Silicon Laboratories Inc (SLAB) 2005 Q4 法說會逐字稿

Good morning and welcome to Silicon Laboratories' fourth-quarter earnings conference call. 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. Now I would like to turn the meeting over to Shannon Pleasant.

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 investor page of our website at www.Silabs.com.

This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 800-295-0889 until February 15.

I'm joined today by Necip Sayiner, President and Chief Executive Officer and Russ Brennan, Chief Financial Officer. Russ will discuss our financial results and Necip will review our business activities for the quarter. We will have a question and answer session following the presentation.

Before we begin, let me comment regarding the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments and presentation today will include forward-looking statements or projections that involve substantial risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call. This information will likely change over time. By discussing our current perception of our market and the future performance of Silicon Laboratories and our products with you today, we're not undertaking an obligation to provide updates in the future.

There are a variety of factors that we may not be able to accurately predict or control that could have a material adverse effect on our business, operating results and financial condition. We encourage you to review our SEC filings, including the Form 10-K that we anticipate will be filed by February 13, 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 am pleased to report strong fourth-quarter results with revenue exceeding expectations and increasing by 6% sequentially to $110 million. The broad-based mixed signal business represented approximately 53% of revenue in Q4 and 56% of revenue in 2005.

The mobile handset business represented approximately 47% of revenue in Q4 and 44% of revenue in 2005. Gross margins for the fourth quarter increased to 55%. A richer product mix in our broad-based mixed signal business was responsible for the increase while mobile handset margins remained flat with third-quarter levels. On a GAAP basis, research and development investment was $23.7 million or 21.6% of revenue in the fourth quarter and $101.2 million or 23.8% of revenue in 2005.

Adjusted R&D investment in Q4 was $22.6 million and 20.6% of revenue, which excludes the impact of 1.1 million in stock compensation expense. On a GAAP basis, SG&A expense was $18.9 million and 17.2% of revenue in the fourth quarter and $72.6 million and 17% of revenue for the full year. Adjusted fourth-quarter SG&A expense, excluding $1.3 million in stock compensation expense, was $17.6 million and 16% of revenue.

GAAP operating income for the fourth quarter was $17.8 million or 16.2% of revenue and $58 million or 13.6% of revenue in fiscal 2005. Excluding a $2.4 million charge, the stock compensation expense representing $0.04 per fully diluted share, adjusted operating income for the fourth quarter was $20.2 million. Adjusted operating income for the full year, excluding pro forma charges, was $76.9 million.

Other income was $2.5 million and is expected to increase modestly to approximately $2.9 million in the first quarter as we continue to build cash. Other income is expected to increase sequentially again in Q2 and throughout the year by about $200,000 per quarter. Our pro forma tax rate was 22% in the fourth quarter and 21% for the full year. We expect our pro forma tax rate to be 20% in 2006.

GAAP net income for the fourth quarter was $15.3 million or $0.27 per fully diluted share. GAAP net income for fiscal 2005 was $47.5 million or $0.86 per fully diluted share. Adjusted net income per fully diluted share, excluding pro forma charges, which are detailed on our investor website, was $0.31 in Q4 and $1.20 for the full year.

Cash and investments at the end of the fourth quarter increased sequentially by almost $28 million to $364 million. Accounts receivable totaled $69 million with days sales outstanding at 56 days. Inventory decreased by approximately $4 million during the quarter to $23.1 million with days of inventory at 42 days. Inventory at distributors increased slightly in mobile handset products to prepare for a higher than normal seasonal sell through in Q1.

Capital expenditures in 2005 were approximately $20 million and are expected to be in the $20 to $25 million range in 2006. We adopted FAS 123R as of January 1 this year. We will be using the modified prospective approach. The impact of adopting this accounting in Q1 will be an all-inclusive charge to the GAAP P&L of approximately $10 million representing around 9% of revenue on a pretax basis.

