Silicon Laboratories Inc (SLAB) 2006 Q2 法說會逐字稿

Good morning and welcome to the Silicon Laboratories' second-quarter earnings call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections you may disconnect at this time. I would like to introduce your host for today's conference, Ms. Shannon Pleasant. You may begin.

Thank you. 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 telephone replay available approximately one hour after the completion of the call at 888-673-3571 until August 14.

I am joined today by Necip Sayiner, President and Chief Executive Officer, and Paul Walsh, interim Chief Financial Officer. Paul 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-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, Paul Walsh.

Thank you, Shannon. We delivered very strong second-quarter results, with revenue increasing by 8% sequentially and 15% year-over-year to $123.5 million. The broad-based mixed-signal business exceeded expectations, growing sequentially and resulting approximately 53% of revenue in Q2. The mobile handset business also grew sequentially and represented about 47% of revenue in Q2.

Gross margin for the second quarter was very strong at 57.1%. This was due to strong revenue growth, some overall margin improvement resulting from ongoing product cost reduction, a higher mix of broad-based mixed-signal products, and maintaining average selling prices for our mobile handset products. Non-GAAP gross margin, which excludes the impact of approximately $200,000 in stock compensation expense, was 57.3%.

On a GAAP basis, research and development investment was $33.1 million in the second quarter. Non-GAAP R&D investment, which excludes the impact of $4.8 million in stock compensation expense and a $2.6 million charge for in-process R&D related to the Silembia acquisition, was in line with our guidance at $25.7 million and 20.8% of revenue.

On a GAAP basis SG&A expense was $26.2 million in the second quarter. Non-GAAP SG&A. excluding $4.9 million in stock compensation expense, was $21.2 million and 17.2% of revenue. This was slightly higher than our guidance, primarily due to increases in variable compensation associated with the growth in the business.

GAAP operating income for the second quarter was $11.3 million. Non-GAAP operating income was $23.8 million or 19.3% of revenue. Other income was $3.4 million.

Our pro forma tax rate was 22% in the second quarter, but we expect the rate to be in the range of 20% to 21% for the balance of 2006.

GAAP net income for the second quarter was $10.1 million or $0.18 per fully diluted share. Non-GAAP net income per fully diluted share, excluding pro forma charges, was $0.37.

Cash and investments at the end of the second quarter totaled $407 million. Accounts Receivable decreased slightly to $75.7 million, with Days Sales Outstanding at 55, down from 59 days in the first quarter. Inventory was up by $14 million to $38 million, with days of inventory at 66. Distributor inventory dropped by $3.1 million or 7% sequentially.

The remaining net inventory increase was driven by growth in our business including the ramp of several key products. We believe inventory levels will increase sequentially in Q3.

Before I wrap up, I would like to comment on the stock repurchase program we announced today. As we have discussed, we have targeted a cash balance of about a year's worth of prior revenue before considering any changes to the capital structure of the Company. We are now approaching this goal.

I am pleased to announce that given the health of the Company and our confidence in the long-term potential of the business, our Board of Directors has authorized a repurchased of Silicon Laboratories' shares having an aggregate value of up to $100 million of a period of 12 months. Necip, I now turn the discussion over to you.

Thank you, Paul, and good morning, everyone. The business performed well again in Q2. Both our broad-based mixed-signal and mobile handset businesses grew nicely above a strong base from Q1.

As you may recall, given the unseasonably strong first quarter in handsets and higher-than-expected Voice over IP port growth, we were cautious coming into Q2. But I am pleased to report significant upside to our guidance as the robust demand for our products continued into the second quarter. Let me provide you with some of the dynamics we saw in our key markets.

Our mobile handset revenue increased by about 9% sequentially to $57.5 million. Aero transceiver units reached another record high as we solidified market share. As you know, our total Aero customer base includes more than 30 volume customers. Of the top handset makers, we ship either directly or through ODMs to Motorola, Samsung, LG and Sony Ericsson. ODMs like Compal, Chimei, and Arima, represent about 25% of our handset business in a typical quarter. The next big piece is Samsung, and we believe our transceiver business at this customer is stabilizing.

We are also seeing positive EDGE progress at Samsung and secured additional platforms during the quarter with our Aero IIe EDGE transceiver. Samsung is our largest EDGE opportunity in 2006, and I am very pleased with the progress we are making. As we stated previously, we expect initial EDGE shipments to begin in Q3.

