Silicon Laboratories Inc (SLAB) 2004 Q2 法說會逐字稿

Good afternoon and welcome to the Silicon Laboratories second quarter earnings release conference call. At this time all participants are in a listen-only mode. After the presentation we will conduct a question and answer session. This call is being recorded. If you have any objections you may disconnect at this time.

Now I will turn the meeting over to should say Shannon Pleasant. Thank you, ma'am, you may begin.

Good afternoon. This is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the company's quarterly financial results. The financial press release, reconciliation of GAAP to nonGAAP financial measures and other financial measurement tables are now available on the investor page of our Web site at www.sililabs.com.

This is call is being simulcast and will be achieved on our Web site. There will also be a telephone replay available approximately one our after the completion of the call at 800-584-7317 until August 26. I am joined today by an Dan Artusi, President and Chief Executive Officer, and Russ Brennan, Chief Financial Officer. Russ will discuss our financial results and Dan will review business activity this quarter and provide guidance for next quarter. Well have a Q&A session following the presentation. Before we begin let me comment about the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

Our comments and presentation today will include forward-looking statements or projection 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 under taking an obligation to provide updates in the future. There are a variety of factors that we may not be able to accurate predict or control that could have a material, adverse effect on our business, operating results and financial conditions. We encourage you to review our SEC filing that identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Also the nonGAAP financial measurement which are discussed a today are not intended to replace the presentation of Silicon Laboratories GAAP financial results. These measurements merely provide supplemental information to assist investor in analyzing Silicon Laboratories financial position and result of operation. However these measures are not an alternative to GAAP and may be differed from nonGAAP measures used by other companies. We are providing this information because it may enable investor to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operation.

Now I would like to introduce Silicon Laboratories President and CEO, Dan Artusi.

Thank you, Shannon. Second quarter revenue increased by 11% to a record $126.1 million. The business continues to outperform most of our end markets, resulting in market share gain for both established and new products. Execution of product development, manufacturing and sales were all key factor inside Q2 performance. I will talk more about the business after Russ reviews the financial results.

Russ?

Thanks, Dan.

Our revenue of $126.1 million for the second quarter is an 83% increase over the same period in 2003. The split of broadband mixed-signal and mobile handset product revenues for the second quarter was at follows. Broad-based, mixed-signal revenue which includes Silicon D.A. A., ISO modem, ProSLIC, DSL analog front ends, [inaudible] chips, optical transceivers and CDRs, satellite radio tuner, [inaudible] synthesizer for nonhandset applications and MCU products, grew sequential by 10% and represented approximately 46% of revenue. Mobile handset revenue, which was driven principally by the Aero transceiver family, grew by 12% and represented approximately 54% of revenue.

Gross margin for the second quarter was the same as last quarter, at 54.4%. Research and development investment dropped slightly from first quarter levels, and was below projections at $17.9 million, up 14.2% of revenue. R&D investments related primarily to new product take outs, originally expected at the end of the second quarter will now occur in the third quarter.

Selling, general and administrative expense increased to $16.6 million, or 13.2% of revenue. GAAP operating income for the second quarter was $32.9 million, or 26.1% of revenue. Excluding a $1.2 million non-cash charge for amortization of deferred stock compensation, adjusted operating income for the second quarter was $34.1 million. This represents 27% of sales and is the eighth consecutive quarter that we have met or exceeded our target operating model. Our Federal Income Tax rate on a GAAP basis was 32.1%, resulting in a management rate of 31% after an adjustment for a non-cash charge. We expect the tax rate to remain at this level through the rest of the year.

Other income was slightly higher than expected due to a $183,000 gain on an asset sale that occurred in the second quarter. GAAP net income for the second quarter was $22.8 million, or 41 cents per fully diluted share. Adjusted net income per share, excluding the non-cash deferred compensation charge, was 43 cents. When compared to last quarter, which included 2 cents of the gain on sale of capital equipment, EPS grew 13% sequentially in G2.

Our BS remained very healthy. Cash and investments at the end of the second quarter increased by almost 10% to $223 million. Accounts receivable totaled $67.7 million, with day sales outstanding of 48 days. Inventory was $34.7 million, increasing by four days to 54 days. By back inventories were generally replenished and production ramp through the quarter at finished goods levels were depleted. Inventory distribution also went up consistent with our plan to increase MCU sales and distribution infrastructure to support this ramping business and to support projected growth in our other broad-based, mixed-signal businesses.

