Silicon Laboratories Inc (SLAB) 2006 Q4 法說會逐字稿

Good morning and welcome to the Silicon Laboratories fourth-quarter and fiscal 2006 financial results conference call. (OPERATOR INSTRUCTIONS). This conference is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the call over to Ms. Kellie Nugent. Ma'am, you may begin.

Good morning. This is Kellie Nugent representing Investor Relations 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 the Company's website at www.silabs.com.

As a reminder, this call is being recorded. This call is also being simulcast and will be archived on the Company's website. In addition to the webcast, there will be a telephonic replay available approximately one hour after the completion of the call. To listen to the replay, please dial 1-800-801-6154 until February 14th.

Necip Sayiner, President and Chief Executive Officer, and Bill Bock, Senior Vice President and Chief Financial Officer, join me today. Bill will begin the call with a discussion of the Company's financial results for the fourth quarter of 2006. Necip will then review Silicon Laboratories' business activities for the quarter.

Before we begin, let me comment regarding the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments 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, Wednesday, January 31, 2007. Please be informed that 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 condition.

We encourage you to review our SEC filings, including the Form 10-K that we anticipate will be filed by February 12, 2007 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 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' Senior Vice President and CFO, Bill Bock.

Thank you, Kellie.

We are pleased with the Company's fourth-quarter results. Revenue and operating expenses were in line with guidance, margins were favorable to guidance and we experienced positive trends in earnings per share, accounts receivable and inventory. Furthermore, we took appropriate steps to align our cost structure with current revenues as evidenced by a decrease in SG&A.

Revenue for the fourth quarter that ended December 30, 2006 met expectations and totaled $111 million.

The mixed signal business represented approximately 57% of total revenue, or $63.3 million, in the fourth quarter. The mobile handset business represented approximately 43% of total revenue, or $47.7 million, in the fourth quarter.

GAAP gross margin for the fourth quarter of 2006 was 53.4%, which was within our gross margin target range and slightly above our previously stated guidance of 52% to 53%. Non-GAAP gross margin, which excludes the impact of approximately $300,000 in stock compensation expense, was 53.6%. Changes in product mix primarily contributed to the favorable fourth-quarter margin results.

On a GAAP basis, R&D investment was $32.4 million in the fourth quarter and $124.9 million for fiscal 2006. Non-GAAP R&D investment in the fourth quarter of 2006 was $27.3 million or 24.6% of revenue, which excludes the impact of $5.2 million in stock compensation expense.

On a GAAP basis, SG&A expense was $24.2 million in the fourth quarter and $102.4 million for the full year of 2006. Non-GAAP SG&A expense, excluding $4.6 million in stock compensation expense, declined sequentially to $19.6 million or 17.6% of revenue in the fourth quarter.

GAAP operating income was $2.6 million in the fourth quarter and $29.1 million for the year. Excluding a $10.1 million charge for stock compensation expense, non-GAAP operating income for the fourth quarter was $12.7 million or 11.4% of revenue. Non-GAAP operating income for the full year, excluding the pro forma charges, was $74.7 million or 16.1% of revenue.

Other income in the fourth quarter was $3.6 million and is expected to increase slightly in the first quarter of 2007.

Our pro forma tax rate was 16.9% in the fourth quarter and 22.2% for the full year. It is important to note that Congress recently passed the R&D tax credit retroactive to January 1, 2006. It will remain in effect for all of 2007. As a result of this credit, our fourth-quarter tax rate is well below prior guidance. We expect that our pro forma tax rate will return to 23% in the first quarter of 2007 and will be in a range of 22% to 24% for the full year of 2007.

GAAP net income for the fourth quarter was $5.2 million or $0.09 per fully diluted share. GAAP net income for fiscal 2006 was $31.2 million or $0.54 per fully diluted share. Non-GAAP net income per fully diluted share, excluding pro forma charges, was $0.24 in the fourth quarter and $1.20 for the full year.

Cash, cash equivalents and short-term investments as of December 30 totaled $386 million. During the fourth quarter, we repurchased shares at a cost of approximately $15 million.

