Silicon Laboratories Inc (SLAB) 2005 Q2 法說會逐字稿

Welcome to the Silicon Laboratories second-quarter earnings conference. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections you may disconnect at this time. I will now turn the conference over to Ms. Shannon Pleasant.

This is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the Company's quarterly financial results. The financial press release, reconciliation of GAAP to non-GAAP financial measures and other financial measurement tables are now available on the investor page of our website at www.SiLabs.com.

This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately 1 hour after the completion of the call at 800-513-1173 until August 5th.

I'm joined today by Nav Sooch, Chairman and interview Chief Executive Officer, and Russ Brennan, Chief Financial Officer. Russ will discuss our financial results and Nav 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 production 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 conditions. We encourage you to review our SEC filings including the Form 10-Q that we anticipate will be filed later today 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 measurement, 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 highlight the results of core ongoing operations.

I would now like to turn the call over to Silicon Laboratories Chief Financial Officer, Russ Brennan.

Thanks, Shannon. I am pleased to report very solid second-quarter results. Revenue was in line with the high end of our expectations at $107 million. Pro forma operating profit before taxes was better than expected increasing to 19% of revenue. In the second quarter the split of broad-based mixed signal in mobile handset product revenue was as follows -- the broad-based mixed signal business, 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, FM tuner for portable audio applications, digital power controllers and the MCU products, represented approximately 56% of revenue in Q2. Revenue in this product area increased slightly by 1% sequentially.

The mobile handset business, which includes the FM tuner for handsets, the dual band power amplifier and the Aero transceivers, was driven almost exclusively by the Aero family, representing approximately 44% of revenue in Q2. Revenue in this product area grew by 4% sequentially. Gross margin for the second quarter was 54.7%, up 1% from Q1 levels due mainly to lower than anticipated Aero II startup costs. Research and development investment was $21 million or 19.5% of revenue, slightly less than expected due to lower outside engineering services expense. Selling, general and administrative expense was $19.1 million and 17.9% of revenue.

GAAP operating income for the second quarter was $18 million or 16.7% of revenue. Excluding a $649,000 non-cash charge for amortization of deferred stock compensation representing $0.01 per fully diluted share and a onetime CEO severance charge of $1.9 million or approximately $0.03 per fully diluted share, adjusted operating income for the second quarter was $20.4 million representing 19.1% of revenue.

Other income was $1.8 million and is expected to increase modestly throughout the year as we continue to build cash. In Q2 our tax rate was 20%. We expect that tax rate to be 20% for the balance of the year. GAAP net income for the second quarter was $15.6 million or $0.28 per fully diluted share. Adjusted net income per fully diluted share, excluding the non-cash and onetime charges, was $17.7 million or $0.32 in Q2.

Cash and investments at the end of the second quarter increased sequentially by almost $27 million to $330 million. Accounts Receivable totaled $60 million with Days Sales outstanding at 50 days. Inventory during the second quarter decreased by $1.6 million to $28 million with days of inventory at 53 days. Inventory at distributors grew slightly across all product lines. Nav, I'll now turn the discussion to you.

Thanks, Russ. Over the last three months I've reviewed the business, particularly the new product pipeline, and I'm very excited about the products we're developing. I believe they have the potential to be big winners in the marketplace. We'll introduce several new products this year that could each drive greater than $50 million in annual revenue for the Company over time.

Our strategy remains the same, to leverage our core competency in mixed single to develop a broadly diversified product portfolio and customer base that consistently delivers high profit. The management team is energized and focused on this strategy. We're formalizing several key processes to ensure ongoing innovation and to fine-tune strategic product selection to improve our overall diversification. We also intend to return to our target of 25% operating profit before taxes as revenue increases.

The CEO search is underway and interest in the role is very high. I along with the rest of the Board of Directors have met with several impressive candidates that recognize and appreciate our core expertise, our long-term strategy and the strong Silicon Labs culture. I'm committed to stay on as CEO until we find the right person, but based on the quality of candidates so far I feel confident that we'll have the new person on board soon.

