Silicon Laboratories Inc (SLAB) 2004 Q3 法說會逐字稿

Welcome to the Silicon Laboratories Q3 earnings conference call. All participants will be able to listen only until the question-and-answer session. Today's conference is being recorded. If you have any objections you may disconnect at this time. Your host for the call today is Shannon 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.skylabs.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 866-470-8786 until November 26th. I'm joined today by Dan Artusi, President and Chief Executive Officer, and Russ Brennan, Chief Financial Officer. Russ 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 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 including Form 10-Q that we anticipate will be filed on or about October 25th, 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 operation. 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 highlights the results of the core -- of core ongoing operations. And now I would like to introduce Silicon Laboratories' President and CEO, Dan Artusi.

Third-quarter revenue was within our expectations totaling $121 million. The growing diversity of our business was clearly demonstrated in this quarter's results with broadbased mid single (ph) revenue growing in the double-digits sequentially offsetting expected weakness in mobile handsets. This also represents the ninth consecutive quarter that we have met or exceeded our target operating income model. I will talk more about the business after Russ reviews the financial results.

Our revenue of $121 million for the third quarter is a 46 percent increase over the same period in 2003. The split of broadbased mixed signal and mobile handset product revenue for the third quarter was as follows. Broadbased mixed signal revenue, which includes our silicon DAA, ISOmodem, ProSLIC, DSL analog front end, quad (ph) chips, optical transceivers and CDRs, satellite radio tuner, RF synthesizer for non handset applications, and MCU products represented approximately 53 percent of revenue and grew 11 percent sequentially. Mobile handset revenue, which was driven principally by the Aero transceiver family, declined sequentially by 17 percent to approximately 47 percent of revenue.

Gross margin for the third quarter increased to 55.6 percent compared to 54.4 percent in Q2 mainly due to a stronger mix of broadbased mix signal revenues. Research and development investment was $18.9 million or 15.6 percent of revenue. This investment was lower than anticipated due to product take outs (ph) completed in early Q4 that were originally scheduled for late Q3. Selling, general and administrative expense increased slightly to $17.1 million, or 14.1 percent or revenue. GAAP operating income for the third quarter was $30.4 million or 25.1 percent of revenue. Excluding a $1 million non-cash charge for amortization of deferred stock compensation adjusted operating income for the third quarter was $31.4 million representing 25.9 percent of sales.

Our federal income tax rate on a GAAP basis was 32.3 percent resulting in a management rate of 31.3 percent after an adjustment for a non-cash charge. We expect the tax rate to remain at this level in Q4. Other income was $683,000 and is expected to remain at this level in the fourth quarter. GAAP net income for the third quarter was $21 million or 39 cents per fully diluted share. Adjusted net income, excluding the non-cash deferred compensation charge, was 40 cents.

Our business continues to generate considerable cash. Cash and investments at the end of the third quarter increased by 8 percent to $241 million. Accounts receivable totaled $77.8 million with Days Sales Outstanding of 58 days. This increase in DSO from Q2 levels was primarily due to a more back end loaded revenue quarter in Q3.

Inventory increased during the quarter by $4.2 million with days of inventory at 65 days. Essentially all of the inventory increase was in broadbased mixed signal product with the majority in MCU. Inventory to distributors grew by approximately $13.5 million to support strong quarterly sales performance in ISOmodem, ProSLIC and MCU products. Important to note is our conservative approach to revenue recognition. We do not recognize revenue until sell through to end customers. Dan, I'll now turn the discussion back to you.

We're very pleased with the Company's ability to manage through a rapidly changing market environment this quarter. We continue to generate cash and met our target operating income model while making progress addressing the excess (ph) Aero supply at our customers. Our strategic objective to increasingly diversify the business was validated during the quarter. Broadbased mixed signal revenues had another double-digit sequential increase and represented more than half of Q3 sales.

Our ProSLIC product had another record quarter. Voice over IP services continues to expand, particularly in the U.S., where subscribers are expected to increase from about half a million today to over 12 million in the next 5 years. The ProSLIC and Voice DAA uniquely meet the requirements for Voice over IP gateway, (indiscernible) adapters, and integrated access devices improving on size, build materials and the ease-of-use. As a result, adoption of our solutions have been very wide spread.