It's important to note that a conservative approach to revenue recognition. We do not recognize revenue until sell through to end customers. Overall we believe inventory is adequately balanced and staged to meet expected demand in the second half of 2004. Dan, I will now turn the discussion back to you.

Thanks, Russ. I am really pleased with the steady growth cross our business during the second quarter. First I would like to talk about the broad-based, mixed-signal business which increased by 10% to $57.4 million in Q2. After only six months of operation with Silicon Labs the micro controller business has shown impressive growth due to a solid product portfolio and excellent sales, marketing, and manufacturing execution. Revenue increased by 55% from $3.3 million in the first quarter, to $5.1 million in the second quarter, with meaningful revenue growth expected again in the third quarter.

Our USB and small form factor MCU represented the largest percentage of the grow. It was primarily due to the side wins in consumer products and communications hands held, particularly in Asia. During the quarter over 2,000 development kits were sold and products shipped to approximately 1500 individual customers. Our sales team reported over 150 new MCU design wins during the quarter which represents a mix of existing and new Silicon Labs customers. A few sample applications include security cameras, handsets, digital cameras, fingerprint analyzers and smart battery. We also uncovered a host of new vertical opportunities due to the unique feature set of our MCU product.

For example, the integration of flash memory on a chip has opened opportunities to provide a specialized micro code to produce application specific parts for targeted vertical markets like modem control. The voice-over IP market continued to accelerate, driving more than 40% sequential increase in product for the [inaudible]. Deployment of voice-over IP services has ramped in Europe and North America in addition to the already substantial footprint in parts of Asia. The cross link is a key part of residential voice-over IP Gateway, terminal adaptors and integrated access devices where it provides the analog telephone interface to the traditional phone line. During the quarter we announced we win with leading telecom equipment supplier [WAWAY] for voice-over IP Gateway. We also secured key wins with D. Link for voice over DSL Gateway.

The ISO modem imbedded modem business continued to exceed expectation, growing by more than 10% sequentially, and achieving a record revenue quarter. We gained share in the set-top box market including high end DBR.s. We secured additional set-top box design wins outside of the U.S. increasing market share potential for future quarters. Applications outside of the set top box are a small but growing percentage of the ISO modem business. In particular, point-of-sale terminal and security applications offer growth opportunities as we continue to diversify this business over time.

The overall D.A. business was impacted by softness in the DC modem market. Silicon D.A. revenue declined slightly from the first quarter revenue levels and third quarter revenue is expected to be approximately flat to the second quarter. Our successful partnership with Motorola to provide self modems to Apple began to contribute significantly to Silicon D.A.'s revenue during the quarter. The Silicon D.A. footprint would be expanded into the set-top box market as well. During the quarter we announced that S.D. Microelectronics, the market leader in set-top box processors, licensed and is integrating our systems site D.A. Technology to their processor.

The integration of our systems IDA with S.D.'s new processor gives us access to the footprint in the set-top box market and position us for quick market penetration. We expect this solution to be broadly adopted in low end set-top boxes. Looking forward we believe the momentum behind the broad-based mixed-signal business will continue into the third quarter with increased sequential revenue growth rates compared to the second quarter. We expect ProSLIC, ICE Modem, and MCU's to be the main drivers behind the broad-based, mixed-signal revenue expansion, demonstrated the continuous progress we are making in diversifying our business model.

Moving to the mobile handset business, revenues increased by 12% to $68.7 million. By quarter end we believe we increased our mobile handset unit market share to over 25%. Our Aero family continues to be adopted across the range of handset platforms. In fact, Aero One and Aero One Plus , which we introduced only one year ago, represented over 40% of the mobile handset revenue in Q2. This demonstrates a rapid adoption and ramp up of our next-generation products. Samsung remained our largest customer at 19% of revenue during the second quarter. Handset revenue increased by approximately 7% sequentially at Samsung, and we continue to see considerable new design activity. Aero is to the E.A. model expected to be received very positively by consumers. We also expect to benefit from Samsung's push into the low end of the market with new design win into their export 50 and E-300 series model.

