Silicon Laboratories Inc (SLAB) 2005 Q3 法說會逐字稿

[OPERATOR INSTRUCTIONS] This call is being recorded. If you do have any objections, you may disconnect at this time. I would now like to introduce Ms. Shannon Pleasant of Silicon Laboratories for the third quarter earnings. Ms. Pleasant, you may begin.

Good morning, 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 investors 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 800-280-4691 until November 14. I am joined today by Necip Sayiner, President and Chief Executive Officer; Russ Brennan, Chief Financial Officer; and Dan Rabinovisj, Vice President of wireless products. Russ will discuss our financial results; Necip will review our business activities; and Dan will discuss our new product highlights in wireless. 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 presentations 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 update for 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 measurements which are discussed today are not intended to replace the presentation of Silicon Laboratories GAAP financial results. 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'm pleased to report the third quarter revenue of $104 million exceeded expectations. A split of broad maced mix signal and mobile handset product revenue was as follows. The broad based mix signal business which includes our silicon DAA, ISOmodem, ProSLIC, DSL analog front end, quadchips, optical transceivers, and CDRs, XOs and VCXOs, satellite radio tuner, RF synthesizer for non-handset applications F.M. tuner for portable audio applications, digital power controllers, and the MCU products represented approximately 57% of revenue in Q3. Revenue in this product area decreased slightly by 1% sequentially. The mobile handset business, which includes the F.M. tuner for handsets, the dual band power amplifier and the Aero transceivers represented approximately 43% of revenue in Q3. Revenue in this product area declined by less than expected, approximately 6% sequentially.

Gross margins for the third quarter was 54.5%. Slightly higher than expected, due to lower start-up costs related to the F.M. tuner. Research and development investment was $36 million, or 34.6% of revenue on a GAAP basis. Pro forma research and development investment was generally in line with expectations at $22.3 million or 21.4% of revenue when adjusted for a $13.7 million writeoff in acquired research and development associated with the acquisition of Silicon MAGIKE. Selling, general and administrative expense was consistent with our expectations at $17.2 million and 16.6% of revenue. GAAP operating income for the third quarter was $2.6 million, or 2.5% of revenue. Excluding a $940,000 non-cash charge for amortization of stock compensation representing $0.02 per fully diluted share and charges related to the acquisition of Silicon MAGIKE of $13.7 million representing approximately $0.25 per fully diluted share, adjusted operating income for the third quarter was $17.2 million or 16.5% of revenue. Other income was $2.1 million. It is expected to increase modestly to approximately $2.4 million in the fourth quarter as we continue to build cash.

In Q3, our pro forma tax rate was 24.8% while our GAAP tax rate was 116% of pretax income. The higher GAAP tax rate is being driven primarily by the non-deductibility of the acquired R&D writeoff. The slightly higher pro forma tax rate in Q3 was due mainly to a higher percentage of revenue, generated in higher tax jurisdictions and increases our year-to-date tax rate to 21%. We expect our tax rate to be 21% in the fourth quarter. GAAP, net loss for the third quarter was $745,000, or $0.01 per fully diluted share. Adjusted net income per fully diluted share, excluding the non-cash and one-time charges was $14.5 million or $0.26 per share. Cash and investments at the end of the third quarter increased sequentially by approximately $5 million to $335 million, which includes the impact of the $13.3 million cash payment for Silicon MAGIKE.

Accounts receivable totaled $61 million with day sales outstanding at 53 days. Inventory decreased by $1.4 million during the quarter to $27 million, with days of inventory at 52 days. Inventory at distributors also decreased slightly by about 9% sequentially due to strong sell-through. This quarter, we completed our research on FAS 123R and stock option expensing. As a result, in Q3, we adopted a new stock compensation plan that replaces nonqualified stock options with restricted stock units. This was the primary driver behind the sequential increase in stock compensation charges in the third quarter.

Effective immediately, grants issued to both existing and new employees will be restricted stock units. The executive officers of the Company will receive a blend of both nonqualified stock options and restricted stock units going forward. We expect this change to increase fourth quarter stock compensation charges to $2.4 million. The management team and our Board of Directors believe that our SUs offer the best combination of reduced dilution and employee retention. And we believe this stock options strategy will create the most value for our shareholders in the long term. Necip, I will now turn the discussion to you.

Thank you, Russ and good morning, everyone. Before I start, let me say that I'm excited to be doing my first Silicon Labs earnings call and since this is my very first earnings call, I'm hoping that you'll take it easy on me today. As I promised in our introductory call six weeks ago, I would like to first review my observations of the business. I have been engaging with all of the product groups and assessing their strategic foundations, value propositions, and competitive strengths. A few things emerged from these deep dives. First, Silicon Labs possesses the rare ability to combine mixed signal and RF expertise, with digital architectures and other events to replace pure analog approaches. This, coupled with the technology and innovation to introduce disruptive products in established market is a powerful value proposition. I believe there are very few companies who can do this as successfully as we can.