After taxes, the charge is expected to be approximately $8 million representing a fully diluted EPS charge of about $0.15 per share in Q1. We anticipate, based on current forecasts, that the dollar charge will remain approximately the same during each quarter of 2006. An explanation of GAAP to non-GAAP reconciliation of FAS 123R charges is available on our website. The fully diluted EPS share count is expected to rise sequentially to 57.3 million shares in Q1 and will rise by approximately a $700,000 share rate each quarter over the balance of the year.

Necip, I will now turn the discussion to you.

Thank you, Russ and good morning, everyone. The business performed very well this quarter as we benefited from the strength in the mobile handset market. We increased our handset revenue by 14% sequentially to $51 million and shipped a record number of transceivers.

Sales growth was solid across many of our customers. Sales to Samsung were slightly stronger than anticipated and represented 11% of revenue in Q4 and 14% for fiscal 2005. We believe we ended the quarter with close to 50% marketshare at Samsung. As we have said before, EDGE penetration will be central in maintaining this share position and we made significant progress on designing activity with our EDGE transceiver in Q4 at Samsung as well as other key opportunities.

[Tarsham], a leading handset maker in Europe, has adopted the Aero family across the majority of its platforms, including the [My 300X], which became available in Q4. We anticipate that Tarsham will remain a top customer in the coming quarters. We also believe we have majority marketshare at LG and Amoy, two additional OEM customers that also grew sequentially in the quarter.

The ODM channel was a strong source of wireless demand and our revenue increased across several customers, including Arima and [Compau]. ODMs enable us to access the volume of larger manufacturers. For example Nokia 6708 handset designed by BenQ includes our Aero transceiver. We continued to see new design wins for both Aero I and Aero II in Q4. In addition, the expansion of our wireless portfolio has bolstered confidence among our customer base in our ability to be a long-term strategic supplier.

Our mobile handset portfolio, which was primarily our GSM and GPRS transceivers only a year ago, now includes EDGE transceivers, PAs, FM tuners and the AeroFONE single chip phone. We have also communicated to customers our intentions to expand our transceiver expertise to deliver a white solution for the 3G market and we're targeting the first half of 2008 for first revenue. This portfolio expansion is driving momentum in our mobile handset business and will obviously be a key component of our growth in 2006.

We also expect emerging markets to be a real opportunity this year, particularly for GSM/GPRS. We have exactly the right portfolio for the low-cost, high-performance requirements of these emerging markets. Since we announced AeroFONE last quarter, our engagements have expanded to 12 customers spanning both OEMs and ODMs. Customers are taking advantage of the flexibility of our software approach and are designing handsets based on all our available stack options. Either their own software stack or one of the stacks we have validated from CCww, StackCom and TCPCOM. We expect to complete general certification in the first quarter, which puts us one step closer to volume production.

The adoption of our FM tuner in handsets, portable audio players and accessories, began in earnest in Q4. We have already secured more than 60 design wins. Penetration of FM radio into handsets is accelerating beyond initial expectations. Based on feedback from handset makers, it now appears that FM radio penetration may be as high as 30% of the handset market in 2006. You would also find our FM tuner if you were to tear down Apple's recently announced iPod radio remote accessory. This application, which allows iPod users to listen to the radio and view RDS information via their iPod, is a great example of how FM radio and our FM tuner in particular could proliferate throughout mobile applications.

We delivered our first meaningful FM tuner revenue in Q4 and expect revenue to ramp steadily throughout 2006. When we announced the FM tuner last year, we set a revenue target of $20 million for 2006. Based on the high level of design activity, we now believe revenue could be as high as double that initial expectation.

Now I would like to move to the broad-based mixed signal business. In 2005, our modem business declined by about 10%. While we maintained our leadership position in DAAs, the transition to soft modems and set-top boxes was the primary source of the revenue decline. We expect this transition to continue to play out this year driving similar revenue declines in 2006 as we experienced in 2005. Voice over IP has emerged as a real alternative to traditional telephony and we believe our highly integrated, high-performance [crosslink] family is the marketshare leader in Voice over broadband networks.