Now I'd like to cover some of the quarterly business highlights. Our DAA and ISOmodem businesses continue to consistently deliver solid profit. There are three product areas in our DAA portfolio -- PC modem DAA's; DAA's targeted at the set-top box market; and Voice DAA's for Voice-over-IP applications. In PC modems Apple was a very strong customer. As our portfolio of products has broadened we're also capitalizing on cost selling opportunities with customers like Apple where we can offer additional solutions such as MCU's and our FM tuner devices.

Revenue for DAA's and ISOmodems going into set-top boxes was up during the quarter. We also secured new ISOmodem design wins with six different manufacturers in Q2 for electronic point-of-sale equipment. Voice DAA's, which commanded a higher ASP than PC modems, continue to trend with our ProSLIC business. The residential Voice-over-IP market is driving the growth opportunity. Design cycles for CPE are very short and we're winning the majority of these designs with our ProSLIC devices.

ProSLIC's revenue was approximately flat sequentially in Q2 due to somewhat erratic purchasing patterns among customers in this emerging market. We believe ProSLIC revenue will grow in the third and fourth quarters ending the year at greater that 50% growth over 2004 levels. We will also be expanding our ProSLIC portfolio to increase market share in 2006 in the central office, a slower growing but long life cycle segment of the business.

The microcontroller product line is delivering exactly the diversity and breadth of customers we had hoped and I'm very excited about the long-term growth prospects for the business. MCU revenue increased again in the second quarter; sales to distributors were solid, a good indicator of new customer traction. Sales into USB applications were strong including point-of-sale terminal wins with Verifone and Windtalk. This business is incredibly diverse spanning a variety of markets from medical to consumer. Based on the current expectations we believe this highly fragmented, high margin business will end the year at approximately 50% growth over 2004 levels.

We're very pleased with the level of interest in our recently announced digital power controller family. A significant number of projects were started by major providers of switch modem power supplies this quarter using the 8250 digital controller. These projects will begin to contribute to revenue in 2006. Stay tuned this year for new product activity in the broad-based mixed single business that will expand existing product lines and allow us to enter new markets to further diversify.

A few years ago we talked about 13 new development projects in our pipeline that would double our total available market. Since then we have announced several and added to the pipeline with the majority of these projects nearing completion now and are expected to launch over the next few quarters. These products will contribute significantly to revenue in 2006 and beyond.

The FM tuner announced earlier this year is one of those projects with great revenue potential. We're gearing up the FM tuner for production in the third quarter, earlier than originally anticipated. We're securing design wins in MP3 players and handsets and expect to begin generating revenue this year from both markets. We're very pleased with the initial interest in the product and intend to quickly expand the product family.

In RF transceivers we're seeing a rapid migration of new designs to Aero II. Aero II represented almost 40% of new designs in handsets in the second quarter. Samsung is rapidly adopting Aero II across new handset models and we're pleased with the level of design win penetration. Sales to Samsung declined sequentially to 15% of revenue in Q2. We expect sales to Samsung to be approximately 10% of total revenue in Q3 as the migration to Aero II continues.

Non Samsung mobile handset revenue increased by approximately 15% sequentially in the second quarter. We experience strong growth at LG and SAGEM as well as several customers in Southeast Asia. We recently announced that Compal, an ODM for handset makers like Motorola, adopted Aero II. BenQ, Pantech, Bird and Lenovo all introduced new handsets based on our Aero transceiver family. Examples include the BenQ Z2, the Pantech PG 3000, the Bird V007, and the Lenovo P708.

Design activity on the power amplifier is also proceeding. Our dual band PA is targeted at low-end handsets in China and Southeast Asia where low cost and small footprint are especially important selection criteria for handset makers. Given the adjustable market for dual band PAs we expect the product to deliver some revenue this year and contribute modestly to 2006 revenue.