Second, I'm impressed with our engineering organization. A talented group that is focused on delivering products that result in commercial success. I see enormous opportunity to grow the business and expend our presence in the mixed signal market as a result of this world-class technical talent, complemented by solid business leadership.

Third, there is significant enthusiasm internally for the new products and current R&D efforts. I fully agree with Nav's assessment last quarter that our products have tremendous revenue potential. As we implement a more refined approach to a disciplined R&D investment and fine tune our execution, we will be able to further optimize our highly skilled work force on those programs with the best return. And finally, we're committed to achieving a long-term profitability model of 25% adjusted operating income before taxes. Revenue growth primarily driven by new products and new customers, while we drive higher levels of efficiency across the business will allow us to achieve this target.

I would like to focus our call today on new products to ensure you're aware of the impact they will have in the marketplace. Over the last quarter, we have introduced seven significant new products that are representative of our strategy to both enter new markets and also increase content in existing markets. First, let's talk about products that allow us to tap into new markets. In August, we announced the industry's first quad frequency crystal oscillators and voltage console crystal oscillators for frequency control applications. We have leveraged patented technology to implement frequency control and tuning in a single CMOS IC, eliminating the need for complex high frequency resonators. Our products offer a 25 fold improvement in initial frequency accuracy, better frequency stability and a wide frequency range. In addition to these technical advantages, we can dramatically reduce the lead times for our customers compared to competing solutions.

Frequency control is a brand new segment for us, and we're targeting the medium to high end of the $1 billion market. Our ASPs for these products range from mid single digits to $70 plus depending on configuration. Based on the considerable enthusiasm from customers we are sampling today, we anticipate that we will see revenue contribution for this product line in the second half of 2006. We also expanded our ProSLIC family with the Quad ProSLIC, a new product designed to address the essential office segment which represents more than 50 million units per share. This market driven by performance, reliability, and density is very attractive to us due to long life cycles and a strong margin profile. The consumer oriented ProSLIC business continues to be a high growth area for us. In Q3, our revenue for residential Voice over IP increased by 30% sequentially. We expect Q4 to be flat sequentially due to choppy ordering patterns, but market growth is still tracking very strongly. Quad ProSLIC revenue will nicely augment our consumer ProSLIC business beginning in the second half of 2006.

In Q3, we also introduced fax modem product to the market. We had not previously competed in the fax and multi function printer market, which we estimate to be up to 20 million units per share. This market segment is characterized by higher ASPs than many modem applications. We plan to leverage our strong track record and customer relationships to gain share in this market. We continue to expand our microcontroller products in Q3, adding a family of very small high memory devices optimized for consumer electronics. These new mixed signal MCUs feature silicon labs high-speed 8051 port and a variety of on-chip profiles. They also integrated precision internal oscillator that eliminates the need for an external crystal. MCU revenue declined slighty in the third quarter. While this business is increasingly diverse, revenue is still fairly concentrated among the few large customers. Order delays at two of these large customers impacted revenue in the third quarter; however, we expect this delayed revenue to materialize in the fourth quarter, resulting in double digit sequential growth.

Long-term growth prospects for the business remains strong with development kit sales increasing to almost 33,000 kits shipped today. Design activity in digital power accelerated as we made our 8250 development kits broadly available during the quarter. Our lead customer, Aztec, a leading supplier of power conversion solutions, announced their DTX power supply platform, using our digital controller. This platform is the first of several digital power platforms that will be introduced in 2006. Finally, on the new market front, we acquired Silicon MAGIKE, an Austin-based development stage start-up, designing high voltage ICs. This is a small but strategic acquisition for us for two reasons. First, the newly acquired team brings significant mixed signal expertise in complex high voltage designs, giving us access to new large market opportunities, and second, Silicon MAGIKEs technology is very complementary to some of our existing product areas.

The second part of our stated growth strategy is to expand our content in existing applications. We have several examples this quarter of new products that will significantly increase our content in mobile handsets. The F.M. tuner which potentially adds $1.50 to $2 in content per handset began ramping into product early in the third quarter, only six months after we started sampling. Customer interest has exceeded our expectations at both mobile handset and portable ODO makers and we expect F.M. tuner revenue in the fourth quarter to come from a mix of both applications. We are rapidly securing design wins and expect revenue to ramp in Q4 and throughout 2006.

