Silicon Laboratories Inc (SLAB) 2005 Q1 法說會逐字稿

Welcome to Silicon Laboratories' first quarter earnings call, hosted by Ms. Shannon Pleasant. Today's call is being recorded for backup purposes. If you object , you may disconnect. As a reminder, all lines will be in a listen-only mode until the end of today's presentation. At that time, you may press star 1 if you have a question. Now I'd like to turn the meeting over to your host, Ms. Shannon Pleasant. Ms. Pleasant, 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 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 888-446-2545 until May 9, 2005.

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 diverse effect on our business, operating results and financial conditions. We encourage you to review our SEC filings, including the Form 10-Q, that we anticipate will be filed by the end of this week, that identify. important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Also, the non-GAAP financial measurements which are discussed today are not intended to replace the presentation of Silicon Laboratories' GAAP financial results. These measurements merely provide supplemental information to assist investors in analyzing Silicon Laboratories' financial position and results of operations. However these measures are not an alternative to GAAP and may be different from non-GAAP measures used by other companies.. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Nav Sooch, Silicon Laboratories Chairman, and Russ Brennan, Chief Financial Officer.

Thank you, Shannon. Before we begin the call today, I'd like to announce that Dan Artusi has resigned as President and CEO, and from our Board of Directors to pursue other interests. In the interim, I will be serving as CEO while we search for a replacement. We are very grateful for Dan's leadership and tireless efforts on the Company's behalf. His many contributions have been instrumental in building a foundation for future growth. We have solid business fundamentals, a vibrant new product pipeline, and a world-class team.

I am very excited about the prospects for the Company, and think the potential is as great as any time in our history. I'll provide more insights into the first quarter after Russ comments on the financial results. Russ?

Thanks, Nav. I am pleased to report first quarter revenue in line with the high end of our expectations at $105 million, up 10%, sequentially. For the first quarter the split of broad-based mixed-signal and mobile handset product revenue was as follows. Broad-based mixed-signal revenue, which includes our Silicon DAA, ISOmodem, ProSLIC, DSL analog front-end, clock chips, optical transceivers and CDRs, satellite radio tuner, RF synthesizer for non-handset applications and MCU products represented approximately 57% of revenue in Q1. Revenue in this product area grew by 10%, sequentially.

Mobile handset revenue, which was driven exclusively by the Aero Transceiver family, represented approximately 43% of revenue in Q1. Revenue in this product area grew by 9 %, sequentially. Gross margin for the first quarter was 53.7%, down slightly from Q4 levels and slightly lower than expected due to higher Aero II production start-up costs. Research and development investment on a non-GAAP basis was $20.4 million on 19.5% of revenue, and was less than expected due to lower development expense. Research and development investment on a GAAP basis was $19 million, which includes a 1.4 million R&D grant from a foreign subsidiary earned for activity that took place primarily in 2004.

Selling, general and administrative expense was $16.7 million, or 16% of revenue in Q1 and essentially in line with expectations. GAAP operating income for the first quarter was $19.8 million, or 19% of revenue. Excluding a $753,000 non-cash charge for amortization of deferred stock compensation, along with the $1.4 million R&D grant related to 2004, adjusted operating income for the first quarter was $19.1 million, representing 18% of revenue. Other income was $1.3 million, and is expected to increase modestly throughout the year as we continue to build cash.

In Q1 our tax rate declined to 18%, somewhat lower than expected, as our mix of taxes by jurisdiction was slightly favorable to our estimates. We expect our tax rate to be 20% in the second quarter and for the balance of the year. GAAP net income for the first quarter was $17.4 million, or $0.31 per fully diluted share. Adjusted net income per fully diluted share, excluding the non-cash deferred compensation charge, along with the R&D grant mentioned earlier, was $16.7 million, or $0.30 in Q1. Cash and investments at the end of the first quarter increased sequentially by $27 million to $304 million. Accounts receivable totaled $52 million, with day sales outstanding at 45 days. Inventory during the quarter decreased by $8 million to $30 million,with days of inventory returning to more normalized levels at 56 days. Inventory at distributors grew slightly across all product lines.