We are anticipating transceiver demand will moderate in the third quarter. Entering Q2, the transceiver forecast was very high, and it softened toward the end of the quarter. As a result of this demand volatility, we expect some inventory to make its way through the channel during Q3.

Last quarter, we formally introduced the second product in the AeroFONE family, the 4901, a voice-centric version of the AeroFONE designed for the ultra-low-cost handset market. We began sampling this product to lead customers and are encouraged by customer feedback on the significant differentiation in cost and performance of our solution versus the competition. We are still on track to see revenue contribution from our fresh product, the 4905, this year, and revenue from the 4901 in 2007.

As AeroFONE continues to progress with customers, we are also expanding our internal software capabilities. Last week, we announced the acquisition of StackCom, one of the independent protocol stack partners validated on the AeroFONE platform. We believe this acquisition complements our software partner strategy, further securing our long-term position in the baseband market. We have been impressed with StackCom's capability and believe that internalizing this software gives us a very competitive cost point for ultra-low-cost handsets over the long term.

We will continue to partner with independent stack providers such as TTPCom and see these partners as an integral part of our strategy for securing several key accounts.

We also had another successful quarter with the FM tuner. We shipped to 27 volume customers during the quarter, and we now have more than 150 design wins today. We announced multiple design wins [Eco] Samsung's MP3 and handset platforms. Motorola announced several handsets with our FM tuner inside, including their ROKR E2 handset as well as several ODM-designed handsets in Motorola's W series that will be available in the second half of the year.

We are also making progress on design activities directly with other large OEM customers that will drive revenue growth in 2007.

As I have emphasized in the past, we see the broadcast market as a strategic area for us, and we are investing accordingly. During the quarter, we acquired Silembia, a privately held company developing digital demodulation and channel decoding IP. This acquisition will extend our expertise in the broadcast area and allow us to accelerate development on several significant mobile and fixed video products. We see this as an exciting vector for both our mobile handset and broad-based mixed-signal businesses going forward.

Our broad-based mixed-signal business continues to be an area of limited focus for the investor community, but as we have highlighted this business provides us with multiple profitable growth vectors. The broad-based mixed-signal business grew by more than 6% sequentially to a record $66 million in Q2, driven by revenue increases across all of our major product lines.

Our notebook customers gained share in Q2, driving a solid quarter for our DAA. Additionally, we secured a modem on motherboard design win for a major consumer notebook PC platform this quarter that we anticipate will start shipping before the end of the year.

The ProSLIC product again exceeded our expectations. In Q2, strong demand was driven by Voice over IP rollouts at North American cable providers and the expansion of fiber to the premise services. Fiber to the premise rollouts are an exciting area of growth for us, as we support customers such as Tellabs that supply optical networking terminals for Verizon's fiber to the home deployment. This product line continues to deliver solid growth, and we are anticipating increased revenues again in Q3.

I am also pleased to report that the MCU business experienced very strong growth in Q2, with record revenues increasing sequentially by more than 20%. The success of this business is based on thickening the product portfolio to increase the number of applications we can address. We have been doing this, as well as expanding into additional sales channels; and we are starting to see the results of these efforts in the revenue growth.

In particular, design win activity for the MCU family was very high in Asia. Our USB product announced in the first quarter now represents the fastest ramping MCU product in our portfolio. We also continue to see strength in optical and camera modules. However, this business remains extremely broad-based, with literally thousands of customers each quarter. Based on healthy backlog, we expect to grow this business again sequentially in Q3.

Our emerging product lines are also starting major product cycles. For example, revenue from timing and networking products increased again in Q2, as design wins began to ramp at several customers. This high-margin business nearly doubled over the same quarter in 2005 and now represents more than 3% of revenue.

We continue to build out our power portfolio as well. In Q2, we announced a highly integrated, power over ethernet controller for power device applications. Targeted at wireless access points, Voice over IP phones, RFID tag readers, [secured] assistance, and cameras, our power over ethernet controller reduces the footprint and the total bill of material. This is a large and growing market, and we plan to leverage our core technology to further expand the product line.