We also expanded our transceiver product line. Aero IIe, our single chip EDGE solution began sampling in September. We delivered our EDGE solution to lead customers as committed and first surveys in Silicon is meeting or beating all of the customer requirements. We feel very confident that Aero IIe is a leapfrogging from our existing EDGE transceivers. Based on initial customer feedback, we expect that demand will drive a reasonable revenue contribution beginning in mid 2006. We also introduced the Aero 4209, a transceiver optimized for the ultra low cost handset market. This emerging segment which includes developing countries like Brazil, Russia, India, and China, represents new incremental unit volume in the GSM, GPRS market. And this morning we announced AeroFONE, the first fully functional, truly single-chip phone for GSM/GPRS handsets. AeroFONE integrates the power management unit, better interface and charging circuitry, digital base band, analog base band, and a quad band RF transceiver in a single monolithic CMOS IC.

Single chip solutions from our competitors are in reality market chip solutions that do not integrate either the power management unit or the battery charging circuitry. We have been able to integrate these high voltage subsystems in 0.13 microns, standard CMOS, and other industry firsts. This breakthrough innovation has the potential to increase our total content in GSM, GPRS handsets significantly. These new mobile handset products are key to our ability to accelerate growth in our wireless business. So I've asked Dan Rabinovisj, the Vice President of our Wireless Products to provide an update to us today from Asia, where he's demonstrating the AeroFONE technology live this week. Dan?

Thanks Necip. This is a very exciting time for us in the wireless group. The handset market offers many opportunities where we can use our mixed signal expertise to expand our share of mobile handset electronics. We have successfully applied this expertise in the past, and have consistently delivered disruptive technology to the market. AeroFONE is a very obvious example of this.

Because of our proven heritage in RF CMOS, we set out to provide the highest level of integration possible without sacrificing our performance metrics, such as sensitivity, blocking, transmit modulation spectrums, spurious, phase noise. In AeroFONE we have succeeded in doing just that, with measured results that showed no difference between AeroFONE and the Aero II transceiver, which is today's gold standard for RF performance in cellular. AeroFONE is sampling today and we have been working without the customers for sometime. The technology has been proven on networks in the U.S., Europe, and Asia. In fact, we are making live calls at press events in Asia this week. We believe that we have taken the single chip phone concept that's been promoted for sometime and made it a reality for the merchant market.

AeroFONE fundamentally changes the way systems are designed for entry level phones. For example, a typical entry level phone today has more than 250 components. We are able to duplicate this same functionality in only 6.1 square centimeters of board space, using less than 60 components, without sacrificing performance. The result is a handset that will truly exhibit the lowest total cost of ownership, from beginning to end. Higher yields, faster test times, lower manufacturing costs, lower inventory and procurement costs, and dramatically reduce development time and resources.

One of the biggest challenges facing handset manufacturers, considering a new base band is the software switching costs. We worked closely with customers to develop a strategy that would, first, leverage proven software stacks widely available in the market and second, give customers maximum flexibility by enabling them to use their existing software infrastructure. AeroFONE is the only solution on the market today that's been validated with multiple protocol stacks and application software frameworks. Handset developers can either reuse their existing software infrastructure, so they don't have to abandon their existing investment, or they can select one of the solutions we have validated together with our software partners. This strategy also enables us to efficiently scale our software investment as we ramp to support multiple customers

We expect to ramp into production with the AeroFONE in the second half of 2006. I am extremely excited about customers' reactions and their enthusiasm for the level of integration and the performance we have achieved with AeroFONE. So my expectations for this product are very high. Our near term single chip phone road map addresses additional segments within the GSM, GPRS market space. Including a part optimized for the ultra low cost GSM handset market and a single chip AeroFONE modem designed to address the Smart phone and machine-to-machine markets.

Now, I would like to briefly address a few additional quarterly highlights for the mobile handset products. In the third quarter, we made our first public announcement of a design win for our CMOS power amplifier with Lenovo which will begin contributing modestly to revenue in the fourth quarter. RPA is the industry's smallest, most integrated power amplifier solution. When paired with our transceivers or the AeroFONE, it offers a very compelling bundled solution. Our transceiver portfolio continues to see tremendous design activity. Design wins topped 60 during the quarter. Our latest generation GSM, GPRS transceiver, Aero II, represented greater than 25% of our transceiver sales in Q3 and based on current design win momentum, we believe that the cross cover between Aero I and Aero II will occur in the middle of 2006.

Now, before I wrap up, I would just like to emphasize that reliably delivering high performance RF in standard CMOS for the high volume mobile handset business, is a unique competency. Silicon Labs abilities to drive innovation in the market leverages our freedom to exploit digitally intensive architectures, to create new levels of integration, cost reduction, and performance, that simply can't be matched by using exotic process technology or old-fashioned ways of solving problems. We are truly known as the benchmark for CMOS RF integration in the industry and I firmly believe that Silicon Labs' capability in this area is a significant differentiator that positions us strongly for the future across all of our markets. Necip?