Accounts Receivable totaled $49.7 million in the fourth quarter of 2006. Days sales outstanding were 40 days, which was in line with our guidance.

Inventory decreased by approximately $5 million during the quarter to $40.3 million, which represents 71 days, or 5.1 turns. Inventory is in line with guidance and returned to normal levels after the revenue shortfall we experienced in the third quarter of 2006.

Capital expenditures in the quarter were approximately $5 million and $29.8 million for the full year of 2006. This included the purchase and associated cost of a company-wide ERP application software system. We have been preparing for the change to SAP for some time and plan to transition to this new system at the end of the first quarter.

At the end of 2006, our total U.S. IP patents, both pending and issued, were 792. We ended the year with 742 employees.

Necip, I will now turn the discussion over to you.

Thank you, Bill, and good morning, everyone.

I'm encouraged with the progress we made in 2006. Total revenue grew to $465 million in fiscal 2006 from $426 million in fiscal 2005. During the year we continued to expand and diversify our broad-based mixed-signal business, which grew approximately 9% year-over-year to $258 million. The mobile handset business performed similarly and grew 9% to $206 million while managing through multiple product transitions throughout the year.

Let me begin our discussion with an overview of each of our product lines to provide perspective on 2006 and set targets for 2007.

Microcontrollers remain a very strategic growth area for us. With over 40% revenue growth in 2006, this business represents a long-term driver of continued diversification into new markets and offers new customer opportunities. One of the strong indicators of future revenue growth in this market is development tool shipments. In 2006, we have doubled the number of development kits that we shipped.

Our strategy for the MCU product line is to continue to expand the portfolio with products for consumer and connectivity applications, including the automotive market. In 2006, we were very successful with our USB and small form factor products in consumer applications. Our recently introduced MCUs targeted at automotive electronics have received positive feedback from customers as evidenced by their inclusion in several design evaluations. In 2007, we will continue to add to our MCU portfolio of small form factor devices that offer high functional density. We expect growth in this business to be at or above 40% again in 2007.

In early 2006 we anticipated that the growth of our Voice over IP product family would slow significantly. However, our ProSLIC product revenues increased nearly 45% in 2006. Voice DAAs also grew by more than 30%. Voice over IP continues to be a strong area for us as positive trends in Voice over Cable, DSL and fiber drive port growth. We expect that the growth rate for voice products will decelerate in 2007, but currently we see positive trends with Quad ProSLIC adoptions in Central Office applications.

Broadcast products, which include our AM and FM tuners and transmitters and our satellite receiver, continue to be a very promising product line for us. Our satellite receiver is contributing to revenue at several customers, and our tuner products continue to be rapidly adopted by portable device manufacturers.

We shipped nearly $40 million in FM tuners in 2006, meeting the high-end of our target range for the year. Momentum behind tuner adoption is accelerating, and we have more than 250 design wins. We are engaged with all of the top handset makers and we are expanding our customer base among other portable device makers. The FM transmitter, which was announced in the third quarter of 2006, has already secured a major design win with a top handset maker.

We also recently introduced an AM/FM receiver, significantly broadening our target market to include the very large range of devices that are AM capable. Our highly integrated AM/FM receiver is designed for consumer devices such as clock and portable radios, home stereos, MP3 players and docking stations. We also are enabling handsets, for the first time, to cost effectively include AM capability. Since 8 of the 10 most popular countries in the world have more AM than FM radio stations, the demand for AM capability is expected to be significant. We anticipate that existing design wins and new products will allow us to Broadcast product family to post high double-digit growth in 2007.

Timing revenue more than doubled in 2006, driven primarily by our clock products. Throughout 2006 we have highlighted our timing products as a small but fast-growing segment of our mixed-signal business. With our highly differentiated product portfolio, we see significant growth opportunities in this margin rich market. Design activity for our oscillator products is very promising throughout telecom, networking, test and measurement and video customers. Looking ahead, we plan to capitalize on the early successes in oscillators and expand our Timing revenue base. We expect this will drive high double-digit growth of at least 50% in 2007.