A recent example is (indiscernible) Voice over IP gateway that will be deployed in Verizon's residential Internet telephony services. In addition, we believe telecommunications and data network service providers are beginning to reinvest in their networks. For the first time since the downturn in 2000, service providers worldwide are increasing capital expenditures, especially in next generation technologies. These service providers are focused on reducing their subscriber churn, increasing revenue from new services and on cutting operating expenses. These requirements play into our product strength.

Our ProSLIC, Voice DAA and networking products have all experienced increased demand as a result of this market trend. As expected the ISOmodem products experienced double-digit revenue growth again in Q3 achieving another record quarter. The sale of high-speed modems have been a key growth driver in this business in the last several quarters. High-speed modems surpassed low-speed modems for the second quarter in a row during Q3. Applications outside of the set-top box are in a small but growing percentage of the ISOmodem business.

We're continuing to expand our market presence to include digital television and industrial applications where a small footprint, global compatibility and excellent performance are requirements. Our microcontrollers are finding sockets next to ISOmodems and other Silicon Lab products in a variety of applications. We're also expanding into new markets. In Q3 we announced an integrated MCU with a 16-bit high Shannon Pleasant: ADC (ph). The F064 Showcases our mixed signal capability and is optimized for high precision analog and signal processing applications. In only 8 weeks we shipped almost 1,000 F064 evolution boards to prospective customers.

Overall MCU revenue increased to $5.4 million in the third quarter and is expected to grow at double-digit rates in Q4. During the quarter we expanded the product portfolio to over 60 unique products. We added over 200 new design wins and we increased our installed base of development platforms shipping 3,000 development kits during the quarter. We also added DigiKey, a well-known electronics catalog distributor, to our network. The expansion of our distribution presence is a critical component of our strategy to reach thousands of unique customers. We expect momentum to continue in this business as we convert design wins into revenue.

We see deceleration in the Silicon DAA business. In Q3 Silicon DAA revenue was down slightly from Q2. We believe this business will decline slightly again during Q4 due mainly to increased ASP pressure and inventory adjustments at notebook manufacturers.

Moving to the mobile handset business, revenues decreased to $57.1 million as expected. By quarter end we believe most of our customers worked through a good portion of excess inventory there. Sales to Samsung remained flat representing 19 percent of total revenue during the third quarter. We expect Samsung to decline as a percentage of revenue in the fourth quarter to slightly under 10 percent of total revenue and to be down sequentially by 60 to 70 percent.

Our projected decrease in revenue in Samsung reflects several near-term factors. The impact of Samsung's projected 10 percent sequential decline in total handset shipments, a decrease in Samsung's component on hand inventory policy by approximately 4 weeks, and what we believe is a onetime decrease of approximately 2 weeks in Samsung's production related to operator software issues.

Non Samsung handset revenue dropped sequentially during the third quarter by 25 percent as inventory was rebalanced. We expect this revenue to decline by about 9 percent as inventory moderation continues in Q4. We also believe that many of these customers are suffering from share losses in China and Southeast Asia to the top two handset makers which will impact our demand during the quarter.

We're pleased to report that we're able to increase penetration at several key accounts including LG where revenue increased by 18 percent sequentially. Total design wins in Q3 increased our highest level this year totaling almost 70 new wins in the quarter. (indiscernible) of our next generation mobile handset products have been very successful adding to the design win count. Customers (indiscernible) Edge Radio tell us that they like the flexibility of our solution. They prefer to select best in class components rather being forced into battle solutions. We believe that our linear architecture and flexible design enables any linear PA to be matched with our Edge solution, better meets customer needs and will result in broad market adoption.

Now for the guidance. Due to weakness in the semiconductor market, industry realignment of inventory and limited visibility we are taking a very cautious view of the fourth quarter. All product areas are expected to decline sequentially from Q3 levels with the exception of MCU products. In Q4 we expect to drop below the range of our target operating income model. We expect gross margin percentage to be comparable to Q3 levels. We expect R&D investment to increase by 12 percent sequentially to 22 percent of revenue. SG&A is expected to decrease by 5 percent sequentially and be approximately 17 percent of revenue.

In Q4 we anticipate revenue in the range of $93 million to $97 million. Q4 diluted net income per share on a GAAP basis is expected to be 18 to 21 cents. Q4 adjusted diluted net income per share, which includes the non-cash charge, is expected to be 19 to 22 cents. Shannon?

Before we go to Q&A please note that next quarter's call is scheduled for January 24, 2005. It addition we want to note that our year end 2004 Form 10-K filing will be made approximately 2 weeks after our earnings release due to the added requirements associated with the internal control certification provision of section 404 of the Sarbanes-Oxley Act.