We completed the Signal transaction and a final distribution of 712,000 shares will be made in May. This will represent a total of 2.3 million shares issued for this transaction. Beginning in Q2, MCU revenue will no longer be broken out. The Company will take a charge in the second quarter related to the separation agreement with Dan Artusi. This charge is not included in the Q2 earnings guidance on a GAAP or non-GAAP basis that we will discuss later. Nav, I'll now turn the discussion back to you.

Thanks, Russ. Today I'd like to focus on a high level on the first quarter business dynamics. Broad-based mixed-signal business was strong across all products. The modem business, which includes DAAs and ISOmodems, was up 5% sequentially. During the quarter we announced new modem solutions based on our fourth generation DAA, which further decreased the total solution cost and footprint of analog modems. This extends our technology leadership and enhances our competitive position. As we've mentioned in previous calls, we expect some crossover between DAAs and ISOmodems, as low-end set-top boxes and other applications transition to soft modems. We are very well positioned to take advantage of this trend. Both ST Microelectronics and Broadcom have licensed our system site DAA for their set-top box processors, giving us access to their market-leading footprints. The Voice Over IP market continues to exceed expectations. We increased ProSLIC revenue by almost 20%, sequentially, and added design wins with ASCII and PCL. We also added the 3215 to our ProSLIC portfolio, a very compact and cost-effective solution that has been well-received by customers. Microcontroller revenue increased to $6.2 million in Q1. We secured approximately 200 new design wins and shipped over 2,700 development kits.

We continue to win in the MCU market due to our small size, high-performance and precision analog. Three exciting areas for MCU during the quarter were camera modules and accessories like Sony -Ericsson's Camera Flash for handsets, USB where the proliferation of the standard is driving demand for our USB MCUs, and sensors and sensing systems where our technology provides a single chip data acquisition and control solution that allows us to interface our MCUs directly to sensors without any additional circuitry. We're investing in our networking business, particularly in clocks where we see significant potential. During the quarter we announced the Si5318, a new precision clock multiplier IC capable of generating the ultra-low jitter reference clocks required in high-speed SONET line cards.

Moving to the mobile handset business, we added almost 60 new design wins across our customer base. Sales to Samsung, which were 18% of revenue, grew to $19 million, and were in line with expectations. We're designed into several new Samsung models that shipped during the quarter, including handsets in the E300, E600, E700 and E800 series, as well as the recently announced x480 and x488 handsets. We expect our unit share to increase slightly in Q2, while revenues expected to be down slightly as Samsung transitions to Aero II.

Like Samsung, many of our customers are rapidly adopting Aero II, which ramped into production during the quarter. There is approximately a 20% price decline between Aero I and Aero II that will have a gradual impact on revenues going forward. We anticipated when we introduced the first generation of Aero that the market would become increasingly price competitive. Our objective with Aero II was to increase performance, reduce board space and cut our cost structure in half. We believe the inherent cost advantages of this very small CMOS size will allow us to continue to deliver historical margins. Now Samsung mobile handset revenue decreased 16% sequentially in the first quarter, a sharper decline than expected, as customers continued to work off inventory. Design activity accelerated and we expected to grow this revenue stream meaningfully in the second quarter. Several key customers in this category represent significant growth opportunities for us including, LG and SAGEM.

In Q1 we announced the first design win for the Aero EDGE radio with Enfora, which supplies modules for Danger's Sidekick PDAs supplied through T-Mobile. We believe we have the best EDGE solution available to customers and are aggressively competing for wins at all of the major handset makers. We also recently announced a very innovative FM tuner family, which allows FM radio to be added to a variety of portable devices, including handsets across any area interface. Our customers believe that FM penetration in handsets will increase significantly over the next three years, linking the broadcast and cellular networks and increasing average revenue per user.