As we have discussed, our Modem product line is the most mature in our mixed-signal portfolio and has been declining steadily. Revenue decreased by 15% in 2006 primarily driven by the PC modem segment. By the end of 2006, PC modems have become increasingly insignificant and comprised only 6% to 7% of our overall company revenue. We expect that total modem revenue, which includes embedded modems, will stabilize at current levels for 2007, driven by revenue contributions from new products such as fax modems. In the fourth quarter, Samsung selected our fax ISOmodem solution for its fax products, including multifunction printers and stand-alone fax machines. This is a validation of our competitive advantage and a positive step in gaining share in new embedded applications.

Now moving to our GSM/GPRS/EDGE business.

During the fourth quarter, we continued to gain momentum with our EDGE transceiver. As we stated in the past, we set a priority to gain market share in EDGE quickly. Currently, we are included in 14 EDGE models and have shipped our first million units in the fourth quarter. We also see opportunities outside of our largest customer Samsung, specifically in China.

With regard to AeroFONE, we achieved our goal to ship products, and have made further progress with tier one OEMs. We have completed the StackCom integration and have hit all of the major milestones. We now have a proprietary protocol stack with key customer engagements. The team and software are exceeding our expectations.

Consistent with our guidance, GSM/GPRS transceiver revenue declined sequentially in the fourth quarter. This was partially offset by initial AeroFONE revenue and increased EDGE transceiver shipments.

Looking at 2007, we expect our GSM/GPRS/EDGE business to be up modestly when compared to 2006. We are confident that EDGE will continue to ramp and emerging market demand for ultra low-cost handsets will drive growth for AeroFONE. We expect AeroFONE to contribute $30 million to $45 million in revenue in 2007.

Now turning to guidance for the first quarter of 2007.

Consistent with seasonal trends in our major markets, total revenue is expected to be flat to down slightly from the fourth quarter in the range of $106 million to $111 million.

We expect to maintain gross margins at approximately 52% to 53% of revenue. We anticipate R&D investment to be approximately 26% to 27% of revenue and SG&A expense to be approximately 18% to 19% of revenue. First quarter net income for fully diluted share on a GAAP basis is expected to be breakeven to $0.03. Non-GAAP fully diluted net income per share, which excludes a non-cash charge for stock compensation, is expected to be $0.13 to $0.17.

We would now like to take your questions. Kellie?

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

Operator, please review the question and answer instructions for our call participants.

(OPERATOR INSTRUCTIONS). Mark Edelstone, Morgan Stanley.

Two questions if I could. I guess one is just a bigger picture question. Can you just talk about some of the steps that you think you guys will undertake this year to better align your operating expenses to the revenue potential of the Company?

Sure. As you know, we have demonstrated operational leverage in the past and have a target business model of achieving 25% operating income. We are now going through a period where some of our major product lines are going through major product transitions. Therefore, revenue growth has been muted over the last couple of quarters.

What we have done to date is to maintain the operational expense at current levels so we have not seen any increase in Op Ex in the last couple of quarters, and we have done that primarily by limiting SG&A. We believe that the R&D investments that are in place now that will result in several new product introductions in 2007 and are key to our continued revenue growth. And the product transitions I alluded to in some of our major markets, most notably GSM/GPRS/EDGE, needs to materialize, and revenue growth will come from those segments.

But going forward, I would say that we will continue to control SG&A expenses, and you can expect the increases in our R&D to be much more muted than they have been the past several quarters.

And can you just be a little bit more specific on the '07 guidance you put out there for the Broadcast business. You said high double-digit growth, but can you put a little bit more of a tighter range around what that is?

I think that business clearly has the potential to grow more than 50% in 2007, compared to 2006.

Craig Ellis, Citigroup.

Can you provide a little bit more color around your earlier commentary on AeroFONE having potential to do $30 to $45 million in revenues? Also, any color on any Tier 1 OEM penetration, and secondly, how should we expect that to ramp through the year?

First, I should clarify that this revenue range does not assume any Tier 1 engagements. So, to the extent our current engagements with Tier 1 OEMs result in revenue in 2007, that will certainly change the picture.