We would now like to open the call for questions related to our Q3 results and Q4 guidance. Operator, please review the question-and-answer instructions for our call participants.

(OPERATOR INSTRUCTIONS) Jeremy Bunting.

Dan, could you just comment on -- specifically with regard to Samsung -- you commented that you expect Samsung revenues in Q4 to be down based on the fact that Samsung is going to reduce its own inventories and its own sales projections are down in Q4 anyway. And I think that is well-known. But also, what do you see as the competitive environment within Samsung and has that changed? And secondly, is there any situation that Samsung is migrating towards Edge phones and UMTS phones faster than you had expected? And I have a follow-up question afterwards. Thank you.

Yes, thank you, Jeremy. We don't see a competitive change in the competitive landscape at Samsung. We have had the majority of the market share in Q3. We happen to have a 100 percent market share in the phones that come to the U.S. market and that's where there have been operator issues. By the way, the reason we have 100 percent market share in those phones is because the various strings and requirements that the U.S. operator had for this market. The performance of Arrow did very well those requirements. So we haven't seen a change in the competitive landscape there at Samsung.

Regarding Edge and 3G, we haven't seen those ramp up yet. We have talked a lot in the past. Activities in those two markets that are merging in '05. So it's early to tell today what changes there are going to be in those two areas. So the three specific things that we mentioned in the prepared remarks are the reasons for the drop that we are guiding today.

Thank you. And then the follow-up question was would you (indiscernible) Samsung will be 10 percent of revenues in Q4 and, as you mentioned, a strong (indiscernible) with LG. How far behind is LG behind Samsung with regards to percentage of revenues for you?

Right now, Jeremy, we only comment on customers that have greater than 10 percent revenue and those that are greater than 10 percent that have significant shifts. However, I would say that LG is a very significant customer of ours and is probably second in line behind Samsung.

Are there any of the customers besides Samsung who were greater than 10 percent in Q3?

No, Samsung was the only greater than 10 percent customer in Q3.

Thank you, Russ.

Randy Abrams, Credit Suisse First Boston.

I wanted to see if you could talk a little bit about -- just looking ahead another quarter into first quarter -- how do you see the business for wireless starting to track? Do use see Samsung working through other issues and things could snap back to normalized 20 percent or so revenues? And then just broader for wireless, what do you see looking out even a quarter further?

Right now, Randy, we're not going to make any comments on Q1 '05. So we're just going to restrict our comments to Q4. However, I would say that, as you can tell from our opening remarks, we believe that a significant portion of the impact of Samsung revenues in the fourth-quarter are onetime issues that we should be able to work through during Q4.

Okay. And then if you could talk a little bit about the DAA market. The notebook -- at least sell through has been okay. Can you talk about magnitude of the inventory issues you're seeing there and perhaps how quickly your customers work through issues on that side?

What I would say in terms of the DAA business here in the fourth quarter is the primary driver behind the deceleration and revenue that we mentioned is ASP driven. There are some pockets of inventory at various manufacturers that we are addressing. And again, that will be addressed here during Q4.

Let me go back to the Samsung common. We are very excited about the number of new design wins that we're achieving at Samsung. The pipeline remains robust and we continue to be in total of alignment with Samsung. So we are very excited about the future with that account.

Good to see a silver lining there. On operating expenses, just wanted to see, do you have any room in the near term? I know not necessarily this quarter but going in the first half do you have any plans to change discretionary expenses or turn back on some of your growth plans if we continue (indiscernible) from end markets and from your customers?

I will let Russ comment more specifically on the financials, but one of the things (indiscernible) is that we are very focused on R&D. Our model is one of variable cost so we are very focused on product development. We changed our entire supply chain strategy a couple of years ago when we started the process. And you can see that in spite of a drop in revenue in Q3 we were able to maintain a very, very healthy gross margin and we continue to guide a very healthy gross margin for Q4 in spite of the drop in revenues.

So our model is one of variable. We continue to invest in our product development pipeline. We have a very exciting pipeline ahead of us. We are very committed to that. We have a very solid strategy for those products and a great team. That's what has created the value for this company is the mixed signal team that we have developing these products is second to none. So we'll stay focused on that. Obviously we're able to react very quickly during the quarter. Our operating expenses went out by a very small single digit range -- in the range of 4 percent. So we were able to act very quickly on things that could be considered discretionary and maintain the focus on R&D and the expense in R&D.

