Silicon Laboratories Inc (SLAB) 2007 Q1 法說會逐字稿

Welcome to the Silicon Laboratories Inc. first quarter earnings conference call. At this time, all participants are in a listen only mode.

[OPERATOR INSTRUCTIONS]

I will turn today's meeting over to Shannon Pleasant. Thank you, you may begin.

Thank you, and good morning. This is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories.

Thank you for joining us today to discuss the company's quarterly financial results.

The financial press release, reconciliation of GAAP to non-GAAP financial measures, details on discontinued operations, and other financial measurement tables are now available on the Investor page at our website at www.sillabs.com. This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 800-677-5199.

I'm joined today by Necip Sayiner, President and Chief Executive Officer, Bill Bock, Chief Financial Officer, and Paul Walsh, Chief Accounting Officer. Bill 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.

Let me comment concerning 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 or 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 our 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 diverse affect on our business, operating results, or financial conditions. We encourage you to review our SEC filings, including our Form 10-Q, that we anticipate will be filed in early May, that identify important factors that could cause actual results to diver 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 highlights the results of core ongoing operations.

I would now like to turn the call over to Silicon Laboratories' Chief Financial Officer, Bill Bock.

Good morning, everyone.

I'm pleased to report strong first quarter performance. We delivered results that met or exceeded guidance on all fronts. We successfully completed the sale of our cellular business, and we accelerated operation expense reductions. We've been moving at a very fast pace, as we reset the company with a new profile and we are all feeling excited about the path ahead of us.

We close the cellular business transaction on March 23rd. So we had virtually a full quarter of operations inclusive of the Aero products.

On this basis total revenue of Q1 of $111.8 million was up sequentially and above our guidance of $106 million to $111 million. Gross margin for the first quarter was within our guidance range at 52%. Operating expenses totaled $47 million or 42% of revenue, about two percentage points lower than forecasted. Excluding stock compensation expense, non-GAAP operating income was $11.4 million, or 10% of revenue and non-GAAP earnings per share was $0.19, $0.02 over the high end of our guidance range.

I would like to spend the majority of my time today reviewing the financial performance of the continuing mixed signal operation in order to aid in the transition from our former profile to the new business. As we discussed back in February, the mix signal business offers strong gross margins in the 60% to 62% range, double-digit growth potential over the long term and with decreasing operating expenses, a more rapid path to our operating profit goal of 25%. In Q1, revenue came in at the high end of the guidance at $73.8 million.

Let's first cover the GAAP results. On a GAAP basis, gross margin was 61.5%. Research and development investment was $24.8 million and SG&A expense was $24.3 million. Other income totaled $3.5 million. The GAAP income statement then includes income from discontinued operations of $156.3 million. This figure is comprised almost exclusively of the after-tax gain on the sale of the cellular business. The gain does not reflect any potential proceeds from the $64 million earn-out. The effective tax rate on the sale was 29.6%. The final result is GAAP net income of $155.6 million and GAAP earnings per share of $2.84.

Included in GAAP operating expenses are one time stock compensation expenses of $5.5 million associated with the discontinued operations and $3.3 million for continuing operations. These one time charges relate to the acceleration of vesting for employees transferring to NXP and a one time stock grant for retained employees.

Now let's turn to our non-GAAP adjusted financials for continuing operations. The following non-GAAP results exclude a total of $11.8 million of pretax stock compensation expense, $3.3 million of which relates to the one time stock award. Non-GAAP gross margin on revenues of $73.8 million was 61.9%, the high end of our target range. R&D investment was $19.4 million, or 26% of revenue, and SG&A expense was $18.2 million or 24.7% of revenue. Operating income was $8 million or 11% of revenue; non-GAAP net income for fully diluted share from continuing operations was $0.16.

During the quarter, we focused considerable effort on making the structural changes in our organization to properly align operating expenses for the new Silicon Labs. Head count at the end of March declined to 547 employees, a reduction of 195 from year end. In addition to the employees transferred with the cellular product line, the new head count number includes a further reduction of about 10% in our support groups. This was accomplished through selective reductions in force and the transfer of additional support head count to NXP.

