Silicon Laboratories Inc (SLAB) 2006 Q3 法說會逐字稿

Welcome to the Silicon Laboratories third-quarter earnings conference call. (Operator Instructions). I would also like to remind parties this call is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Shannon Pleasant. Thank you ma'am; you may begin.

Good morning; this is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the Company's quarterly financial results. The financial press release, reconciliation of GAAP to non-GAAP financial measures, and other financial measurement tables are now available on the 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 866-415-3312 until November 6.

I'm 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 forwarding statements or projections that involve substantial risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call. This information will likely change over time.

By discussing our current perception of our market and the future performance of Silicon Laboratories and our products with you today, we are not undertaking an obligation to provide updates in the future. There are a variety of factors that we may not be able to accurately predict or control that could have a material adverse effect on our business, operating results and financial conditions. We encourage you to review our SEC filings, including the Form 10-Q, that we anticipate will be filed later today that identify important factors that could cause actual results to differ materially from those contained in any forward-looking statement.

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 end comparisons of operating results that 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. Revenue totaled $115.5 million in the third quarter. The broad-based mixed-signal business was up slightly, growing sequentially by 2%, and representing approximately 58% of revenue in Q3. The mobile handset business declined sequentially by 16% and represented about 42% of revenue in Q3.

GAAP gross margin for the third quarter was 54.9% and non-GAAP gross margin, which excludes the impact of approximately $200,000 in stock compensation expense, was 55.1%. This is a decline from Q2 when margin increases were related to atypical pricing and mix impacts and increased leverage on fixed costs. The 55% gross margin level is more consistent with historical trends.

On a GAAP basis, research and development investment was $31.9 million in the third quarter. Non-GAAP R&D investment, which excludes the impact of $5.1 million in stock compensation expense and a $600,000 charge for in-process R&D related to the StackCom acquisition, increased slightly to $26.2 million or 22% of revenue.

On a GAAP basis, SG&A expense was $27.3 million in the third quarter. Non-GAAP SG&A, excluding $4.3 million in stock compensation expense and $3 million related to exit costs from our former headquarters facility, declined to $20.1 million and represented 17.4% of revenue. We anticipate that the impact of the double lease payments will be concluded by year-end.

GAAP operating income for the third quarter was $4.2 million. Non-GAAP operating income was $17.4 million or 15% of revenue. Other income was $3.3 million.

Our pro forma tax rate was higher than anticipated at 28.7%. We had a revision of our annual tax rate due to the impact that the decline in revenue had on our tax jurisdictional mix. We expect the rate to be approximately 27% for Q4 and 23% to 24% for the year.

GAAP net income for the third quarter was $4.7 million or $0.08 per fully diluted share. Non-GAAP net income per fully diluted share, excluding pro forma charges, was $0.26.

Cash and investments at the end of the third quarter totaled $392 million. Last quarter, we announced the authorization of a stock repurchase program, having an aggregate value of up to $100 million over a period of 12 months. During the quarter, we repurchased the equivalent of about $35 million or approximately 1.1 million shares.

Accounts receivable decreased to $49 million with day sales outstanding at 39, down from 55 days in the second quarter. While revenue in Q3 was more back-end loaded, shipments to distribution were more linear, driving this improvement. We anticipate accounts receivable will increase to more typical levels in Q4. Just as a reminder, we recognize revenue from distributors on a sell-through basis.

Inventory was up $7 million to $45 million with days of inventory at 79. This inventory rise is primarily attributable to lower revenue. Distributor inventory increased by $5 million or 14% sequentially. We expect our inventory to decline in Q4 and distribution inventory to remain relatively stable.

Necip, I now turn the discussion over to you.

Thank you, Paul, and good morning, everyone. Given that I've just completed my first year at Silicon Labs, it seems appropriate to discuss the progress we have made toward the priorities I laid out when I started as well as the challenges we have yet to overcome as they relate to current results and our outlook.

Our first and foremost priority has been to improve the diversification in our broad-based mixed-signal business. We have acknowledged that modems are a product area that is in secular decline. In order to grow broad-based mixed-signal revenues, our goal has been to participate in growth markets and take share in established segments.

