Silicon Laboratories Inc (SLAB) 2004 Q4 法說會逐字稿

Hello and welcome to Silicon Laboratories' Q4 earnings call hosted by Ms. Shannon Pleasant. Today's call is being recorded for backup purposes. (OPERATOR INSTRUCTIONS). As a reminder all lines will be in a listen-only mode until the end of the presentation. (OPERATOR INSTRUCTIONS). Now I would like to turn the meeting over to your host, Ms. Pleasant.

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 one hour after the completion of the call at 866-443-6901 until February 14th. 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 Privates 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 the Form 10-K that we anticipate will be filed before the end of February, which 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 Labs' 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're providing this information because it may enable investors to perform meaningful comparisons of operating results to more clearly highlight the results of core ongoing operations. Now I would like to introduce Silicon Laboratories' President and CEO, Dan Artusi.

Thank you Shannon. I am very pleased to report fourth quarter revenue, in line with our expectations at $95.5 million, and full year end revenue of $456 million, a 40 percent increase over 2003. 2004 was a very successful year for the Company. We expanded our product portfolio, entered new markets, added to our world-class team, and tried to globalize our business. We continue to operate the Company with a very healthy balance sheet while increasing cash flow. We invested heavily in R&D and other key areas critical to future growth. I will provide more insight into the business after Russ comments on the financial results. Russ.

Thanks Dan. For the fourth quarter and year-end, the split of broad-based mixed-signal and mobile handset product revenue was as follows. Broadbased mixed-signal revenues 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 56 percent of revenue in Q4. Broadbased mixed-signal represented 50 percent of revenue in fiscal 2004, a 40 percent increase from 2003 levels. Mobile handset revenue, which was driven exclusively by the Aero transceiver family, represented approximately 44 percent of revenue in Q4. Our mobile handset business represented 50 percent of revenue in fiscal 2004, also up 40 percent from 2003 levels.

Gross margin for the fourth quarter was 54.8 percent, down slightly from Q3 levels and slightly lower than expected. The decrease was solely related to a drop in broad based mixed-signal margins from Q3 levels. Research and development investment was $20.1 million or 21 percent of revenue. This increase was slightly less than expected due to some new product activity moving into early Q1. During 2004, we invested 75 million in R&D, a 55 percent increase over 2003, with two-thirds of our new hires during the year being engineers.

Selling, general and administrative expense was $15 million or 16 percent of revenue in Q4 which was lower than expected due to approximately a $600,000 reduction in bad debt reserves. This was as a result of over a $31 million decrease in accounts receivable. We also had a $200,000 decrease in outside services. GAAP operating income for the fourth quarter was $16.2 million, or 17 percent of revenue. Excluding a $900,000 non-cash charge for amortization of deferred stock compensation, adjusted operating income for the fourth quarter was $17.1 million representing 18 percent of revenue.

The year end reconciliation of our effective Federal income tax rate on a GAAP basis was 31.3 percent for the full year, and 26.1 percent in Q4. The resulting management rate was 30.1 percent for the full year, and 24.9 percent in Q4. The lower than planned Q4 tax rate was due to the conclusion of IRS tax audits through 1999 which resulted in a favorable settlement. In 2005, we expect our tax rate to be 20 percent due to the completed implementation in Q4 of a strategic tax project that aligns our financial structure with the international operational structure that the Company put in place over the last few years.

Other income was $1.3 million, which was higher than expected due to the gain on sale of test equipment of approximately $200,000 and additional interest earned on a sales and use tax settlement payment of approximately $100,000. Other income is expected to be approximately $1.2 million in Q1, increasing modestly throughout the year as we continue to build cash. GAAP net income for the fourth quarter was $13 million, or 24 cents per fully diluted share. GAAP net income for fiscal 2004 was $76.7 million or $1.39 per fully diluted share, up 62 percent compared to 86 cents per fully diluted share in 2003.

Adjusted net income per fully diluted share excluding the non-cash deferred compensation charge was 25 cents in Q4 and $1.47 for the full year compared to $1.18 per adjusted fully diluted share in fiscal 2003. The Company has a very strong cash position entering 2005. Cash and investments at the end of the fourth quarter increased sequentially by $36 million to $277 million. Accounts receivable totaled $46 million with Days Sales Outstanding back in line with historical levels, at 44 days. Inventory decreased slightly during the quarter, as expected, and closed at $38.4 million with days of inventory at 80 days. Sales through distribution reached 52 percent of total revenue in Q4. Inventory at distributors grew slightly less than $2 million. We believe this is an indication that inventory issues are largely behind us.