The Aero family is also gaining share at other up and coming handset makers. No Samsung model has their revenue increased by 14% during the quarter, an impressive growth rate. L.G.L. Electronics is a good example of the type of customer in this category. LG, which is estimated to be the sixth largest market shareholder is now providing C-1300 and L-1200 GPRS handset to Singular, both of which are based on Aero design wins. We also are partnering closely with customers to help them accelerate the design of new handsets. The opening of the joint labs in TCLs facility in , [inaudible] China, demonstrates how we are dedicating resources to closely aline our development and support with our customers needs.

We see several critical development milestones during the first half of the year. Aero Two, which began selling to customers in June, further distances us from the competition in the transceiver market in both integration and ease of use. The only single chip transceiver available Aero Two also offers an excellent improvement in performance over competing solutions. Offering even better receives sensitivity than Aero One's market leading performance, Aero Two improves sensitivity by almost 60%. We believe that Aero Two when combined with our PA, offers the best performing radio in the history of mobile telephony.

Aero two is also the key building block to our edge radio solution which we began Sam principal this movement Aero two and the Aero edge radio has been received so enthusiastically by customers that the sign of activity began immediately when Sam pulse became available. Aero Two is also the key building block to our Edge Radio solution which we began sampling this month. Aero Two and the Aero Edge Radio has been received so enthusiastically by customers that design activity began immediately when samples became available. Aero Edge Radio is a complete radio solution in half the foot print of current Edge solutions in production. Based on proven technology we believe the Aero Edge Radio offers customers the most cost-effective turn key edge solution for their handset designs. We still anticipate that volume in the edge market would be relatively modest in the second half of the year, gaining momentum in 2005.

We are very pleased with the customer reception of our power amplifier. Customer evolution has progressed as anticipated. We are still in the early stages of design activity. We expect meaningful revenue in 2005. For Q3, we are generally cautious in formulating our mobile handset revenue expectations. There is uncertainty about demands and inventory in the mobile handset market. We anticipate this market adjustment will lead to a significant sequential revenue decline in the third quarter. Our inventory check indicate they are two to three weeks of excess supply and that the largest growth market in China and Southeast Asia are moderating in the near term. We still believe that the long-term prospects for growth are very strong and we feel that we are positioned among an increasingly broad-based of handset customers who continue to contribute to our growth beyond the third quarter.

Now I would like briefly comment on our operating income model. In Q3, gross margin percentage is expected to increase slightly due to a higher mixed of broad-based, mix-signal revenue. We expect R&D investment of about 17% of revenue and SG&A at approximately 14% of revenue in the third quarter. This model would allow to us generate a strong operating cash flow and maintain our target operating model of 25% before taxes and non-cash charges with a two percentage point band each quarter.

And now for the outlook. In Q3, we anticipate revenue in the range of $120 million to $123.6 million. Q3, diluted net income per share on a GAAP basis is expected to be 34 to 36 cents. Q3, adjusted diluted net income per share which included non-cash charge is expected to be 36 to 38 cents.

Shannon?

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

[Caller instructions] You're first question comes from Mark Edelstone. Please state your company name.

Morgan Stanley. Dan, I wonder if you could give a little bit more detail as to how you see the inventory situation there in the wireless market? Then also, you had talked about some slowness in the notebook market for DDA's as well. I was wondering if you could expands on that, too.

Okay, let me start with the wireless. One of the things is that we have performed very well in the supply chain, and we have been leading in maintaining on time delivery to customers. That you have not the case or still not the case in some instances for other components for the handsets. So I think that what we are seeing is these adjustment in the marketplace, all these things trying to catch up. There were other more micro economic elements in China that are taking place in this quarter. So all that put together make us be cautious in providing the guidance moving forward.

I guess in terms of the DAA market, what we've seen here is that in the second quarter the PC market was really driven primarily by corporate PC replacements. The PC modem market was relatively soft. And based on current order pattern from our customers we believe this business will remain about flat in the third quarter.

Guys, this is a follow up on to the wireless comments. Dan, how much do you think your wireless revenues will fall off hear this quarter and is it your expectation that you can kind of clean the channels inventory before the quarter is over?