We have made significant progress in this area. In Q3, broad-based mixed-signal revenue grew by 13% year over year to $67 million. Within that, non-modem product lines grew by more than 50% year over year. And in Q3 for the first time, non-modem product revenue exceeded modem revenue for our broad-based mixed-signal business.

We expect to build upon this traction with growth in new product areas outpacing modem revenue declines on an annualized basis going forward. Let me provide you with further detail on the makeup of the modem business in light of what we're seeing in the second half of this year.

Our analog modem business includes three segments -- Silicon DAAs for PC modems, modems shift into embedded applications like set-top boxes, and voice DAA sold into Voice over IP equipment. We experienced weakness in Q3 in both the PC and the voice DAA segments of our modem business.

On the PC side, we believe Agere, which has been a large customer, has begun transitioning to its own DAA solution and we expect the demand from this customer to continue to decline. Going forward, we expect PC modems as a percent of our overall revenue to be no more than mid single digits.

Voice DAAs, on the other hand, are experiencing some growth. While inventory at the large European customer resulted in near-term choppiness in Q3, we expect voice DAAs to be a modest growth area for us on an annualized basis as Voice-over-IP port growth continues.

Embedded modems, which represent over 50% of our modem business, are likely to be down in Q4 but are expected to remain stable in the longer-term. Now, let's get back to the product lines in broad-based mixed-signal, as I mentioned are growing in aggregate at about 50% year over year.

Microcontrollers grew by more than 10% sequentially in the third quarter as existing design wins ramped at PC peripheral and satellite set-top box customers. Our top-selling products continue to be small form factor and USB devices.

We're also moving into new large markets with our MCU technology. This month, we announced our entry into the automotive market. $1 in every $3 spent on 8-bit MCUs goes into an automobile. While the number of automobiles produced is growing modestly, the MCU opportunity represents a $3 billion market, growing at close to 10% per year as demand for semiconductor electronics continues to rise.

Our automotive MCUs are designed to address body control applications, such as motor control for power windows, seat positioning and mirrors. While the competitive environment includes a number of well-entrenched suppliers, we believe in the segment we're targeting our high-performance, highly-integrated solutions have a winning value proposition.

ProSLIC revenue increased by more than 20% year over year but was down slightly sequentially in Q3. This was due to pockets of inventory at certain customers. However, we believe the ProSLIC business will return to growth in Q4.

Voice port penetration in DSL and cable modems is still low with less than one-third of broadband modems having voice ports today. Penetration is projected to increase to more than two-thirds of all broadband modems, which gives us considerable runway for growth in the future.

Revenue for timing products increased again in Q3. The trend in telecom equipment to provide multi-protocol support is significantly increasing the complexity and range of frequencies line card time systems must support. The frequency agile nature of our clocks make them ideal for OEMs, designing receive, transmit and back-playing timing subsystems.

Since all of these subsystems typically exist on each networking line card, we have an opportunity to win multiple sockets on each card. In addition, our precision oscillators are also finding application in these line cards, increasing our total content. A typical multi-protocol 10-gig line card could contain up to four clocks and four oscillators, for example, resulting in over $250 in Silicon Labs content per line card.

Our broadcast products also performed well in Q3. The SiRX satellite receiver began shipping a quarter earlier than originally anticipated due to early success in the free-to-air market, primarily in China.

In Q3, we also gained ground with our FM tuners in non-handset applications, like MP3 players and navigation devices. We expanded our audio broadcast family during the quarter with an FM transmitter, which enables FM wireless audio playback on any portable media device, including cell phones, digital media players, navigation devices and satellite radios. This very small IC is synergistic with our tuner offerings and creates interesting integration possibilities.

The second major goal we stated this time last year related to increasing our content in handsets. The FM tuner is a great example. We are on track to deliver at the high end of the $40 million revenue range we set earlier in the year. FM tuner design win momentum is increasing, and we have more than 200 total design wins. We added 15 new Motorola models alone during the quarter.