The ProSLIC business ended the year up by more than 60% and we expect high double-digit growth again in 2006. The (indiscernible) business returned to growth as expected in Q4 growing by more than 15% sequentially. In addition to revenue from new design wins ramping up, we also recovered revenue from orders that were pushed from Q3 into Q4. (indiscernible) [kit] shipments and total customers also reached their record high during the quarter.

(indiscernible) revenue grew by more than 30% year-over-year in 2005 and represented greater than 5% of total revenue. Microcontrollers are an essential part of our portfolio business model and long-term growth strategy. We expect this business to contribute positively to gross margin, to our customer and market diversity and we expect it to deliver high double-digit growth again in 2006.

Revenue for our timing and networking solutions, which includes our clocks and recently announced VCXOs, reached their high in Q4. We believe that revenue in this product area will double in 2006 and that our VCXO family will be an important contributor. The customer interest in the VCXO product is extremely high. To date, we have sampled more than 200 customers. We think that our ability to cut industry leadtimes and provide multiple frequencies in a single chip is very disruptive and will drive adoption.

We're also seeing early success with several other new products out late last year, including our fax ISOmodem, which we sampled to new customers and made significant progress on certification with our lead customer, and the SiRX set-top box receiver, our latest broadcast product, which is being evaluated by set-top box makers for products slated for late 2006 and 2007 introduction.

Before we provide guidance for the first quarter, I would like to reiterate some of the key trends that I believe will enable us to drive growth in the future. Advances in process technology are enabling products that provide higher levels of integration with much more functionality packed into a single device resulting in a smaller footprint solution in many consumer applications. Even though we live in an analog world, the process technology evolution favors digital-centric implementations in CMOS that provides the scaling you need in order to achieve higher levels of integration, higher transistor density, lower power and lower cost.

On the other hand, performance requirements for these highly integrated devices remain high. From transceiver sensitivity to FM tuner selectivity, performance plays an important role in the consumer experience and customers have less and less tolerance for any performance degradation as a result of integration.

So at the intersection of what seems to be contradicting requirements are two of our strongest core competencies. First is our ability to combine mixed signal expertise with digital-centric architectures to replace pure analog approaches and second is an established track record of driving the highest level of integration without compromising performance. I believe we are one of very few companies who possess these critical skills that will differentiate successful enterprises going forward.

We will continue to translate these unique capabilities, differentiated technologies and our innovation engine into new products and marketshare in existing and new segments. We believe by doing this and with a keen focus on execution, we will return to growth in 2006 and beyond. Revenue from new products as well as our existing product lines will continue to support our gross margin targets of mid 50% while enabling us to make progress towards our target model of 25% operating income before taxes.

Finally, let me turn to our first-quarter guidance. We believe our mobile handset business will be up and our broad-based mixed signal business will be flat to down slightly. Revenue is expected to be in the range of $110 to $114 million. We expect to maintain gross margin at approximately 54% of revenue. We expect R&D measurements to be approximately 20% to 21% of revenue and SG&A expense to be approximately 16% to 17% of revenue. We believe our adjusted operating profit will be in the 17% to 18% range. Q1 diluted net income per share on a GAAP basis is expected to be $0.16 to $0.18. Q1 adjusted diluted net income per share, which excludes a non-cash charge for stock compensation, is expected to be $0.31 to $0.33. Shannon.

Thank you, Necip. We would now like to open the call for questions. So that we can accommodate questions from as many people as possible before the market opens, please limit your questions to one with one follow-up question. Operator, please review the question-and-answer instructions for our call participants.

(OPERATOR INSTRUCTIONS). Mark Edelstone, Morgan Stanley.

Congratulations on a nice quarter. First question related to the wireless products. Necip, wonder if you could give us a sense as to what the ramp looks like from your prospective now for both EDGE transceivers as you go through this year and then when you would expect to see initial production revenues for AeroFONE?

Sure, Mark. Let me start with EDGE. Our biggest opportunity at this point is with Samsung and during the quarter, we made really good progress. We are engaged with Samsung broadly. There are a number of teams evaluating our EDGE solution. Some are ahead of others. But the evaluation and the benchmarking against other solutions is going very well.

