Silicon Laboratories Inc (SLAB) 2006 Q1 法說會逐字稿

This is the Silicon Laboratories first-quarter earnings conference call. All parties will be 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 will turn the meeting over to Ms. Shannon Pleasant. Ma'am, you may begin.

Thank you and 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, the 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.com.silabs.com.

This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 866-501-8774 until May 9.

I am 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 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 expect 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're 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 strong first-quarter results with revenue increasing by 4% sequentially and 9% year-over-year to $114.5 million. The broad-based mixed-signal business was up sequentially, representing approximately 54% of revenue in Q1. The mobile handset business also grew sequentially and represented about 46% of revenue in Q1.

Gross margin for the first quarter was slightly higher than expected at 55.2% due to a greater than anticipated mix of broad-based mixed-signal products. Non-GAAP gross margin, which excludes the impact of $100,000 in stock compensation expense, was 55.3%.

On a GAAP basis, research and development investment was $27.6 million in the first quarter. Non-GAAP R&D investment, which excludes the impact of $4.3 million in stock compensation expense, was $23.3 and 20.3% of revenue.

On a GAAP basis, SG&A expense was $24.7 million in the first quarter. Non-GAAP SG&A, excluding $5.4 million in stock compensation expense, was $19.3 million and 16.9% of revenue. This was slightly higher than expected due to increased litigation expenses and payroll taxes associated with option exercises by employees.

We expect operating expenses to increase at a slightly higher rate than anticipated previously due to two major factors. First, during the quarter we closed on a material lease agreement for office space in Austin that we plan to occupy late in the third quarter. We will be supporting lease payments at both our new and existing locations throughout most of this year. The increased lease expense will result in about a $0.02 impact to EPS in Q2. For more information on the lease agreement please refer to the 8-K filed April 5 on the investor page of our website.

The second factor increasing operating expenses is additional investments we're making to accelerate new product development, which include extending our recruiting efforts to staff new design centers around the world. This will build our base run rate on expenses from the 2% to 3% a quarter we guided previously to 3% to 4% per quarter.

GAAP operating income for the first quarter was $11 million. Non-GAAP operating income for the first quarter was $20.8 million or 18.2% of revenue. Other income was $3.3 million and is expected to increase modestly to approximately $3.6 million in the second quarter. Other income is expected to increase sequentially throughout the year by about $300,000 per quarter.

Our pro forma tax rate was 20.5% in the first quarter and will be at a 20% rate for the rest of 2006.

GAAP net income for the first quarter was $11.1 million or $0.19 per fully diluted share. Non-GAAP net income per fully diluted share, excluding pro forma charges, was $0.33.

Cash and investments at the end of the first quarter increased sequentially by almost $43 million to $407 million. Accounts receivable increased to $76 million, with Days Sales Outstanding at 59 days. Inventory was up slightly by $1 million during the quarter to $24.1 million, with days of inventory at 43 days.

Previously, we have talked about tightness in the back-end of our supply chain. We're now seeing constraints on the front end as well. However, we have been able to deal with these constraints, and today we feel that the demand forecast and our supply are adequately balanced for Q2. Inventories distributed increased in Q1, and sales through distribution reached 62% of revenue.

As we discussed last quarter, we adopted FAS 123(R) as of January 1 this year. We're using the modified prospective approach. The impact of adopting this accounting in Q1 was an all-inclusive charge to the GAAP P&L of approximately $10 million, representing around 9% of revenue on a pre-tax basis. After taxes, the expense was approximately $8 million, representing a fully diluted EPS charge of about $0.14 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 the GAAP to non-GAAP reconciliation of FAS 123(R) charges is available on our website. Necip, I will now turn the discussion to you.

Thank you, Russ, and good morning, everyone. The business performed well in Q1 due to stronger than anticipated performance in our broad-based mixed-signal business and continued robust demand in the handset market.

Let's start with the broad-based mixed-signal business, which grew by 5% sequentially to $61.9 million. The ProSLIC product, which represents a growing percent of the broad-based mixed-signal revenue, grew by about 60% year-over-year in Q1. Shipments hit a record high during the quarter, and demand at Motorola, Sagem, and Sumitomo was particularly strong.

While order patterns tend to be choppy in this business, the market growth rate is very strong. We believe full residential Voice over IP port shipments will increase from about 35 million last year to nearly 100 million by 2008, offering us a number of opportunities to expand our share and continue to grow revenue.