Net capital expenditures grew a modest $22 million in 2004. The majority of this capital is spent on engineering tools, new product programs, and systems improvements. Capital expenditures in 2005 are expected to be approximately $25 million. Fully diluted shares in Q4 were 54.6 million, approximately flat with Q3 levels. Fully diluted share count in Q1 is expected to be approximately flat with Q4 and then increase slightly each quarter throughout the balance of 2005. Dan, I will now turn the discussion back to you.

Thanks Russ. 2004 was a milestone year for Silicon Labs. We increased revenue and earnings and we successfully managed through industry fluctuations and changing customer needs. We did this while maintaining a pristine balance sheet generating cash, integrating an acquisition and improving our market position. With the exception of the synthesizer, the product lines grew in the double or triple digits year-over-year in 2004. This includes mature products where we have substantial market share, as well as new products. For example, with the broad based mixing of business the fastest-growing product lines this year was MCU products, ProSLIC products, networking products and ISOmodems. Our DAA business also grew by greater than 10 percent during the year due to increases in market share at customers like Apple and Kronet (ph) and DAA wins in new markets like Voice over IP.

In the fourth quarter, the broad-based, mixed-signal business decreased to $53.9 million. We continue to see pricing pressure in the silicon DAA business and expect further ASP declines in 2005. We have significant share in the PC modem market and we have opportunities to expand this market share at Dell, HP and Novell (ph), for example. The ISOmodem business, which grew over 35 percent year-over-year, was down slightly more than expected in Q4 due to weakness in the set-top box and PVR markets.

During the quarter we announced the design wins with Lipman, the leader in point-of-sale terminals. We have talked about the growing demand for connectivity in a variety of nonset-top box applications. This design win is evidence of new ISOmodem market opportunity. We believe this business will continue to diversify in the coming year. The ProSLIC (ph) products were out almost 150 percent in 2004 compared to 2003. Voice over IP was a huge growth story and we believe it will continue to be a growth story in 2005. ProSLIC revenue is tied closely to service provider promotions. We see aggressive marketing and deployment of Voice over IP services around the world as a good indicator of demand in 2005. Of the 40 service providers that we track deploying Voice over IP today, approximately 65 percent have customer premise equipment using our ProSLIC devices.

Looking at Q4, ProSLIC's revenue declined sequentially as customers began working through inventory. We believe this business will be somewhat choppy quarter-to-quarter but will continue to post strong growth on an annualized basis. Our micro controller revenue nearly tripled in 2004 to $19.4 million when compared to pro forma revenues in 2003. During the quarter, we added approximately 160 new design wins. We also shipped another 2,500 development kits in Q4 bringing our lifetime shipments to over 25,000. We believe this development kit sale as seeding new revenue opportunities and are one of the indicators of future revenue growth.

We're excited about the new product design and development in the MCU business. In 2004, the MCU portfolio expanded from 50 products to just over 75. During Q4, we announced that the latest generation of our popular USB to UART Bridge. We added new products to both our CAN (ph) and a small form factor MCU family. We also announced that our entrance in the short-range wireless market targeted at cost-effective remote monitoring, sensing and control. Our total available market will continue to expand in 2005. R&D efforts in the MCU pipeline will give us access to very attractive opportunities in power control and sensor interface market. Moving to the mobile handset business, revenue for the Aero transceiver family in 2004 increased by approximately 60 percent compared to 2003. Clearly the Aero transceiver family has been a tremendous success story. We plan to build on this success and we believe that our mobile handset product, both existing and those in the pipeline, will drive a strong long-term revenue growth for the Company.

For the fourth quarter, mobile handset revenues totaled $41.5 million. Sales to Samsung, which were 17 percent of revenue for fiscal 2004, declined to 10.5 percent of revenue in the fourth quarter. We believe that inventories are now in line at Samsung and that Samsung revenues will approximately double sequentially in the first quarter. Our competitive position at Samsung remains strong. Samsung introduced several new handsets using our transceiver during the quarter including the X427M and C200 series model. We also announced Samsung's adoption of the Aero II transceiver, the most integrated RF transceiver available for the GSM/GPRS handset. The Samsung model (indiscernible) revenue decreased sequentially during the fourth quarter by 5 percent as inventories rebalancing continued. We believe that near-term inventory of Aero is approaching more reasonable levels but we remain cautious and plan to ship approximately 5 percent less than Q4 levels to these customers in Q1.