On a separate note we promoted Dan Rabinovitsj to Vice President and General Manager of the wireless group. Dan has held senior management roles within the wireless team for seven years and brings significant system-level expertise to the role. Ed Healey, Dan's predecessor, will be leaving the company to take a CEO position at a non-competing startup company. We wish him the best in his new endeavor.

Before we move on to the guidance, I would like to briefly highlight our entry into the power electronics market. Last week we announced a new family of digital power controllers at the Power Developer's conference. This is the first in a suite of products addressing the power electronics market, which is undergoing the most significant transition in two decades, from analog to digital power control. Digital power control offers the promise of further integration, better efficiency, greater programmability and it requires sophisticated mixed-signal expertise. We leveraged innovative mixed-signal design to create a technology that enables the benefits of digital power to be realized. Based on a patented architecture, the 8250 family of single-chip digital power supply controllers combines the flexibility and programmability of a DSP with the fast loop response of a hardware based controller. This unique architecture provides both digital power control and power management functions, while consuming 1/10 the space and drawing less than 15% of supply current of competing solutions.

Astec Power, an Emerson company and a leading global supplier of power conversion solutions, is an early adopter of our digital power controllers. The power market is large and highly fragmented. This is the first of many products that will be introducing to address the broad market opportunity and generate meaningful revenue. I encourage you to visit our Website to learn more about power market trends and our new power products.

Now for the guidance. In Q2 we expect gross margin percentage to be approximately 54%. We expect R&D investments to be approximately 21% of revenue, and SG&A expense to be approximately 16 to 17% of revenue. We believe our adjusted operating profit will be in the 16 to 17% range. For Q2 we anticipate revenue in the range of $105 million to $108 million. Q2 diluted income per share on a GAAP basis is expected to be $0.25 to $0.27. Q2 adjusted diluted net income per share, which excludes a non-cash charge, is expected to be $0.26 to $0.28. Janet?

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

Thank you. One moment, please. Our first question is from Brian Modoff of Deutsche Bank.. You may ask your question.

Yes, a couple of questions, guys. In terms of the tax rate, what are you planning for it to be for the rest of the year? I noticed it was 18%. Is it going to be around that for the rest of the year or higher?

Brian, this is Russ Brennan. The rate for the balance of the year will be 20% in the second quarter through the fourth quarter.

And in terms of your microcontroller business, given you're not going to really be breaking it out for the rest of the year, give us an idea what you think it might grow this year, year-on-year.

We think that the microcontroller business will grow significantly year-on-year in a range that would be above the 50% level.

And then can you give us an idea, obviously your EDGE product is starting to come out now. When do you expect to have something in the WCDMA side and when do you have the fully integrated EDGE product into the market, the Aero II E?

Okay, so on the EDGE product we have our Aero EDGE radios that we are currently sampling and getting design wins on, which we believe is a very, very competitive and industry-leading solution.

That's the external modulator?

That does include the external modulator. We will follow that up with the Aero II E, which is a single chip solution that we'll have samples of towards the end of this year.

When will that be in volume, next year?

We believe that that will have revenue opportunities in '06. And beyond that, we have not really given any indication to our future roadmap.

In terms of WCDMA.

Or other products.

Okay, thank you.

Thank you. Our next question comes from Arnab Chanda of Lehman Brothers. You may ask your question.

Hi, Nav and Russ. A couple questions, if I could. One is, you've seen your gross margins go down, even with revenue increases, for a little bit actually while the revenues are down a little in the second half of '04, but what do you think the reason for that is? And I have a follow-up, please.

Sure. Arnab, we've basically kept our gross margins in our targeted range of the mid-50% range here for the last several quarters. Obviously, in Q1 we dropped slightly below the 54 % level, and was due to some additional start-up costs relating to our Aero II product. As we move forward, we believe we'll hold the margins at the 54 % range, in essence being able to offset any ASP decreases with cost improvements.