In Q3, more than half of our FM tuner revenue was generated by our 4701 tuner with RDS capability, which enables the display of digital information about the song, artist and album for example. Our competitors have not been able to duplicate this functionality effectively, and our RDS-enabled products command a higher average selling price than stand-alone FM functionality.

For those customers planning to offer high-end handsets with integrated FM and Bluetooth, ST, one of our partners, has been sampling our joint solution. We believe this solution offers very compelling differentiation in terms of both footprint and performance versus the competition.

The AeroFONE single-chip phone also expands our potential handset content. As you know, we are strong believers in integration. Our team has correctly identified the trend towards integration of RF transceiver and baseband processing that is now starting in GSM/GPRS handsets and will undoubtedly carry over into EDGE and 3G in the future.

We have been very clear about our advantages and challenges in the baseband arena from the very beginning. We have a solution that has higher RF performance than any other solution available today. It also enables the lowest cost point for the electronic build of materials due to the unmatched level of component integration.

The obstacle we've had is demonstrating our capability in baseband, which requires maturing the product quickly and shipping into the market. So, in the last 12 months, we have fully validated and stabilized the silicon, completed GCF testing with multiple stacks and supported early customers with their applications development on our platform.

The next major milestone is to ship phones with our solution into live networks. We set a goal to ship up to 1 million units this year with the early adopters of our solution. As we enter the fourth quarter, we are expecting our shipments will be in the lower half of that range, which will result in meaningful revenue for us in the quarter.

While our IC solution is complete and requires no revisions and we have had multiple stacks validated on our platform for some time, there have been some delays from customers building their application framework and MMI using the AJAR product from TTPCom. These delays are unrelated to the core silicon and software platform. And therefore, only those customers who have elected to use AJAR as their application framework have seen an impact on their schedules.

We have no misconceptions about what it will take to be successful in this segment. We all know it is a high-investment business and requires scale to make money and stay in the game. We define success as a meaningful engagement with a top three handset maker, and we believe we have a realistic path to achieve this goal.

Our mobile handset revenue declined by about 16% sequentially to $48.6 million in Q3. As we communicated before, inventory in China and weakness among ODM customers primarily drove that sequential decline.

The much-anticipated transition to EDGE appears to be picking up momentum. And going forward, we are anticipating weakness in our GSM/GPRS transceiver business as a result, which is why we set a priority to gain market share in EDGE quickly, particularly at our largest customer, Samsung. As projected, we began shipping EDGE to Samsung in the third quarter, and we are continuing to add design wins.

We now have 13 wins for new EDGE platforms across both of Samsung's design centers. These wins are expected to go into mass production in the next couple of quarters. And based on the level of design activity, we believe we are on track to eventually achieve similar market share at Samsung in EDGE as we have in GSM/GPRS.

One of the reasons we are winning with our EDGE solution is our robust and innovative transmitter architecture that only requires one calibration step in production. Competing EDGE transceivers based on polar architectures require multiple calibrations due to the interdependency between the transceiver and the custom PA. Our architecture eliminates this complexity, saving the customer time and cost when ramping into mass production, making it a more manufacturable higher-yielding EDGE solution.

In Q3, we expanded our EDGE family to include Aero IIed, which offers a digital interface to the baseband through the DigRF standard. This product will expand our total available market in the EDGE segment in 2007.

Last year, I also outlined the need to improve our execution on new product development. I'm pleased with the progress we're making on this front, but I believe there is still more work to do. We have instituted more investment discipline and focused on resourcing projects for success. We have taken steps to improve program management and add rigor to our processing. We have focused on IP reuse across the organization and are starting to see increased efficiencies as a result of these efforts. Finally, we have set aggressive goals internally for product execution metrics that we're meeting in the majority of cases.

Lastly, we committed this time last year to getting back to our financial model targets by the end of 2007. We made progress on this objective in the first half of the year but have been giving some of these improvements back in the second half.

We view the current moderation of revenues as temporary. And to that end, we are continuing to [emat] in our existing developments by adding resources appropriately in order to maintain our product execution plans. Our investments have been focused on broadening our MCU portfolio to support continued growth in this area, building a sustainable broadcast business around our FM tuner by developing additional audio products and leveraging our tuner technology into video, establishing the required support structure for AeroFONE, continuing with roadmap extensions in our growing voice family, increasing the content in networking applications by expanding our timed products and building a portfolio of power and high-voltage solutions.