In addition, we entered into a transition services agreement with NXP whereby we are providing office space, IT infrastructure, and certain other services to assist in their transition to an independent entity in Austin. This agreement will reduce operating expenses while we work on further of right-sizing of our infrastructure, including, ultimately, fully consolidating all of our Austin sites into our headquarters facility. The net effect of these actions should yield a relatively flat trend in R&D expenses in absolute dollars for the remainder of the year, while SG&A should decline by over $1 million in the second quarter and remain generally flat in the back half of the year.

Wrapping up the income statement for first quarter, other income in the period was $3.5 million, and our pro forma income tax provision was within our guidance range at 22.3%. Please note that due to the cash proceeds from the transaction, other income will be in excess of $6 million for the second quarter.

Cash and equivalents totalled $666 million at the end of the quarter. This excludes $14 million of escrow on the transaction which is classified as a prepaid expense on the balance sheet. Also note the taxes due on the transaction will not be paid until late in the second quarter.

During the first quarter, we also repurchased approximately $13 million of Silicon Labs stock, bringing our total repurchased since the buy back was authorized to $63 million or approximately 2 million shares. The current repurchase program is authorized through July, at which point we will consider any extensions or modifications to the buy back.

Accounts receivable declined $3 million to $33 million in the first quarter. Days sales outstanding was 41 days. Inventory also dropped slightly from Q4 to $21.5 million which represents 5.2 turns.

In the January earnings call we announced plans for the conversion to a new company wide ERP system. Let me update you on our status. We formally transitioned to the new system on April 2nd, and we have experienced the startup challenges you might expect from a change of this magnitude. We fell behind our normal shipping patterns at the beginning of the quarter, but we are now running at our historical shipment rates. We do believe we will be able to catch up with demand as we navigate the balance of the quarter.

Necip, I'll now turn the discussion over to you.

Thanks Bill.

We are pleased with the smooth transition that took place as we transferred the cellular product line within the quarter. I strongly believe the transaction is a positive inflection point strategically for Silicon Labs. We now have a business with a profile that is in sync with the growth and profitability targets we have established.

As Bill discussed, we have been moving at a very fast pace to re-align our infrastructure and I'm pleased to report that we have been able to completely make up for the earnings impact of the sale in a very short period of time. I think this will further highlight the attractive operating model and help unlock the value of our diversified mixed signal business.

We now look at our mixed signal business in the context to have following product lines, broadcast, embedded modems, voice over broadband, microcontrollers and timing. These product areas represent about 85% of our revenue. The remaining 15% is made up of mature products in harvest mode that are contributing nicely to the bottom line but are no longer a focus of our investment dollars. These products include our PC modems and physical layer products for networking applications.

As I mentioned in my remarks last quarter, our existing mixed signal products drove more than 20% year over year growth in 2006. One of the contributors to that growth was our broadcast business which today represents just over 20% of revenues.

Broadcast revenue grew slightly sequentially in Q1 in spite of normal hand set industry cyclicality, and weakness at one of the top hand set customers. We expect that customer's weakness to continue into Q2 but we are still forecasting sequential growth for the quarter due to solid demand at other customers. We've added more than 60 new FM tuner design wins and a dozen FM transmitter design wins which is indicative of continued momentum in this business.

While much of the investor focus in this promising growth area has been on our first product, the FM tuner, our broadcast business has become much deeper than one product or one set of customers. Since the initial launch of the FM tuner, we have broadened the portfolio to offer a complete family of first of a kind audio solutions that includes our FM transmitter announced last fall that will already be contributing revenue in Q2, our FM transceiver, recently announced in Q1, that combines receive and transmit functions into a single Chip, offering a clear upgrade path for existing FM tuner customers, boosting air speeds and providing a competitive alternative to Bluetooth and FM integrations; and our AM/FM receiver that is not only the first solution for hand set applications but also a product that has great market potential for both digital and analog tuned radio applications.