The China market is difficult to forecast. We believe that further consolidation is likely. We believe that there will continue to be extreme pricing pressure on low-end handsets as local handset makers aggressively try to maintain market share and deplete their inventories. We will continue to take a conservative view of Aero revenue in that region until visibility improves. During the quarter, Aero II achieved significant market acceptance and represented almost 15 percent of our new design wins. I am pleased to report that Aero II is already involving production this quarter.

As the U.S. market begins to impress embrace EDGE, we believe we have a very strong offering that will take market share from first generation solutions in 2005. Customers are currently struggling with first generation merchant market products. We believe they're looking for advanced solutions based on reliable architectures like the Aero EDGE radio, to rescue their yields, time to market and performance. We are aggressively competing for design wins for the next round of EDGE handsets and expect Aero EDGE revenue in the second half of 2005. The Power amplifier remains an essential elementary of our business strategy. As a stand-alone device it uniquely addresses the high-volume low end of the GSM handset market. Bundled with Aero II, it provides a smaller footprint, lower (indiscernible) material and best performing radio available.

For the last 9 months, customers have proven out the PA technology, validated its performance and began design activity. Several customer designs are in the advanced stages, so we expect to be in a position to disclose these design wins over the next 2 quarters. We anticipate meaningful DAA revenue in the second half of 2005. Now for the guidance. In Q1, we expect gross margin percentage to be 54 percent, down slightly from Q4. We expect R&D investments to be approximately 21 percent of revenue and SG&A expense to be approximately 16 percent revenue. We believe our adjusted operating profit will be in the 16 to 18 percent range.

For Q1, we anticipate revenue in the range of $101 million to $105 million. We anticipate that our mobile handset business will drive the revenue growth reflected in our guidance in Q1 while the broad based mixed-signal business will be flat to down slightly. Q1 diluted net income per share on a GAAP basis, is expected to be 25 to 28 cents. Q1 adjusted diluted net income per share, which excludes a non-cash charge, is expected to being 26 to 29 cents. Shannon.

Thank you, Dan. Before we go to Q&A, please note that due to the additional requirements associated with the internal control certification provisions of Section 404 of the Sarbanes-Oxley Act, our year-end 2004 Form 10-K filing will be made before the end of February. We would now like to open the call for questions. Operator, please review the question-and-answer instructions for our call participants.

Thank you. (OPERATOR INSTRUCTIONS). Jeremy Bunting with Thomas Weisel Partners.

Thank you very much. One question for Russ and one for Dan. Dan, what is the timetable for an introduction for a fully integrated EDGE version of Aero II rather than the EDGE radio? Then I have a question for Russ.

Jeremy, as we have discussed before, we are deploying the Aero EDGE radio solution today. We have a lot of customers who have been waiting this solution. We have given a lot of very good feedback. This is the basis, the architectural basis, for our Aero IIE and we expect to have the Aero IIE introduction later in the year.

Thank you. Russ, could you just comment with a little bit more detail on both the decline in gross margins and the decline in accounts receivable please?

Sure. In terms of accounts receivable, it basically relates, Jeremy, the Q3 to Q4 decrease is in line with revenue decrease, where we went from approximately 121 million in revenue to 95. So we were down about 26 million in revenue from quarter-to-quarter. That represents a majority of the decrease of 31 million in aggregate.

Thank you.

In terms of gross margins from quarter-to-quarter, we had guided gross margins to be flat to Q3. We were down 8/10 of a point from that. That was solely in the broad-based, mixed-signal area, primarily related to mix related issues within the several different product areas in that classification.

Okay, thank you very much.

Craig Berger with Smith Barney.

Good afternoon. I had a question on the DAA business. It seems like competition is maybe a little more aggressive there then it was a quarter ago, and I was wondering about the gross margin impact there. I know Russ, you just mentioned the mix issues there. Secondly, I just wanted to know if you guys could comment on TI's single chip platform announcement this morning. Thank you.

Sure. We don't really -- in terms of the DAA business, the margins were slightly impacted by some of the ASP decreases we saw in Q4. So that was a component of the decrease that took place in aggregate and broad-based, mixed-signal. In addition to that, the DAA business was slightly lower than we had expected as it looks like we have now cleared up all the inventory issues that were out there at the beginning of the fourth quarter.

Are the more aggressive price declines something you would expect to continue in Q1 or do you see that abating at all?

We would expect those to continue in Q1 and throughout the year.