So this revenue stream is expected to come from what I would refer to as early adopters. We have started shipping product in the fourth quarter and are booked for growth in the current quarter, and our current forecast would suggest a relatively linear sequential growth throughout the year with multiple customers as we get into the later quarters of the year.

Okay. That is helpful. As we look at the product introductions that you're planning on this year, you mentioned and in answer to Mark's question that you're planning on several new product introductions in '07. Was that encapsulated in the financial targets that you earlier set forth, or are those in addition to the targets that you have just established?

These are really products that we have been developing for the last few quarters, and we will be announcing it primarily I would say in the first half of the year. Those products are not likely to make a meaningful impact to revenues in 2007. But we obviously view them as critical for continued growth beyond that.

Okay. And then one last question... Full-year growth would seem to imply from the first quarter's guidance near mid single digit revenue growth through the rest of the year. Should we expect things to start off a little bit more gradually than that an gain momentum through the year, especially given some of the color around AeroFONE, or do you see it being a little bit flatter?

I think as we get into the June quarter and beyond, some of the headwinds that we have been facing the last couple of quarters will subside, and therefore, we are looking at sequential growth from the June quarter on. And, overall for the year of 2007 we are targeting to achieve double-digit revenue growth over 2006.

Srini Pajjuri, Merrill Lynch.

If I look at your guidance for the wireless business, it looks like most of the growth is coming from AeroFONE. Correct me if I'm wrong there. Also, I'm just wondering about your RF business, and how should we think about that business going forward, not just for this year but beyond this year? Will this continue to decline, and also if you have any plans to grow this business, how will that happen?

Sure. As you know, there are two major transitions that have been taking place. One is from GSM/GPRS to EDGE, and the second transition to integrated solutions within GSM/GPRS. So when we look at the landscape from that perspective, we will continue to see our GSM/GPRS transceiver revenue decline, EDGE revenues to aggressively ramp throughout the year, and when you look at them net net, you would say that the overall transceiver revenue will decline year-over-year because some of that volume is transitioning to SoCs, and we're going to be taking part in that transition through AeroFONE.

We will also see some modest growth in our Power Amplifier business, which has started contributing meaningfully in the fourth quarter, and we're looking to sequentially grow that product line as well.

Okay. And as AeroFONE ramps, I'm just wondering how and what kind of impact that will have on gross margins going forward?

Well, our gross margin target for the wireless business in general remains intact. And it will be in line with historical margin levels. In the near-term, our margins are impacted adversely because of some startup expenses and we also have some cost reduction plans in place that will start to impact AeroFONE specifically later in the year.

So, in the near-term, it will keep us at the low-end of our target range for the Company, but throughout the year we would expect to improve those margins as well.

Okay. One final question if I could. On the FM tuner front, you said it is going to grow at least 50%. Is this being driven by new customers, or is it existing customers, or are you counting on revenues from the AM product as well?

Several factors... One is, the existing design wins with major handset customers. There are some major OEMs that we have not seen revenue in 2006, and they will contribute to revenue in 2007. In general, with FM tuners - in the handsets - has not lost any momentum, so we expect to continue to gain share.

We also have a broad initiative to expand our customer base for FM tuners outside of handsets, and we have been successful in growing the revenue from non-handset applications as well.

And finally, we have the new product that we have introduced. I mentioned the transmitter has won a design win already AM has just introduced. So those new products will also start contributing in second half of the year.

Edward Snyder, Charter Equity Research.

Speaking about the tuners, it is such an important part of your business, and you have seen a lot of announcements from some of your competitors in the same area. Are you seeing any increase in price pressure? What is your anticipation for '07 in terms of the competitive environment, specifically in regards to product, but also some of the competition at some of your existing customers? Are you seeing them looking at any alternatives?

Throughout 2006 the blended ASPs stated above $1.00 as Bill indicated. We fully expect in 2007 the pricing to be below $1.00, and we have seen significant competitive pressures. But these pressures are not from new entrants to the market, but the primary competitor we have in that space.