As a result of these investments, you'll see a significant number of new product introductions from us, particularly in broad-based mixed-signal in the first half of next year -- some of which are bolstering our product portfolio in segments we're already in and some are further expanding our total available market.

Now for the Q4 guidance. Broad-based mixed signal revenue is expected to be flat to down, and mobile handset revenue is expected to be down in Q4. Revenue is expected to be in the range of $108 million to $113 million, based on anticipated declines in PC modems and Aero transceivers.

We expect gross margin to be in the range of 52% to 53%. We expect R&D investment to be approximately 25% to 26% of revenue and SG&A expense to be approximately 17% to 18% of revenue. Q4 diluted net income per share on a GAAP basis is expected to be $0.02 to $0.06. Q4 non-GAAP diluted net income per share, which excludes a non-cash charge for stock compensation, is expected to be $0.16 to $0.20. Shannon?

Thank you, Necip. I 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. Operator, please review the question-and-answer instructions for our call participants.

(Operator Instructions). Mark Edelstone.

Morgan Stanley. I guess the first question, Necip, when you look at the gross margin model going forward given the changes in the complexion of revenue, what is your view there of the long-term gross margin potential of the Company?

We project, Mark, the gross margins will stay within the target range. We define this to be 54% to 56% plus/minus a couple percents. We are seeing a lower gross margin in Q4, primarily due to the declines in the PC modem business and to a lesser degree due to some startup costs with our AeroFONE ramp.

Then, just as a follow-on, within the Aero business, given the design wins and the expectations you now have in EDGE, when would you expect to see your EDGE units and revenues cross over that of GSM/GPRS?

For the foreseeable future, we see the revenue from GSM/GPRS transceivers to be above that of EDGE transceivers. Maybe I can answer the question also in a different way. We certainly see in the mobile handset business, the declines in GSM/GPRS transceivers to be more than compensated by increases in revenue from EDGE and AeroFONE and FM tuner.

Craig Ellis.

Citigroup. Question is for Paul. Paul, can you just tell us what you expect the inventories to do in the fourth quarter, both on hand and in the channel?

As we talked about earlier, we expect the inventory to return to a more desirable level of inventory turns for us in the fourth quarter. The primary driver for the increase in third quarter was the drop in revenue, and we have been actively managing supply chain there.

In the distribution channel, the inventory rose but some of that was driven by a mix of different products within the channel. We expect the inventory levels and the distribution channel to remain relatively stable in fourth quarter.

Any days target for the on-hand inventory, Paul?

What we would like to -- we typically don't provide guidance on the inventory levels, but what we would like to do is get back to more historical trends for us in the five to seven turns type of range. I would say more in the lower end of that for starters.

Then, Necip, is it reasonable to think the Company can get back to the target operating margin model by the fourth quarter of next year?

I think our operating expenses is in the high 40s as it stands. We would like to maintain the SG&A expense at the level it is just about now. There will be some modest increases in terms of R&D expense over the next several quarters, but we expect the increases to be more modest than they have been so far this year.

In order for us to get to the operating model, the OpEx needs to be close to about 30%. So, at this type of OpEx level, you can do the math in terms of what revenue level is required to achieve that target model. We obviously continue to target to get to that model as quickly as we possibly can, growing primarily the non-modem piece of the broad-based business as well as the wireless business through the new products.

Whether we're going to be able to achieve this before 2007 or this will be a first half 2008 remains to be seen. We will be able to give a little bit more guidance on this one in January.

Edward Snyder.

Charter Equity Research. What is your current expectation for AeroFONE? You've been talking about a big fourth quarter for the product. It sounds like that might be pushed a little bit. You've got several design wins with Samsung. But in terms of production, is that still expected to ramp hard in the fourth quarter or are we pushing that out into 2007?

Did you say AeroFONE or EDGE?

Yes, AeroFONE EDGE products. And then while you are at it, an update on their GSM sales. Samsung, obviously that has been in decline too, right?