Let me take that in one piece and then Russ will comment on the numeric parts. We think it's two to three weeks of inventory and that's what we pretty much view as a decrease in our revenue in the current quarter, in Q3. So we think that it would be an adjustment and we expect for the following quarter to be a rebound on that. But this is a transition quarter, that's the way we view it.

Mark, this is Russ. In terms of our plan there, our plan would be to significantly address the inventory situation, that our revenue decrease on a sequential basis would be in line with two weeks of quarter shipments, two to three weeks of quarter shipments. And that the business would get back to more normal seasonal growth rates after the end of this, what we believe is a short term market adjustment. And one that we believe is no change in the competitive landscape and one we still feel very comfortable about our position going forward.

Thanks a lot, guys.

The next question comes from Sandy Harrison of please state your company.

Pacific Growth Equities. Good afternoon, Dan and company. Could you talk a little bit about the some of the MCU design wins? What some of the successes were? You guys sold a bunch of design kits. Could you highlight what you guys are doing really well in that business in showing the growth that you have in the last couple quarters?

Obviously we are very excited about it coming right out of the gate with strong growth in this business. It's been with us for only six months. What we are seeing is a very positive response from customers because of the very, very attractive mixed-signal capability of this part. The landscape of micro controllers have been pretty crowded for the last several years, did enough for the competitive landscape, did enough for the mixing capability that we have. We have seen customers adopting our solution for small camera modules that go in handsets, charging functions, motor controls, smart cables that go in handsets, between handsets and PDAs, or PCs. A wide range of power controls is an incredible number of applications. We will launch new products since the organization joined Silicon Labs. We launch a 24 bit data converter base device and a high-speed 16-bit [inaudible] converter, the FO-64, very, very well priced for the market. So the combination of the mixed-signal, the new product, the support and the number of kits that we are shipping out there, that's a key metric for us. We keep an eye on how many kits we ship out because that gives an indication of future revenue. We also are very encouraged when we see the names of the customers buying kits through our distributors. We see big names, big company names by development systems, not in one or two quantities but half a dozen type for development. So that's a very positive indication. The market is large, a [inaudible] of $1 million still small compared to a $5 million market but what it tells us is its plenty of market to take, plenty of mark share to shift in our favor.

What's the AST on the kits, again, I think it was $1,000 or something as I recall?

No, the kits are priced anywhere from $100 to $300, in that range. And the revenue, the significance of the kits is future revenue of Silicon.

Gotcha. And then just a quick followup. The voice-over IP, that looks like that's working for you. What do you guys see in that market for the next couple quarters as far as growth rates and opportunity?

I think we are going to continue to see healthy growth rates for the next several quarters as the new service provider, the new players in the marketplace, all this new service providers deploy and gain subscribers. We are going to continue to see that. We've seen some, some very positive changes in other markets, the U.S. that have been really behind Asia in terms of picking up the voice-over IP is now accelerating. So I can be talking on these calls for a couple of quarters that we see a voice-over IP becoming stronger and stronger and we feel very good with our solution. It's a very compelling solution.

Thanks, guys.

The next question comes from Brian Modoff. Please state your company name.

Hi, Deutsche Bank. Hi, Dan, Shannon. Can you talk about where you see your in Asia, is this an issue specific to China or is this Korea? Can you be more granular or where you see the inventory, kind of a [Tiwanees], Chinese issue? or [inaudible] customers.

It's hard, the part is so global, so many people outside of China built parts for China, there are people in China building parts for the outside. There are several factors. One is you have an incredible number of new players coming into the game. If we look back at five years ago there were three or four large cell phone players in the marketplace and now we have several dozen manufacturers around the world. So the landscape from the customer standpoint has changed. In China there are 32 suppliers of handsets that are going to be licensed to produce handsets. So I don't have usually there are a lot of people there. But also there have been some changes in China. In May the gold room had changed some of the lending, the credit rules. So a few companies were able to secure cash to grow. That is part of the policy that's going to be put in place to control the economy. We think that that will go to Q3 and then probably loosen up later in the year. So we see that as a change. There's a big difference between the official rate and the unofficial rate for private companies. So those are the micro levels. All that plus the component situation that I spoke about earlier, all that combined make us cautious on the situation.

This is kind of more correlate to do China, perhaps the ODMs in Taiwan, in terms of looking at your new products coming in, the Aero Two B. and then the RF C-mos PA, the timing, it looks like Aero Two B, probably talking about volumes next year, would you estimate?