Thank you, Dan. I would like to make a few comments on our large customers before we move on to the guidance. Revenue at Samsung represented 12% of revenue in the third quarter. We believe that the rapid adoption of Aero II, which has a lower ASP than Aero I and market share shifts will result in a sequential revenue decrease of 10 to 15% at Samsung in Q4. We believe our relationship with Samsung remains strong and that Aero IIe, our EDGE solution, is particularly strategic in ensuring we return to growth at Samsung. We expect a decline in Samsung to be made up in part by significant demand from Sagem who will be a strong driver for wireless revenue in Q4.

Looking ahead at our expectations for Q4, we believe our mobile handset business will be up, approximately 4 to 7% sequentially and our broad based mixed signal business will be flat to down slightly. Revenue is expected to be in the range of 104 to $108 million. We expect to maintain gross margin at approximately 54% of revenue. We expect R&D measurement to be approximately 22 to 23% of revenue. And SG&A expense to be approximately 16 to 17% of revenue. We believe our adjusted operating profits will be in the 15 to 16% range. Q4 diluted net income per share, on a GAAP basis is expected to be $0.22 to $0.24. Q4 adjusted diluted net income per share which excludes a noncash charge for stock compensation is expected to be $0.26 to $0.28. Shannon.

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

Certainly. [OPERATOR INSTRUCTIONS] And our first question comes from Mark Edelstone of Morgan Stanley.

Good morning, guys. Thanks for all the details, Necip.

Good morning, Mike.

A couple of questions, I guess, first, congratulations on the AeroFONE, clearly a great-looking product. I guess, can you just give us what the die size is of that product, and then as you ramp it up into production in the second half of next year, what the expectations would look like on margins for that product?

Okay. I -- rather than getting into a die size discussion, what I would like to do is -- to talk about the level of integration we have achieved in the AeroFONE. The number of components we were able to integrate from the bottom is significant, as Dan mentioned. We are offering a small footprint device, replacing multiple devices which obviously saves on the PCB. Not just the size of the PCB, but potentially the number of layers you have on the PCB. So while integrating those components and offering a smaller solution, I expect that customers will see the value in the product, and we expect to get the value for the product from the customer base. Again, I don't want to comment on the gross margins. It would be too premature at this stage. Russ, any comments.

Basically, Mike, we don't talk about specific gross margins per product. At this time, our expectations are that this product would be consistent with supporting our overall corporate targets in the 54 to 56% range, plus or minus a point or two.

Okay. Great. Fair enough. Just another question, if I could, on the wireless segment, obviously you got Aero IIe out there now, and I would think that should have some good impact here in the market over time. Can you just give us a sense as to what you think the ramp looks like there in the second half of next year, and through 2007?

We are initially going after opportunities to win with Aero II. As I mentioned earlier, that particular device will be key for us to return to growth at our large customer, Samsung. We are pursuing multiple opportunities across the globe with that device. As I mentioned, we, like the rest of the products we've announced recently, we are going to start seeing impacts from these products in the back half of 2006.

Do you have design wins--?

We will just continue to grow into 2007 since -- is a longer term question.

Do you have design wins for that now?

I would call preliminary design wins or design ins. We follow a pretty strict definition of what a design win is here. So we are certainly being designed in, in multiple places. Dan, do you want to comment further?

Well, I think the really exciting thing about the Aero IIe transceiver is that we really went after tackling some of the most difficult technical issues that have been facing the EDGE market and so where I'm very excited about the potential of the product, is that we have basically brought something to market which solves all of the manufacturing issues that have been plaguing some of the initial start-ups with EDGE technology. So I think that's really what I think is distinguishing us in the market and it's getting customers very, very, excited to design us in.

Just one last quick question. Russ, do you expect the 21% tax rate to hold for 2006? Or what's your expectation there?

In 2006, the tax rate will be back to 20%.

Okay. Great. Thanks a lot, guys.

Thank you.

Our next question comes from Jeremy Bunting of Thomas Weisel Partners.

Thanks very much. One question on AeroFONE and one question on Aero IIe. On the AeroFONE, from a competitive standpoint, single chip or at least single package is not new. There's a lot of people chasing the ultra low cost handset market with products like this, Philips, TI, Infineon. From a customer standpoint, how would you contrast the use of a genuine single chip, versus a SIP product which other people are obviously planning to use.