Overall, our business is quite healthy. The expansion of our portfolio, the access to new markets and large customers, and the potential of our R&D pipeline give me a great deal of confidence in the future growth and profitability potential of our business. This confidence, which I share with our Board of Directors and the rest of the management team, was the primary driver behind the share repurchase plan we announced today.

Now for the Q3 guidance. We believe our broad-based mixed-signal revenue will be higher and our mobile handset revenue will be lower sequentially. Revenue is expected to be in the range of 122 to $127 million. We expect gross margin to be in the range of 56% to 57%. We expect R&D investment to be approximately 22% to 23% of revenue, and SG&A expense to be approximately 16% to 17% of revenue.

Q3 diluted net income per share on a GAAP basis is expected to be $0.18 to $0.21. Q3 non-GAAP diluted net income per share, which excludes a non-cash charge for stock compensation, is expected to be $0.35 to $0.38. The impact of the StackCom acquisition is also comprehended in this guidance. Shannon?

Thank you, Necip. We would now like 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 of Morgan Stanley.

Nice job on the quarter. Necip, a question for you on the transceiver business here for the third quarter. What type of a decline do you expect there? Then can you talk about what, if any, recovery you expect in the fourth quarter?

Sure. Let me provide some color on the sequential decline. In the second quarter, our transceiver unit shipments grew by measurably more than the unit growth of the industry. Some part of that increase over the market growth was due to increased shipments to a couple of customers who are serving the China gray market. Based on our understanding that there is some inventory buildup in that particular market, we don't expect that delta we have seen in the shipments to occur again in Q3.

So that is the reason we are projecting a decline in units in Q3. We expect, overall, the handset business to be lower by a few percentage points.

The business we do with the large handset makers through the ODMs is not projected to change. However, we think that the second half of this year, based on what we are hearing from the handset makers, is not going to be increasing as it has in the past years, given the strong first half.

What I mean by that is, if you look at 15% or so year-over-year growth rate that handset manufacturers are gravitating towards, and the fact that the industry has shipped about 450 million handsets in the first half, the growth in the second half may not be seasonally high.

But the fourth quarter is going to be seasonally high for us, and we expect obviously our wireless business to return to sequential growth in that quarter.

Just to be more specific there, if you could, Necip, because I assume you've got FM tuners growing in the third quarter, so can you be a little bit more specific in terms of what type of sequential decline seems reasonable for the transceiver part in Q3?

The overall handset business we expect will be lower by a few percentage points. Like you pointed out, the FM tuner business is going to grow sequentially, so that leaves the transceiver business to be down by, I would say, a couple of million units compared to the second quarter.

There is one other thing that I need to point out. We believe that the transceiver ASPs are going to continue with their historical ASP trends. We are still converting some of the Aero I's to Aero II's. So that is almost complete, but not entirely; so you have to factor that in as well in the revenue piece.

Understood. Then just what percentage did FM tuner make up of the handset business in the quarter?

That we are not separating out, Mark.

Okay, thanks a lot, guys.

But it is on a path to get to nearly the $40 million upper range we had provided for the year on the FM side.

Arnab Chanda of Lehman Brothers.

Necip, our first question is, would you update your expectations? You talked to FM tuner a little bit. For the AeroFONE, what type of expectations do you have for the year, with the wireless adjustment? Then I have a follow-up. Thank you.

As I just mentioned, we had provided a range of 20 to $40 million for the year on FM tuners, and right now we see us very close to the top end of that range for the year for revenues.

With AeroFONE, we have also provided a range for the year. We are sticking with that range. Most of that revenue will materialize in 4Q we expect.

Great. Then a question about the broad-based mixed-signal business. You talked a little bit about microcontroller and ProSLIC. Could you talk, maybe qualitatively, about whether you saw any kind of inventory-related adjustment there in Q3; and whether, if that was the case, whether that was the case overall or by segment; and what type of effect you see maybe beyond that. Thank you.

Yes, on the broad-based side, we see sequential growth into Q3 in pretty much all the product lines within broad-based mixed-signal. We do see that the ProSLIC business is going to grow sequentially. We have seen a double-digit sequential increase in Q2 over Q1. That was driven by, as we said, North American cable providers as well as fiber to the home deployment here in North America as well as in Japan.

MCUs has had a very nice quarter. That business is continuing to grow, really directly proportional to the number of products that we have now in the portfolio and the design wins that we have won earlier in the year and the end of last year turning into revenue.