We're on track to deliver our single chip EDGE solution, Aero IIe to market in early Q4. I believe that our current offering, the Aero EDGE radio in the Aero IIe single chip EDGE radio are the most architecturally sound solutions available. Our linear approach to EDGE will eliminate issues related to battery life currently plaguing handset makers using polar implementation. Our EDGE solutions were designed to provide EDGE handset performance equal to or better than that of stand-alone GSM GPRS handsets. We believe Aero IIe will be perfectly timed to hit the sweet spot in market demand.

During the quarter market consolidation of handset makers continued. In general we think the recent consolidation is a net positive for us. We believe it has the potential to eliminate some of the handset inventory volatility while opening doors to large accounts we have not successfully penetrated historically. Now for the guidance.

In Q3 we expect gross margin percentage to be approximately 54%. We expect R&D investment to be approximately 22% to 23% of revenue and SG&A expense to be approximately 17% to 18% of revenue. We believe our adjusted operating profit will be in the 14% to 15% range. For Q3 we expect our mobile headset business to be down and our broad-based mixed signal business to be relatively flat. Revenue is expected to be in the range of $100 to $103 million. Q3 diluted net income per share on a GAAP basis as expected to be $0.22 to $0.24. Q3 adjusted diluted income per share, which excludes the non-cash charge for deferred compensation, is expected to be $0.23 to $0.25. Shannon?

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.

(OPERATOR INSTRUCTIONS). Jeremy Bunting, Thomas Weisel.

A couple of questions. In terms of handset expectations in Q3 or Q2, you said it would be down. Is that a factor of units down or pricing pressure in the fact that the price cut which you announced last time is beginning to blend in?

It's both factors. The decline is largely due to Samsung and there are two factors at Samsung in play. First is the price decline that we had previously mentioned with the transition to Aero II yielding lower prices; however margins maintaining. But the second factor is that Samsung has different base band suppliers and we are -- our Aero transceiver is designed into the base bands along -- the handsets that use the Agere base band. And our guidance here reflects a different mix of Samsung base band selections for Q3.

Okay, thanks. Second question -- and Nav, this is for you too. You've commented that you had a review of programs in development since you've been back as CEO the last three months. You commented on programs which are moving forward, can you comment on programs which you're deemphasizing?

Yes, I've reviewed the projects that are in the pipeline and in general we have decided that all of the projects that we were pursuing are excellent projects and that they're worthy to continue. So we have not decided to deemphasize anything. What I've concluded is that the projects are exciting and the potential for them is enormous and that we're going to have a very good '06 as a result of these new projects and beyond.

I think the one thing that was obvious in retrospect is that we took on too many projects at any one time which resulted in product delays in development across the board. That is contributing to the lull that we see in revenue today. And so we're applying those lessons to our processes in selecting new products and the number of new products that we're going to be selecting will be less, but I believe the execution will be superior as a result going forward.

Okay. Thanks very much.

Shawn Slayton, SG Cowen.

I know you're only giving 90 days of guidance here, but with your comments related to Samsung, can you at least try to help us understand the trajectory of Q4? It seems like with things in place as they are that you're going to be somewhat challenged to have a sequentially up Q4. Can you speak to that?

As you mentioned, Shawn, we do not provide guidance on into Q4. And the visibility right now is really not that great to provide any real meaningful comments. And we really won't have that until we get much later in the quarter. So it wouldn't be appropriate to comment on that at this time.

Okay. We'll move up to 50,000 feet here. What are your expectations for when SLAB might be able to actually return to positive year-over-year comps at the top line? Maybe you can just speak very broadly about -- I'm challenged to understand why Silicon Labs at this point won't have another down year at the top line next year. Can you help me with that?

Absolutely. I think it's very certain that '06 is going to be a growth year for us over '05; and the reason for that is simply the sheer number of new products that we're going to have available to sell in '06 that we didn't have in '05. There are two significant ones that we've already talked about and those are the FM tuner and the digital power controller products. We have a number of new products that we're going to be introducing over the next six months that we think are all going to contribute to revenue in '06.