We will start revenue shipments next year, if the first half, and we will continue to ramp like we have seen the previous generations, we have public multiple generation that co-exist so well see that throughout next year. We are very excited about the reaction from the customers. Our customers designing prototype phones very quickly. Aero One was very easy to use and accelerated the development of phones among multiple customers. Aero Two is even easier to use. We have seen positive reaction from customers. The other thing we are very proud of the team, first Silicon 113 technology we are able to sample the customer devices. So that's a big accomplishment. It speaks very highly of the quality of the design we put out there.

This is Russ, I would just like to add a few more comments to the Q3 handset revenue projection. Obviously in the first half of the year, the growth in the nonhandset piece of that business has greatly exceeded the Samsung piece and has been at the highest level. We would expect that the largest portion of the adjustment would be in the nonSamsung piece. However, it is important to note that we Samsung like all mobile handset suppliers, are carefully reviewing and recalabrating their inventory positions. The one thing while with don't give out guidance by specific customer, we feel very comfortable about our position in Samsung, the design wins and ramp up in connection in some of those most popular, new handsets, and what we hope will be their most popular handsets going forward.

Then looking at the Aero Two and the Aero Two Edge product, not the one where you have these through a modulator, Dan, can you walk through the timing of that product, any comments on the C-mos PA product?

Well, Aero Two we are sampling today. We have, sampling, we have shipped over 50 development systems for Aero. Those are out in the field. They were deployed very quickly after the first was out of the. Aero Two Edge, we start sampling this month. The reaction has been very, very positive because of the approach we took on that device, and you have seen the announcement on that one and we continue to expands the product family for several quarters. It will be a variation of that and more integration on Aero Two Edge.

What do you think the timing of volume on that product is?

It will be into next year, Brian, for the Aero Two Edge.

Then the C-mos PA?

The C-mos PA, sorry. On that one, we expect meaningful revenue for next year like we have been saying for the last two conference calls. That's when we expect the meaningful revenue to take place.

You made a comment I think on the Aero Two Edge product, was it your own PA you were talking about in terms of the best performance out there or was that with another PA?

In edge we are collaborating with other people in the marketplace. We have several options and we are offering use in a leaner P.A. we have taken a more cost-effective more straight-forward approach with our solution in using a linear P.A. We are collaborating with some other people in the industry.

Thank you.

Thank you, Brian.

The next question comes from Arnab Chanda. Please state your company name.

Lehman Brothers. Thank you. A couple questions, maybe could you tell us a little bit quantitatively, you told us DAs would be flat, in mixed-signal and obviously mixed-signal has to grow to offset handset decline. First off if you could shed some light on what you expect the other segments of mixed-signal to do? Then I have a follow up. Thank you.

This is Russ Brennan. As we said in our opening remarks we do expect the D.A.A. business to be relatively flat in revenue from quarter to quarter. However, we see very good and accelerating growth in our other diverse products in that category, particularly in the ProSLIC area, the MCU area and in the ISO modem area. So those will be the main growth drivers behind our accelerating growth in the broad-based, mixed-signal business.

Thank you very much. Then a question about the handset business. Dan, maybe if you could talk a little bit about what sort of opportunities you have with your PA? Is it a one to one attachment to GPRS? And also with your edge transceiver, are you expecting to get into new suppliers? I think you were obviously went penetrated with GPRS. Thank you.

Well, obviously our goal is to have a one to one attachment. That's what we are driving. We are showing, designing samples to customers and like I said in my earlier remarks, we had probably the most, the highest performance radio combination of the Aero Two and the PA in dual configuration. We have expectations also that D.A. can work with other transceivers, somebody else if they wasn't to use it. So we are well position from that standpoint.

If you have a follow on question?

Yeah, I did ask for the edge transceiver, the design wins that you're looking for, are they going to come with the new head transceiver or just the old one that was, I think on the return and when do you expect to see those revenues?

The radio that we have announced using Aero Two, the one we just announced recently and the one we started sampling in June. So it uses our latest and greatest Aero, which is Aero Two, and we expect revenue next year. We are working with customers in designing this today.

When can with see announcements for customer design wins?