The MCU business grew again sequentially in Q1, and we made significant progress on our goal to thicken the product portfolio. During the quarter, we introduced a family of USB products, a family of Embedded Ethernet controllers, and a family of new small form factor products. We're seeing particular demand in the industrial and consumer connectivity applications for these devices.

A promising growth area for MCUs is in digital multimedia broadcast receivers, where we have recently won several significant customers. We have also had success combining our MCUs with our other products to penetrate existing customers. For example, we have been successful in winning MCU sockets in cell phones for camera modules and USB connectivity.

We also expanded our power portfolio in Q1, adding a family of digital isolators that are the industry's highest performance, easiest to use, lowest cost isolator product family. These highly-integrated patent-pending four-channel isolators are one-third the size of competing Ultra Copper solutions, reducing the bill of material cost by as much as 50%. Exciting markets for this product include plasma TVs and motor control applications.

We are engaged with the core design groups at a number of large networking and telecom equipment providers for our timing solutions, particularly our oscillators, and are in the process of being qualified at several key customers. Based on current design activity, we are expecting revenue in the timing product area to double in 2006.

We have emphasized previously that broadcast is an important growth area for us. Our SiRX set-top box receiver family announced last November is actively being designed-in by several of the major free to air set-top box providers. In fact, we expect to start seeing modest revenue in Q3, a quarter earlier than initially anticipated.

The FM tuner continued to ramp in Q1, shipping in volume to 18 customers, 13 of which are handset makers. We shipped to five customers building portable audio players, of which two are brand-new customers to Silicon Labs. In addition, we are also in the process of securing approved supplier status with two new large handset customers that could result in significant opportunities in 2007.

The FM tuner market is segmenting as adoption rates increase. For entry-level phones, the handset makers consider the FM tuner as a stand-alone function, and design wins are driven by footprint, cost, and performance. This is a large and growing market where we have established a very competitive roadmap.

Our digital-centric architectures in CMOS will allow us to continue to reduce footprint and bill of materials as we add features, further distancing ourselves from the competition.

At the mid to high end of the market, FM radio and Bluetooth are expected to have similar penetration rates. So in some handsets there may be a case for integrating the two functions together. Our strategy here includes partnerships with Bluetooth providers that will deliver modules combining our FM tuner with their Bluetooth technology. One such solution from a partnership with STMicroelectronics will be available this quarter.

About 85% of our FM tuner revenue came from handsets in Q1. Including revenue from FM tuners, our total mobile handset revenue increased by about 3% sequentially to $52.7 million.

During the quarter, we shipped a record number of Aero transceivers. We experienced strong demand from our ODM customers like Compal, Chi Mei, and Arima. As we anticipated, Aero II surpassed Aero I in revenue in Q1, and Aero II continued to make up the large majority of new design wins.

We believe that reduced market expectations for 2006 EDGE growth outside of the top two handset makers will result in healthy GSM/GPRS demand throughout the year.

Samsung represented about 10% of revenue in Q1. As we discussed last quarter, Samsung is our largest EDGE opportunity in 2006. I am pleased to report that we were successful in winning our first EDGE platform at Samsung in Q1. We also secured two EDGE models at NEC. We expect initial shipments to begin in Q3.

In order to expand the EDGE opportunities at our large OEM customers outside of Samsung, we also plan to sample Aero IIe-D, a single chip EDGE transceiver with a digital interface, in the third quarter of this year.

We continue to make progress towards production readiness of AeroFONE, our single chip phone. Last quarter, we talked about [Janelux] certification being a major milestone, and we essentially completed this in Q1.

We have been focused on executing on current wins to move the designs into production and revenue. Based on progress our customers have made to date, we are targeting to ship up to our first million AeroFONE units this year.

When we introduced AeroFONE last fall, we talked about the roadmap, which includes a voice-centric version of the AeroFONE designed for the ultra-low-cost handset market. We began sampling this product to a lead ODM customer this month. We believe this voice-centric version of AeroFONE will contribute to revenue in 2007.

Overall, we are pleased with the healthy demand for our products and the progress we're making on getting our new products ready for mass production. We are very focused on winning new opportunities and executing on products currently in development. As Russ mentioned, we are also taking steps to accelerate the timelines on some of our developments to better position ourselves to take advantage of certain market and customer opportunities.