Craig, let me answer your second question. The announcement today actually was something that had been out preannounced for the last couple of years. Overall, we are excited about the TI announcement. We think this is a milestone. CMOS solutions are becoming pervasive. This is an endorsement of what we have been preaching for the last several years that CMOS is the only way to do radios. Those competitors out there that don't have a CMOS solution and they are implementing their radio in other technologies, are going to be facing a blind alley in the marketplace roadmap. The other piece is, we are very encouraged to see that Nokia is changing their strategy. They are going to merchant solutions out there, so that opens all kinds of opportunities for other vendors. As you know, traditionally, they have been all their RF, all their transceiver designs themselves and using foundry (ph) services. So this is a change. Regarding Silicon Labs, we don't see a near-term impact of total market share based on this announcement today.

As the base brand continues to soak up more functionality is that something you guys might be looking at?

We don't comment on speculation on development, Craig, and we are very excited about the wireless roadmap that we have in front of us. The results of Aero II, the rapid adoption of Aero II and the ramping into production this quarter, we are very pleased. We have continued to make progress using various (indiscernible) CMOS technologies to implement our RF solutions. We are very pleased on the path we are in.

Thank you for your time.

Mark Edelstone with Morgan Stanley.

Good afternoon, guys. A couple of questions on wireless if I could. First Dan, with the guidance you're offering up for Samsung in the first quarter, would you expect that you'll basically be at consumption rates with them in the first quarter?

Yes, we believe so.

Then if you look at the non-Samsung business, on your fourth quarter where the visibility is more difficult there, but where do you think your shipments were in the fourth quarter relative to actual end consumption for the designs that you have there?

This is Russ. We believe that in fourth quarter we were essentially slightly below consumption rates. There was some minor expediting that took place at the end of Q4 where we were partially able to meet some of the requests for additional inventory. But we do expect and we are planning to be a very cautious in that channel and would expect revenues to drop about 5 percent, sequentially, from Q4 to Q1.

It sounds like that decline that you're forecasting for Q1 is mostly then seasonality?

That would be the majority piece of it and in some areas, some inventory balancing -- rebalancing.

Just one last question of the gross margins. I certainly understand the guidance for Q1, where the mix will shift back to a bit more wireless. But as you look at the year as a whole and look at how you think your mix is going to play out and take into consideration that maybe the pricing environment will be a little bit more aggressive than what we saw let's say in 2004, does 54 feel like that is the right kind of percentage for you guys? Or how do you think gross margins generally would trend throughout the year?

We believe that 54 is a very reasonable projection for us in Q1 '05. I would also say that Q1 is also being impacted by some planned startup expenses related with the ramp of Aero II into production, which normally occurs in the early stages of a production ramp. Throughout the balance of the year, we would expect margins to trend up slightly on increasing revenue as the year progresses.

Great. Nice job on managing the business. Thanks a lot.

Blaine Carroll.

With Oppenheimer. Nice quarter and outlook everyone. A couple of questions if I can. First of all, Dan, when you look at Samsung you said that you were -- well I guess Russ said it, that you were pretty much at consumption rate. With type of visibility do you have with them beyond the first quarter? Did they give you build plans or order indications or anything of that major?

What we do, Blaine, is are in a process here, sales and operating planned process every month where we look at (indiscernible) and we take data from the field. As I commented in some previous calls, we have been solid, a very good tool that allow us to capture data in the field. And every 30 days basically we look at what is out there and what we are getting from the customers. But this market is very fluid, so we get data, a customer provides us with forecast, but we also do a lot of testing of that demand.

What are your assumptions for handset growth through the year based on that model?

Right now, while we really haven't gone out and put together our own forecast of handset growth, I would say relative to what Samsung has discussed publicly, they look to be growing their handset business by approximately 10 percent from Q4 to Q1. We factor that unit increase into our plans specifically. And have agreed with Samsung on what the demand is in Q1. So the full year, Samsung is talking about increasing their total handsets from about 88 million to slightly over 100 million and that is the sort of rough range that I have seen that has been predicted out there. Obviously, at this point in time, it looks like total handset market GSM, includes GPRS with CDMA, is looking like it is going to be growing from about the 660 range to 700 to 710 million unit range. That is really the most aggregate view that we have at this point in time.

Okay. That is consistent. Also on the pricing, can you talk about the pricing environment with the Aero product?

Yes, the Aero pricing as we stated before has been aggressive. We would expect Aero pricing to stay on a curve of approximately 20 percent decline per year.