As we mentioned in our opening remarks there, the Aero Two, and Two E is being rapidly endorsed by our customers. There are a couple of designs that are already taking place. Those design wins when they go into production.

Thank you very much.

Thank you. The next question comes from Blake Carroll. Please state your company name.

A couple questions, if I can. Dan, typically on the handset market, the September quarter starts slow and then ramps as we get throughout quarter and we move in towards the back to school season and the Christmas season. I'm wondering if you could talk about whether you see sort of a hockey stick type of demand pick up as we move through the quarter? And then secondly, if you can talk about the pricing environment? Maybe some of the guidance has to do with some excess pricing that's going on in the industry.

Let me start with the second part. The guidance is not related to pricing so there's no connection there. The industry follows traditional pricing curves and we have talked about those in the past. There's no change of that. Regarding the hockey stick, that could happen toward the end of the quarter, later in the quarter. We are well-positioned with die as we indicated, we have increased our die position. And so we are well-positioned unless something will change but at this time we are talking a very cautious approach.

Dan, could you give us some indication on where the ends markets for your products are on the wireless side?

They are worldwide, Blaine, the U.S. Obviously our part out performance sensitivity, any other transceiver in the market. So what you are going to see with the new players coming into the market trying to display displays the traditional handset players. We see now LG is taking a very visible position. Singular, if you go to a Singular store today you see big posters highlighting the LG phones. Those supplier tends to come into the U.S. without a transceiver because of high sensitivity and high performance. So that's a very key point. We also see in Europe wide spread of either some local suppliers European suppliers like, [inaudible] that we have shared in the past, new suppliers like [inaudible] they are key players and then across Asia a multitude of suppliers, starting with the big once, Samsung and LG being very strong supplier. So worldwide, we are in a lot of PDAs because of the small phone factor, small size, high performance, all the new blackberries, GSM, GPS blackberries they are all enabled by the Aero technology.

The DSOs picked up a little bit during the quarter. Can you talk about linearity and in conjunction with that could you tell us how much the turns business is and then how booked you are for the September quarter?

Well, first of all in terms of the DSOs, they did tick up a little bit. There was some nonlinearity during the quarter that is reflected in those DSOs. Nothing that's extraordinary but as we mentioned in the opening remarks, production did ramp throughout the quarter and finished goods inventory levels came down. In terms of where we are right now, the comments I would say on our order patterns and lead times they are obviously been reflected in our Q3 '04 guidance. Backlog is really not a real reliable indicator of revenue in our case. Our lead times have changed. Somewhat on some devices are pretty much in the same normal ranges that they have been now that our die banks have been replenished.

Last, in the September quarter could you give us the split that you are assuming between the broad-based and the wireless?

We really don't give out specific revenue guidance by the two segments, Blaine.

Okay. Trying to get what that growth would be, or that decline would be. All right. Thank.

Thank you.

Thank you.

Thank you. Mr. Pergini, you may ask you question and please state your company name.

Merrill Lynch. Hi guys. Just a couple of quick questions. First of all at inventory, you said it's two to three weeks. I was wondering how do you measure this? Is this anecdotal that you hear from your customers or is there any other way that you measure this two to three weeks of inventory?

This is Russ. What we do at the end of each quarter, the beginning of the current quarter is we do our own pretty rigorous channel checks as well as we meet with the majority of our customers to assess their supply and demand situation. And that was the essence of where we began to get a real feeling that there was excess supply in the channel. And that really led to our cautious revenue guidance that we gave in mobile handsets.

Okay. Then looking beyond next quarter, maybe, Dan, could you tell us what's your longer term growth strategy in the wireless business, especially, if you see any opportunity at Motorola, for example, and also could you talk about your W. CDMA strategy as well?

Obviously we don't comment by targeted customer that we have. You mentioned Motorola we supply to several OEMs, we are suppliers that are suppliers to Motorola last our growth strategy for the wireless consists of a couple of pieces. One is adding content on what we are participating in today. So the PA is one example of that. Aero Edge Radio is another example of that. And we continue to look at what are the opportunities for strong mixed-signal participation, where there is a mixed-signal opportunity. Going to the last part of your question, on the wide band [inaudible] 3-G. We have always indicated we had that in the roadmap and we are going to be talking about that in the future, obviously 3-G is getting a lot of attention these days and we have that in our roadmap.

