Silicon Laboratories Inc (SLAB) 2004 Q1 法說會逐字稿

Thank you for holding. All participants will be able to listen only until the question-and-answer session of the conference. This conference call is being recorded. If you have any objections, you may disconnect at this time. (OPERATOR INSTRUCTIONS) Ms. Shannon Pleasant, 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 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 1 hour after the completion of the call at 800-294-6358 until May 26th.

I am joined today by Dan Artusi, President and Chief Executive Officer, and John McGovern, interim Chief Financial Officer. John will discuss our financial results and Dan will review business activities this quarter and provide guidance for next 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 1985. 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 our core ongoing operations. Now I would like to introduce Silicon Laboratories' President and CEO, Dan Artusi.

Thank you, Shannon. First-quarter revenue increased to a record $113.6 million, representing our 12th consecutive quarter of revenue growth. The outstanding results of the last three years demonstrate how our strategy to develop innovative, analog-intensive mixed-signal products has enabled exceptional and sustained financial performance, coupled with strong market penetration. I will talk more about the business after John reviews the financial results.

Thanks, Dan. Our revenue of $113.6 million for the first quarter is a 78 percent increase over the same period in 2003. The split of broad-based, mixed-signal and mobile handset product revenue for the first quarter was as follows. Broad-based, mixed-signal revenue, which includes our silicon DAA, ISOmodem, ProSLIC, DSL Analog Front End, clock chips, optical transceivers and CDRs, satellite radio tuner, RF synthesizer for non-handset applications, and MCU products, represented approximately 46 percent of revenue. Mobile handset revenue, which was driven principally by the Aero transceiver family, represented approximately 54 percent of revenue. This 46 percent/54 percent mix between these two product groups is the same split as the fourth quarter, showing balanced revenue growth across the two businesses.

Gross margin for the first quarter increased slightly to 54.4 percent. Research and development expenses in the first quarter totaled $18.1 million, or 16 percent of revenue. Q1 R&D investment included mask and wafer expenses associated with Aero II, the first full quarter impact of the R&D efforts of the acquired microcontroller product, and incremental R&D for the broad-based, mixed-signal products.

Selling, general, and administrative expense increased to $15.2 million, or 13.4 percent of revenue. Approximately $1 million of the quarterly increase is a result of the impact of SG&A attributed to the acquired microcontroller products. There was additional legal cost and bad debt expense of $300,000. The balance of the increase was due to expenses associated with global sales, marketing, and product promotion.

GAAP operating income for the first quarter was $27.2 million, or 23.9 percent of revenue. Excluding a $1.2 million noncash charge for amortization of deferred stock compensation, adjusted operating income for the first quarter was $28.4 million. This represents 25 percent of sales and is the seventh consecutive quarter that we have met our target operating model.

Our federal income tax rate on a GAAP basis was 32.3 percent, resulting in a management rate of 31 percent after an adjustment for a noncash charge. We expect the tax rate to remain at this level throughout 2004. GAAP net income for the first quarter was $19.9 million, or 36 cents per share. Adjusted net income per share, excluding (ph) the noncash deferred compensation charge, was 38 cents.

Our balance sheet remains very healthy. Cash and investments at the end of the first quarter increased to $204 million. Accounts Receivable totaled $56 million, with Days Sales Outstanding of 44 days. Inventory was $28.6 million, with Days of Inventory at 50 days. Dan, I will now turn the discussion back to you for a review of our business performance.

Thanks, John. We had many successes across the (indiscernible) portfolio in Q1. Let's start with the broad-based, mixed-signal business, which grew 4 percent sequentially. The silicon DAA benefited from strong PC growth, particularly in notebooks. The momentum behind notebook sales continues to build. In fact, according to market researchers, the notebook market is expected to grow at double-digit rates throughout this year. Clearly, we should benefit from this trend.

During the quarter, we completed the transition to our third generation DAA for PCI modems destined for desktops. The transition is still underway for mobile dotter (ph) cards offering continued ASP lift from the notebook segment.