I don't see a particular area of inventory buildup as it pertains to our broad-based business.

Thank you.

Ed Snyder of Charter Equity Research.

This is [Glenn Dills] for Ed Snyder. The question is regarding FM tuners and what are your growth assumptions about FM tuners, particularly regarding the competitive environment? What are you seeing in terms of pricing pressures for FM tuners?

Maybe I can describe what we see as the overall opportunities this year. Our projection for the year for the market is approximately about 225 million units in handsets alone. We had earlier indicated that we expected to exit the year at a double-digit market share. Based on where we are and what we see today, we now see that we will have double-digit share for the full year; and we will be able to get to the upper end of our range.

As far as pricing goes, we had indicated a $1 to $2 price range based on volume, and I think that range is intact for the entire year this year.

Thank you.

Tore Svanberg of Piper Jaffray.

A couple questions. First of all, you mentioned you expect the wireless business to bounce back in Q4. Is that driven by a bounce-back in the market? Or is it more some of your newer products going into production?

Well, multiple things. As you know, Q4 is a seasonally high quarter. We have maintained our share with the large players; as a matter-of-fact in Q1 we have gained some market share at the major OEMs that also carried over to Q2.

So the reduction in unit growth we are signaling for our transceivers really doesn't equate to any type of share loss at the large customers. But more so a timing of the shipments and this one customer that we have talked about that provides into China gray market.

So overall, our transceiver business is very healthy as far as our market share is concerned. We think that we are about 25% market share for GSM/GPRS; and if you included EDGE and looked at GSM/GPRS/EDGE as the entire market, about 20%. We are starting to ship EDGE transceivers this quarter and more meaningfully next quarter in 4Q.

Great. On your gross margin, pretty high this quarter. Should we start to look at this as a new base? Or do you think that you will swing back as the wireless mix contributes more in Q4?

This is Paul. As you saw in 2Q, our gross margin was driven primarily by the growth in our broad-based mixed-signal business, along with some stronger margins in mobile handsets driven by relatively flat ASPs.

As we indicated, our guidance for Q3 is up compared to our historical trend. But going forward, we would expect gross margins in the range of 54% to 55% consistent with our target models and historical trend.

Great, thank you very much.

Craig Ellis of Citigroup.

Necip, congratulations on the second quarter. Just with respect to the full year for ProSLIC and microcontrollers, in the past the Company had talked about 50% growth rates in those two areas. Can you update us on how we look at the full-year performance of those businesses?

Sure, I can do that. Coming into the year, on ProSLIC we had said that we had experienced about 60% growth last year; and we expected the growth rate to be somewhat below that for 2006. Based on the strength that we have seen in the first half and our projections for the second half, we are now able to raise that to 60% year-over-year growth for our ProSLIC business in 2006.

On the MCU side, we had grown about 35% last year. Coming into this year, we said again we will be able to achieve that kind of growth rate at 30% to 35%. We are now looking at a growth rate of 40% to 50% for the year over 2005.

The emerging product lines, such as satellite receiver and timing products are either at or slightly ahead of our projections. I think I mentioned last fall that we expect the satellite receiver business to start contributing a quarter early, in Q3; and this is indeed what we are seeing. We are also on track with the doubling of the timing business.

Okay, thanks for that. Then as a follow-up, on the inventory line, up $14 million, Paul, can you just identify what the constituent parts of that increase were? Then I think you said it would be up sequentially in the third quarter. When would we expect to see days move back into the Company's target area?

Craig, our inventory in Q2 grew as we expected due to growth in the business. As the product portfolio broadens, that will add to the growth in inventory. As the portfolio broadens in 3Q and the revenue grows towards the second half of the year, we expect a sequential increase.

We also want to ensure we have the appropriate service levels in place for upside opportunity.

I think there are several ways to look at inventory. Historically, we have been at very lean levels, but the revenue has been flat. As the revenue tends to increase, the turns model for us is probably more in the 5 to 6 range as opposed to being in the 7 to 9 range in the downward cycle or a flat cycle.

Can you quantify how much you'd expect inventory to be up in the third quarter? Is it single-digit percent, or would it be double-digit percent?

At this time, I cannot comment on that.

Okay; thanks, guys.

Jeremy Bunting of Thomas Weisel Partners.