We are very well positioned on the operational basis, to deal with those ASP changes. We have been making a lot of improvement over the last several years the way we have lined up our supply chain, the move that we make to a smaller guide, different (indiscernible) flows. We have been spending a lot of time, and you can see looking back at what our gross margins have been. We have been able to manage through the typical semiconductor industry ASP decline. That is a given, that is a constant in this industry. So I'm very pleased with the operations team that have been able to introduce the cost reductions and the efficiencies in the system to maintain those gross margins.

Okay. Last question, then I will pass it on Dan. The one question we have been getting a lot of late is on GCT and their position in the market. I wonder if you can just comment on them and the relationship that Samsung has with them?

Well, a lot of people are trying to do transceiver in CMOS. Obviously it has taken quite a while for people to come out with parts. That is another clarification that CMOS is the way to go. Regarding Samsung, Samsung is an investor, is an (indiscernible), Samsung called Samsung Ventures, and that should now be read that Samsung is a user of the device. Many companies have investment arms that invest in different technology, different companies.

I will pass it on. Nice quarter, thanks.

Kalpesh Kapadia with C.E. Unterberg, Towbin.

Dan, you implied that CMOS is the way to go, and with the (indiscernible) Nokia, what is moving towards that? Does that mean that outside of Samsung and LG with your solution it could crack to another top tier OEMs this year (technical difficulty)?

We are always working with a lot of customers with Nokia (ph) customers and we have a proven solution. There is no more doubt what CMOS can do. We have shipped over 100 million units, way over 100 million units, and performance is there. So we stay the course right here and we will continue working with all the customers.

In terms of new (technical difficulty) and existing product side line on wireless, what are we looking at in terms of integration or (indiscernible) products? And by when will we know? I know that you can't answer this question, but I will ask it anyway.

I think that you're going to start getting a glimpse of that throughout the year. Our goal is to increase the content per handset, so what is in the pipeline, a very exciting pipeline. We have made the right investments. We added the right people in R&D. You're all familiar, the kind of talent we have in the Company and the high expectation we have when we bring engineers and we have brought two-thirds of the headcount that we had in the year, went into the engineering area. So we are very pleased adding key talent to this new area. Bottom line is we are focusing on expanding our content on the handset and obviously continuing the roadmap as their interfaces change or their expansion of their interface requirements out there.

Thanks. Good job.

Tore Svanberg with Piper Jaffray.

Good afternoon. I guess I am still a bit puzzled about the lumpiness of Samsung. Could you perhaps give us an insight on how much of the March quarter is restocking of legacy products and how much is new business?

This is Russ Brennan. As we stated previously, in the fourth quarter we made a very conscious effort to bring down Samsung's inventory in line with Samsung's inventory targets. We felt that we had done that now in Q4 and we will be shipping into Samsung at a rate that is equal to their consumption right here in Q1.

Let me expand on that. We announced that Samsung has adopted Aero II, so that means new platforms into Samsung with Aero II is going on, going into. We continue to have a dominant market share. We continue to win designs. I mentioned in my earlier comments a couple of models that Samsung has announced, and we see opportunities to gain share in EDGE during 2005. Relationship is as vibrant as always. They have their challenges in fourth quarter, but we have a strong presence on all their activities.

Very well then. I know you usually don't disclose backlog and bookings, but could you give us at least some visibility metrics to your guidance?

Sure. At this point in time we feel very comfortable with our guidance. We had a very strong set of meetings with all our customers on what their demand plan is in Q1, what their supply is of our components and what our agreed-upon shipment plan into those customers are. So therefore, where we are right now relative to those commitments is pretty much where we would expect to be.

Finally on the power amplifier product, I guess it is almost a year since you introduced it, what is it that may be causing that to delay a little bit to go into production? Are there yield issues? Or help us understand a little bit the complexity of that launch?

It is customer evaluation. It is not a yield. It is not a technology issue. It is customer evaluation. As I have said in past calls, customers take longer to evaluate the (indiscernible). This is a disrupt to technology, this is a change. But anybody in the marketplace that thinks that the transition to analog technology is not going to take place is fooling themselves because the history of semiconductor shows that when people start talking about the (indiscernible) switch from bipolar technology and obviously the bipolar people say that was never going to happen; it took place. Sooner or later those changes happen. As a matter of time, a matter of giving the customer the evaluation. I have witnessed in my career, two or three of these big transitions in the industry. I would not bet against one of these big transitional changes.

Great. Just one final question. I know you don't talk a lot about your product roadmap in detail, but any thoughts about WCDMA at this point?