We expanded our market leadership position during the quarter, securing a major design win, together with modem software partner Motorola. Motorola is exporting (ph) their soft-modem driver to support a new DAA customer, further expanding our market share.

Adoption of the higher speed ISOmodem continued during the quarter. We added 10 new high-speed ISOmodem design wins, including Panasonic. Panasonic is leveraging the ISOmodem for its market-leading digital televisions and set-top boxes. Panasonic's stringent quality requirements are well-known, and I believe that this win is another testament to our high quality standards.

The voiceover IP market was very active during the quarter. Service providers worldwide are embracing the technology. Both enterprise and residential voiceover IP offered significant opportunity for our ProSLIC and voice DAA. Some of you may not be familiar with how we participate in the voiceover IP market with our telephony products. Every residential voiceover IP gateway, (indiscernible) or integrated access device attached to an analog phone requires at least one analog telephony interface, like the ProSLIC. In the SOHO and enterprise voiceover IP market, each port on a voiceover IP PBX has the potential for a voice DAA to interface to the analog network.

With the ProSLIC and Voice DAA in our portfolio, we see enormous potential as the market accelerates over the next 12 months. For example, the ProSLIC has been designed into equipment being used by innovators in voiceover IP services, such as Vonage and 8X8, traditional service providers like AT&T, and by cable heavyweight Time Warner.

One of the most gratifying success stories for the quarter was the ramp in the recently acquired microcontroller business. Revenue for these products totaled $3.3 million in the first quarter, putting us on a strong growth trajectory for the remainder of the year.

During the quarter, we converted several major new prospects to design wins and began leveraging the synergy with existing categories. We successfully launched the microcontroller products to an expanded global distribution channel, which have been (ph) aggressively positioned our MPUs. We benefit from a global marketing campaign designed to raise awareness of Silicon Labs as a source for high-performance, analog-intensive 8-bit microcontrollers.

In March, we launched the latest products in the flagship precision mixed signal MCU family -- the F350. Another industry first, the F350 is the only 8-bit microcontroller available with a 24-bit ADC that is competitive with stand-alone analog peripherals. This product is optimal for industrial and medical instrumentation. Due to the positive customer feedback, I have high expectations for the microcontroller business.

Switching gears, our mobile handset business had another strong quarter. Aero I and Aero I+ represented over 50 percent of the unit volume in Q1, and design wins continued to accelerate. China's handset makers were a strong source of growth during the quarter, although design win activity increased across all of the major regions. Ease-of-use has been a major factor in the adoption of Aero by handset makers in China and throughout Asia. We have simplified the RF to the point that manufacturers have changed their sourcing strategy and many have designed their own handsets in-house based on best-in-class components.

For example, Lenovo, formerly known as Legend, uses Aero I in its G880 handset, which is representative of a growing number of handsets completely designed and manufactured in China. This is an important market shift that is occurring at a very rapid pace.

There it is not another solution available that offers the ease-of-use, high integration and market leading end product yields of Aero. This is why the Aero family has played a role in the success of many emerging market leaders, beginning with Samsung, which is now rapidly gaining on the top two handset makers. Samsung remained our largest customer at 19 percent of revenue during the first quarter. This is approximately flat, as expected, due to the strong Q4 ramp experienced in support of Q1 demand. Silicon Labs was one of the few semiconductor companies recently recognized as one of Samsung's top overseas suppliers, a significant milestone for us. We continue to benefit from Samsung's aggressive market share growth. Existing and new design wins are ramping across low, midrange, and high-end handsets. Popular Samsung handsets featuring Aero that were in production during Q1 included the E710 and the E715.

We're also excited about a steadily increasing demand from our other 35 volume customers, which include Ben Q, Compal, LG (ph), NEC, palmOne, RIM, Sergeant (ph), and Cymbal (ph). Our next generation RF transceiver, Aero II, taped out as expected in Q1. We are currently evaluating it for Silicon and we're extremely excited by this product's potential. Aero II is the first GSM/GPRS transceiver in 0.13 micron CMOS, and will further extend our significant leading integration and total bill (ph) of materials. Aero II is also a key building block to our EDGE road map.