The expansion of the audio product lines through penetration of new markets will allow this business to be a sustainable growth engine. It will also enable us to invest in expanding our portfolio into video broadcast applications where our RF and mixed signal expertise is well aligned with evolving system requirements.

Embedded modems, which are sold into satellite set top boxes, PVRs and industrial connectivity applications represent about 25% of revenue. These margin-rich products have been steady performers and are expected to deliver modest growth as we cost optimize and augment our product line with new additions like the [fax]modems. We expect to continue to gain share in the growing multifunction printer segment the market. Samsung for example is the world's second largest laser printer manufacturer and an early adopter of our [fax] modem.

Voice over broadband represents around 20% of revenue in the first quarter. Our voice over broadband product line includes ProSLIC and voice DAAs sold primarily into residential gateways for voice over IP services. We experienced weakness in this product line in Q1, primarily due to excess DSL gateway inventory at the European customer. It may take until the end of Q2 for this inventory to clear.

We are also expecting some weakness in North American demand due to recent Vonage service rollout restrictions and have incorporated this into our Q2 expectations. While we believe these factors will have a short term impact, we are encouraged by new wins new large customers have secured with additional service providers in Europe. We believe these wins will contribute to gradual resumption of revenue increases, starting in the third quarter.

We are optimistic about the long term potential of the voice business for several reasons. First, we believe that voice penetration in residential gateways will continue to rise. Second, we are now sampling our next generation ProSLIC for the residential market and anticipate that this new product will further improve our competitive position and cost structure. Third, we are slowly but steadily gaining ground with our QuadProSLIC. For example, this quarter, a major networking customer announced two new router platforms that use our QuadProSLIC.

With over 8000 customers, our microcontroller products represent a truly general purpose diversified business. Still very early in its growth cycle, the MCU business increased sequentially again in Q1 to record revenue and represented just under 15% of our total revenue. In the first quarter we made a significant addition to our MCU product family with the T600, a highly integrated but low cost family of MCUs that will allow us to compete effectively in the low end of the 8-bit market. This segment of the market which includes white goods and toys for example is large and virtually untapped by us previously. We bring the same value proposition to the low end of the market that has allowed us to gain share in other application areas which is the best functional density combined with easy to use development tools. We expect this new family to be a meaningful revenue generator into 2008.

Our timing business which includes clocks and oscillators increased sequentially and represents around 5% of revenue. We intend to be the one stop shop for timing solutions with our portfolio of performance frequency controls and clock solutions. These products target high performance, greater than 100 megahertz applications and networking equipment, test and measurement and wireless base stations, which represent about a $400 million opportunity.

We've continued to add new products in this area in Q1, and introduced the first [indiscernible] clock multiplier family able to generate any output frequency from any input frequency with industrial leading jitter performance. Our sales channels and customers are excited about this new product family and we are anticipating strong adoption. We have barely scratched the surface in terms of market penetration in the timing area and we continue to believe we can achieve high double-digit growth at least 50% in 2007 for this product line.

We have a strong pipeline of products in all five of these product areas. We are also making investments to create new differentiated products, many of which will contribute to revenue in 2008. As Bill mentioned, we plan to maintain our R&D investments roughly flat to current levels through 2007 as we manage our resources carefully and optimize our return on investment.

In addition to organic growth factors, we are also entertaining targeted acquisitions to accelerate our growth. I would like to clarify our thinking in this regard. We are targeting potentially accretive acquisitions offering strong technology teams and products that would either augment our current portfolio or enable us to enter a new complementary vector. We look for businesses that have a sustainable business model, are well aligned with our margin profile and profit expectations, and bring a competitive edge to our business with a desirable return on investment. This set a high bar for any potential meaningful acquisition and I want to emphasize to our investors that we are being very methodical in our consideration of any possible targets. If we do not find what we are looking for, we have equally attractive uses for our cash, such as additional share repurchases.