Now for the guidance. In Q2, we believe our broad-based mixed-signal business will be roughly flat, and our mobile handset business will be up. Revenue is expected to be in the range of 116 to $120 million.

We expect gross margin to be between 54% and 55% of revenue. We expect R&D investment to be approximately 21% to 22% of revenue and SG&A expense to be approximately 16% to 17% of revenue.

Q2's diluted net income per share on a GAAP basis is expected to be $0.18 to $0.20. Q2 non-GAAP diluted net income per share, which excludes a non-cash charge for stock compensation, is expected to be $0.32 to $0.34. This earnings guidance comprehends the $0.02 impact from the double lease payment Russ discussed. 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) Mr. Edward Snyder of Charter Equity Research.

A couple questions, actually. FM tuners obviously made up a big portion of your revenue here. I am assuming most of that coming out of mobile products. What percentage of your total mobile products was FM tuners?

Then in terms of cash flow, you're still -- you are seeing a very strong cash flow here, adding over two quarters of revenue in cash. Are you looking to increase your dividend, or start a dividend per share, or increase your share buyback program? Or basically what do you plan to do with your cash balance?

This is Russ Brennan. Ed, in terms of our cash balance, what we have said consistently is once we have for the prior year's worth of revenue in cash, we would then entertain changes in our capital structure, such as dividend policies, buybacks, and the like. Until that point in time, we will continue to build cash; and that will be the plan.

In terms of FM tuner, like I indicated, 85% of FM tuner revenue came from mobile handsets.

I guess the flip side of that question, what percentage of your total mobile handset revenue was from FM tuners?

We're not planning to break that out separately.

Okay. Then you have indicated that you've got an Aero IIe win at Samsung. What model that might be, and when you might start shipping that product?

We're going to start initial shipments for that model in Q3. I'm not at liberty to say more about the model and the base (indiscernible).

Okay, but is it an EDGE-only phone, or is it a WEDGE phone or [do you know]?

This is an EDGE phone.

Okay, thank you.

Arnab Chanda of Lehman Brothers.

Yes, a couple questions. One, Russ, if you could talk a little bit about your operating margin target; and when do you think you can get there, especially in the light of more expenses?

Then secondly, you talked a little bit about some of your products, could you qualitatively mention what you see going on in your modem businesses currently, and what you see going on in your AeroFONE business? Should we assume significant revenues this year versus next year? Thank you.

Sure. In terms of our operating margin model, it has been and still remains to be at 25% of revenue on a pro forma basis. With an increase of operating expenses, we still believe we will achieve that rate sometime in the 2007 time period. That is the target at this point in time.

In terms of our modem business, our modem business continues to decline, as we had mentioned previously. It did take place again this quarter and will continue to decline throughout the balance of the year at roughly about a 10% or so annual rate.

I think you had a question (indiscernible) with respect to AeroFONE also. I think at this point, for 2006, we are able to provide a target range or -- as I mentioned, up to 1 million units that we think we will be able to ship to our existing customers.

We are working with those customers and a couple of large ODMs, as I mentioned in the last quarter's call, for 2007 models. One of those large ODMs we have sampled this past month, a voice-centric version of our AeroFONE.

Those developments are on track, are progressing well. At this point, we're not going to be able to provide a guidance for revenue for 2007, other than to say the developments with our customers have been progressing on schedule.

Thanks, Necip and Russ.

Mark Edelstone of Morgan Stanley.

A question on the part you're doing for Samsung for their EDGE phone. Is that a customized part? Or is the part that you're going to ship to them, will that be available to ship to other OEMs as well, and ODMs in the future?

It is available for us to provide to other customers as well.

Okay. Then Russ, on the lease payments that you have, expectation is that you're basically paying somewhat excess lease payments here for the remainder of this year. Can you give us a sense as to when that actually will stop? Does it stop in Q4, or does that roll into next year as well?

It will stop in Q4, Mark.

Just one last question if I could. You had a fairly sizable increase in your distribution inventory reserves that you have, or distribution revenue reserves rather. Can you talk about that? Why it went up so much, and what we should expect from that going forward?