Thanks. And a couple of questions , or a question on the new products. What time frame do you think we’ll start to see significant revenues from the FM tuner and the power management products? And are the margin structure in those products, would you say they're higher or lower than the average of the Company? Thank you.

Well, we think the margins for those products will be consistent with the corporate average that we have, and with the possibility of slightly higher in the power electronics area. With respect to revenues, the FM tuner, we believe has an opportunity to generate a modest amount of revenues toward in --the end of the year. But we believe that very significant revenues can be obtained for that product line next year. With respect to the power electronics business, this is a large business opportunity, however the business is quite fragmented. There's a variety of different products that will need to be developed to address all of the customer needs and the specific segment needs of this market. And we anticipate developing and introducing several products. Many of them will be based on this first controller product. And so, once we have a sizable portfolio of these power electronics devices, we believe we'll grow a very sizable business, but that will start-- we'll see meaningful contributions from those products in '06.

Thanks a lot, Nav.

Once again, to ask a question please press star 1. One moment, please, for our next question. Our next question comes from Randy Abrams of Credit Suisse First Boston. You may ask your question.

Yes. I wanted to see if you could talk about just beyond the next quarter, if we look out to second half, . what product areas of existing products do you think are still underperforming consumption where you could still get a snap-back? And then maybe talk about new products, whether any of the ones like Power Amplifier or some of the other ones start to ramp up second half of this year.

I think with respect to the handset business, for example, we've had an inventory correction that took place largely in Q1 with the non-Samsung business, and we expect that that's largely over. That's been factored into our guidance here in Q2. We expect an improvement in that business. Beyond that, I'm not so sure that there is any one particular category that has underperformed. And I'm not --I don't believe there's any one particular segment that we'll see any abnormal growth patterns from. We believe all of our product lines have a growth potential and that we'll start realizing that. The second part of your question?

Yes, just to understand moving -- if you were to look at your segments into the back half of the year, which ones do you feel most optimistic about the growth prospects, whether it's newer or existing products?

Well, we think all of our products have growth opportunities. Obviously, some of the mature products like the VAAs don't have quite the growth opportunities as some of our newer products, such as the ProSLIC would. But -- and we're very excited about the new products that we've recently introduced, particularly FM tuner and the power electronics. But, however those will start contributing meaningful revenue in '06, as will some of the products that we have yet to introduce.

Okay, and then just a couple of questions on this quarter. The mix of Aero II -- just want to understand since that lower pricing, what's the mix of Aero II now, and then how quickly should we ramp up, or how quickly will your customers transition over to that new platform?

Randy, this is Russ Brennan. We really don't split out the mix of the Aero revenue by product type. However, I would characterize it that we were very pleased with the strong rate of introduction this quarter. It was in the multiple million dollar range, and four customers were in volume production. We would expect that that business would continue to ramp throughout the balance of the year and be at a very strong rate, exiting the year.

Okay. And yes, just maybe one clarification, a couple questions earlier on the EDGE, maybe talk about prospects ahead of the single chip EDGE radio. Do you see the material adoption coming with your multi-chip solution or so you think we wait until the Aero EDGE radio is single chip?

I think we'll have meaningful adoption with the two-chip solution, but I think the vast solution of EDGE opportunities that we're likely to see will come with the single chip offering.

Okay, thanks a lot, guys. Thank you.

Our next question comes from Mark Edelstone of Morgan Stanley. You may ask your question.

Good afternoon, guys. I guess first off, Nav, can you give us a little bit more insight into Dan's departure, since it does seem rather sudden and I'm personally kind of surprised by it. So, can you give us your insight there? And then I've got a couple of other questions on the business.

Sure, Mark. You know, it was a mutual agreement between the Board and Dan that it was a time for a change in leadership. And so Dan agreed to resign. And we're grateful for Dan's contributions to the Company. He was instrumental in preparing our operations and systems to be able to support the level of business that we currently have, and we're well prepared to grow further. So we wish him the best in his future endeavors.

I guess is there some additional insight you can provide as to why the Board thought it was necessary to make a change?