Could you just give us a time frame for production revenues of the power over ethernet products? In terms of your longer-term expectations of that, how material could that business line be, say, versus DAA or ProSLIC? Thank you; and I have a follow-up question.

Okay, Jeremy. We expect that product to start contributing in the 2007 time frame. We haven't yet set a public target, but we don't expect that to be as large as our modem business.

But it is a high-volume segment. It is a growth segment, and I think we have an interesting, attractive solution in that space combining our high-voltage technology with our mixed-signal expertise.

But we don't see any revenue from that product line this year. We will start seeing some contribution next year.

Thank you. One question on the software stacks. Did StackCom have any revenue-producing customers? What is your current status of the relationship with the newly acquired TTPCom?

If there is any revenue for StackCom, it is really immeasurably small. We have acquired StackCom in order to create a dependable and continuous solution for our customer base.

We are going to continue with our strategy of working with multiple stack partners. So we are going to continue to support TTPCom. We see this as an important element in penetrating some key accounts.

Also for our future developments we intend to continue a software architecture that can support multiple protocol stacks. So we're not going to create solutions going forward just based on StackCom. But we felt it was important and valuable and strategically important to internalize the software so we can ensure continuity for our customers for the long term.

Okay, on the same theme, though, what assurances have you had from Motorola that it will still be possible for your customers to license TTPCom?

Well, they have maintained to us that they intend to continue licensing their stack to all existing TTP customers and certainly uphold the contractual obligations that they have in place.

Maybe I need to emphasize that the acquisition of StackCom is not a reaction to TTPCom being bought. These interactions -- and you can tell that from the timeline of our completion of our acquisition -- but these discussions really started earlier in the year with StackCom, because we have been impressed with the footprint of their stack, especially for the ULCH segment.

Okay, thank you.

Brian Modoff of Deutsche Bank.

A few questions. First, can you give us an idea on the DAA and ISOmodem growth that you anticipate for next year? Do you see these growing? Or do you see this business starting to decline?

Brian, our modem business declined last year 10% year-over-year. We have projected that business to decline again this year at about the same rate, and that is what we're looking at for the year. Going forward, we would expect that business to continue that decline at about that rate, 10% a year.

Okay. Then on your EDGE transceivers with Samsung, do you now have design wins on more than one baseband with that customer?

I am not at liberty to say. We have now four model design wins with Samsung, and we are engaged with both basebands, both locations. But I'm really not at liberty to say the existing four design wins are with one baseband or the other. But we are engaged with them on both phones, that I can say.

Thank you.

Srini Pajjuri of Merrill Lynch.

Necip, the modem business looks like it posted growth. I am wondering, in a weak PC environment, what is driving that growth? If this is causing any inventory build in the channel?

The modem business, just to be clear, in 3Q was roughly flat over 1Q. There are two dynamics there. On the PC side, our customers gained share. Notebooks continue to grow nicely, and some of our notebook customers gained share. Attach rates are at about nearly 100%; so there is certainly unit growth continuing.

On the embedded side, it was a balance between some weak demand from direct TV, but that was offset by the set-top box suppliers, the system operators, and growth on the EPOS side.

We also have started to benefit from migrations, at least by some customers, to modem on motherboard in order to save costs. We have a compelling solution in this area, and we have won a significant design using our product.

Going into Q3, we expect the PC business to be seasonally strong. As I said, there is some share gains that we are seeing with our solutions there. So we do expect the modem business to post sequential growth into Q3.

Okay, just a follow-up. It looks like your handset business is going to come down a bit; and your broadband business is growing. Why would the gross margins come down to 56%? Is there any reason? Are there any other factors driving that?

Well, in achieving 57-plus-% gross margin, as Paul highlighted earlier, we have also been able to maintain relatively flat ASPs for our handset products in Q2. But that doesn't make a trend. I think we are going to continue to see historical cost reductions and price declines on transceivers.

It also has to do with the mix within each business. So 56% to 57% we are guiding is still measurably above our target model, and this is supported by the growth in the broad-based business for this quarter.

Okay. One more on the EDGE side. You talked about more design wins, Necip. Are you referring to WIP in Samsung, or do you have any non Samsung customers as well?

No, this is primarily Samsung. There are some other engagements with other customers, but we are primarily focusing on Samsung at this point with the product that we have already out there.