But, as I have said before, we have the right cost structure to compete very effectively, and I would say our design win rate has not subsided at all. And we have both been introducing products with additional features that the competition cannot match and also have a very aggressive cost reduction roadmap to meet the demands of high-volume opportunities.

Does your guidance consider the -- is it a status quo for the competitive environment that you will be facing head-to-head with your major competitor, or are you anticipating new entrants this year to change the dynamics of the market?

I think for much of 2007 at this stage, the decisions for various sockets, particularly in the handset domain, are made. So we have reasonably good visibility into our opportunities for the next two or three quarters. The new products that we have introduced obviously are just competing for new design wins. So we have a set of assumptions we have made for those in the guidance that we have provided.

Amit Kapur, Piper Jaffray.

Just in terms of getting back to the handset market, we have seen some more discussion from some Tier 1 OEMs of getting more aggressive in WCDMA in the back half of this year. Could you maybe kind of walk us through your views on how you see the mix of handsets changing between low-end and high-end through 2007 and how you want to plan your product portfolio around it?

So, as far as AeroFONE is concerned, our product roadmap calls for investing in GSM/GPRS and taking share in that market. As we have alluded to in the past, the technology that we have developed is readily extendable to EDGE. We have not made any announcements in that regard yet.

As far as 3G goes, we have a WEDGE transceiver in development, and we have stated in the past that we will start seeing revenue from that in 2008, and that is still intact.

Great. Thanks. And then maybe just a quick follow-up... Could you talk about what you're seeing out of China and some of the manufacturers, the Tier 2 manufacturers in that market?

Sure. In the fourth quarter for us compared to the third quarter, our revenues from China were up slightly. We are also seeing more and more opportunities in China with respect to EDGE. This likely has to do with the fact that China Mobile is talking about making investments in EDGE, upgrading their existing networks. But quite a few of the handset makers from China are moving to EDGE and have expressed a lot of interest in engaging with us with our current product.

Arnab Chanda, Lehman Brothers.

A couple of questions. First, can you talk qualitatively about what you see the difference between the growth characteristics between your wireless business and the mixed-signal business in the first quarter? And I have a follow-up, please.

In the first quarter, we see both businesses with similar characteristics, and the wireless market is going through a seasonal weakness. Many of the other component providers to this segment have already announced ahead of us with high single digit reductions sequentially. So our business in the quarter is going to decline less than that, partially driven by the ramps in EDGE and AeroFONE. In our broad-based mixed-signal business, the seasonal weakness is in the modems, and they have alluded to this in our prior earnings call on the PC side. I would say the rest of the product lines 4Q to 1Q are about flat, give or take a few hundred thousand.

And then last question. If you look at your expectation or your goals for the wireless business, maybe excluding the FM tuner business being flat year-over-year, that has to seem a fairly strong growth in Aero IIe and AeroFONE both. You talked about AeroFONE or perhaps less than expected decline in Aero IIe. Could you talk a little bit about Aero IIe where you see the design wins, and do you expect in your goals to have more design wins to announce?

Could you clarify one thing -- when you refer to the business being flat? Because for the year 2007, just to repeat what I said in my prepared remarks, the GSM/GPRS/EDGE business we're looking to be up modestly from 2006. So any reductions in GSM/GPRS transceivers will be more than made up by EDGE and AeroFONE. And, on top of that, we are obviously still looking for growth in our FM tuner business.

Sorry. I must have missed that. So you are talking about growth, and even more specifically then that means you have to see a pretty good growth in your Aero IIe business to offset the decline in the GPRS business? Could you talk a little bit about where you see that growth coming from and some more discussion on the design wins?

Aero IIe was shipped only to Samsung in 2006 for all practical purposes just one quarter. We have, as I mentioned, more than 14 models that are ramping in the next in couple of quarters. So we see a very strong growth in our EDGE business throughout 2007.

Our business in general with Samsung is also stronger. Our revenue from Samsung has grown in the fourth quarter, over the prior quarter. And we're looking at a strong year with Samsung in general and a very strong growth for our EDGE business. And you layer on top of that the AeroFONE revenue, which I guided to, $30 million to $45 million, so that adds up to growth year-over-year in that business.