So if you look at our total product offering, I'd say over the next six to eight months, that product offering is actually likely to double. So as you know, in the semiconductor industry it takes two years plus to develop these projects. So this has been a long road for us in product development, but we are near the end of that road. And we're going to see the benefits of that in our financial numbers going forward.

Okay. On the transceiver side again, can you just speak to the supply chain dynamics there? Everybody seems to be talking a lot this quarter about how lead-times are being measured in days and weeks and not months now. And can you to talk a little bit about the -- what I'll call the merchant transceiver business away from Samsung? Thanks.

Sure. Our lead-times have remained very consistent with what they've run in the past several quarters. We've seen no real change in the -- in our overall supply chain. Supply is available and we're currently meeting demand on an as expected basis from our customers.

And what about just the other folks that you're selling to other than Samsung? Can you speak a little bit about that business on the transceiver side -- the relative health of that business? Is that business going to be sequentially up for you guys in the current quarter? I would assume it is.

Yes, that business is going to -- it grew about 15% in the second quarter. At this point in time what we're looking at there is that business to be basically down slightly from the Q2 level.

Okay, thanks. I'll yield the floor.

Brian Modoff, Deutsche Bank.

Can you talk about why revenues would be down slightly? Is that units or is it more pricing that you're seeing out there (indiscernible) non-Samsung and the Samsung business?

In the non-Samsung category in the mobile handset non-Samsung business it's largely just an ASP decline reflection of Aero II being a larger mix. And as I mentioned previously, with respect to Samsung there are two factors; one is the ASP decline due to Aero II transition, but the other one is a mix shift in Q2 at Samsung of more handsets using the Philips base band solution versus the Higiyo (ph) base band solution.

With Aero II sampling in Q4 of this year and the (indiscernible) products coming in next year, would it be fair to say your ramp in revenues is going to be more back half weighted in '06 versus front half?

We're not going to comment specifically on '05's breakdown in revenue ramp. We think we'll see a steady increase in new product revenues throughout 06.

And on your margins, how do you expect your margins -- do you expect them to maintain at these levels, a gross margin of say in the mid-50s?

Yes, our gross margin target has always been in the mid 50% range and we will stay within that roughly 54 to 56 bandwidth throughout the third quarter and our expectations are is that that would continue throughout 06 as well.

Okay, thanks.

Randy Abrahms, CSFB.

First question on the mix single business. Maybe talk about factors for going into third-quarter and why you are not seeing some more seasonality in that business? Is there still price pressure affecting the modem business that is overriding some of the growth that we should see there?

There is several factors involved with guidance for broad based mixed signal in Q3. There are portions of our broad based mix single are seeing a seasonal up tick in Q3 and I think we are seeing growth in our ProSLIC family and our MCU family. But those positives are being offset by declines in the modem category and there are three factors involved in that decline.

First, as we have talked about in the past there is a transition in low-end ISOmodems from hardware based modems toward software based modems. We anticipated this trend and developed DAA’s that would support these soft modems and we have driven agreements with large chip set suppliers for set-top boxes to integrate our system side (ph) DAA's into those solutions but with that transition comes a lower ASP and we get a lower revenue share of that business. Margins of course remain high but that transition started particularly at Thomson in Q3 and so we're seeing a decline there.

Second, there are some known marketshare shifts in DAA as a result of market consolidation. Conexant acquired SmartLink's soft modem business, and we expect that revenue to begin transitioning in Q3. And lastly, there are pockets of inventory among some of our set-top box customers, and those factors are contributing to our guidance in Q3.

Okay. Maybe looking beyond that, you mentioned the Conexant, SmartLink and some other factors -- is that a trend that if they were to look at even a quarter beyond, is there anything that we can start to offset that? For instance, like the radio tuner starting to ramp up or other factors, say microcontroller, Voice-over-IP or do you think these trends will override us in fourth quarter as well?

Well, no. As Russ mentioned, we're not giving guidance specifically to Q4 currently; however, there's no doubt that the positives will offset some of these declines. For example, our FM tuner product will be contributing to revenues nicely in Q4. MCU business will continue -- is expected to grow nicely for the foreseeable future. And so there's certainly no doubt that the new products that we have and our growing businesses are continuing to grow.