With respect to AeroFONE, as I said, we expanded our customer engagements to 12 customers and I can put those in a few different pockets for you. The first would be the smaller ODMs and design houses in Asia. There are a couple of engagements that we are calling design wins at this point in time. There is an alpha customer OEM that is designing several models with AeroFONE. We also have a couple large ODMs who have plans to build phones with our solution to offer to their OEM partners and finally, we have a design win with a smart phone manufacturer.

So if I look at these engagements with EDGE at Samsung and other key accounts and AeroFONE, I think we are still comfortable with the prior guidance we have provided, which is the second half of '06 in terms of revenue ramp. As these engagements mature a little more, we will be able to provide a little bit more granularity as to whether the ramp will start in the third quarter, in the fourth quarter, late third quarter. That type of granularity we will be able to provide as we make further progress.

Great. Thanks for that clarity. And then just on the revenue ramp for EDGE, does that basically begin kicking in kind of middle of the year at this point?

This really depends on the customers' introduction plans at this point in time. So the best estimate we can give you would be still saying second half of '06. I would be inclined to say that we will start shipping perhaps late third quarter. But we do not have a design win at this point with our strict definition of a design win. So I'm giving you this guidance based on the progress we have made with customers so far.

Jeremy Bunting, Thomas Weisel Partners.

Good morning. This is Jenny Hsu calling in for Jeremy. I think you mentioned in your prepared remarks that you were working on a transceiver for GG handsets and I was wondering if you can just go into a few more details on that.

Really what I said in my remarks is all we are prepared to say at this point. We have shared this roadmap with our customers. It is going to be a multimode transceiver incorporating both wideband CDMA and EDGE in a single chip transceiver and based on our development timeline, we expect that we are going to start seeing revenues in the first half of 2008.

And then just continuing off of that, I was wondering if you could give me an update on how you feel your position is right now with Samsung? You mentioned you have 50% marketshare. Would you expect that to remain at similar levels in 2006 or potentially capture more share as you start to ramp your EDGE and additional new products throughout the year?

As I mentioned, maintaining our share at Samsung will highly depend on our penetration with their EDGE phones. I think we are well-positioned for all the GSM/GPRS phones currently in production and new designs that might come up in 2006. And I gave you an update on EDGE where we are with Samsung. So we need to execute on these design wins in order to maintain the type of share we have enjoyed at Samsung.

Frank [Ellis], Citigroup.

Just with regard to both ProSLIC and the microcontroller commentary on 2006, you remarked on high double-digit growth. Should we assume that would be greater than 50%? Can you give us some parameters for looking at that?

I think the year-over-year growth on ProSLIC is going to be somewhat lower than the growth rate for 2005. For MCUs, I would say that the growth rate into 2006 will be at or above the growth rate for 2005.

Great. And then with the strength that you are seeing with the FM tuner products going from targeting 20 million to perhaps double that, should we think about a fairly linear ramp from here or is that going to be more second half weighted?

No, I think there will be a steady ramp from now on. As I mentioned, we had our first meaningful revenue in Q4 and we would define this to be a $1 million quarter. So we achieved that milestone and throughout the year, we are really looking at a sequential increase as we go through the year.

Brian Modoff, Deutsche Bank.

Can you kind of talk about some of your marketshare? Give us an idea of what your marketshare is in say inside of LG in the same space with regard to GSM/GPRS transceivers and any view of timing on perhaps EDGE wins in that customer?

At LG, Brian, we believe we have a majority share in GSM/GPRS and the timing of the engagement with LG really is dependent on LG's plans at this point when they can introduce our transceiver. They clearly have our transceiver and our evaluating it. The timing of that will be based on their baseband selection and when they can introduce our transceiver. But we're very comfortable with the marketshare we have at LG now and going forward.

Are you ahead or behind Samsung in terms of time frame with LG?

Behind.

Behind. Can you give us any update on any progress with the other two large OEMs? Obviously Motorola has some very particular requirements but anything at Nokia that you can talk about at all?