I think the differentiation from my perspective, the biggest differentiation in AeroFONE compared to competing solutions is Silicon Labs' ability to maintain the performance that we have been able to demonstrate in our RF transceivers. Often when you -- when you integrate an RF module or any mixed signal module with a larger digital device, you are very concerned about noise and reducing performance. And a lot of care has been taken in that particular development to avoid that, and I think measured results today with AeroFONE suggest that there is just no performance degradation in AeroFONE compared to our transceiver technology. So I think customers will recognize that. I think having the single chip clearly simplifies the integration efforts, simplifies the PCB design. Our particular design incorporates a lot of additional components of the PCB. So these are the advantages I would list.

What you are saying is that the performance of the product would surpass even a system in packaged products?

What I said is the performance of the AeroFONE, as far as the receiver sensitivity and all the other metrics we have listed go is identical to our Aero transceivers.

Okay. Thank you. Question on EDGE. Specifically with regard to Samsung, this is Aero IIe, that you said that you expect the product to regain share, I believe you said at Samsung. Does that imply that the product would be used to cause other base band players than you have traditionally partnered with?

I said two things. One is for us to start gaining share at Samsung, it is key for us to win the exotic with Aero IIe. I also said that we are procuring design wins across the globe with Aero IIe, and are in the phase of multiple design in. Am I answering your questions, Jeremy?

Yes. But specifically within Samsung that you've traditionally sat alongside an Agere base band product, with most of the other large portions of Samsung's GSM/GPRS businesses and I guess also EDGE as well, goes with a Philips base band. Does this imply the other two products might be used with the Philips base band.

At this point I can't really comment on what Samsung will decide to do with respect to the transceivers across their multiple platforms. But it's safe to say that we are going to try to get as much share as we can across the platforms at Samsung. Dan, would you like to add anything?

No, I think that pretty much says it. We're trying our -- we're trying our very best to position Aero IIe as the transceiver that can be used with a number of base band platforms and as you said, Necip, we are working with a number of customers across the globe, using a real variety of base band technology.

Okay, gentlemen, thanks very much.

Thank you.

Okay. Our next question comes from Arnab Chanda of Lehman Brothers.

Thank you. A few questions maybe for Necip or for Dan. The first one, you now have a fairly wide portfolio in handsets. Could you talk a little bit about how they all fit in in your offerings? Obviously, specifically is there any kind of cannibalization possibility with your low cost transceiver versus your -- the single chip AeroFONE that you introduced today and as you get sort of a wider penetration with these products how should the margins in that business trend? Would it be higher or would it remain the same or lower? Thank you.

Okay. Let me try to respond to them in the order you've asked. In terms of cannibalization if our customer would like to use -- instead of using just our transceiver, would like to use the single strip offering from us, yes that will cannibalize the transceiver revenues, but we will be adding significant content in that application with the single chip offering. From a margin perspective, with all the offerings we have recently announced in wireless, let me just say that we are committed at the corporate level to maintain the gross margin targets we have outlined. So these will continue to support that model.

Thank you, Necip. Another question in your mixed single business. It seems like there's some parts of the business that are growing versus others. Could you talk a little bit about your -- the larger DAA ISOmodem segments? What's going on there. And what sort of trends should we expect in the future?

Okay. In the modem business, there are a few dynamics that are putting pressure on the business. One of them is the shift to soft modems particularly in set-top boxes. There are some competitive displacements also with some of our modem partners deciding to exit the business, and that's causing some market share shift. And on top of this, obviously, as the attach rate declines in desk tops, the overall market is going to continue to decline with continuing ASP pressures. So in this market, what we are trying to do in modems in particular is introducing new products like the fax modem we introduced this past quarter to try to gain share in segments we have not competed in before. This product line will continue to provide good profits for us to the bottom line.

I think on other pieces of the mixed signal business, let me also address the ProSLIC, that is a growing market for us. You can expect continued growth. We also started playing on the CO side of things. With the quad ProSLIC and we will continue to make investments there and take advantage of the growth in the segment.

Thank you, Necip.

Thank you.

Okay. Your next question comes from Randy Abrahms of Credit Suisse First Boston.

Yes, good morning. Thanks a lot. Maybe a follow-up question on the ProSLIC. It looks like a strong quarter, but it remains a lumpy segment. Could you talk about where you are seeing the strength in deployment activity this quarter and what do you see as underlying growth, if you kind of strip out the lumpy trends. Like if we were looking underlying growth rate for that segment?

Yes, Randy, the growth was pretty much across all the customer base. We feel we are engaging with all the top customers on a worldwide basis. In terms of the overall growth that we're expecting, that segment will grow for us by over 50% this year and we would expect that growth to pretty much mirror the market trends in that area, which are indicating, you know, very high growth rates going forward into '06 and '07. But, again, the the auto patterns and the purchasing patterns will tend to be choppy.