No, I'm not really at liberty to go into that at this point, Mark. You know, I'm here as interim CEO for as long as it takes to find a candidate that we're excited about. And I'm, you know, obviously familiar with this company since its inception. And we believe that we have a management team that's very deep, very strong. And we're very excited about the opportunities that we have in front of us. And I'm pretty energized, myself.

Well, it's nice to see you back, Nav, number one. I guess it at least gives weight to the business as a whole. Can you just talk about kind of the overall visibility that you have here for the second half of the year? Obviously, you had a nice snap-back here in Q1 and flat to slight growth in Q2. Can you talk about some of the drivers that you see overall for the second half? And do you expect that we will see a further strong growth as you go into the second half of the year?

Well, you know, as we've always mentioned in the past, Mark, the backlog of our business typically only extends one quarter or slightly less, and this quarter is no different. So our visibility into the second half is simply based on projections that we have from our customers. And the second half, you know, we're not commenting exactly, we're not giving guidance beyond the second quarter. But, we expect our businesses steady throughout the rest of the year, and further growth of our business is likely to be driven by our new products. which we'll see contributing again in '06.

As you look at the transaction going on right now in wireless, then and I guess take two of the bigger trends, one in your control on the transition from Aero I and the I series to Aero II, and combine that with the factors in the marketplace, overall, as we are seeing slower growth in GSM, GPRS and incremental growth coming in things like UMTS and EDGE, it seems like it will be difficult for you to grow your traditional wireless business this year. Is that a fair appraisal or do you think that there are growth opportunities when you look at the transceiver business by itself?

I think that's an accurate assessment of the transceiver business. You know, we've been focused on maintaining healthy margins in that transceiver business, and that was really our focus with our Aero II effort. . We wanted to have the industry's best performance with Aero II, which we have in terms of sensitivity. We wanted the industry's lowest, smallest board space and external component count. We've achieved that. And more importantly, we were anticipating a pretty difficult pricing environment for Aero -- for these transceivers as early as three years ago. And so we started our Aero II effort with the goal of cutting our cost structure in half. We've accomplished that with Aero II, so we are very well-positioned in this marketplace to maintain the historical margins that we've had in this business. However, the revenues, you're absolutely correct, will not see a meaningful growth in our wireless unit until we see contributions from our newer products, which essentially add dollar content to our offering. And those, the FM tuner is one example of the kinds of products that we're working on.

Just one last question, Nav, can you just talk about the pricing environment for DAAs at this point?

You know, it's -- the DAA business, the pricing has been steadily declining for quite some time, and we've been able to, being the market leader, have been able to kind of control the rate of that decline. It's a very, very profitable business for us, and you know, we don't see anything out of the ordinary in that segment.

Okay. Thanks a lot, Nav, and best of luck.

Thank you.

Thank you. Our next question from Jeremy Bunting of Thomas Weisel. You may ask your question.

What's your level of activity within Silicon Labs [inaudible] when Dan was CEO?

Jeremy, I think your first part of your question was cut off.

I'm sorry. Could you just comment on what has been your level of involvement with Silicon Labs when Dan was CEO?

Okay. Well, I've been, obviously, Chairman of the Board while Dan was CEO which was the past 15 months. I have not been involved active in a day-to-day basis up until the last couple of days. And -- but, again I'm very familiar with the road maps and strategy of the Company and the people of the Company. And so I don't anticipate a long ramp-up time for myself.

Okay, Thank you. And on the products and end-markets standpoint, can you just comment on two things? One, what is the status of the CMOS PA for handsets? And number two, what do you feel your Voice Over IP opportunities are beyond residential TAs?

Okay, with respect to the PA, you know this has been a great technical achievement that our team was able to do, a CMOS PA. But as with -- typically with highly innovative technologies, it takes a little bit of time sometimes to generate meaningful revenues from those. We believe that the PA will generate some modest revenues in the second half of this year. We've got some design wins in place to support that. But we believe that we have to grow that product line with respect to offering more variation, more variance, more bands. And we believe when we do, then that we'll build a significant business. Your second question, second part of your question?