I think at this point both Nokia and Motorola remain longer-term propositions for us and I have nothing to report on these accounts with respect to EDGE.

Tore Svanberg, Piper Jaffray.

Could you give us an update on your power management business maybe as far as defined wins is concerned and then I have a follow-up from that.

Sure. We have continued to provide evaluation boards to our customers. Design activity is ongoing. Design wins are happening and we expect to start to see some revenue from our products later in this year.

And on that same topic, can you just give us an update on the Power-One suit?

I think all I can say at this point is we do not believe the lawsuit has merit and we are going to defend our position.

And finally for Russ, I think your inventory days came in at 42 days. Is this the level that you're comfortable with or are you going to actually try and build some inventories here in the March quarter?

Well I would say that inventories are probably at the low end of our target range from the days of inventory on hand. Our lead times remain constant but given some of the revenue trends that we are seeing, we would like to try to build a little bit of inventory if we could in Q1.

Thank you and great job.

Srini Pajjuri, Merrill Lynch.

Just a quick one on the FM tuners. You're clearly expecting a pretty strong ramp. I was wondering if you could give us a little bit more color as to whether these design wins are for cell phones or MP3 players. And any color you could give us on that?

Sure. The design wins are very broad. We are engaged with a large number of handset manufacturers. And as we said before, the FM tuner also enables us to compete in new areas, for example CDMA phones and 3G phones, and allows us to penetrate potentially new customers in handset markets. The design wins in the handset area are really broad and engagements are strong even with those customers that we haven't yet won. And it is worldwide. We also have a number of design wins with portable audio players. We just mentioned Apple's accessory but we have a number of design wins with other MP3 player makers.

I guess some of your competitors have been talking about offering a Bluetooth and FM tuner chip. Do you see any risk to your business and if you do, is there any chance of you offering a similar solution?

I think that there is a trend in integrating Bluetooth with FM tuners. I think both are having increased attached rates and we will see increased attached rates. So we are cognizant of a trend of integrating them and we have a strategy in place to address this. But today we are not prepared to talk about the specifics.

Edward Schneider, Charter Equity Research.

You detailed engagements for Aero II and AeroFONE with 14 different customers. How many of those are you in final qualification with. You mentioned you didn't have any actual design for production but I'm just wondering how far along you are. And then you also said that 30% marketshare in FM tuners, is that for -- is that your marketshare in FM tuners or is that your expectations for the penetration of FM tuners into handsets for the --?

Let me answer the second question first. The 30% number we have given is the penetration rate of our FM tuner functionality into handsets. We believe that, as we exit 2006, we will have double-digit share in that market. Your first question about AeroFONE, we are going through the GCF testing this quarter. So we are going to complete and pass that certification this quarter. The customers are in the process of designing handsets with our solution adding multimedia and we are supporting them in various ways with different customers. So that is the stage we are at with most of the lead customers.

So of the 12 customers you are dealing with then, how many of them are actually designing -- I don't want to say platforms but actual models around this part versus evaluating the device? You mentioned that some were in the lab comparing the performance of your product to others after obviously an evaluation process versus a model design process.

Yes, as I said, I went through different categories. I tried to highlight what we call design wins and for us to call something a design win there has to be a specific model that is being designed. So there is an alpha customer OEM at that stage who are designing several models with us. There is a smart phone being designed and two of the smaller ODMs and design houses are also designing phones.

David Wu, Global Crown Capital.

Congratulations for a great quarter. Two quick questions. Number one is can you describe the situation with -- the surprise in the both calendar quarter and unseasonally strong Q1 reflects -- I suspect Samsung hasn't done much to do with the Q4 upside and the Q1 better than seasonal trend? Am I correct? I assume that it's design wins at OEMs that drive that. The other thing is really on the same subject on AeroFONE. It seems to me listening to the conference calls, at least at Samsung, they don't really want to go into the entry-level GSM/GPRS phones. What are your chances of getting business with those AeroFONE designs at either Samsung or LG?