Okay, sure. Let me try to give you an overall picture of that of the mobile handset business. AeroFONE is starting to ramp this quarter. As I mentioned in my prepared remarks, the units will be in the lower half of the wide range we had provided before. That volume is going to continue to pick up from what we see from the forecast from the early customers into 1Q.

On EDGE, we have had one design win a couple of quarters ago. As you may recall, that number was 4 last quarter with Samsung and now it is 13 across both design centers. We are starting to ship more meaningful revenue this quarter. And we expect this ramp to continue strongly into the first half of next year, as many of these models we have designed into are going to be ramping this quarter and next.

In terms of GSM/GPRS transceivers, we have guided a decline. And I think this will continue to decline in the next couple of quarters from a unit perspective. But as I said in response to Mark's question before, we expect that the AeroFONE revenues and EDGE revenues -- EDGE transceiver revenues will compensate for the declines in GSM/GPRS. And then, we have the FM tuner revenues to provide the additional growth for us.

And then, as follow-up, have you seen any impact to the customer uptake of this product, AeroFONE EDGE, due to TTPcom being purchased by Motorola? Have people become more skittish about this, or -- basically, has it been an issue in discussions with new customers about the legacy of that stack for your product?

In terms of just the stacks of EDGE, I don't believe this is an issue. We have multiple options. We continue to provide one from TTPcom and one our internal stack.

The issue I highlighted has to do with a product that is sourced by TTPcom for the application framework for customers; the product is called AJAR. At least one of our customers has elected to use that product from TTPcom to build their application suite, and they've had some delays because of the delays associated with this product.

But this has not impacted other customers who are using either their MMI suite or a third-party software that is not coming from TTPcom. But in terms of just the stack itself, we have not seen any issues nor project to see any issues.

Arnab Chanda.

Lehman Brothers. A couple of questions for Necip. First of all, I think you talked about your entire wireless business. If you just look at -- if you exclude the FM tuner and just look at your voice business -- so that's your transceivers, GSM/GPRS, EDGE and I would probably put in AeroFONE in there -- do you think that greater than 50% of that will be the growth business in 2007 or should we expect that to happen later than that? And I have a follow-up please.

So as you pointed out, the GSM/GPRS unit is going to continue to decline. From what we see in general, our market share remains in the range that we have been historically, certainly in the last 12 months.

EDGE will continue to be a bigger portion of our transceiver revenues. And clearly AeroFONE becomes a larger portion of that pie too.

I couldn't give you a time frame at this point in time as to when the combination of new products, EDGE and AeroFONE, is going to be larger than the GSM/GPRS transceivers at this point. I can take this as something to update you on in January.

Then, second question, regarding the R&D, you did say there will be a bunch of new products introduced in the first half of the year. Could you give a qualitative picture as to where you think that R&D is going to go as a percent of sales earlier on and then whether that -- the rate of growth moderates or not, that would be great.

So the products that I have alluded to are more concentrated on the broad-based mixed signal side of the business. As we talked about, the non-modem piece of our broad-based mixed signal is growing at a very healthy rate -- about 60% year over year -- and we would like to keep that growth going.

Therefore, we are going to maintain the R&D investments in this area, basically building on the product portfolio that we are announcing new additions to in the first half. Some of these products will get us into new markets that we're not currently competing in. And we would like to continue the investments in all of those areas. What I indicated to use is that the rate of increase in R&D from this point onward is probably going to be more modest than they've been in the last several quarters.

Then one last question on modems. When do you think that modem business becomes a point where it won't impede the growth of the mixed-signal business?

That's a good question. The PC portion of the modem business, which has been the most vulnerable part of our modem business, we're projecting that to be no more than mid-single-digit percentage of our overall revenues. So it's gotten to a size that is relatively small in the grand scheme of things.

So, even though at some point in time in the future we will see some de-bundling of modems from the PCs, the impact to the top line will be a lot more muted given now it's a 5%, 6% of revenues.