We have indicated in the past that WCDMA is in our roadmap, and later on throughout the year we are going to give more granularity on our plans.

Thank you.

Brian Modoff with Deutsche Bank.

Hi, Dan and Russ. Great entry guys. When do you expect to have your first EDGE product, the one with the external modulator, out in volume?

We are working actively with several customers right now. I think in the next couple of quarters we are going to be talking very specific designs. The way I see it today is our solution, Brian, may come into play in the market place to rescue some of the handset OEMs based on some information I'm getting real-time. All of the promises of higher efficiencies using this polar architecture for EDGE is becoming an empty promise based on the interest we're getting. A lot of people follow all of these great ideas, bipolar, and OEMs have time to see some other big issues that are presented by this architecture. We have a very, very solid solution. Customers are not going to accept lower efficiencies on EDGE than what they have fought very hard to achieve in GSM/GPRS, so there is no going backwards in terms of performance.

So unfortunately, the solutions are there, they are promoted out there. They are hard to implement, hard to bring in production and in many cases lower efficiencies. I believe we are well-positioned. We have talked to a lot of customers, we have got a lot of feedback and we are showing real data on our performance and customers have bought, they are awaiting the parts. We are very encouraged by the feedback we are getting. So stay tuned; we should be talking more in the next couple of quarters.

Yes, in looking at your CMOS PA, I would have to say actually, you talked about this being ready in about a year so this seems to be very much on schedule, not behind schedule. But anyway, do you expect it to be with the Aero II product in terms of shipping together, in the back half of the year?

Possible. Like I said earlier, in the next couple of quarters we are going to be talking about specific PA designs. Recently have seen some (indiscernible) layouts, including our PA and Aero II, and it is just awesome to see this very competent (ph) design, very few components on the board. It is night and day of what the industry has been using in the past. You have seen pictures of our PA, pictures of our Aero II. You just put those two together and sprinkle no more than a handful of components. That is it. That is the entire radio. We are very excited by those two pairing together in the marketplace and very enthused about it.

What kind of part count reduction would you see comparing that versus standard products?

In the PA, they're always half a dozen to a dozen extended components, and in our case there is no extended component required. So it is a big reduction.

In terms of the announcement this morning, certainly it does show that their focus is on CMOS as well, although I don't think they have a CMOS PA. What other options would you view, would vendors have in looking at the Aero II in the CMOS PA with competitors to TI? What kinds of solutions could you see there? What kind of options could they have in addition to the DRP technology from TI?

We have not seen anything, Brian. And most of the people we have seen in the marketplace, they are still stuck in the old paradigm of using BiCMOS and silicon germanium and (indiscernible) technology to implement RF. It's going to be very hard to break away from that because there is a mindset, there is an architecture that is already cast in silicon, and move away from that into the CMOS world is a big mountain to climb for a lot of people out there.

What could you see, based on potential other -- based on competitors (indiscernible) perhaps looking at a teaming effort with you to come up with a full solution? Does that make sense?

I haven't gotten any phone calls this morning.

Thanks.

Randy Abrahms with Credit Suisse First Boston.

Good afternoon guys. You have a little bit of granularity on distributors and how the inventory levels are looking. Could you take that one step further on the mixed-signal side and talk about how inventory levels look within your products? Are there any areas where there is still access and any areas where you see customers needing (indiscernible) refill now?

I would say that in terms of additional color on distribution, Randy, that all our distributors with the exception of one, dropped inventory from quarter-to-quarter. Number two is, that most of the drop in inventory was in the mobile handset area. We did have a slight increase in broad-based, mixed-signal, but that was spread across a few product areas. I would say in aggregate, the distributors are well-positioned to meet our Q1 requirements and are in line with the model we're using in terms of days supply on hand which is in the 40 to 45 day range. We feel that we are in a very good position as we enter into Q1.

Taking (indiscernible) ProSLIC, which was real strong in the middle of last year, slowed down a little bit end of year, where is that at as far as -- we have lumpy revenues. Do you think that is the first quarter or do think it is actually later in the year that you start to see big deployment start up for that again?

Randy, I think the service providers are learning in the marketplace, are finding their own ways. There is a lot of competition out there. They're still learning how to do deal with soft switches in the infrastructure side. Again, it is a response from the consumer. That is the main thing that they have to deal with. The way they operate is they build a lot of modems, they stack them and they start chasing potential subscribers. But there is no question the Voice over IP is the way for the future.