Sure. Distribution inventory grew in both businesses. A good portion of that growth took place during the March time period. We would expect that those inventories will grow slightly in Q2 as we prepare to increase our revenues in Q3. But that we also had quite a bit of revenue through the distribution channel in Q1, at 62% of our total sales.

Thanks a lot, guys.

Craig Ellis of Citigroup.

A quarter ago, Russ, I think you put out some growth parameters for ProSLIC and microcontrollers to be up around 50% this year, and then the FM tuner at around $40 million. Can you just update us on targets for those businesses?

Well, Craig, as you can tell from our opening remarks, the Voice over IP revenue increased 60% Q1 over Q1; so that remains well on track. The MCU business is still contributing nice sequential growth and should be able to maintain their objective as well.

I think you have also asked about FM tuners, Craig. The $40 million, we said up to $40 million; and we are, based on what we have shipped in 1Q and our forecast for the remainder of the year, are on track to be somewhere near the high end of that range.

Okay. Then just on the gross margins, Russ, you came in a little bit above your forecast. You've got some nice guidance there. What is it that drove the mix on the broad-based side, given that that is really what seems to be driving the shift in margin?

Well, as you are well aware, Craig, there is a number of different varied parts in the broad-based business. It was just a richer mix of those devices in the revenue stream. On the handset side, we do get a nice contribution from our FM tuner business as well. So as that grows, that also helps the margin.

On the broad-based side, if I can point to one area of particular strength in Q1, that was with our ProSLIC product line.

Okay. Maybe lastly, Necip, you have been on board for about six months now. Can you just update us on what you think you've accomplished so far in the first six months, and how that positions you for some of your key objectives over the next 12 to 18 months?

Sure. We have early on gone through our investments and prioritized our investments to make sure that the programs that we are staffing are being resourced effectively and adequately to meet the market windows for those particular products.

We have looked at our product portfolio and taken a segment approach, aligned our products, aligned our product developments.

As you have heard from Russ earlier, we are also on a continuous basis, looking at our investments and seeing where we have opportunities, whether it is customer related or market related, and what we need to do to take advantage of them.

There was a question earlier about the expenses, also; maybe I can elaborate just a tad on where the increased guidance on the run rate for investments are coming from, without naming the actual programs, if you don't mind.

In one case, for instance, we are accelerating one of our product roadmaps significantly, and that is -- that applies to a new product for Silicon Labs. In another case, we are adding resources to solidify and possibly accelerate a product development we already have underway in one of our key product areas.

Finally, there's another case where we are presented a significant customer opportunity that we are planning to pursue. So these are the basis for some of the higher based building on our R&D investments going forward.

All right; thanks, everybody.

Jeremy Bunting of Thomas Weisel Partners.

If you could please just give us what your current view is of the competitive positioning within Samsung for both GPRS and EDGE, please.

Sure. As we have indicated earlier, in general, our synthesized view from all the data points we have gathered is that, outside of the top two handset makers, the adoption of EDGE and the unit volume growth for this year appears to be slow, or not as high as expected. So this leads in general to a healthier demand for GSM/GPRS for our Aero II product.

Within Samsung, I think we have said many times that it was about EDGE, our penetration in EDGE, strategic for our share at Samsung. If you look at what has happened at Samsung in EDGE, they had a number of suppliers for the first wave of EDGE design. We did not participate in that because that was last year.

The second wave of those designs, they have chosen a different set of transceiver vendors, and we are one of those. They have started adopting our solution on some platforms that met the timeline of our introduction and so on.

I expect that Samsung is going to continue with their strategy of using multiple vendors for their transceivers and EDGE models as well. Similar to the situation with GPRS, we are going to continue to compete with the other transceiver makers based on cost, based on performance, and based on responsiveness.

Okay, thank you. One other question on the same lines. I think, Necip, that you mentioned an Aero II D product with a digital-only interface? Is that right?

Yes.

That would imply that it is being designed to work with one specific base-band player. If that is the case, who is that base-band company?

Okay. So there are a number of vendors with base-bands with digital interface. This product is primarily targeted to our existing customer base. So I think having said that, you will know who the base-band vendors would be that we are aligned with.

Thank you.

Randy Abrahms of Credit Suisse.

I wanted to see if you could elaborate on the distributors, where you mentioned it would grow sequentially. Could you remind us how many weeks of inventory you saw this quarter, and if it grows again in June, as I think you suggested, where you think distributor inventory weeks would be?