The rest of the modem business we see relatively stable at least in the medium-term. The embedded piece of the modem business is going to be somewhat stable. There are some ASP erosions there, but we are also introducing new products into that market, such as the fax modem which is going to be going into ramp into production by the way very soon to counter some of these ASP erosions. And on the other hand, the voice DAAs are experiencing unit growth.

So, the rest of the modem business outside of PCs looks to us relatively stable. So, the growth that we are seeing in the broad-based -- the rest of the broad-based business will certainly reflect on the top line of the Company going forward.

Brian Modoff.

Deutsche Bank. A couple of questions -- first, on the -- can you talk about the pricing environment you are seeing now in the transceiver market, specifically the EDGE transceiver market? Has that gotten more aggressive?

And then, what are you thinking on baseband for the AeroFONE? What kind of ASP that product is going to command and what are you seeing competitively there?

Okay. On the transceiver side first, the pricing pressures in that market continue. I would say the competition -- the ASP erosions on the GSM/GPRS side at this point in time has gotten a little bit more fierce but nothing outside of the usual reductions that you see in this market.

EDGE continues to have a premium over GSM/GPRS. In the past, we have indicated this premium to be in the 20%-plus range. And so far, that has proven to be the case.

In terms of AeroFONE, in the past, we have put this into two different buckets. We said for the low end the functionality we are replacing is in the $6 to $8 range. And for higher feature phone, functionality is $8 to $10. Clearly, this is eroding at a 20% to 25% range a year. So, the same functionality in 2007 will probably be in the $5 to $6 range for the ultra-low cost segment (multiple speakers).

But are you hearing some of your larger vendors getting more aggressive trying to lock up more market share?

I'm sorry, Brian?

I said, are you hearing about any of your larger vendors getting even more aggressive trying to get market share with their products, even if it's not perhaps as strong as yours design wise?

In terms of transceivers?

AeroFONE baseband.

Well, from a -- from an integrated solution perspective, we have only one competitor who is shipping in the same time frame as we do. The intelligence we have does not indicate any aggressive pricing from this competitor. But we have to see how they react as we continue to compete with them a little bit more.

Then finally, on FM tuners, Philips, are you seeing anything out of them on the response side of your product, particularly on the pricing?

Yes, we do. As we expected, they are responding aggressively in order to protect their market share. We fully expected that, and we have the cost structure to deal with this very, very effectively.

Srini Pajjuri.

Merrill Lynch. First, I have a clarification. Paul, you said tax rate is going to be 23 to 24. Is that for 2006 or 2007?

That's for 2006.

Could you give us a guidance for 2007?

At this point, we are not providing any guidance for 2007. In January, we will go through that and provide an update on the tax rate for '07.

And then, in terms of the lease expense, you said it will come down after next quarter. Should we be modeling SG&A to come down as well or will SG&A stay flattish from here?

As Necip alluded to in an earlier question, we are expecting to control OpEx by managing SG&A to be relatively flat.

Cody Acree.

Back to the gross margin question -- I know you can't really provide a lot into '07 but you really pointed toward PCs as that lever that continues to pressure and as PCs are expected, the modem business expected to continue to come under some declines. When do we see an inflection in gross margins to start to head back towards your target levels?

Maybe I can provide a perspective to that. The impact that the PC modems have had on our gross margins is I think pretty much in the numbers that we are providing you as a guidance. We are not expecting meaningful declines in our overall modem business following this drop we're talking about.

Clearly, the products that are in our broad-based mixed-signal outside of modems also have healthy gross margins. PC modems are not our highest gross margin product but one of the higher ones. But many of the products that are growing nicely, such as MCUs' timing products, have very desirable margin profiles for us. So, I think as the product revenues from non-modems and broad-based continue to grow, we're going to see the benefit of this on the margin line.

Then just to follow up, you mentioned briefly the pricing implications or maybe a lack thereof so far on the AeroFONE and some of the integrated platforms and some of your competition -- like I said, just one player in this space now. But can you talk about what you are seeing when you are talking to customers where do you differentiate? What impact are you seeing now that there is a competitor in the space that has an integrated solution?

So, like I mentioned, there are two major advantages that we bring to the table. One has to do with the RF performance of that integrated solution, and the second is the total cost that we are enabling through the level of integration and simplicity of the PCB.