Leveraging the benefits of our cycles of learning in CMOS, we expanded our mobile handset portfolio in Q1 with the introduction of a GSM/GPRS power amplifier in CMOS. The Si4300 integrates all of the PA functions together into a single CMOS die (ph). The 4300 requires no discreet components, and when coupled with the Aero I transceiver, offers a complete radio in only 3.8 square centimeters. The power amplifier is well along the design path with prospective customers, and we continue to be pleased with customer reception. Meaningful revenues are expected in 2005.

Now, I would like to briefly comment on our operating income model. In Q2, gross margin percentage is expected to be approximately in line with Q1. We expect R&D investment of about 16 percent of revenue and SG&A at approximately 13 percent of revenue in the second quarter. 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 the 2 percentage point band each quarter.

Before I provide the outlook for Q2, I would like to share some good news with you. I am very pleased to announce that Russ Brennan, who has been on medical leave, has successfully undergone treatment and will be returning to his position as CFO. The transition will occur on April 29th, the same day as our annual shareholders meeting. We would like to personally thank John McGovern for his support as our interim CFO. John has been a tremendous asset to the Company and will continue to work for Silicon Labs on special projects.

And now for the outlook. In Q2, we anticipate revenues in the range of 120 to $123 million. Q2 diluted net income per share on a GAAP basis is expected to be 36 to 37 cents. Q2 adjusted diluted net income per share, which excludes the non-cash charge, is expected to be 38 to 39 cents. We look forward to reporting Q2 results in July.

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.

(OPERATOR INSTRUCTIONS) Brian Modoff.

Deutsche Bank. Hi, Dan. Nice quarter. A couple questions. Aero II, you taped it out last quarter. When do you expect to start seeing some volumes with that product? And then two, I noticed Samsung is now down to 19 percent of revenues. In terms of looking at sequentially from last quarter your non-Samsung vendors, can you highlight any of them that were perhaps stronger or abnormally strong in Q1, and how are some of these other -- Motorola, Ericsson, LG, how are they doing in terms of progression from Q4?

Let me take the first one. We are very pleased with the initial results on the Aero II. We expect to be sampling soon, so we expect some revenue to occur before year end on the Aero II. Regarding the growth, in Q1, we had some ODMs in Taiwan where we had some very nice growth, so we experienced across a lot of the new customers. As you probably noticed on our statement, we are now up to 35 non-Samsung customers. So the list continues to grow. We are very pleased with the growth across all the regions.

One last question on ProSLIC -- Vonage obviously coming in and now AT&T. What are you thinking in terms of growth in that group this year? Is that going to become more of -- a more significant piece of the wireline revenues this year vis-a-vis DAA and ISO -- do you see it becoming a little more significant because of these customers?

It is going to be a significant piece. The growth will be very significant this year. Obviously, the DAA is a big business for us. The ISOmodem is a big business. But the ProSLIC would be right there following these other two big businesses. So we see this year -- I call it "the year of the voiceover IP." I think all the key elements are now in place in the industry, from self-switching to the service providers to operations and management software to (indiscernible) these packet networks. I think it is all coming together and we are very enthused by the opportunities. We are in a lot of boxes out there with many manufacturers. Last conference call for Q4, we talked about some of the people in Asia that we are participating, here in the U.S. and other parts. So we will see more and more voice-enabled boxes going out in the market over the next 12 months.

(indiscernible) expect it to increase as a percent of revenues, vis-a-vis ISO and DAA?

Probably.

Lastly, on the MCU. Obviously, that was above what we were thinking on that business. What is driving your microcontroller business in the quarter?

What happened is once the acquisition was announced in the fourth quarter, obviously there were a lot of fence-sitter type of customers that we were able to convert from prospects to design wins. So there was a lot in the pipeline that we were able to -- with our track record and our success in the vertical markets, we were able to go to these customers and push it over the fence.