Okay, one final one. Was Samsung your 10% customer for the quarter?

Yes, it was.

Okay, thank you.

Craig Berger of Wedbush Morgan Securities.

Necip, on the ProSLIC, you said it was pretty strong this quarter. It tends to be a lumpy business. Should we think about that sort of softening a little bit in Q3?

Well, we think it is going to post sequential growth in Q3 over Q2. The other data point I provided is we expect that business in 2006 to post again a 60% year-over-year growth.

Thank you. Then on the timing on the clock side, I know you said it is pretty small at about 3% of revenues. Is that the type of business that can continue to grow at sort of that 100% rate on a go-forward over the next few quarters? Or should we start to moderate that?

Well, I think for this year on an annual basis over last year, that's the projection that we have given and sticking to. Really the design wins are just starting to kick in, and some of the design wins that we have had this year are not going to start contributing until next year with the networking customers.

So we are pretty optimistic about the growth potential of that product line. Whether it is going to be 100%, 80%, 60% into next year, we will update you at the beginning of the year; but it is going to be a significant growth business for us.

Thank you. Just real quickly, finally, on the ethernet microcontrollers and power over ethernet power device microcontrollers, when does that start to contribute to revenue?

I think meaningfully, really, both of these products will start contributing in 2007. I would say the MCU may be a little sooner than the PoE.

First half?

Likely for the MCU.

Thank you very much.

Satya Chillara of American Technology Research.

Good quarter. I've got a couple of questions. In terms of, Necip, on FM tuners, (indiscernible) AeroFONE if you talk to all the customers and look at all the planning that you do, what are your market share goals in 2007 for these two product lines?

If you look at the market this year, as we see it, out of that 225 million units, a majority of those units will be with the largest handset maker. The projection that we have provided to you for this year doesn't include any revenue from that customer.

Obviously, our efforts at Nokia to become an approved vendor is progressing. It is based on a stand-alone device. Should we be successful in our quest to be an approved vendor, we would see revenue from that customer in 2007.

Okay, what about AeroFONE?

With AeroFONE, we are going to see revenue from 4905 this year in the fourth quarter, primarily. And 4701 for the ultra-low-cost market will contribute to revenue in 2007.

Okay. Just switching gears, a clarification here. On FM tuners, when you report the revenue between broad-based and mobile, are you lumping the FM tuner revenue into broad-based, or (inaudible) mobile (indiscernible) handsets?

We basically split that. The part that we are shipping to handset makers gets reported under handsets, and the rest under broad-based. I would say of our FM tuner revenues, 85% to 90% is with handset business.

Got it. Last question, in terms of microcontrollers. Last year, you had 13,000 kits sold. Is the expectation with the 40% to 50% growth that you're looking at, what kind of -- how many kits are we talking about for the entire 2006?

I don't have the development kit number in front of me. But when we looked at the chart in terms of development kit shipments it was at record highs for the last two quarters.

Great, thank you.

David Wu of Global Crown Capital.

Can you help me with two things? Number one is Broadcom is bundling FM tuners with their Bluetooth offerings. I guess as they become more of a cell phone company, we will have more of those bundling things. How do you counter bundling effects from competition for FM tuners on one side?

The other one is Samsung is forecasting a fairly strong growth of their high-end cell phone models in Q3 and Q4. I was wondering, are you designed into the new models that are coming out in that period for your transceivers?

Okay, let me take the FM question first. We see the market segmenting, David. At the entry-level and below, most of our customers are choosing to keep the FM tuner functionality as a stand-alone device. For the higher-end phones, where Bluetooth also has a high attach rate, some are choosing to keep them as separate functions to give them utmost flexibility. Some are choosing or intending to use integrated solutions.

So we also want to participate, obviously, in the integrated path. So the way we are going about that is by partnering with some of the other Bluetooth providers. We have announced [SD] last quarter. We are talking to another as well in order to provide an integrated solution using our FM tuner and the partner's Bluetooth.

On the Samsung question, our business will really track -- our Samsung transceiver business will track the success of their GSM/GPRS model success in the near term. Obviously, we are getting designed into their EDGE handsets at an increasing rate. We will start participating in that business as those models start ramping up later this year.

Thank you.

At this time, I would like to turn the call back over to Ms. Shannon Pleasant.

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