Okay, and just a last question. You mentioned in the prepared remarks about distributors, their inventory up slightly. Maybe talk about where levels are versus where you'd want them to be.

Sure. Right now we have, as I had mentioned, inventory grew slightly across all the product areas. From a days coverage of POS, we're running approximately in the 45 to 50 day range with our target being 50 days. So we're pretty much where we want to be at this point in time.

Thanks a lot.

Sandy Harrison, Pacific Growth.

I know you don't want to tip your hand too much on the products that you're going to be introducing, but I'd love to hear some of the markets you guys think could have the tams (ph) of $50 million or more a year. And sort of are those markets established or do you hope to start some acceleration in those markets. Just as much as you can fill us in on your thoughts on that?

Many of the projects that we're going to be introducing are going to be in markets that we currently do not participate, but these are markets that are established. I'd say there are really no products that we're introducing that are in markets that are just in their infancy. So generally everything is an established market whether there's a track record of real business -- and historically we've come into markets with superior solutions in terms of cost, floorspace (ph) and performance and been able to win share. That's been our track record that's gotten us to where we are today. So we're following that same formula and there's a number projects also that we're introducing that are in our existing markets where we're adding functionality and concepts. So we're going to have both.

And then I guess the comments on getting back to the 25% operating margins, what sort of strategy do you have in place there? Is there one dynamic to it, or is it focusing on a couple of products versus, as you'd said, a broader set that you were spending too much time on? What sort of a timeframe do you think that 25% operating margin you could get back in?

Obviously revenues have to increase to get to that 25% operating income. Our goal is obviously as soon as possible, but realistically we're going to have to have some -- you can look at our expenses and you can probably compute the kinds of revenue levels that we'd have to have to get to that 25% given the expense level that we have today. Our goals are to only modestly increased expenses until we get there.

And one thing I would add to that, Sandy, is that we're very comfortable with our gross margin structure which will obviously provide the basis to getting back to that 25% operating income level combined with good control and more moderate growth in operating expenses as Nav has mentioned.

And just let me add one more thing. Part of your question was which products are we going to emphasize. We are focused on being broad and being diversified. So all of the products that we are currently offering and all the products that we are currently developing are all important to us and we think that they'll all contribute to our long-term success.

And at the risk of hurting the audience here this early in the morning on a technical question, you talked about the linear versus the polar modulation. What do you guys think is the advantage there that you guys have on that that the other players don't?

Just mainly as it relates to battery life. We believe that the linear implementations are really going to give a longer battery life particularly in the GSM GPRS portion of the phone call which is still the majority of the traffic. And I think that's where the polar modulation teams have been lacking.

And one last one. On the MCU's, what was a percentage of revs or what was a dollar amount for the quarter you guys were able to do from that division?

Sandy, we're no longer splitting out MCU as a separate line item given that the earn out period is now over other than to say that we had pretty healthy growth quarter-to-quarter in MCU's.

Thanks, guys.

Arnab Chanda, Lehman Brothers.

A question for either Nav or Russ. Could you talk a little bit about -- if you look at it your two leading customers, clearly Samsung and (indiscernible) transitioned to lower margin Aero II business. Do you expect that same transition to occur in the other companies and are you expecting that in your guidance for maybe later on this year? I have a couple follow ups.

One of the things that -- you're correct in saying that we have seen the acceleration of the continuation of the transfer to Aero II products. However, given the process we're on and our cost reduction programs, our margins in mobile handsets have pretty much been in line with what we've historically been able to do. So we're really not seeing a negative impact per se from the transition to Aero II. And we would expect over time a continuation of the transition to Aero II by existing customers as the ramp is taking place at a pretty fast pace.

Thanks. And then a question about the transition to soft modems for ISOmodems. When do you think that process is complete and you can see growth in that segment again?