We are very excited about the breadth of the design wins. I can give you some ideas. We go from small appliance -- for example, there is a radio in a small appliance cobranded between Tide detergent and Black & Decker called the Buzz, and it's already in the market. And that is a high-volume small appliance that leverages the analog expertise that is in MCU. We are also designing in a camera module that will go in handsets. That's a business that we are going to be seeing revenue in Q2. And you know how fast the camera business is growing integrated with the handset. We are designing into a center for an automobile application with a major European car manufacturer.

So the range of designs is broad, and that is exactly what we want in our strategy. The breadth of market, the breadth of customer we can get these microcontroller designs in. So I'm very, very enthusiastic, as you can probably tell from my voice.

Is it possible to see that revenue double from this quarter in Q2?

There is going to be significant growth in Q2.

Kalpesh Kapadia.

Unterberg Tobin. Welcome back, Russ, if you're on the call.

John is here on the call.

Dan, the question on the silicon DAA front, Connexion (ph) bought the PCTEL side of business sometime last year. And even in the Q1, which is seasonally soft for laptops, you had pretty good business in silicon DAA. How were you able to offset some of the laptop weakness in Q1?

First of all, we have a very compelling solution for the notebook -- because of size, the bill of material, the solution that we have to offer today is a very compelling one. The end customers, ODMs, OEMs, are really pulling pretty strong for our solutions, so that is what is helping us. We have continued to increase our presence, continued to increase our market share. And like I said in my comments, my remarks, we have a new customer. We are going to be seeing revenue in Q2, and it's another indication that we have a very, very good solution in the marketplace.

So is the PCTEL part of Connexion still continuing to use Silicon Labs?

Connexion is a very valuable customer, and their end customers continue to require and demand the use of the silicon (indiscernible) D.A. So their software and our DA is a very compelling solution in those markets.

And on the Panasonic design win for the ISOmodems, are you seeing expansion of relationship beyond this source product, as you just entered this Japanese OEM, since they are also major handset makers?

Every time we engage with the large customers, every first engagement is an instant examination that we tend to pass with flying colors. So we take every opportunity in every market and every customer to see how we can expand in different areas and different applications, and that is a key part of our strategy.

And on the Aero side, on the wireless side, Samsung was pretty much flat, so you must have had nice growth in non-Samsung business. Where do you see your market share, considering what Nokia is going through right now, by end of this year in GSM/GPRS and how is the EDGE strategy unfolding?

It will be a continued market share shift among the handset makers, and I think over the next 12 to 18 months, we are going to see some other shift as some of the manufacturers based in China start moving outside China. You are going to see a presence in Europe. You're going to see a presence of Chinese manufacturing with some branding that's either acquired, or they are using to penetrate the European market. So I don't think we have seen the end of the market share shift among the new players.

And regarding EDGE, as we have discussed in the past, Aero II is EDGE-compatible on the downlink. You are going to see us promoting a reference design probably around the Q3 timeframe that will offer a solution, a very compelling solution to our customers for full EDGE compatibility.

And Aero II is on schedule to tape out in Q4?

We're not going to comment about tapeouts now. I think the first important milestone is having a reference design out there that customers can take to market. That is our key milestone and obviously, we will continue working on designs, the follow-ons to Aero.

Thank you.

Arnab Chanda.

Nice quarter. A couple of questions. If you can talk a little bit about the seasonality you experienced in one business versus another, did you see pretty much all businesses up sequentially? And another question I have on the mix. If your non-wireless businesses are actually higher gross margin, if this is the year of voice-over IP, etc., should we expect margins to go up through the year?

This is John McGovern. The answer on the mix, we had between the broad-based product and the handsets the same mix of 46 percent and 54 percent both in the fourth quarter and the first quarter. So we had a nice, balanced growth process across those two product groups from the fourth quarter into the first quarter.

