues in Q4. In the fourth quarter, many new handsets became available that incorporate Aero I or Aero I+, including models commercially available from Samsung, Sendo, Motorola, and KGM. The pace of design win activity is exhilarating, and as a result, we expect Aero I and Aero I+ to represent a growing percentage of Aero revenues throughout 2004. Aero II, our next-generation single chip RF transceiver is only scheduled to take out (ph) this quarter.

Samsung remained our only greater than 10 percent customer in Q4, representing 20 percent of fourth quarter revenue. We are also seeing very promising growth rates from several new customers. In fact, handset revenues excluding Samsung increased by over 60 percent from Q3 levels, demonstrating the broad acceptance of the Aero family among existing and emerging market leaders.

The outlook for GSM as the dominant global standard in wireless communication have never been brighter, particularly with the strong roll-out of GSM in North America by both AT&T wireless and Cingular Wireless. The growing presence of GSM in developing countries is for on-demand (ph), as is the broad of adoption feature-rich GPRS handsets.

Beyond GPRS, we are excited about the promise of EDGE technology. While we anticipate it will not be until late 2005 before EDGE establishes a meaningful market presence, the Aero II transceiver will support EDGE in the receive (ph) path, enabling support for high-speed downloads. The follow-on to Aero II will provide symmetrical EDGE support and will be available as handset makers begin designing their full feature EDGE offerings.

Before I move on to the guidance for the next quarter, I will briefly comment on our operating income model. In Q1, gross margin percent is expected to be the same as Q4. We plan to increase our engineering investment. This is fueled by our new product pipeline and continued investment in MCU products. This is consistent with our investment focus in 2003, where we grew design engineering headcount by 62 percent, which includes the addition of the Cygnal design team. In Q1, we anticipate the R&D investment will be approximately 17 percent of revenue.

For the fourth quarter, SG&A was only 11.5 percent of sales. In Q1 we expect SG&A to be approximately 12 percent of revenue. This model will allow us to generate strong operating cash flow and maintain our target operating model of 25 percent before taxes and non-cash charges, within a two percentage point band each quarter.

And now for the outlook. In Q1, we anticipate revenues in the range of $104 mill to $108 million. Q1 diluted net income per share on a GAAP basis is expected to be 30 cents to 33 cents. Q1 adjusted diluted net income per share, which excludes non-cash charges, is expected to be 32 cents to 35 cents. We look forward to reporting Q1 results in April.

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

Thank you. (OPERATOR INSTRUCTIONS) Mark Edelstone of Morgan Stanley.

Great quarter. Dan, you gave us some good details on Aero II and on your outlook for EDGE. As you talk to the customers and look at where their design cycles stand today, where do you see that playing out, when do you think we will actually see the first opportunity for guys to actually begin designing in EDGE solutions from you and when would we likely see the first phones actually go through type (ph) approval? Is that going to be largely a first half of 2005 timeframe do you think?

Yes, Mark. 2005 is when we will see what I would call real cost-effective production EDGE phones. Obviously there are models out there that are being used to -- that are exercising the networks, but we see this as a 2005 play, and our road map is contemplating the EDGE -- the arrival of the EDGE through the network operators.

And one quick follow-on. It looks like the revenue guidance that you have here, you're looking for a relatively seasonally normal Q1, which is fantastic given the strength you have had in both the third and fourth quarters. Are you expecting relatively normal seasonality in both handsets as well as in the modem market, or do you see something different in those two markets when you look at them separately?

This is John McGovern. We don't see any particular issues in the either one of the pipelines that makes it disproportionately down. We have not given specific guidance by productline, but we think Q1 will be a balanced attack from both of our product areas.

Thanks a lot. Nice growth.

Mark Grossman of Needham & Company.

Can you talk about the quarter itself? The numbers were a lot higher than guidance. Were you just being conservative going into the quarter, or did you see something accelerate during the quarter?

Mark, we put our guidance out there on our call in October, and we certainly felt there was enough information out there in the industry, particularly around the GSM/GPRS phones. We really saw no compelling need to go out there and change our guidance and we're delighted to share these numbers with you today on the call.