What are the opportunities for ProSLIC and Voice Over IP beyond residential TAs?

Well, you know, we have a product offering that is going to be targeted at central offices. You know, we have a very meaningful market share in residential Voice Over IP business. So it's really we're waiting for that-- we want that market to continue to grow at the pace that it's been. But beyond that it, it will be central office revenues, and we have some product developments that are targeted at that segment.

Okay, Nav, thank you very much. Thank you.

Our next question comes from Shawn Slayton of SG Cowen. You may ask your question.

Hi, guys. Good afternoon. On the guidance, is the correct interpretation that we'll see some seasonal strength in mixed-signal, perhaps more than offsetting sequential weakness in handsets? And then I have a follow-up.

The guidance that we've put together, Shawn, will actually show some strength in the mobile handset business, with the majority of the revenue increase quarter-over-quarter being mobile handsets. And in our broad-based mixed-signal business right now we're projecting it to be essentially flat.

If I recall, don't we normally see a sequential uptick in Q2? And I guess why is it deviating from seasonal trends in that regard?

Well I think what we've seen here over the last few quarters in our broad-based mixed-signal business, and particularly our modem business that’s related to computers and set-top boxes, is that we've done a good job getting the inventories in line. And that led to a very strong Q1, which is typically the seasonally lowest quarter in that business. So we think we're back to normal consumption rates, and that will continue going into Q2.

Okay, that's helpful. Thank you. And maybe perhaps piggy-backing on Mark's question regarding the leadership change, how does this change the Company's previously articulated strategy, perhaps specifically in relation to adding headcount this year and next year? I think that Dan had previously articulated the notion of driving some organic growth with a pretty meaningful augmentation of head count. Thanks.

Yes, with respect to our stated strategy, we're not changing course one bit. We are very excited about our strategy, and that is that we believe we can build a sizable business that's profitable and growing, based on leveraging our mixed-signal expertise. We want a diversified portfolio of products, as well as customers. And that hasn't changed and will not change. With respect to spending , going forward, I'm a big believer in an emphasis on profitability. And we will be certain to maximize the amount of new product developments that we can afford with-- given our present headcount and given the constraints that – of our revenue level. So we are not inclined to make substantial changes to our operating model, going forward. We believe, however, we can and will accomplish the vast majority of our new product efforts with this level of investment.

Okay, thank you very much. .

Thank you. Our next question comes from Tore Svanberg of Piper Jaffray. You may ask your question.

Yes, good afternoon. A couple of questions. First of all, looks like Samsung is going to be down in June, based on the transition. How long do you expect that transition to occur?

Tore, that transition will take place throughout the balance of the year. And we would expect, you know, again based on certain- you know, their current projection of which models will be selling at which levels, that that the transition would most likely also continue into the first part of next year as well.

Okay, very well. And also, coming back to the power management business and the new efforts there, now correct me if I'm wrong, but I think like you said earlier, it's a fairly fragmented business, which means that you probably need to add some resources. Could you talk s little bit more about that? And also, are there any areas within your business that you can leverage, as you launch this business unit, maybe looking at your Signal division?

Yes, actually we leveraged our microcontroller efforts very significantly in developing this power electronics controller. And we intend to leverage a lot of our capabilities and talents from other parts of the organization for this new division. So that, by itself, will not be a major consumer of resources.

So, should we view this more as distribution business or a direct OEM business?

I think it will be a combination of both.

Okay, and one final question, looking at the FM tuner opportunity, can you talk about how much additional content that gives you in a handset?

I think that the ASPs for this product in volumes are going to be slightly over $1.

Great. Thank you very much, and good luck.

Thank you.

Thank you. I would now like to turn the call back over to Ms. Pleasant for closing comments.

Thank you very much for joining us for today's call. This now concludes our remarks.

This concludes today's conference call. You may disconnect at this time. Thank you for participating.