Thank you.

Thank you.

Thank you. [Caller instructions]. The next question comes from Jeremy Klein. Please state your name.

Piper Jaffray. Good afternoon. First question regarding the distribution channel for your mixed-signal business. You look at it excluding the MCU ramp, can you describe how the inventory has been tracking throughout the quarter.

This is the inventory in distribution?

Yes.

The inventories in distribution have pretty much tracked as expected throughout the quarter. It was a little bit more additional supply that was available in the later half of the quarter, as supply from our fab partners and backend partners increased. So there was a little bit of growth in the latter heart of the quarter than the first half of the quarter.

Can you talk about the sell through rates during the quarter, as well, please.

The sell through rates throughout the quarter was fairly indicative of prior quarters, no real substantive change there. Again, in the broad-based, mixed-signal business there is a variety of different product areas so it's hard to characterize it other than in aggregate terms.

Okay. Then final question regarding the ST micro licensing agreement. When you talk about the timing of the volume ramp and what type of ESPR margin profile you are expect, maybe is it better or less than the average for the consumer business?

Okay. The 5100, that's the processor that was announced recently by the integrated systems site, obviously will sell the line side, which is a key piece of the proprietary technology on the modem. And there's a software element attached to that. So there is software that had to go into the processor to perform the modem function. So that will take sometime. So we don't see the impact short term. We see a positive impact into next year as they continue to design and into set-top boxes, new set-top box. In the meantime we continue to sell ISO modem, low speed ISO modems into those sockets. It's a good opportunity for to us transition from one technology to another. ISO modem imbedded to [inaudible].

Jeremy, this is Russ Brennan again. Just to make sure we are in sync, we do not recognize revenue through distribution until it sells through to end customers.

Yes. Understood. Thank you very much.

Thank you.

Thank you. The next question comes from Capesh Kapadia. Please state your company.

Unterburg Tobin. Dan, a question on the wireless side. You know, your stock is down almost $9 in after hours, is it the beginning of a declining trends, beginning of Q3. How confident are you that once again an inventory situation that we are going to and be on time with the edge transition?

Well, Kalpesh, we are taking a very cautious prudent approach to this. We have very large market share. We have, in the second quarter we got the design into 60 different models around the world. That's up from Q1 where we are in the 50s range. We now have hit 40 volume customers out there. So if the market is starting recovering and the inventory situation gets back to normal, we are very well-positioned to regain . It's not that one of one customer or two customers. We are talking about a significant presence out there, and that is a key part of the strategy. Because operator shifts from one provider to another and things change. I believe we are in a very, very good position. The competitive landscape has not changed. We continue to drive a very strong market share. And the reaction I have seen on Aero Two is just very encouraging because it gives me the sense that we have put even more distance between us and behind.

The next question, Dan, on the micro controllers , clearly it is meeting everybody's expectations in the near term. Now it is almost over 20 million this year in revenue if it continues this way. How do we look at that business in 2005? What kind of growth do you have for your [inaudible]?

Continues to grow. I probably we made acquisition would like to see the business in three years be in the range of a $100 million business. In order to get there in three years we have to have another good strong growth in 2005. Again, what I say always, Kalpesh, that reaction from the customer, I personally visit customers, large customers with a lot of large volume opportunity, is very, very encouraging. The team that we have added to the original team to augment in marking and sales is perform, marketing and sales is performing very well. The integration has gone very well. We have absolutely no problem attracting people to join the team because of the caliber of product that we have out there. So I am personally very bullish on next year. Like I said earlier, in a $5 billion market, we can have a lot of traction just because of the analog of mixed-signal capability we put [inaudible].

Are we being very cautious because as I look at your customers and your prepared cometary is not as cautious on the market inventory, the inventory in Q3? Are we under shooting here or who do we look at it?

Well, Kalpesh, like Russ said, we do our own channel checks. We look at macro economics. We look at all kind of factors and have a lot of with our customers. And we are doing what we think is prudent running our business. We are blessed with opportunities, having a very diversified portfolio mixed-signal. So that smooths some of this adjustment that take place in some particular markets.

Thank you and good luck.

Thank you.

At this time I would like to turn the conference over to Ms. Shannon Pleasant.

Thank you for joining us today. This now concludes today's call.