Great. And on the competitive landscape for transceivers, are you seeing anything significantly different in terms of competition?

It is the same competition as before. The important piece is -- as I reported during the call -- is that we continue to grow our customer base. We continue to grow the number of phone models where our transceiver is in. As I mentioned earlier, we have added a premier name in the electronic industry - that is NEC. And the N900 phones that I reported in is the third phone since fourth quarter that we are in there with our Aero. So we are very pleased with our competitive position today.

If you look out over '04, would you expect the broadband business to grow faster than wireless?

No, the wireless is still growing very fast. There is a whole cycle now that we are going through of refresh of our models. Actually, Europe was very strong in the fourth quarter with new models, and so we see a continued growth in 2004.

Great. Thanks.

Tore Svanberg of Piper Jaffray.

I had a couple questions. First of all, in terms of your guidance, could you give us some visibility metrics there, either some backlog coverage or at least qualitatively how you feel about that number?

Our guidance of 104 to $108 million for the first quarter, we typically don't give out precise backlog guidance, but we feel like we have pretty solid backlog coverage relative to what we see going into other quarters. And it is spread out broadly among all the various productlines, so we think that's a good indicator that this guidance is pretty solid and quite achievable.

Very well. And if we look at Cygnal, now that you have integrated that division, could you give us a little bit more color on what applications we should look out for to see some more successes there?

We are addressing a wide variety of markets and that was the reason, as we reported in our call when we announced the deal back at September 25th, that we were looking at a broad base of applications. So we see a lot of applications in different markets -- power management, battery packs, automotive markets, health care -- so we are seeing all of these markets moving as a wide front, and that is exactly what we are looking for in our strategy. So I feel very comfortable now that we have been together since December 10th -- actually, we are in our own building here; they all moved. Four days later, they were here. We have a very clear visibility. We are very excited about the future for this business, so this is doing what we set out to do.

Great. And my final question, if you look at the December quarter, do you have a breakdown between OEM, ODM and distribution?

No, we do not have that breakdown.

All right. Thank you.

Kalpesh Kapadia of CE Unterberg.

Dan, what a way to start the year! Congratulations. A question relates to your breakdown of product revenue between broad-based and mobile. You still have Aero and synthesizer as the only two products on the mobile side. And I believe Nav had made a comment last quarter that you would be increasing content inside phones. Would you care to comment on those initiatives?

Not at this time. I think at a later date, we will be commenting on some of our strategy.

Is there a timeline to it or we should just wait?

Just wait.

John, on the R&D guidance going out in Q1, is that just due to increased R&D across the board and hiring, or is there some product pick-outs (ph) or anything like that going on?

One of the key things is that Cygnal Integrated Products, that we closed the deal on December 10th, was only in the December quarter for 24 days. It is in there for the full quarter of March. This company had 60 people and was intently focused on engineering R&D, so the bulk of the Cygnal dollars roll into the R&D line. Additionally, as we said earlier in the call, that we would be taping (ph) out the Aero II product, so there's some additional mask and wafer costs there. Plus there are some underlying R&D roll-on expenses for what I will call a certain amount of classic expenses as we have continued to hire people and move a lot of engineering projects forward. So those would be probably three broad areas where the incremental R&D spending is coming from.

The follow-up to that, what would be the Cygnal contribution in revenues for the full quarter in your guidance?

We did not give a specific Cygnal number for the year, but let me characterize it a little bit. On a pro forma, stand-alone basis, Cygnal had $5.2 million in 2003. They had $7.5 million stand-alone in '03. And then as we go into '04, in the merger agreement, there is an earn-out that has a revenue range in there, ranging from $10 million to $24 million for (ph) the 12 months ending in March of '05. So I think if you were to head down the middle of that range, that would be fairly well within the expectations of what we would like to see them do here in 2004.

And would it be fairly linear or seasonal? How would you ramp it through the year?

Generally, because of the broad-based nature of their products spread over a lot of different customers, a lot of different products, we would like to see nice steady growth in that throughout the year in that productline.