Okay. And with the introduction of your value Aero transceiver, maybe talk about the price points you are hitting relative to your main stream transceiver and are you targeting a new segment or is there any risks that you are cannibalizing some of the existing business with your main stream Aero transceiver?

Are you talking about the 4209?

Yes, the new -- the value transceiver that you just introduced.

Yes, again, I would not want to talk about the price points in particular for a given product, but that product having less features enables us to compete in the -- what you might call the ultra low cost handset market. So that opens us, that particular segment, that we did not compete in before with the 4210.

Okay. And just one final question. On the R&D expense, in your guidance for fourth quarter, it looks like it's upticking to 22 to 23% of sales. Maybe talk about is that more to support the new development projects and it could remain at that level until revenue scales or is there one-time expenses coming in in fourth quarter?

Well, Randy it's a combination of things. One is to continue to support the current programs and new product activities that we have in the pipeline. And number two is, it's -- about half of the increase is related to having Silicon MAGIKE, their team on board for a full quarter. So it's split about 50/50.

Okay, thanks a lot, guys.

Thanks.

Okay. Our next question comes from Brian Modoff of Deutsche Bank.

Yes, a few questions for you guys. In terms of Samsung, you indicated that they're going to be down in the current quarter. Looking into -- given your Aero II, it won't be ramping until the middle of next next year. How do you see Samsung in the front half of next year? In other words, could we see them perhaps drop below 10% of revenues in Q4 and maybe stay there for a couple of quarters before ramping again?

I would say, Brian, that the Samsung revenues typically in Q1 there would be some seasonality.

Yes.

Now with Samsung holding their unit forecast flat Q3 to Q4, there may not be as much seasonality as we've typically seen, but I would say that the revenue would continue to be in line with what we've talked about here for the fourth quarter.

Kind of low teens, around that area?

Yes.

Okay. And then on the F.M. tuner, Philips is pricing theirs at around $1, and they've got a new one, a new smaller integrated product coming around year-end, you are at 1.50 to 2, do you see bringing the price points down to be competitive there?

I think the performance of our device, compared to the other offerings is better. The cost of ownership for that product is low. Clearly we will be competitive in the marketplace, while maintaining our margin sector with F.M. tuner. I have to say the -- what I have seen so far in terms of interest from the customer base, on that particular product, is -- is very high. So I think customers are recognizing the value that we are bringing.

And kind of a question around WCDMA. This topic has not been brought up. Obviously you guys were late on EDGE and we have got WCDMA now ramping into volume. What's your view on WCDMA. When do you expect to have transceivers? Kind of what is your game plan for attacking that market and perhaps being earlier than with EDGE?

Okay. I think I agree with your assessment on EDGE. We would have liked to had offering two, three, quarters before. But on that very point, I think we have a product out today, and it is performing very well, and we have -- we hope to make up the lost ground. If you look at the investment dollars in the wireless business to date, it's -- clearly from our announcements the last few weeks and today, it's being concentrated on the AeroFONE for the GSM/GPRS market and the transceiver for EDGE. But we have the best transceiver technology today. So it is natural for us to expand our capabilities to next generation solutions, wide band, CDMA in particular. I'm not prepared to talk about the road map as to when we'll have devices for that particular segment, but it is natural for us to extend our technologies into next generation, but we'll do all of that within the business model that we have stated we are committed to.

Okay. Thank you.

You're welcome.

Okay. Your next question comes from Shawn Slayton of SG Cowen.

Hi, guys. Good morning. And I want to say, welcome aboard, Necip. Also, I want to say Silicon Labs appears to have many new compelling products in the marketplace. I wish you guys great success there. So I don't want to jump right into the negative of the call, but I -- on Samsung, can you just help us just understand, or maybe do a little bit of a postmortem over the past couple quarters about what has happened at Samsung? I mean is it merely that Philips is able to bundle their base band and transceiver and that that's causing you guys to be at a disadvantage there? And then can you speak a little bit to how your EDGE transceiver is going to overcome some of the dysfunction that's caused you to lose market share in the GPRS space? And then I have one other follow-up, thanks.

Okay. I think in terms of the share loss, at Samsung, from what I see, there are multiple elements. One obviously is how successful is various platforms that Samsung is introducing to the marketplace. There's a bundling expected that you mentioned is -- it's affecting things. And also we have not had an EDGE product to compete in those platforms that Samsung shares some of their -- 2.5g to EDGE. We have not had the product. However, the relationship with the customer from what I see appears to be strong. And they are looking to us to provide the EDGE device, which we now have. It is with them and it is being designed in. So it is going to take us sometime to reclaim some of the target but I think with the performance and the good relationship, we ought to be able to achieve that.