Regarding gross margins, with the help that we are expecting in the non-wireless business. We have typically set our model around 54 percent gross profit margin. We've shown that for a number of quarters. And I think if you look at all the dynamics of the various products, that is still a reasonable trend on gross margin. As we said on the call earlier, that we would expect on our operating income model in the June quarter to come in about the same gross margin, in the 54 percent range.

Thank you, John, and I hope you enjoy your second retirement.

I will be working on special projects here with Dan Artusi, so I suspect he'll keep me busy.

Tore Svanberg.

Good afternoon. First of all, Dan, can you talk a little bit more about your voice-over IP products in reference to content?

You say content?

I am just trying to understand your ASP per system between DAA and ProSLIC.

Let me separate it too. All the voice-over IP boxes that connect to broadband require a cross-link to connect to the analog lines inside the premises. So most of the boxes going out today are dual channel -- so have two ProSLIC per box. That is because many households or small SOHO or small enterprises want to have two telephone lines. So you will see that most of the boxes are dual channel enabled. That is a content across all the boxes.

In some cases, we have DAA incorporated into the box, and the DAA can be incorporated for one of two reasons. One is in the case of PBX, they connect to the trunk lines, so you need an analog interface to the trunk lines. So the DAA is the inverse of the cross-linkages in the other side, so you have to connect to a trunk line that goes to a central office.

In other cases, we have regulatory requirements where you have to maintain a connection to the old PSPN (ph) at all times, only for 911 phone calls. And that is -- in some areas, in some countries, that is regulatory driven. So in many cases, the box will have a DAA that connects to the old established analog in case there is an issue with the broadband, only for emergency. So those are the two applications within the box.

Okay, very well. Going back to your F350 microcontroller, where are you going to be manufacturing that part?

They have to be fitted. The wafers are all manufactured -- it's a flash-based product. They are manufactured at TSMC. TSMC is our primary supplier of our wafers across the Company. So that was the other good part of the MCU business, is they share the same supply chain.

Okay. And are you seeing any capacity constraints at all or have you secured some good capacity there?

We have secured the capacity for the MCU business.

Great. Thank you very much.

Sandy Harrison.

A couple quick questions. Just as a follow-on on the prior one, they asked about capacity. How is the pricing environment out there at the foundries? Is that something that you are watching and what is your view on that over the next couple of quarters as to where that goes?

Obviously, the market environment is very different today than it was let's say a year ago. If I can use analogy, a year ago we were flying at 30,000 feet with very loose air traffic control. And right now, we are all flying 1000 feet above ground with very tight air traffic control. So we have to be watching the forecast. But the benefit that we had is for the last three years we have been on a growth path. So our suppliers, our partners, they have historical track record of what we needed, they were able to make projections and they were able to support that and continue to support that.

So near-term, we are in good shape from a supply standpoint, and we are working on the later part of the year. I spent a lot of time in Asia in the first quarter working through our supply chain, but I think the advantage we have is we are not coming out of a long slumber and now asking for (indiscernible). But we have been on a steady ramp quarter on quarter. So I'm very confident that this is a typical cycle in our industry, and I lost count of how many of these I have gone through in my 28-year career. So we will handle this one and just position ourselves for continued growth.

Got you. On the signals, it sounds like the MCU product is starting to do well. Is there any market -- Dan, you went over a bunch of opportunities in areas you're playing. Is there one particular market or markets where this product is a no-brainer for customers, that it has something that everyone needs, wants or uses?

Any market where you need a precision analog, where you have a sensor or you have some analog functionality, what this allows you is with a single chip to have the performance of a high-performance of analog converter that otherwise you would not put in a board because it becomes too expensive or too bulky. So the advantage is we can provide in a very small footprint, very, very small package, we can provide high-precision analog. So markets in instrumentation where there are sensors. But again, we are looking at this as a very broad market presence across many, many applications.

As far as some of the other markets that we haven't talked about, as you are looking through the new car offerings today, satellite seems to be almost -- they give you three months free now. How is the satellite radio and the other markets like that? What assure (ph) your expectations throughout the year in that area?