And last question for Dan. You went through the exhaustive list of Aero customers and we didn't see L.G. on that list. You had Samsung, but I believe there were some L.G. phones which also included Aero introduced into the U.S.

That is correct. Our transceiver is in the LG phones that they are now in the U.S. They are to my knowledge in the Cingular Wireless network; but yes, we in those phones.

Thank you and good luck.

(OPERATOR INSTRUCTIONS) Brian Modoff of Deutsche Bank. Max Schuetz of Credit Suisse First Boston.

Great quarter, guys. Two questions. First, I was wondering if you could give us a better idea how the Cygnal design cycle progressed and what the length of that cycle was that you were expecting compared to your wireline or wireless communications products. And second, I was wondering if you could comment on how much tail is left in the synthesizer business in wireless and if there are any customers that have not fully transitioned over to the Aero products yet?

Let me comment on Cygnal. I assume you are referring to the design-in cycle, correct?

Right.

Again, because of the diverse customer base with different cycles, you go from people that can put the chips on a system and turn it around very quickly in some consumer applications to people that are in the medical equipment space where they need all kinds of regulatory approval. So, it will range from could be from six months to two years. Now obviously, when we acquired the company, the company had 50 plus products. They have been in operation for quite a while. They have been shipping some of the products for over two years, close to three years. So, it is a lot of designing backlog that is built in that we are following that. So, where we have put the emphasis on in the last several weeks and during the integration is to make sure that we have a very strong channel that we have the distribution channel very strong with reps. We have been hiring people in the US and Asia and other parts to make sure that we support that we have continuity and also with a lot of customers these transactions has given customers a lot of comfort that the company that is now involved with this Microcontorller is in a strong company with strong balance sheet that they can attract us their designs and their systems for the long-term. So, all this have been positive and we are pulling on, on the 250 design wins. The second question on the retail business on the synthesizer is a very small probably no more than two customers still using it some old models, and for all practical purposes we are focusing on strictly on today and just sustaining some of the smaller remnants of the synthesizer in some of the handset.

All right. Thanks.

Thank you.

Our next question comes from Arnab Chandra of Lehman Brothers.

Thank you guys. I can't find a more creative way of saying great quarter, so I guess I am going to say that.

Thank you.

Couple of questions if I could. First of all, can you talk a little bit about what - there are some, you do have your synthesizer being used in non-handset market, such as satellite, how do you classify that? Are those classified in the mixed-signal and if you can talk about what you think that kind of business could represent in the future? And then I have a follow-ups.

Arnab this is John. We have in the broad-based mixed-signal products the non-handset synthesizer business in there and it's certainly is part of the satellite radio business. It's part some instrumentation, scientific, and medical, wireless communication activities, and it's a good general purpose product where people have a need for voltage controlled oscillators used on their integrator , which you know well. So, that's a pretty good summary of the sustaining general-purpose product line of the synthesizers.

Thanks John. Maybe, question for Dan. If could you talk little bit about, you are talking about obviously entering some of the OEMs somewhat through the ODM channel. If you could talk a little bit of other than Samsung or some of other OEMs you talked about, what the strategy is and how do -- should we like to think about entering those markets such as top handset customers? Thank you.

We continue to expose our company, our capabilities to all the OEMs, all the leaders in the industry. We are continuing to showing our capability and I think there is no better proof of what we can do when some of those OEMs procure ODM phones were it -- they can see the performance, the quality, the overall manufacturability of phones using our parts and some of those OEMs launch quite a number of phones through the ODM channel with outward solutions. Some of those have Aero I, some of those have Aero I+, so leading edge of the product family.

Thank you and one last question. I think I may missed this part, you did talk about the first quarter, the sort of model in terms of long-term what should we be looking for in the expenses side, for R&D and SG&A? I am sorry, if I have asked you to repeat it.

Sorry about that. For the first quarter, we indicated gross margins coming in at 54%. We had R&D at 17%, SG&A at 12% and that would align with a operating income of 25%. I just want to say plus or minus 2% or 3% around that. So, we would stay focused on that. We are not giving a specific guidance beyond Q1, but obviously we need to spend a good solid amount of money on R&D that's what we do and we've enjoyed a lot of leverage on SG&A over the last few quarters and again this third quarter, we are bring that into 12%, which we think shows a good leverage on those expenses.