Brian Modoff, Deutsche Bank.

So if we're looking at your EDGE and GPRS transceiver revenues only, you expect that to be down this year from last year if you exclude AeroFONE, correct?

That is correct.

How do you look at that business in terms of '08? Could '08 be another down year, or do you see AeroFONE as being a key to having perhaps growth in '08? Would you have EDGE transceiver or have an EDGE SOC product available for the '08 timeframe?

And then finally... ProSLIC. Can you talk about -- quantify what kind of growth you expect to see in the ProSLIC line '07 from '06?

Sure. So let me take the transceiver question first. I think the transition to oSCs are undeniable. They have been believers in that integration path all along. So the stand-alone transceiver opportunities in GSM/GPRS and shortly in EDGE are going to be smaller and smaller replaced by integrated solutions.

So we are looking at that business in its entirety, not just as a transceiver business or AeroFONE business because of that transition. So it would be reasonable to expect that the overall transceiver revenues will continue to decline in 2008, and our AeroFONE revenues will continue to grow obviously with the expectation that the overall business will continue to be up.

Having said that, we are gaining good momentum with EDGE. We have a version of the EDGE transceiver with digital interface. We have talked about the wideband CDMA transceiver becoming available for 2008.

So the transceivers in terms of the available market will continue to hold our share. On the ProSLIC side, I think the growth into 2007 will subside quite a bit from what we have seen in prior years. I know this sounds similar to what we have said in early 2006 also, but with all that we have seen in that space, Voice over DSL and cable adoptions, while we will continue to hold our share and possibly gain share, the overall revenue growth will likely be in the teens for the ProSLIC product revenue.

Satya Chillara, Pacific Growth Equities.

Starting with the wireless, if you look at AeroFONE, it sounds like it is shipping nicely. I do want to ask a question on the cost structure. Presently there are 130 nanometer node, right? At this point what is the plan to go to 90 and 65, and if you look at your competition, whether it is TI, I think they are rapidly moving to that, and so the question is, can you address the gross margin structure growing forward of the AeroFONE business, please?

Sure. I think there are some immediate cost reduction opportunities available to us going to the half node of 110 is readily available, and our architecture allows for that type of porting to be relatively straightforward. We think that for future developments, future nodes on the AeroFONE roadmap, the right process node will be 65 nanometers.

Okay. With respect to the gross margin, are you still -- have your feeling it is going to be above 50 or below 50 plus the margin on the wireless business?

Well, our corporate margin target is in the mid '50s, as you know, and the wireless margins historically have been measurably below that corporate average, and we don't see that to change anytime.

Okay. One follow-up question in terms of we're talking about Bluetooth FM tuners. There is a lot of life out there. You talked about having the relationship with STMicro. How is that working out? Any update there and so any design wins there?

As you pointed out, there is a lot of noise out there, and we continue to grow our business nicely. I think there will be integrated solutions with Bluetooth. ST has won numerous sockets with that integrated solution. I'm not at liberty to say where. This is their business. But we have through our partnership been able to win sockets together, and we will continue that partnership with ST and possibly other Bluetooth providers going forward.

Jeremy Bunting, Thomas Weisel Partners.

That you highlighted I believe your expectations that '07 revenues could be double-digit, do you think you will be able to cap R&D growth in '07 below 10%?

Well, I think from where we are on R&D this fourth-quarter exit rate, we will see a step-up in the first quarter, primarily due to the change in the year and salary adjustments and so forth.

Beyond that, the incremental additions to the team certainly through the first part of the year, the first half of the year, will be modest, and our R&D expense profile will be more driven by mask expenses and so forth. I think, as we announced several products in the first half of the year, we have the opportunity and the plan to start using these resources on new identified projects. So I think all I can say qualitatively at this point is the R&D growth in general and OpEx growth to be muted throughout the year.

Thank you. Let's just talk about the software running over AeroFONE. Is the relationship with Motorola's TTPCom still intact, or are you really working more with your own software stack in OEM for proprietary software stacks?