I think that's an ongoing process. It's gradual. It might take a couple of years and -- but part of the benefit of signing these agreements with the chipset providers for the set-top box business where we've integrated our system side DAA chip into those is that we believe our marketshare could grow in that segment. So we get a higher share of a lower ASP DAA product and I think those two trends will tend to offset each other over time. But we think it'll be a gradual transition.

Last question please. When do you think Aero II would be more than 50% of your handset business? Should that be -- I apologize if you already mentioned it. Thank you.

What we've said on that is that we would expect the transition to take place sometime during the middle part of calendar year '06 would be our best estimate at this point in time.

Thanks, guys.

Mark Edelstone, Morgan Stanley.

Good morning. A couple questions -- I guess the first one just to start with Samsung if I could, Nav. On your comment that at least in Q3 part of the decline is coming from the transition from Agere to Phillips base band solutions. How much of the transition that you're seeing there you think here in the second half of the year is also due to the EDGE ramp taking place at Samsung?

Well, we actually think the EDGE ramp at Samsung has been delayed due to some of the performance issues that we talked about with polar implementation. So we think the majority of the impact that we've seen is due to the factors that I've mentioned. EDGE, we really think at Samsung is an '06 story and significant volume.

And how do you think you are positioned to take advantage of that with them directly?

Well, we admittedly are not in their first generation of EDGE offering because we did not have an EDGE offering until Q2 here recently. But we do think that our Aero IIe is scheduled to sample in early Q4 and that product we think is going to be very, very successful because it will have substantial advantages over the competition. So we think that it's well timed to hit a significant portion of the revenue ramp that we will see next year with EDGE. So since we don't have a product today it's hard to claim design wins, but we know we have a lot of interest.

So I guess, just sticking on that for a moment, it with sound like actually Aero IIe is going to be the key to getting growth back into the handset business for you guys. With sampling in early Q4 and looking at the time it takes to basically get design wins and get through type approval, should we pretty much assume that the revenue ramp for Aero IIe is largely going to start in the middle of next year?

I think that's realistic, but I think there are two factors that are going to drive our growth in mobile handsets. Aero IIe is one of them, but I think an earlier factor is really our FM tuner business. That product is going to get sold into broad-based markets like MP3 players, but a significant portion of the market is mobile handsets. And here we're not constrained to a particular standard like GSM or GPRS.

This product is suitable for 3G phones, it's suitable for CDMA phones and EDGE phones as well as GSM and GPRS. So it's a much bigger market, the interest level is extremely high in that product, we're getting a large number of design wins and, as I mentioned earlier, we're one quarter ahead in our production ramp of that product. So we believe that that's going to be a significant factor in our mobile handset growth.

And just one last question on the transceiver business. Just looking at the product roadmap that you have, do you expect that we eventually get back to record units for this business? (multiple speakers) interface, just record transceiver units over time?

Yes, I think over time with the EDGE offering and as the market continues to grow I think yes, we do get back to record units at some point.

Just one last question if I could. You talked about keeping relatively tight reins it sounds like non-operating expenses; can you just talk about what the headcount plans look like here for the second half of this year and if you've got any initial thoughts on what that looks like for 2006?

Sure. We had -- first of all I'll start with Q2 -- we had very modest increases between Q1 and Q2 and overall headcount and we would expect those modest increases to continue in Q3 and Q4. As we keep a nice control over operating expenses but still ensure that we're funding our development programs with the right level of resources.

In terms of '06, we really haven't looked at that in detail right now other than I would comment that we would expect to, again, see pretty good control over operating expenses going forward.

Great, thanks a lot, guys.

Brian Modoff, Deutsche Bank.

Kind of following on that chain of questioning, as you move into next area (ph) EDGE will have some decent ramps, but then WCDMA is going to be ramping at a faster rate. And we expect in '07 WCDMA volumes will really be the growth driver in handsets and beyond that, and this is going to include voice centric devices, so not just for high-end multimedia. What comfort can you give investors that you're not going to run into the same exact issue you're hitting right now with EDGE from a timing standpoint with WCDMA?