Yes, Randy. First of all, it's important to note that our revenue recognition is based on sell out through distribution. So we only recognize revenue when the distributor sells to an end-customer.

In terms of supply on hand, we tend to look at our units supply on hand in days. Right now, we are roughly at about slightly over 50 days. We would expect any growth that took place in Q3 to support that 50 day range, plus or minus a few days, sort of inventory carrying levels.

Okay, thanks for the color. On the Bluetooth FM tuner, maybe you can talk about what percent of the customer mix is looking for that approach. Do you see any trade-offs with doing the partnership with ST for the Bluetooth module? Or would you have plans to do your own Bluetooth solution at some point?

Okay. I think for certainly this year and as far as we can see for the next calendar year, a large majority of the opportunities for FM tuner will be stand-alone.

As I mentioned, at the entry-level and below, and that represents also a growing portion of the handset market, the handset makers are looking at this as a stand-alone function. Bluetooth is usually not integrated into those phones. The decisions are based on a footprint and functionality and performance.

So I think it is safe to assume from our perspective that the majority of the opportunities and the revenue and the volume will be on stand-alone.

In terms of our partnership, we have felt that going the partnership route at this point in time was the best use of our investment resources. We are entertaining partnerships with Bluetooth providers, partially driven by their customer engagements, whether existing or potential, with the handset makers. ST partnership is not an exclusive partnership. It is one of several that we are entertaining.

Okay, thanks a lot.

Brian Modoff of Deutsche Bank.

Yes, a couple things. What was the data that kind of led you to the conclusion the EDGE business would not be as big as you earlier thought?

Can you talk about the pricing environment you're seeing both on the FM tuner side as well as on the transceiver side? Is that a digi or an interface, or it's just a standard digital interface?

Okay. So on EDGE, if you looked at the expectations of industry analysts last year for volumes this year and the mix between GSM/GPRS in general, added to what we were hearing from our customer base, and we have a relatively broad set of customers, in terms of their mix between EDGE and GPRS, if you look at those data points over a period of time starting last year until now, I think the statement we are making is valid.

The EDGE e-D that we're going to be sampling in the third quarter is essentially the same core of transceiver as we have today, but with the digital [F] interface.

So it is the [GRF].

Yes. The question that you asked about FM tuner, the guidance we had provided earlier was $1 to $2; and we also said that in higher volumes it would be closer to the lower end of that range,. I think for this calendar year for sure this is a very valid guidance.

Do you think next year you could see it down, say down below $1?

What about pricing on the transceiver side? We're hearing Infineon has been pretty aggressive, which is how they have gotten their market share inside of Samsung, via the press release last week. Can you talk about the pricing environment on transceivers?

Okay, sure. On the FM tuner, I think we do expect that the prices may erode further next year. Not too different than the price erosion that we have seen in transceivers. As I may have mentioned earlier, I think we have the architecture and the cost base to keep up with that kind of price erosion through cost reductions.

On the transceiver side, there is not much news from our perspective, in that the price reductions that we have been seeing on an annual basis continues to be in place. We have not seen anything out of the ordinary. We are still competing for our share at Samsung or others, key customers with EDGE and GPRS based on performance and cost. So nothing new.

No real change in the pricing environment trends, Brian. Typically in the 20% sort of range decline on the transceivers on an annual basis.

Thank you.

Srini Pajjuri of Merrill Lynch.

A quick clarification. Russ, the DSOs have been going up for the last few quarters. Could you talk about what is driving that, and also where your target is (technical difficulty)?

DSO and receivables?

Yes.

Sure. The DSO grew this quarter primarily due to some nonlinearity. We had a much higher shipment quarter in the month of March than we have typically seen, would see on a linear basis. The DSO range is typically around 50 to 60 days. So we're at the very high end of our range, so we would like to bring that down over time.

Okay. Then a follow-up to the previous question on pricing. Once you start to ship the EDGE product in the second half, what kind of price premium do you expect for EDGE over GPRS?

I would say at the beginning there will be a slight premium; but given the low levels of volume, not anything that is really going to move the needle much on the gross margin. Then the prices will fall down in line over time.

Okay, then my final question is on the STMicro relationship. Are you shipping a finished die or is it just an IP relationship? Also could you talk about if the pricing is any different compared to your other customers?