Thank you guys.

Thank you.

Our next question comes from Jeremy Bunting of Thomas Weisel Partners.

Thank you. I was wondering if you could comment on where you are in the transition from Aero to Aero I? Whether the Aero I product itself is got you into customers, which you didn't get into with the original Aero chipset? And what the basic differences between ASPs of Aero and Aero I? Thank you.

Let me take the first part of the question. Obviously, a lot of customers still running with Aero, like I have reported during the presentation that 10% of the revenue came from Aero I Aero I+. That's continued to increase. A lot of new customers have launched during 2003 because of the timing of the launch, they went straight into Aero I and Aero I+, and that's the case for example with NEC that they were new customers that joined our product usage in 2003. So, there is a transition as they launch new models, obviously the attractiveness of Aero I and Aero I+ is a smaller footprint than the previous solutions. The Aero I+ have the added benefit of eliminating, it's sometimes hard to get components, which is a TCXO. So with a I+ customers now can use very straightforward crystal and that simplifies the supply chain. So, we'll see the transition -- 2004 is a year of Aero I and Aero I+ and that we announced, if you recall we announced Aero I and Aero I+ in June of 2003. So, it's short time, short six months, we have already made a quite impact out there in the marketplace with this product. We'll see that transition.

Thank you. And the third part was does Aero I have any price premium of a Aero?

No. There is no difference in ASP between the two products.

Thanks Dan.

Our last question comes from Brian Modoff of Deutsche Bank.

Hi guys, a few questions for you if you don't mind. Normal seasonality with the handset vendors is down 10% to 15% Q1 from Q4 and you are guiding roughly flat, slightly down. Can you give me an idea, got an idea why that is, but can you kind of talk through why that is and what do you expect Samsung to be in its percent of revenues in Q1 from Q4?

Brian, in terms of specific customer guidance like that, we generally don't provide that. Regarding the overall seasonality down 10% to 15% while clearly we have a mix of products that for the whole year of 2003 was split evenly down the middle between mobile handset revenues and the other broad mixed-signal revenues. So, that may have something to do with mitigating the seasonality that you see in the -- totally in the handset business. But clearly we will go forward through the first quarter with the balance in tact between handset business and the other broad mixed-signal revenue, and that really helps support our guidance in those $104 million to $108 million that we put out there.

That would also imply less than normal seasonality for you in handsets?

Well, what happened, Brian, is again we are increasing the number of models, increasing the number of customers and if you look at going for new 11 customers at the end of 2002 to 34 at the end of 2003, and you'd multiply that by the number of models each one of those customers and the different cycle for those models and the other thing that happened is a lot of the new designs that we're running in 2003, our models with color screen, cameras, all the things that are very hard today they are selling well through the channel, through the networks, and the channels. So, all that is obviously helping.

And if you look at the top seven vendors, handset vendors, if you count both direct NVO, ODM, how many of the top seven vendors you now find?

Many of them.

Okay, all right. Many of them. So, anyway with the Aero II E we tend to agree with you on that. We were forecasting 7 million H phones this year and 70 million next year. So, we definitely did more back, more '05 in terms of scaling. Assuming that you start seeing a scale up next year with the H 2E product be ready to go in terms of end customers shipping.

Like I mentioned before, we have the road map of Aero II that was already be H compatible on the downlink and Aero II E, that would be fully symmetrical and there are things that can be done in between to bridge. So, we are very comfortable in having the products this year with Aero II, starting with Aero II.

And then the price point, what's the difference in pricing between the two, the Aero II and the Aero I?

We haven't communicated that yet.

There is a premium between the two?

We haven't decided yet, also depends on the final chip.

Okay. Thank you very much.

Thank you.

This concludes our question and answer session. I would now like to turn the call back over to Ms. Pleasant for any closing remarks.

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

Thank you for participating in today's conference, you may disconnect.