The relationship with TTPCom is intact in that the current shipment that we are making utilizes the TTPCom protocol stack. I would say a majority of our new engagements are using our Silicon Labs protocol stack, and most importantly, in the progress that we have been making with Tier 1, we are essentially using our proprietary stack.

David Wu, Global Crown Capital.

Can you explain perhaps a little bit about when you mentioned about the product mix was richer in Q4, which led to the gross margin upside, exactly what were the segments of the business that was richer than planned? And on the question about this software stack on AeroFONE, I guess this is a hard question to answer, but how amenable are Tier 1 OEMs like the one that you are targeting to using your own software stack as opposed to the more popular software stacks out there?

So let me take the gross margin question first. I think that the quarter came in slightly favorable to guidance, really up just approximately 1 percentage point above what we had guided to back in October. The broad-based mixed-signal business was slightly stronger in the quarter, and it does as Necip suggested a few moments ago inherently have a higher margin profile. So there was no unusual or fundamental change in cost structure or other dynamics in the business. We just simply had a slightly richer broad-based mixed-signal mix.

And I will take the AeroFONE question. Yes, this was the whole gating item for that product line to get to the next level in order for us to have a meaningful engagement with a Tier 1. I think we have demonstrated now that we can have a phone with our own stack built and go through the internal testing rigor of a Tier 1 OEM.

So really it is the maturity of your protocol stack? That is really the key?

Well, we have demonstrated that to the Tier 1 OEM. We're not shipping with it yet. What we are shipping today is with the TTPCom stack. But we have demonstrated that our GSM stack with our AeroFONE to the Tier 1 OEMs are far along enough to pass through their internal test.

[Tayyib Ali Shah], Longbow Research.

Can you give us an idea of when you're likely to know when your top tier OEM will adopt AeroFONE in its current iteration? And what are the chances that you get multiple OEMs designed into 2007?

So, we have said in our last earnings call that we have set a timeline of six to nine months for achieving a concrete win, and the progress that our team has made in the last three months since then has been quite good. So that would suggest to you that we would be in a position to turn this engagement into a concrete win in the next three to six months.

And then chances of getting more than 1 OEM on this?

Well, we are engaged with multiple Tier 1s. I would say our chances of succeeding with this one I am referring to is higher in the nearer term because of the amount of progress made. So we want to get this under our belt successfully first.

Okay. And then the Quad ProSLIC design wins, can you give us an idea of when they start to ramp in a meaningful way, and is there a possibility that the Quad ProSLIC designs could lead to some upside to your growth outlook that you just talked about in the 10 to 20% range?

Well, you know the central office applications have long design-in cycles. The flipside of that is they also have long product cycles. So getting to revenues takes awhile, but then you are in the sockets for long many years. So I still think that the impact to revenue from the Quad ProSLIC's in 2007 will be limited. We will ship some products, but it will be limited, and it will gradually grow in 2008 and beyond.

Cody Acree, Stifel Nicolaus.

Can you just give me a point of clarification? You said that you expect double-digit revenue growth for the full '07? Is that correct?

Yes, I did say that.

I guess just real quick math means that after this decline in Q1, we have got to see some decent growth in June, but then fairly aggressive back-half sequential growth in September and December. I guess could you maybe give us a little more clarity as to what gives you confidence that we could see that level seeing what we're seeing still with DDA's and what you expect out of the transceiver business?

So I think maybe the answer lies in the perspective for 2006. If you look at the back half of 2006, as all of that revenue declines, actually more of it declines; it has come from our GSM/GPRS business. So the rest -- this is another way of saying that the rest of the business has actually grown in the second half in spite of the headwind that I referred to with respect to modems.

So now we are at a stage where we are going through this transition in the GSM/GPRS business with the expectation that will grow into 2007. Our underlying mixed-signal businesses have been growing nicely all throughout, and with the modems now we have come to a point that we see the current level of revenues say in Q1 of this year to remain stable throughout 2007. So when you put that altogether, it provides a nice trajectory in 2007 to enable that double-digit growth for us.