So, certainly at the very low end of the market, the cost targets that are required to provide this advantage for us and for all of the suppliers really continues to decline significantly. We believe the architecture that we have with AeroFONE lends itself to very meaningful cost reduction roadmaps, which we will undertake as we get involved with the large players in a meaningful way. Have I answered your question?

Amit Kapur.

Piper Jaffray. Just a quick question on the handset business -- to what extent are you also seeing some of your smaller transceiver customers maybe lose some share in the handset market? And if so, is improvement in this base of customers needed to improve some of your own mobile handset sales?

Clearly, this is one of the things that is taking place. We have talked about the inventory in China in particular as one of the causes of the lower revenue in Q3.

What we're seeing as we go into Q4 is that the China business is not back in a big way. We're seeing an uptick but not a big uptick, which indicates what you have alluded to as some of the players gaining share there from the local brands.

Maybe just a quick follow-up. In terms of the pickup of inventory in September, how much of that was raw materials versus finished goods?

It was probably -- our inventory is primarily between WIP and finished goods. And it was probably more towards the WIP side than finished goods because we're able to manage the back end and that helps us manage our supply chain.

David Wu.

Global Crown Capital. Can you help me with two things? First thing on the AeroFONE side, what is the number one and number two barriers for you to get into Tier 1 accounts for that AeroFONE in calendar '07?

And secondly, I was looking at your ProSLIC business. Are we still on that 60% growth curve for the year and how does next year look?

The number one obstacle has been that we don't have a shipping record with the baseband space. So, our -- one of the primary goals has been to change that and shipping to the market. And that is what we are in the midst of achieving by ramping AeroFONE.

The second is obviously -- goes along with the first, but it's to gain the confidence of the large handset vendors in our ability. And some of these customers have made progress in the last three months with their evaluations. We certainly see a heightened level of interest from their development and/or platform groups. And also, we're picking up a higher level of senior management development from those companies. So these are some of the things that give us confidence that we will be able to meaningfully engage with the top three handset customers in 2007.

The second question had to do with the ProSLIC. I think the current projections for this year on ProSLIC is about 50% year-over-year growth revenue wise.

Okay. Should it be any slowdown from that rate in '07?

'07, we're not prepared to give a projection on this yet. As you may remember, though, when we entered '06, we had anticipated a slowdown also from the prior year.

I think just on a macro level, I would see some slowing down of revenues. I think we're still seeing healthy unit growth. There is increased price competition in certain areas.

And we're also going to go through a part of our portfolio through a product transition from a higher ASP product to a lower ASP product over time. So, this will also have some impact on the top line. So, we will again be able to hopefully give you a better picture in three months on 2007.

Craig Berger.

Wedbush Morgan Securities. Just a question on AeroFONE competitive situation. Can you just tell us what you are seeing in terms of sort of high-level socket wins for you guys versus TI? How much are you guys getting and how much is the competition getting?

So far, our engagements have been limited to Tier 2 and 3 players, so we have not yet gotten the design with a large player. As I indicated earlier, the lack of shipping history has been an obstacle that we are now overcoming. So, clearly, the next two or three quarters will be critical in our ability to capture a design win with one of the top customers.

What did you say the shipping range was for Q4? I missed that.

We said we're going to be coming at the lower half of the range, so under 500k.

Under 500k. With respect to FM tuner, have you guys been qualified in any new major Tier 1 handset vendors?

It's I think fair to say that we are fully engaged with all the top handset makers at this point in time with our FM tuner.

Do you expect to add any new top-tier handset makers as an FM tuner customer in '07?

There are none left.

They are all customers?

They all will be customers shortly, yes.

Lastly, do you feel the need to work on an integrated Bluetooth FM tuner solution? Or do you think the system and package will do for now?

No, we have no plans to develop it internally. We felt that our R&D dollars are spent better elsewhere than to compete in Bluetooth. So, we're going to go after that market through partnerships and MCM solutions.

All right, Operator, thank you. Thank you all for joining us, and we look forward to talking with you again in January. This now concludes today's call.

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