So we are going from basically half of a million subscribers in the U.S. to approximately 12 million to 18 million, depends who write the report, talk to 18 million by 2008. The numbers are large. There is no question that voice is going over IP for the future. The big names, the AT&T's of this world, are launching their own services and trying to write off some of their old switching equipment. But again over this year, we are going to see this lumpiness. But no question there will be growth.

Last question on the microcontroller. I think the number you gave for 2004 implies a little bit of a flattening out in revenues for the second half of '04. What is the outlook? I know you talked about longer-term we could get doubling type of growth rates for a couple of years. How does that look? Do you think it starts to reaccelerate even beginning of the year or does it take time for some of these applications to get hold?

First of all, I consider the acquisition, now a year into this acquisition. to be a resounding success. We have been able to integrate this business, invest in the R&D, get the new products out, and increase the number of new products by 50 percent as I reported earlier. The number of design wins continues to come in with large number of dollars associated with those design wins. And so we are building a business and we're building a business for the long haul. So we're making investments in the sales organization. We're making investments in the application side and (indiscernible) applications. We are building a business that, like I said earlier, tripled in revenue in one year. So we are learning a lot. We have created a channel, a specific channel, and a specific sales approach to the microcontroller. This strategy is working well for us, and I expect to see the revenue following those investments that we're making.

Very good. Thanks a lot.

Srini Pajjuri with Merrill Lynch.

Thank you. Just a clarification first. Russ, did you say the tax rate was going to 20 percent?

Yes I did.

What is causing that huge decline from 31 percent to 20 percent? Could you give us a little bit more color?

As I mentioned in our opening remarks, Srini, what we have done is we have been in the midst of a tax project here I would say for the last fifteen months or so, in essence trying to match our financial structure with the operational structure that we have put in place over last couple of years. We essentially completed that in Q4. And what in essence we have done is we have matched the sales and earnings activity with the geographic regions where those activities take place. In many instances, in those other geographic regions outside the United States, there are tax rates that are less than what we have on a marginal basis here in the United States, which drops the overall tax rate for the Company down into the 20 percent range that we have got for calendar year '05.

Okay, great. Then I guess a question for Dan. Dan, you're getting a nice snapback from Samsung, and if I look at non-Samsung business, I guess in your peak quarter you did about 45 million, and that's my estimate roughly, and it's in the low 30s or high 20s. Do you think we will see a similar snapback here sometime in the next couple of quarters? If not, why not?

As indicated, the challenge in that part of the business is the visibility. Obviously in the non-Samsung we have some (indiscernible) customer, we have good visibility. But the rest of that group of customers, the visibility is still not good. We tend to be very cautious in that. There is a lot of realignment going on in the market. There is a lot of change in position and ranking in the supply of handsets out there. We want to see what happens after the Chinese lunar new year that starts on February 5th, and see what happens after that. It's a traditional shopping season across Asia. So we want to see what signals we get after that.

I would also add to that, Srini, that the increase, that the peak revenues that you mentioned occurred right around the second quarter of '04. That was right before we began to really see the amount of inventory that was in the channel and we gradually took some pretty heavy action in the second half of the year to reduce -- produce the revenue pretty significantly. So I would say that Q2 '04 run rate had a significant inventory build in there and really wasn't indicative of consumption.

Where do you think the normal consumption should be, if you had to take a guess?

I would say that right now where we are at, that in Q1 '05 some of it will be related to normal seasonality, as I mentioned previously. Some of it is related to inventory rebalancing. So I would expect that from this level the non-Samsung handset revenue would begin to grow throughout the balance of '05.

Okay. Finally, the Aero II product, it seems like you're doing that in 0.13 micron. It is a fairly smaller die (ph). Shouldn't we expect some positive impact on gross margin going forward?

Early on, Srini, you had to obviously deal with startup costs in bringing this product to volume, as Russ mentioned earlier, by picking up a technology node that gives us a very small die size in the technology where capacity has been added rapidly. Big fabs have been built for these nodes of technology. We expect 0.13 technology node to start coming down in cost. That could have an impact into overall costs. Our package is a very low-cost package compared to previous generation of Aero. So a combination, I think long-term, we have an advantage.

Okay, fair enough. Thanks guys.

Arnab Chanda with Lehman Brothers.

A couple of questions. One is, if we look at where your businesses are going, can you tell us a little bit about if you see increases in handset business, should we expect -- if handsets grow faster than mixed-signal, should we expect gross margins to go down or stay flat or go up? How do we qualitatively manage that mix in our fallout? Thank you.