Very good. Can you give any more clarity as to when you should expect -- we should expect to see the WCDMA transceiver revenue in '08? Is that very late '08? Is that earlier enough to be meaningful to the models for '08?

I think we should start seeing revenue in the middle of '08.

And then lastly, you discussed a little bit with the Bluetooth FM tuner partnership you had with STMicro how do you see that market shaping up as we see other competitors coming out with integrated Bluetooth FM tuner solutions? Do you see more and more of those models or handsets or consumer devices that need one or the other taking both, and what do you see for the stand-alone FM tuner market versus an integrated market?

Certainly there will be more and more integrated solutions. Some of them will be integrated with products like ours in AeroFONE, for example. So our strategy with the FM is to continue an aggressive cost reduction path, to compete effectively for the sockets. We can also compete with integrated solutions relatively effectively as I mentioned before FM and Bluetooth don't share in the circuitry. So, from a cost perspective, we are not at a disadvantage.

We have a roadmap with additional features that our competition has not been able to match yet. We have a transmitter. We have AM announced. We have other products in the pipeline. Furthermore, we are looking to diversify our customer base with the AM/FM product line, and we have been successful in doing that as well in the last couple of quarters outside of handsets.

Suji De Silva, Cathay Financial.

One quick question on the financials first. The deferred income amount on the balance sheet dropped significantly. Any color on that?

Yes, we made a change in the balance sheet presentation and is essentially reflects how we treat price protection for distributors. I want to emphasize that there is absolutely no change on revenue recognition, and we still have a policy of only recording revenue after sell-through from the distributor to end-users. There is adjustments on both receivables and deferred revenues that reflect this change in treatment. It is complicated enough. I don't want to chew up the whole rest of the call today, but for any of you that are really interested in balance sheet analysis, feel free to call Paul or I later on today, and we will give you all the details.

Okay. That color helps. And then my other question is on AeroFONE. You have talked a lot about in the call, but can you just kind of step back and talk about what the key competitive factors are as you try to win Tier 1's versus your competition right now?

Well, the current challenge is the same challenge we have had 12 months ago and to demonstrate that we can ship into live networks and demonstrating the maturity of our software in building an application framework on our platform. So clearly starting to ship demonstrates that capability. We have demonstrated the maturity of the protocol stack, along with our platform to the Tier 1, but these remain the challenges. From a cost and performance perspective, I think we're still best-in-class.

Okay. And last question here. As you roll into your own software stack from the TTPCom stack, does that change the margin profile of this business meaningfully?

Well, it helps a little bit.

Just a little bit. Thanks, guys.

Craig Berger, Wedbush.

As you look at your wireless business right now, do you feel that your current research and development spending is enough to sustain and make this a successful business given the many ramping standards and greater thrust towards the integrated parts and leading process technology?

This is a high investment business. We recognize that. In order to afford the level of investment required to compete effectively, we need to have a meaningful engagement with a meaningful provider. So this is a necessary requirement for us to be able to continue to invest in this business.

And just heading down that path further, can you talk about your product roadmap for AeroFONE with respect to EDGE and WCDMA and future process nodes?

Not at this point. I think I alluded to the fact that what we have now is easily extendable to EDGE. But we have not made any announcements in that regard.

And then can you just provide some color on how big the magnitude of your timing products are now and your broadcast products and whether you are including FM tuner in the broadcast segment?

Yes, FM tuner is the primary product within our broadcast portfolio. The other meaningful one being at this stage the satellite receiver. The timing portfolio is still a small portion of our overall revenues, so in the 2 to 3% of our overall Company revenue.

Great. And then just one last question on housekeeping. Is there any guidance for 2007 tax rate?

Yes, we suggested first quarter will be 23%, and we kind of bracketed that at 22 to 24 for the full year.

I think that is our final question, so we want to thank everybody for their participation today and look forward to follow-up calls with some of you during the course of the remainder of the day and seeing the rest of you throughout the quarter.

Thank you.

This completes today's conference. You may disconnect at this time.