We are providing die to STMicro but I cannot comment on the pricing.

Fair enough. Thank you.

Tore Svanberg of Piper Jaffray.

From a seasonality perspective, I am a little bit surprised your mixed-signal business would be flat in that June quarter. Anything I should look into there?

Do you want to elaborate why you say that?

Basically, the mixed-signal business in June quarter tends to be seasonally stronger; so I am just wondering why you're guiding for flat.

I see. Well, we have seen a significant uptick, as I mentioned, in Q1 on ProSLIC. So given the choppy trends, we do not expect to see necessarily further upside in ProSLIC.

You know, modems we have talked about; and the other products, not a significant change. We are seeing sequential improvement in our MCU business. So net-net, given the strength that we have experienced in Q1, we are anticipating a roughly flat quarter in Q2.

Fair enough. You also talked about the front end getting tighter. Could you elaborate little bit on that, especially on how you're securing more capacity at this point?

Well, we are working with TSMC, our partner, in making sure that we can deal with the demand at hand and some small upside. I think, we have been able to successfully do that; and we see the balance being adequate for this quarter, but somewhat delicate in that lead-times are what they are. Given the constraints, dealing with significant upside, especially in 130-nanometer nodes, will be challenging.

Thank you very much.

David Wu, Global Crown Capital.

Just wanted to make sure that, Russ, when you mentioned those ratios on second-quarter guidance, those are pro forma or they are GAAP ratios in terms of R&D and operating expense and SG&A ratios?

Pro forma. They exclude FAS 123 stock compensation expense.

Okay. The other thing I wanted to ask is that the low-end cell phone business seems to be a focus of a number of major vendors. As I look at it, Samsung does not particularly want to go that way. I was wondering how it affects your competitive situation there.

Where do you overlap with Texas Instruments, which has been playing up so-called one-chip cell phones? I guess their combination is a little different from yours.

What exactly did you want to know about Texas Instruments and our solution?

Yes, where do they overlap? They're not identical, the bundling, as I see it, and I am just wondering where they overlap. If Samsung is not going to the sort of $60, $50 phone, really pushing it, where do you expect to sell most of these one-chip phones or AeroFONE II?

Okay, I understand now. The customer base that is most interested in our offering, whether it is 4905 which we sampled in fall or 4901 which we sampled this month, are those customers, as you pointed out, who have a particular focus on the entry and below segment.

With the 4905 we're able to service entry-level and low-end of the future phone segment and GPRS as well. With 4901, we're focusing on a lower-end; it is GSM only, and some of the features are not supported.

We think that both products, for their respective segments, provide the lowest cost of ownership in terms of the electronic BOM, in terms of the simplicity of the PCB.

So the interest that we are seeing the most are from ODMs who are extremely sensitive about cost, or those customers who like the level of integration that we are offering compared to other competitors like TI or Infineon.

Thank you.

Operator, we have time for one more question.

Satya Chillara of American Technology Research.

Can you talk about FM tuners? You talked about 18 (inaudible) cell phone customers. Can you at least maybe talk about top three or four customers in that category, please?

At this point in time, Satya, we do not have the liberty to talk about specific customer names. But we wanted to provide some color as to the mix of the customers.

So there are 13 handset customers. Those I can say all are our existing customers. We also said that there are two additional large handset customers that we are going through the AVL process with, approved vendor process with. Those will likely not hit before 2007.

Okay. Maybe so from that I'm assuming the 13, most of them are ODMs, at this point, not OEMs? Is that fair to say that?

It is a mix.

Okay, got it.

We do have OEMs in that list, [that are] our current set of customers.

Okay. Second question, in terms of single-chip AeroFONE, you guys talk about 1 million phones in 2006. Can you maybe drill it down a little bit in terms of -- is it more of Q3 or Q4 shipments at this point? Can you clarify, please?

Sure. I think if there is any shipments in Q3, that will likely be at the very late Q3. I would say a large majority of the shipments we will make this year will come in Q4.

Got it. Last question in terms of WCDMA transceiver, or any new updates here, or is this more of a 2007 story?

No new updates on wideband CDMA. We had said that our development in progress right now will bring us revenues in the first half of 2008; and we are on track.

Okay, great. Thank you.

Okay, thank you very much for joining us. This now concludes today's call.