I would say, Randy, overall our intention, as you can see by the 4Q guidance that we gave is to continue to operate the business profitably which we will during Q4 at a very significant rate. Company's that are dropping revenues sequentially as we are. And number two is still generating favorable cash flow going forward.

Just one final question. What amount of turns activity do you need to see in fourth quarter?

At this point in time we really don't view backlog and turns activity as key elements. What we go through is a very detailed approach with each of our customers on what their overall supplier requirements are for this quarter versus their in demand. And that's how we build up the sales and revenue plan on a detailed account-by-account basis.

Okay, thanks a lot.

Kalpesh Kapadia, Unterberg.

A question on Samsung. If you have 100 percent share of it in the U.S. phone shipments, do you think that Samsung's own shipments should also get impacted due to this (indiscernible) issue?

We think so, Kalpesh, and I think that they referred to something like that during their own calls.

Because their guidance is only down 10 percent, so it seems to me that it should be down more if this is an issue.

Can't comment anymore on that. We refer to the visibility that we have. And, as you know, there is imminent consolidation of some operators in the U.S. that is creating some demands on software port interoperability on their networks.

So in other words, are there -- based on these phones will not be able to ship in the U.S. due to the consolidation either?

We don't know at this time.

Okay. Next question on the Aero II. Dan, you've seen that some of the R&D (indiscernible) keeps getting pushed out a little bit. When are we going to see Aero II in volume production? Followed up by the Aero IID (ph)?

Well, Aero II have been sampling and Aero II have now been pushed -- the expense in R&D are not related to Aero II are related to other developments. Remember, we have -- and we have been talking about this for the last couple of quarters -- a very robust product development pipeline so Aero II continues to be sampled. A lot of activity around the customers with Aero II. So we are very excited about the reception that this product is getting.

In the case of Edge, we are sampling the Aero II radio solution and we are working on a fully integrated version for next year. So stay tuned on that one; we'll be talking more next year on that one.

Any more light on any of the other new product buildups and initiatives that you can talk about given what you are seeing in terms of current business weakness?

Kalpesh, you know as well, we don't talk ahead of when we are ready. We like to work hard and announce a product when we are ready to be sampling customers and when we are already deep in the process of designing with a customer. So a lot of products in the pipeline, we are very excited about the development that we have on the roadmap.

Thank you and good luck.

Sandy Harrison, Pacific growth.

Just a quick follow-up on some of the comments on the microcontroller products. Basically you guys are in your third-quarter here of shipping meaningful quantities or at least in a ramp. Are you guys able to coordinate what the sales of kits are to potential Silicon sales yet? Is there somewhere in which we can kind of draw some conclusions there?

The business is still young to be able to determine data, what is the correlation between development systems versus long-term revenue expected but it is a strong indicator. We have been consistently shipping about 2000 development systems pretty much since we acquired this business. Very excited by the customer response to our products. We have stepped into this market at a time where other suppliers had portfolios that were getting stale; they didn't have the strong mixed signal to offer. We have stepped into this market with a powerful 8-bit (ph) core with a superb mixed signal like the product that I commented in earlier remarks, the F064. We are very excited about that and if you look in the first nine months of this quarter, we shipped 2x of what that business shipped in the entire year 2003. The performances is there, I see the opportunities, I see the range of applications and market devices are going in where customers are valuing the mix signal that is onboard. Pretty excited about the business.

As far as the DigiKey relationship, is that under the same terms as the others where it is a sellout versus a sell into I assumed?

Yes, basically that is the case.

Was a lot of the inventory you had commented sort of being put on the shelf or getting ready to be put on the shelf for them to take down?

That was a portion of it but the MCU distribution inventory pretty much increased across the board at all of our distributors.

Dan, you had said that you didn't want to comment on some of the other product that you guys have had in the pipeline now for several quarters and I can respect that. Just kind of an idea, is it expected to be sort of newer products or different products? Or is it products that are just a different flavor of already established products? Maybe you can give us some direction on that front.

It is a combination of new products for existing applications, existing markets where we participated in. A portion of the development is going into brand new areas. They are very exciting and very, very large markets that we are going to be addressing. And it will be also a new area for the Company where we are going to be leveraging the mixed signal capability and the micro controller capability we brought on board. So, into next year and after that we'll continue to see the leveraging of all of the capabilities within the Company.