This is Russ Brennan. If handset growth exceeds the growth in the broad-based, mixed-signal business as we mentioned previously, that would have a tendency to decrease gross margin at the corporate level.

Great. I just have one more follow-up. If you look at your handset business, you talked about what kind of growth rate in the overall ,market and I think it seemed like a high single digits type of number. Should we expect your handset business from the second quarter when you're caught up with consumption, to have the same kind of growth or should you be higher because of market share gains? If you could talk a little bit about that.

At this point in time, we're not really going to disclose any projections beyond the Q1 '05 time frame, other than what we have discussed today at a very aggregate high-level.

Maybe I could just ask it slightly differently. Do you think normally -- you have obviously gained market share historically with some major customers. Your internal expectation is that say for the Aero product, not excluding the (indiscernible), should we assume that market share gains continue? Are you managing for that? Are you expecting your market share to be flat from here on?

We manage for strong market share. As I said earlier we have a strong position at customer like Samsung and others. We continue to manage for strong market share. We made a significant investment to get Aero II out, significant R&D investment to get a leading-edge part in the marketplace. We manage for growth. There is a lot of potential out there in the marketplace, and the market for a while is not going away anytime soon.

Thanks, Dan.

Sandy Harrison with Pacific Growth Equities.

Good afternoon guys. Spend a second, Dan, on the MCU business. You talked about some pretty nice sales in the form of the early design tools and the number of design wins. Could you talk about, let's say the top five applications that you're seeing for the MCUs, or what sort of markets we should be looking at, which is going to continue to drive that product?

The beauty of the MCU business is spread across hundreds of customers, actually thousands of customers. So that is the great thing about the MCU business. As we move forward we will have more and more diversity of applications. But we are involved in applications that range from control for a camera module that goes in handsets, that is a good application that we're shipping in volume today; cables for handset or PDAs to PCs and a long list of applications in the central interface space; diagnostic tool for automotive.

We have a great opportunity now that we're going to start shipping soon for diagnostic tool that every garage will have to do diagnostic on the very sophisticated engine controls in cars. So we see a wide variety of applications. As I said in my earlier comments, we are looking very specifically at areas like power control. We are looking at areas of center interface. We're looking at all of those areas where the mixed-signal component, or the microcontroller, is a differentiator, it brings real value and a value that will command high area speeds for us.

Got you. Just to spend a quick second on your 50 channel comments. You said 50 was 52 percent of revs in the most recent quarter. How would you characterize what goes through (indiscernible) as far as the broad-based, mixed-signal versus wireless? Is it roughly half for each? Is one more heavily laden? How is that? Could you remind us, is it a sell into or sell out of? I'm trying to recall how you handled that?

This is Russ Brennan. First of all, we have a sell-through model. We are very conservative in revenue recognition at distribution and only recognize revenue when it sells through to the end customer. In terms of the mix between broad-based, mixed-signal and mobile handsets, I would characterize it that there is more mix of broad-based, mixed-signal business through distribution than there is for mobile handsets.

Alright. So then looking at what you guys feel, in the (indiscernible) channel, you're comfortable with that with your outlook for the mixed-signal for the next several quarters, it sounds like?

Yes, for Q1 '05.

As you know, we have deployed a few distributors that are mostly catalogue, online, web-based transactions. That is absolutely critical to the MCU design win process.

Got you. Thanks guys.

Shawn Slayton with SG Cowen.

Good afternoon. I may have missed it, did you speak to inventory in the notebook market as it relates to DAA? If not, can you give us some color there?

Yes, what we have discussed there was that in the beginning -- in Q4, we felt that there was some excess inventory of our components at some notebook manufacturers, so we plan to decrease the revenue to get that inventory more in-line. We feel that we have done that here in Q4 and are well-balanced entering Q1 to meet the requirements of our customers for those parts.

Okay, thanks. For Dan, I am curious, you mentioned in your press release that market visibility is limited in 2005. Did you put that statement in to principally reflect handsets or is it sort of a catchall comment to reflect the majority of your business segments right now? Thanks.

Obviously, handsets is the area that the visibility is more difficult right now, getting the right visibility. Other areas remain challenging, and it is basically product group by product group. Some markets' visibility improves and another markets' visibility remains poor. But handsets is the one right now, the visibility that mostly concerns us.

Okay, thanks for that. I appreciate it.

This concludes today's call. Thank you very much for joining us. We will talk to you again in April.

Thank you.

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