Obviously 3G is an important market. We're participating in that market, for example, in our FM tuner product line. We believe we're going to have a design win in a 3G phone shortly. So we think we're going to be participating in that business right off the bat with our announced products. And beyond that we have a roadmap that we're comfortable with and we'll announce that roadmap when the products are ready.

What about from a timing standpoint, what kind of (technical difficulty) that you're not going to have similar issues where the market has gone to the next phase and (technical difficulty) catch up?

I think time will tell. And I think all we can say is just stay tuned.

Edward Snyder.

Gross margins came in about 100 basis points above plan on lower-costs for Aero II, as you mentioned. What happened or what didn't happen that you thought was going to happen? And then there are a number of suppliers that have EDGE products out there now, several using the linear approach -- Nokia uses (indiscernible) transceiver, Motorola uses (indiscernible). You mentioned that Aero II has significant advantages over competitors in the market. Can you try and give some color on what you think those advantages are that would move an OEM who has already qualified other devices to switch vendors perhaps after they've moved to production? Or are you targeting slots at OEMs that don't have EDGE products yet and won't have one until the second half of '06? And then I've got a couple follow ups.

I'll let Russ handle the gross margin question in a second. But our main advantage using our Aero IIe in an EDGE phone is that we have longer battery life and much easier ability for the manufacturer of the phone to meet the specs required for an EDGE phone. We've heard a number of horror story at customers where they're simply just not able to get the kind of battery life that they want from their phone as well as to be able to just meet the sheer EDGE specs that the standards have with the existing solutions.

And we believe that that has contributed to do the delays at some of these manufacturers in being able to supply EDGE phones. At least that's what our customers are telling us and it's a believable story. So we believe that our advantages are going to be battery life, performance and then the advantages that we've historically had of integration and size and number of external components. And so all of those are significant factors and we believe we are going to win new designs at manufacturers that currently have EDGE designs underway with other solutions.

Let me handle the gross margin question here in Q2. We in essence ramped our revenue in Aero II by 3 to 3.5 X what we did in the first quarter and we had assumed that we'd have some issues regarding test throughput and some similarly on yield type issues lower than we have targeted and none of that happened in Q2. The manufacturing operation responded superbly and we met all our customer expectations on time and as expected.

And then you mentioned the ASP's -- your ASP's in the handset businesses are down on a higher mix of Aero which is to be expected, but margins were also down slightly this quarter. What are we to infer from that profitability for the new products? Was it too small of a mix to innate (ph) that affect?

First of all, our gross margins were up this quarter from 53.7 to 54.7 in Q2. And as we've mentioned previously, we're able to maintain our historical gross margin in our mobile handset business even with the lower Aero II ASP's.

And then a question on MCU's. It's obviously a very profitable business for you and it's broad based. Are margins in this product higher than the corporate average, any color there? And then last quarter you mentioned camera modules, public safety and sensing systems as probably your primary markets. If those are it, what metrics are you using to forecast demand there? Are you using industry forecast or the distributor's forecast or do you have your own (indiscernible) model trying to give you a handle on what the demand is going to be for that business?

In terms of our margins in the MCU business, they are significantly above the corporate average.

And in terms of forecasting, we look at a variety of input, but most of it is our own bottoms up driven forecast which has been judged by management.

And this must be the form by what you're seeing in terms of your backlog or demand from your channel partners?

Yes, one of the things that we're really encouraged with, and it's typically a leading indicator in this business, is the amount of development kits that we sell each quarter. I believe we're up to 30,000 development kits that have been sold in the lifetime of this product.

It would typically be tough -- I mean it's pretty broad based business so getting forecasts extending out beyond the quarter, so whatever visibility you're getting from distributors I imagine is a little bit problematic. And final question -- sorry for the number here. But dual band PA's, any wins there yet? Can you provide any color on how much revenue you expect this year? Are we talking a million, 10 million? Just generally what do you think it's going to do this year?