One last question if you would. Kind of the ProSLIC, you said that most all of the business except MCU is going to be down sequentially. What's the ProSLIC look like specifically and what's behind that given the strong ramp you guys have had the last couple quarters in this product?

The Voice over IP market, and we had a long experience in this. Remember we had started with Yahoo (ph) Japan several years ago that was probably one of the largest deployments in the world early days of Voice over IP. So this business tends to be choppy in the way it comes in, so there's a large deployment and boxes out there to go and gather residential customers and goes back and forth.

So we had a very strong ramp in Q3; a lot of people were preparing. As you know, there are three, four major players in the U.S. launching. On top of that we had in Q3 the opportunity that one of our customers was trying to deploy line cards for the Japan Telecom new Voice over IP services. Japan Telecom is now owned by (indiscernible) Bank of Japan and they were getting ready with a lot of line cards.

So that's a large business for us on the premise side, not just on the customer premise. We view this business to be continuous growth but will be choppy at times. But I remain very, very excited about it. The (indiscernible) adoption of our ProSLIC and the new boxes; if you look at the (indiscernible) website they are now supplying to AT&T, (indiscernible) and Verizon, their boxes and that has our ProSLIC. Very exciting future for the product.

Thanks, guys.

Brian Modoff, Deutsche Bank.

So bottom line it sounds like on ProSLIC you're just looking at product in the channel -- or too much product in the channel relative to demand, so that's why you're looking at a slower Q4?

Yes.

Okay. With regards to Edge, when do you expect to be in volume shipments on Aero II with the integrated -- or the external device?

We haven't announced any customer. We are working closely with the customers. So at this time I don't want to speculate on any timing on that, but we're working very closely with a customer. As I said in the earlier remarks, the reception from customers is very, very good. They like the linear architecture that we have introduced, and our team has innovated a lot on that. The flexibility of taking any PA that is out there in the market, whatever is convenient for the customer they're going to put it in using linear PA. So we are very, very encouraged by the result. It is very cost competitive compared to solutions that are out there today. So that's something we will be talking more in the quarters to come.

But the integrated product will be available next year -- second half next year timeline?

We haven't provided granularity on the timing, but it's next year.

And then WCDMA, when do you think you'll be able to start talking about your plans in WCDMA?

It's in the roadmap. It's early to start talking with more precision than that, but it's definitely on our roadmap.

Okay. And in terms of your microcontroller business, obviously it was up this quarter. Do you expect a similar -- can you see this growing strongly into Q4 or do you see that as Q3 was to Q2?

No, we have guided and I commented earlier that we expect a double-digit growth Q3 to Q4.

Alright, thank you.

Tore Svanberg, Piper Jaffray.

Could you talk a little bit about how you identified this correction and what is that timing going to do to inventories this quarter?

Tore, I'm assuming you're mentioning the correction at Samsung?

That's corrected.

We identified that early in the October time period as part of our supply and demand sessions with Samsung. That's when the sharp fall in revenue played into our plans. In terms of inventory going forward, we would expect our inventory to be flat to slightly down here in Q4.

Very well. And looking at the gross margin guidance, given the mix, is there a reason why gross margin wouldn't be up this quarter?

If you look at our gross margin it's 55.6 percent -- it's at the very higher end of our model range. And when you go back and look at the various calculations, everything we know to this period of time has been factored into that. We feel very comfortable with that gross margin.

Great. And finally, could you give us an update on your power amplifier product and how that's sampling?

We continue to work with customers. We are not ready to announce design wins yet. Earlier in the year when we announced that product we guided that it was going to be 2005 revenue expected for that product. So we're still on the same path and we're going to be talking next year.

Very well. Thank you.

Mark Edelstone, Morgan Stanley.

A few questions if I could. The first one just related to the distribution inventories which do show up on your balance sheet. Russ, it sounded like from your description there that inventories were up because of expected demand, yet it looks like in the market you'd be service through distribution. With the exception of controllers that demand is going to be off in Q4. So can you help to reconcile why we would have seen the increase in the third quarter there?

Sure. I think that the first part of it, Mark, is as you stated; our MCU business is expected to grow very strongly in Q4, strongly in the double-digit range. And in addition to that we've added a few distributors to increase our overall coverage. That's the majority of the increase within the broadbased mixed signal business. In aggregate broadbased mixed signal distribution inventory was the majority of the increase and a lot of that was to support a very strong ProSLIC and ISOmodem revenue stream this quarter. And that will obviously moderate here as we move forward. And we would expect that distribution inventories would be flat to down slightly here as we end Q4.