Let me make a quick comment on Samsung business for 4Q first. We have guided that both units and revenues would be down at Samsung in 4Q. We have done a little better than that in the quarter. Our units were actually up slightly. In terms of potential engagements for AeroFONE at Samsung, I would like to answer it in a more generic way in that our view of the market in 2006 and in 2007 suggests that there are going to be significant opportunities in the emerging markets that require really low cost, high-performance phones. So I think many OEMs will look to these regions for growth in GSM/GPRS and we would like to think that our offering is very suitable for those applications. So we are going to continue to engage with large ODMs who are building phones for OEMs for the emerging markets. As I mentioned, two of them have plans to build phones with our solution and in turn, they will offer it to their OEM partners.

The only thing I would add is that our Q1 guidance on revenue comprehends that we will have less dollar shipments with increased unit shipments into Samsung in Q1 as the conversion to Aero II is taking place at a very fast pace.

I see. What about the dollar revenue though?

Dollar revenue will drop quarter to quarter by 10% to 12%.

Randy Abrams, Credit Suisse.

I had a question on the richer mix that drove the higher margins in the current quarter. Even the [slight] wireless [going] faster. Maybe talk about the mix drivers that helped and then if you look in the first quarter, guiding back toward the 54% level, what are the factors taking place next quarter?

Sure. Well in the broad-based mixed signal area, the mix was across -- the richer mix was across several product categories. One is the modem category came in stronger than expected. Number two is the high growth areas of Voice over IP and then CU also performed very well, higher than we had anticipated. In addition, we mentioned the networking and courtships reached an all-time record in revenue and they are very high margin products. So that lifted the average as well. In terms of the handset gross margins, they remained flat. We would expect those margins to remain relatively flat going into Q1 and we would expect that our broad-based mixed signal margin will not have as rich a mix in the Q1 time period.

Maybe just a follow-up on the VCXO. I think you mentioned it was going to double going into next year. Could you talk about the revenue run rate, just the magnitude and also how pricing is in that segment?

Well I would say that the revenue run rate in the second half of the year will provide us with some moderate revenues. In terms of pricing, the pricing has a broad range depending on the number of the frequencies of the devices s that we offer but it also has a very high margin structure for those products.

Shawn Slayton, SG Cowen.

Nice execution. Actually most of my questions have been answered. Maybe can you speak just a little bit to the attached rate of the PA and the transceiver and how that is tending for you guys? Thanks.

We have announced a design win a couple months ago with Lenovo. So we are going -- we're just starting to ship into Lenovo with our PAs. There have been a couple of other design wins in the quarter that will add modestly as the year progresses to stronger revenues.

Can you speak a little bit to the synergies of maybe the chip set sale in the GSM handset or how you guys are approaching that now that you have these multiple offerings and multiple silicon offerings within the handset? Thanks.

I think we are able to offer a bundled solution with the transceivers but perhaps more importantly with our AeroFONE. So most places -- we are talking to customers about AeroFONE. We are also talking to them about our PAs. But at this stage, as you know, we have dual band and tri band PAs only. So that is a relative portion of the market that we can go after at this stage.

That helpful. Thank you.

[Nadia Chalara], American Technology Research.

Necip, can you talk about AeroFONE in terms of -- I'm assuming you're targeting both GSM and GPRS phones. What kind of market (indiscernible) is available and knowing there are very few players, what kind of marketshare are you targeting or what is the realistic expectation if you take the production to ramp from second half '06 going into '07? What kind of targets do you have and also if you can comment on the average ASP on that and your [complete] equation in terms of die sizes and so on?

On our marketshare goals, I think it is a little premature for us to publicly state a target given we are relatively new in the base band business and have been engaged with customers only for a few months. Clearly, the opportunity is large. I think to date, if I can give you a little color on what we have seen with our customer engagement, there haven't been surprises. Customers I think appreciate that the RF performance in the integrated solution and definitely validate the significant [bomb] advantage that we are bringing to the solution.

The challenge for us and the opportunity at the same time is really to create the product together with the protocol stack and the multimedia support to meet the specific needs of every customer. And we have the flexibility with our software partners to do that. So the engagements so far are encouraging.