Our PA program is a dual band PA. It's targeting business primarily in Asia and low-cost handsets. Now admittedly that is a small portion of the total mobile handset business and consequently our revenue expectations for the product line are modest and we believe that we'll see revenue here in Q4 and we believe that we'll have a modest contribution to overall revenues in '06.

Do you expect to have a new CEO in place by year-end? Any timing there?

Yes, we're down to a short list of some really excellent candidates that we're trying to figure out who it's going to be. But we expect to be able to close on someone relatively shortly.

Great, thanks a lot.

Blaine Carroll.

Oppenheimer & Co. A very early good morning to all of you know. A question for you -- and I apologize now, but I got called into our morning meeting during part of this, so if you already went over this I'll get it from the transcript or from Russ and Shannon later. But I'd like to talk about the pricing environment for a minute because there's been a lot of talk about the low-end phones and the fact that the OEMs are getting squeezed on their operating margins and I look at pricing as typically coming from two areas.

First of all, it is the OEM squeezing the supply chain; and then secondly, it typically comes from competition coming into your industry and trying to buy market share with lower prices. Unfortunately you have this third thing which is the Aero II seems to be biting you with this 20% reduction. You've address that, but I was wondering if you could go back and talk about the OEM dynamics as well as what you're seeing on the competitive front.

I think the OEM requirement for price declines and competitive responses for new transceiver introductions are all factors that we anticipated when we started the development of Aero II. So we knew that the market was going to get increasingly competitive and that as the volumes increased that the OEMs would require lower prices. So we undertook the development of Aero II some three years ago with that anticipation in mind and we set a target that for Aero II we wanted our cost structure to be cut in half over our Aero I.

We've accomplished that and so Aero II -- that's why Aero II is having the same margins as Aero I. But those pressures are what is responsible for why Aero II's pricing is lower than Aero I. I think it's always those market dynamics that dictate the pricing.

What would you say the OEM is looking for for price reductions year-over-year?

They want zero price. But realistically they push hard for 3% to 5% a quarter.

And then you mentioned the cost side of the equation and, Russ, earlier you had said that margins were the same. When you say margins are basically the same, is that margin percent or margin dollars on the Aero II?

I meant margin percent.

So actually the margin dollars are lighter?

Yes, as the revenue goes up and if the revenue goes down the margin dollars are lighter.

Right, okay. And then, Nav, are you developing Aero on any other base band? You said it's on Agere. Is it just only on Agere and are you looking to develop it on some other base bands?

It certainly works with PI base bands.

At Samsung it was on the Agere?

Yes, Samsung it's been with Agere and with analog devices.

Alright. Russ, how booked are you for the current quarter?

As we said before, Blaine, backlog is really not a good indicator of our revenue per quarter. What we do is a pretty detailed rollup by customer, their supply and demand position and what our commitments are to them. And based on those factors we feel comfortable with our revenue guidance.

And we're about 20 days in July. Is there anything different as we're sitting here in the third quarter as far as orders versus how we ended the second quarter? Is it slower because we're getting into the summer months or is it picking up because we're getting into the seasonally strong second half?

Nothing that would be worthwhile commenting on since we really go through each quarter on a pretty detailed customer basis. So we have a good expectation of where we expect to end up and what our commitments are to each customer.

Okay. And then you said the GAAP EPS was $0.28, but the number that we really should be using is to ex out that onetime charge and say that the quarter was $0.32, correct?

Exactly.

Okay. I guess that's it. Thanks.

Niraj Patel, Wachovia.

Nav, just a question in reference to your positive point on an EDGE ramp in '06. Do you see more interest from your customers on Wedge (ph) only or Wedge devices versus EDGE only handsets?

I think it's mixed.

Okay. And Russ, just on gross margin. What is the range across the product platform?

It varies pretty significantly, especially in the broad based mixed signal businesses. We have some exceedingly high gross margins in that area with all of those businesses being above the corporate average. So there is a mix differential within broad-based mixed signal.

Okay, thank you.

At this time I have no further questions. I will now turn the conference back over to Shannon Pleasant.

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