Okay. But I guess suffice it to say that the increase you saw in the third quarter is still -- I'm guessing it must be somewhat over stating demand there though because it's still a pretty big jump quarter to quarter?

It is a big jump quarter to quarter. What we're attempting to do is to try to increase our overall days of inventory at distributors such that we can meet turns requirements that are coming up specifically in our MCU related business. And I think it is important to realize that we don't recognize any revenue on sales into distribution, only on a sell through basis.

Right, understood. Then a couple questions if I could on Samsung. Do you have a good sense right now in terms of units as to how much excess inventory Samsung now has of your Aero parts?

Yes, we have a pretty good sense of what's going to happen in terms of the decrease that's going to have on our overall revenues here in Q4.

So should we expect that all of the -- or at least 90 percent of the decline quarter to quarter is all coming from the inventory burn?

It would be a portion of the three items that we mentioned in our opening remarks and I would say the substantial piece of that would be related to the inventory burn. The other items would be Samsung's 10 percent sequential decline in revenue -- in units revenue and also the onetime impact of 2 weeks in Samsung's production related to the operator software issues.

And I guess could you just help to quantify that -- how much of the operator issues you think are impacting you? Is that going to be a couple million units in the quarter or how would you try to quantify that from your perspective?

Yes, I would say that that's probably not a bad rough cut estimate.

Thanks a lot.

Arnab Chandra, Lehman Brothers.

A couple questions if I could. First, if you could talk a little bit about what was your distribution inventory last quarter and what percentage of revenues were -- I think (indiscernible) used to be greater than 10 percent -- if they or anybody else is about 10 percent and what you expect them to do next quarter? Then I have a follow-up.

Sure. I think two points. First of all Edom and Uniquest did contribute greater than 10 percent of revenue. Of coarse, the way we look at that is we go through to the end customer level and treat the end customers as our end customers, number one. Number two is, we obviously don't recognize any revenue until we sell through to end customers. Thirdly, I'd say that given the higher mix of broadbased mixed signal revenue this quarter, our distribution revenue as a percent of the total went up from what our historical percentage rates have been.

And what do you expect in Q4 for that?

In Q4 we would expect distribution inventories to be flat to down slightly.

Thanks. And one follow-up question. Could you talk -- you had talked about your PA business in the past or PA product in the past, should we assume that they are somehow correlated to your Edge transceiver or Edge deployment? How should we track that in terms of what technology transition if any that will occur in the market?

This is Dan. They're not connected. The PA that we announced earlier in the year is for GSM/GPRS and for Edge is a different PA technology that we are currently not offering.

Is there any kind of -- any technology change that would cause that to introduce in the market or it's just going to be a replacement of old PAs?

The PA that -- I don't think you can use a PA as a tracking. I think it's more important to look at what the networks are going to do from an Edge standpoint. I think that's the way to look at Edge. Follow the trail of the subscriber.

Thank you.

Blaine Carroll, Oppenheimer & Co.

Dan, when you're looking at non Samsung wireless customers, are there any issues with that customer base as far as some of those customers exiting the business?

Blaine, there have been some small guys that have been consolidated. There are some small guys that have exited the business, but they were di minimus (indiscernible) of our revenue. We have a very strong customer base today. Like I said earlier, we've added 70 new design wins, the highest level in the year of new design wins for wireless. So we feel very strongly about the opportunity for the future. As we continue winning designs on the strength of the product offering, the product characteristic and the customer base -- it's a very, very good customer base (indiscernible) customer.

Okay. Are there any other major Tier 1 customers that you're in discussions with that you can share with us?

Not at this time, no. No comment at this time on that.

As we mentioned in the script, Blaine, LG is a major customer of ours as well.

Russ, one of the things that you mentioned is that you identified this guidance in the inventory issue and the Samsung issue early in October, but here we are today towards the end of October. I'm wondering if anything has changed over the last 3 or 4 weeks as the fourth quarter has started to progress?

No, right now things have pretty much remained as we saw them at that point in time.

Okay. And then something else that you mentioned was that there was a tape out that moved from the third quarter into the fourth quarter. I was wondering if you could quantify what the impact there was.