In terms of ASPs, all I have said before and we will stick to it is the fact that the functionality that we are replacing today in entry-level phones with our AeroFONE, including all the bond savings that we are able to accommodate, is in the $8 to $10 range. We have also said that we are going to shortly introduce a derivative product that is going to target the voice on the GSM segment and the ASPs there are going to be lower.

Can I ask a follow-up in terms of FM tuners? Looking at the handset market, you talk about 30% penetration in the handset market. What kind of marketshare do you have already you see most of the competition there?

Well what I said earlier is, as we exit 2006, we believe we will have double-digit marketshare and our goal obviously is to increase that sequentially into 2007. And we believe with the type of engagements we are seeing now and the level of interest we can achieve that.

Arnab Chanda, Lehman Brothers.

Just a couple of questions. First, if you look at your handset business, would the Aero business be up in Q1 if you excluded the FM tuner? And I have a follow-up please.

We don't really provide guidance by specific product category. I think it would be safe to assume that our FM tuner business will definitely grow from Q4 to Q1 and there will be a slight change in our handset business. In particular, there will be unit growth driven by the quick transition that we are seeing take place in Aero II and we would expect Aero II revenues to exceed Aero I revenues in Q1.

Thanks a lot, Russ. And one follow-up, just at a more macrolevel, if you look at the products, if you exclude ProSLIC and MCU, if you look at all the new products that you introduced through '05 and the revenue contribution from '06, would you say your core business would be flat? Without that, would the [outset] mostly come from new products or do you think your modem and your handset business can actually grow? So if you could talk a little bit qualitatively even that would be great.

Let me try to respond to it and see if I hit the mark. We have talked about the modems for 2005, right? They are about 10% decline we expect. We have talked about the ProSLIC business and MCU business and their respective growth rates. We talked about the timing products, which we said is going to double but it is a relatively modest revenue today. We have identified the FM tuner potential for the year and on transceivers, the transition that we have been talking about from Aero I to Aero II, as Russ mentioned, has happened and is happening this quarter. So I think we have given all the key ingredients to you in terms of making up the revenue profile for us for 2006.

Thank you very much.

Sandy Harrison, Pacific Growth Equities.

A quick question on MCUs and a follow-up if I could on handsets. The MCUs look like they got back on track this quarter. When you look at the business, what do you think as a percentage of revenues you would like to see this at or it could be at for 2006 and then looking further into 2007, could this be 20%, 30% of your business in the future?

I think in the near term, if you restrict the discussion to 2006 in particular, we expect that business to be less than 10% of our overall revenues. It is a steadily growing business but at this stage, as we talked about this last quarter, there is still a high customer concentration, which we are going to change over time by diversifying the customer base further and we are doing that. So we can still expect some lumpiness in the near term in terms of revenue. But over a period of time, we expect to see sequential growth quarterly and certainly year-over-year comparisons in the order we mentioned.

Got you. And then the follow-up, as far as the handsets, I got the sense that you don't have any design wins yet that you can talk about. However, I sense a confidence in your prepared remarks that you guys expect to remain or keep your marketshare at Samsung. What gives you that confidence? Is the incumbent position something that you like? Is it a technology? Then along the same lines as that, would you expect Samsung to do a second source on this product or is this a product that you want to sole source and basically kind of hitch your horses to?

Well clearly we like to think that we have been a good supplier to Samsung with GSM/GPRS transceivers. We believe that our technology is superior in terms of performance whether we are talking about sensitivity figures on the receive side or modulation spectrum on the transmit side. I think we have -- we are achieving perhaps unprecedented reduction in the component count around our transceiver. So the component reduction and the performance that we have been able to demonstrate gives us the confidence that will ultimately win targets at Samsung and other customers.

As far as second sources, is that something that Samsung would expect to do or is that something you think that remains a sole source position for you?

I think Samsung today uses multiple suppliers for all of their platforms and we don't have the expectation that that will change.

Thank you. This does conclude the question and answer session. Now I will return the conference over to Ms. Pleasant.

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