We're very excited about our participation in the satellite digital radio. As you know, today the revenue in that market comes from the synthesizer. We have a synthesizer. It is virtually 100 percent penetration across all the receivers that are out there. We're well-positioned with a world-class partner like Delphi, so all the GM cars, all the GM vehicles going out with receivers for satellite for XM have our sympathizers. So we are well-positioned there and very pleased to report that our tuner has just passed some tests with one customer and we're very pleased with the results.

So we are gearing up for revenue in the news later model year. As you know, the automotive industry takes awhile for all the approvals and all the qualifications, but we're well-positioned and we have put some features on that tuner that are very attractive to the high-volume manufacturers. So I'm very pleased the progress -- and from what I see in the reports the subscriber rate continues to grow. It seems like these services are becoming very popular.

Mark Edelstone.

Good afternoon. Nice quarter once again, and congratulations on Russ getting a clean bill of health to come back and join the Company. A couple questions if I could, Dan. The first one is you gave us some details on Aero II. Based on what you've seen from the first silicon, will you need to do any revs to that before that can go into production, or do you think the version you have now is sampleable and eventually able to go into production as is?

In the mixed signal, there is always a second rev to fine-tune. And we left in the design a few things that will allow us to zero in on the final spec that we want. We feel that this rev would be sampleable -- initial samples out of these rev. So I could be very pleased with the results so far.

Great. So no impact on one's ability to basically design it in? You'll just fine tune the design before customers would take it into production?

It's no different what we did on Aero I back in 2001.

Great. And can you give the overview that you have seen here out of the set-top box market in Q1, and what your observations look like going into Q2?

Set-top box market is still very strong. I think the biggest changes happening right now, Mark, is the PBRs are gaining a lot more penetration. The good news for us is a lot of those boxes require high-speed ISOmodem, so our ASP goes up with those. So we see the strength continue. There's going to be a whole cycle of replacement of set-top boxes. Recent change in ownership of one of the satellite providers gives them a larger volume, worldwide reach. So we see opportunities many places and we have been gaining market share with some new box suppliers outside the U.S. So we felt very good in Q1 and we see a lot of good opportunities moving forward. And again, if you remember a comment I made about Panasonic, we're starting to see ISOmodems incorporated into digital TV -- not just in the set-top box, but now the TV would come with a high-speed modem for some of the services.

Great. And one quick question for John. I noticed that on the P&L you had an other income there of $1.8 million. Can you just describe what that is from?

During the quarter, we sold some test equipment to some of our test vendors. So that entire amount of $1.8 million was related to the gain on that sale.

Do you expect any of that to continue here in Q2?

No, we do not.

Okay, great. Thanks.

Jeremy Bunting.

Thomas Weisel Partners. Dan, could you comment on what the current competitive landscape for soft modems is and where Motorola's position is within that? And for John, were there any other customers over 10 percent other than Samsung, and are there any customers hovering just under that line?

We have many partners in the soft modem space, and Motorola was the latest one to be added to that list. They have a very good code (ph), well tested. They have an excellent software team working with that. And so it is one more partner that we have added to the team that we have out there that is collaborating with that as we promote the hardware piece. But we're very pleased to have Motorola in the team of partners and this recent win has been a very good opportunity for us to work together.

Jeremy, on your follow-on question, Samsung was a 19 percent of revenue customer in the first quarter. There was no other direct customer that is over 10 percent. There is one other customer, EDOM, which is our sales rep in Taiwan, that represents behind it, of course, a number of customers, and they were 16 percent of our revenue. So there are no other customers greater than 10 percent besides those two.

Okay, thanks. If I could, one last question. Just to roughly (indiscernible) things, would it be right to assume that your DAA revenues are running about twice your ISOmodems?

We're not giving on specific guidance on that, but over the last, say, 18 months the ISOmodem has done very well. And although it has not pulled up to parity, it is certainly shadowing DAA because of its success that we've had over the last six quarters.

Okay, thanks very much.

At this time, I show no further questions.

Thank you. This now concludes today's call.