Well, the tape outs -- there were more than one tape out involved in the reduction in engineering expenses from what we had expected for Q3. That was the sole reason for the decrease in -- for the lower than expected engineering expense in Q3. And the key on that one is those tape outs have already taken place here in the early Q4 time period.

Let me expand on that. A large portion of our new product is being developed based on the .13 technology node. And this is a challenging technology, but we are in the lead in the use of .13 for mixed signal RF applications. That has given us a great experience. But they're expensive masks (ph) so we are taking our time to make sure that we have a solid tape out so we don't have to go back and expend another method. So we are being very careful on each one of these tape outs that we are making.

And the increase in the inventory, would you say that that's reflective of something that has changed on the demand side or did your customers just order too much during the beginning part of this year?

I would say that it varies really by individual customer sets. Obviously we feel that there was an over ordering of inventory and an increase of inventory at our customers. Now that the supply chain not only of our part, which has been relatively consistent, but of all part are more available, there have been adjustments made by almost all of our customers in their inventory carrying philosophies. So that's reduced our overall sales of mobile handset units into those customers.

Okay, thanks.

Srini Pajjuri, Merrill Lynch.

Dan, I guess you talked about three different items and you said one of them is a onetime issue. Did you say that was software or is it something else?

It's software related, it's related to interoperability across networks. So that's the reason. It's not related to any software connects to the transceiver or anything like that. It was higher level software.

And when you say it's a onetime issue, you are comfortable that that issue has been taken care of now?

We're not in control of that, that's our customer who wants to work in those issues. We're confident they have the expertise and the strength to deal with that and address that. But it's not a software issue related to a Silicon Labs part or any interface level device.

Fair enough. And then on your Aero II product, could you help us understand where the benefit is going to come from? Is it going to be from incremental ASB (ph) or is it going to be on the cost side? Or are you expecting more market share gains because of that product?

It's early to talk about margins and ASB at this time with Aero II. What I can say with a lot of confidence is this part has an incredible performance improvement over the world-class performance that we already had with Aero I. So Aero II has great performance; customers love the characteristic of this part and it's a single chip, so it's always a great inventor (ph) of having the smallest die in an advanced technology that you can continue shrinking in the future, small package, minimal number of components. So there are advantages for the customer, there are advantages for us. Eventually this is the device that could go into 12" wafers. So we are very confident that we have the smallest die in CMOS on a mainstream technology.

Fair enough. And then a last question on the DAA pricing, you talked about pricing being weak there. Could you give us a little bit of color as to what you normally see and what you're seeing right there now?

The typical ASB in those products is around 15 percent on an annual basis. That's what we have seen -- continue to see that. We have obviously a large market share in that market, but it's a competitive space.

And what's driving that sudden price decline in that market? Is it just a competitive action or is there anything else going on?

It's both of those. Obviously there is pressure on the end customer on their part because they have cost to take out of their boxes and it's a competitive environment.

Thank you.

Chris Versace, FBR.

Just one quick question. I think you guys have discussed in the past how your wireless business attacked the ODM market. Can you give us a sense of what you're seeing out there, what percent comes from China and what your view on the excess inventory levels is there and when you think it might be burned off? Thank you.

Chris, in terms of our percent of business that we estimate we do through China, we estimate that less than 30 percent of our mobile handset business is related to the China market. And as we mentioned in our opening remarks, we feel that we made significant progress with our customers in reducing their excess component inventory of Aero during the quarter. However, we still think there's more to do there and, as a result of that, the revenue in the non Samsung portion of the handset business will drop approximately 9 percent quarter to quarter.

You see that in excess inventory to the industry leaning into the first quarter or not?

Really I can't make any comments at this time on what the overall industry profile will be.

Thank you.

Karl Motey, Wachovia Securities.

Just a quick question on LG. Dan, could you give us an idea with respect to your design wins at LG? Could you compare and contrast relative to Samsung and your relative position at LG versus what you have at Samsung?

We don't comment on market share specifics by customers. We have a very good position at LG. Some of the exciting models they have recently introduced on several networks, certain operators include our devices, again, because of the performance requirements from the operators, the Aero is a natural fit in there. So we don't comment on that, but we have a very good position. We commented earlier that we had an increase -- 18 percent sequentially in Q3 with LG. LG is performing very well in the marketplace. It's a top tier supplier now so we are very encouraged by the progress they're making.

Okay, thank you.

Thank you very much for joining us for today's call. We'll see you next quarter.