Okay. And you don't feel like the absence of a base band in that regard, you don't think you are going to have the same head wind that you have in the GPRS space with just selling the merchant transceiver part?

No. I mean, it is -- it is the same market dynamics as it was a couple of years ago, and I think the Aero I and then Aero II transceiver are getting very good market acceptance so we expect this to continue. It's also designed to be able to work with multiple base bands. So we'll pursue various alternatives there at different customers.

Okay.

Dan, is there anything you would like to add to Shawn's question?

Yes, absolutely. I think the -- first of all from the perspective of the running the wireless business unit, we are going to continue to invest in the transceiver and the -- the importance of that transceiver business independently of the AeroFONE products. So it's extremely important for us to be successful with Aero IIe, and to work with a number of base bands that are out in the market today. I would also like to just point out that, in fact, if we really look at 2005, there have been relatively few shipments into the EDGE space. Its not been a tremendous year for EDGE and the majority of handsets that have shipped in the EDGE market this year have come from Nokia and Motorola. I would say that the lack of an EDGE transceiver in 2005 probably did not affect us as much as, I guess, some folks were fearing. And it makes us actually feel very bullish that our timing is really good now to take advantage of EDGE really picking up in 2006. So I feel very confident about that.

Okay. Thanks for that. And maybe for Russ, Russ the top line performances had a lot of variance in it, maybe things are stabilizing here somewhat. Can you maybe help us understand what the trajectory of your March quarter is going to be? You guys had an up March quarter in the current year but that was off a really depressed Q4, from late 2004. Can you, at least, obviously with the percentage contribution from handset we might expect that revs would be down a little bit in Q1. Is that going to be offset by the mixed signal business? Thanks.

Sure, Shawn. I would say that we should expect some normal seasonality in our business, both in handsets and the broad based mixed signal area and that revenues given their normal pattern, will be -- could be down slightly from fourth quarter levels, but really it's too early to make that call right now, given the visibility that we have.

Okay. Understood. That's helpful. And just one last question. What -- can you give us some particulars on what drove the upside relative to your expectations for the handset business in the September quarter? Thanks.

Yes. We had higher growth than expected primarily at Samsung.

Okay very good.

That's for the additional growth.

Okay. Thank you. Good luck, guys.

Thanks.

Your next question comes from Tore Svanberg of Piper Jaffray.

Thank you. Good morning. Couple of questions. Russ, first of all, I know you don't really give out any backlog information, but could you qualitatively talk about your visibility for your current quarter guidance, please?

Sure. Well, as we've mentioned previously, we go through each quarter, a very detailed analysis with our customers and our sales force of what our customers' requirements are, their inventory position, and what production needs they have from us. Having gone through that we feel that we're very well positioned to support the revenue guidance that we have given here for Q4.

Okay. Very good. And looking at the AeroFONE chip set, it looks like a pretty good product, yet it also seems like a very competitive marketplace. Can you talk a little bit more about the reasoning behind this product? Is it really to continue to accelerate the growth rates. Because I assume it's probably not going to be helping margins much.

Dan, why don't you take this, since you initiated the product two and a half years ago.

Sure. Well, I think for sure one of the compelling reasons for us to develop this product was absolutely to address the potential of being kitted out or bundled out at certain customers. And we also were really focused on trying to increase the total content that we could address in the mobile handset business. So for us this was a natural step in the evolution of the Company. Now, again, getting back to the value that we are bringing, yes, this is a very competitive market and, in fact, it's competitive in all aspects of it and we still, I believe, get paid a premium for the performance that we have with the Aero transceiver family and the integration that we have managed to achieve just in the stand alone transceivers. So if we really are paying attention right now to what our customers are telling us, I think the value is profound with this product, and I think as time goes on, we're going to be able to extract that value.

So just looking across the whole range of issues of owning a platform, we are really addressing the heart of the issue, which is to reduce the total bowl of materials with unprecedented integration, to provide that performance that we've talked about, to address the software switching costs which really can be a big barrier to entry. And then a lot of other issues that may be a little bit more subtle, but nonetheless very compelling for our customers, for example, reducing the test time and manufacture, improving the yields. Every one of those components that we integrate away from the board is potentially something that can sell in the field or in a factory test.

And finally, if we just look at the supply chain management for the mobile phone industry, that it's really sensitive in terms of how much inventory is held. And you know that sometimes we're not all the best at forecasting in this industry. The mobile phone operators don't always know which are going to be the hot sellers; therefore, our customers have to hold in their stock quite a bit of inventory in order to respond to the upside and the quick turn around times that are expected. All of those components that we reduce are components that would be in the inventory cost of our customers. So you can just imagine, if you could reduce 200 odd components times 1 million handsets that's 200 million things that you didn't need to hold in inventory. So I think if you start adding up all of this value you can see that we have a very compelling story.

Very well. Just switching gear to mixed signal, your microcontrol business has done tremendously well, but it seems to be still a bit lumpy. When do you expect that business to maybe smoothen out a little bit and maybe grow less per quarter but more consistently?

Let me also say a couple things to clarify the decline in the quarter. At this stage of its growth, this product line, even though it has thousands of customers, has its revenue fairly concentrated in a few customers. For example, about 30 to 40%, roughly speaking of revenues come from top 10 customers. And what's happened this past quarter is two of those top ten customers delayed their orders. One had an issue with their product unrelated to our offering and the other had some inventory that we came to find out during the quarter. So this affected us. This will make up itself in the next quarter by a larger sequential increase. But to address your question, I think we just need to build more of those larger customers in the customer base so that this lumpiness, based on one, two customer issues do not affect us. And as I said, there's significant activity with new design wins with a lot of development kits going out the door. So over time, we expect to have achieved that level and, like you said, the growth may be more stable, but with less lumpiness.

Great. Thank you very much.

You're welcome.

Okay. Your next question comes from Srini Pajjuri of Merrill Lynch.

Just to go back to the AeroFONE, I'm just wondering what type of cost savings are we talking here for, for someone who's already using a lower cost base band and transceiver to switch to the single chip phone?

Well, we've integrated a lot more components, right? 250 or so components in an entry level phone today typically to less than 60. So there is cost savings both in terms of the [balm] and the PCB side, and the complexity of the PCB honestly. There are secondary savings in terms of yields that they see or the costs of developing a phone, using our offerings. So there's value there that we bring, and while we are going to enable the handset customer -- manufacturers to use some of that benefits, we also expect to get paid for the value.

I also want to say we should not confuse ultra low cost or entry phones with low-performing phones. I think quite to the contrary, in those regions where we think that we are going to be selling a lot of entry phones, the cost of building the infrastructure is such that you need to actually have higher performance on your handset. On the networking side, on the bay stations, the cost of per channel is higher than any of the dollars we are talking about here. So you actually need to offer a higher performance device on the handset to those markets.

Okay. Fair enough. And then I guess you are expecting production revenues some time in '06. Just going back to your power amplifier announcement, I mean from the time it took for you to announce the product and to see meaningful revenues I think it was a lot longer. I'm just wondering what is different this time? Are you in advanced status of design ins? If you could give us some color as to why, given that especially this is a total system versus one component?

Sure. I will let Dan give you more color than I can, but I will just say that we are now able to do -- make live calls in all three continents with the phone in all the press events. So we are that much further along in terms of maturity of the product. Dan?

Yes, I -- other than the contrast with the power amplifier, we can just look at, for example, the announcement of Aero II as a more recent benchmark. We announced that product and very quickly ramped it into production. Aero IIe, First Silicon went to customer as fully functional and meeting all the EDGE requirements and the same story with AeroFONE. First Silicon came out exactly one month later, we were making live calls on the network in -- on the Orange Network. And we have since made calls on multiple networks across multiple countries doing dry cuts et cetera. So on the AeroFONE product in particular, I can just say that our confidence level is very high. We chose to announce it when we had a very high degree of confidence in the platform, as a total solution, hardware and software and the reason why we expect the revenue to be able to start ramping in the second half of '06 is based on the initial feedback we have from our alpha customers and the confidence that they have that the platform will go through validation interoperability testing and into production fairly smoothly.

Okay. Just briefly on your customers, would they be Tier one customers, your existing customers, your new customers, if you could give us some color?

Well, the privacy of our customers is important. We are under non-disclosure with all of those companies. We have one -- one of our customers today My-Tronic has endorsed the technology publicly. And the other alpha customers are companies that are all capable of generating significant volumes and we are very excited about them.

And then in terms of your content increase, what magnitude are we talking about here? Is it going to be double the content or triple? Could you give us some idea how to think about this?

I will just say more than that.

Okay. And finally just going back to the Aero II transition. I remember you telling us last quarter or the quarter before that, that the ASP difference is about 20% lower for Aero II from Aero I. Is it going to continue to impact as we move more and toward Aero II or is it somewhat behind us already?

We had characterized that, Srini, as that -- when we introduced the pot that was the case. Obviously ASPs are also declining in the MCM area as well. So the impact has ameliorated slightly between the two different product offerings and the Aero II pricing here in the -- since we have announced the product has remained relatively flat to down slightly.

Okay. Thank you.

I think we have way overrun our time today. Thanks for being with us and I really appreciate all of your being very nice to me today. I hope to see you next quarter.

Thank you. This now concludes today's call.