Now turning to the guidance for Q2, total revenue is expected to be up modestly from the first quarter in the range of $74 million to $77 million. We expect to maintain gross margins in our target range of 60% to 62%. We anticipate R&D investment to remain roughly flat, and SG&A expense to decline sequentially by over $1 million in Q2. We expect our adjusted operating profit will be in the range of 12% to 13%. Due to acceleration of operating expense reductions, second quarter net income per fully diluted share on a GAAP basis is expected to be $0.10 to $0.13 which includes $0.02 from discontinued operations. Non-GAAP EPS, excluding a non-cash charge for stock compensation, is expected to be in the range of $0.22 to $0.25.

We'd now like to take your questions. Shannon.

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

[OPERATOR INSTRUCTIONS]

We have our first question from Srini Pajjuri, Merrill Lynch. Your line is open.

Thank you, good morning guys. Good quarter. Congratulations on that.

Necip, just a couple of questions. You talked about the potential acquisitions. Have you identified any companies as yet and if you could give us some idea of the timing, the potential timing of that acquisition.

No, we have not identified any companies. And I have to say that in the public domain, there are very, very few companies that would even meet our basic criteria. We are continuing to look for companies that meet the criteria that I mentioned. Our focus is also growing in the private company domain. But I don't have any target companies established at this time.

Okay. And then clearly done a pretty good job on the operating margin side. Do you think this -- you'll be able to achieve the 25% by the end of this year, or do you think it's going to happen a little sooner than later?

As we announced the sale of our cellular business a couple months ago, I chose to share that internal goal we said a while ago with all of you and our investors of achieving 25% operating income by the end of 2007.

In order to convey the sense of urgency we have on this topic, as you pointed out, we have shown the ability this past quarter to move quickly in realigning our infrastructure without really impacting the business progress. So we're committed as a management team to continue to make progress towards that goal that we have set. I think in order for us to have a meaningful shot at this target, aggressive target this year, we're going to need the macroeconomic conditions to recover a bit. But I also think that it's fair to say at this point that we've left the earnings per share trough behind us.

Thank you.

Thank you. Next, Romit Shah, Lehman Brothers, your line is open.

Hi, thanks. Just on the operating margin -- you have a plan in place ultimately to get to 25%. Obviously it goes hand in hand with the revenues. Is there a minimum revenue number we should think about in terms of achieving that target?

Well, if you do the math based on the guidance that we've provided, we look at our gross margins to remain in the range of 60% to 62%. Obviously, we'll continue to make efforts to improve on that profile. So for us to get to 25%, the operating expense as a percentage of revenue needs to be below 40%. So we've told you about the R&D investment guidance for the rest of the year. For SG&A, we'll take a step down -- a large step down in Q2. And for the rest of the year we're going to look for opportunities to create further efficiencies on that P&L line.

And with gross margin at the higher end of the target range, is there any reason why you can't sustain gross margins near 62% or -- in other words I guess what factor should we think about that would drive gross margin back to 60% to 61%?

Clearly, it's a function of product mix. I think with the product portfolio that we have today and the revenue growth we expect to see in each product line, we are fairly comfortable with the range that we've provided. We are continuing to look for ways to be at the high end of that range and possibly exceed that range, so those efforts will not cease. Whether it's going to be in the middle of the range, the high end of the range will depend somewhat on the mix as we go through the year.

Just lastly, on the expense structure, you gave detailed guidance for SG&A and R&D. If the revenue growth doesn't materialize to your expectations as the year progresses, do you have leverage to cut SG&A and R&D more than you have already forecasted today?

What we have attempted to do is make the structural changes in our support groups that are consistent with the exit rate that we are expecting in 2007. So we've had a philosophy that it didn't make sense to cut expenses dramatically below where we thought we would be in roughly six to nine months. I think our view is that we'll hold expenses in this area as long as we feel confident about the exit rates. But we'll take further looks at operating expenses if we don't believe that's achievable.

Great. Thank you.

Thank you. Next, Craig Ellis, Citigroup, your line is open.

Thank you. First, welcome back, Shannon.

On the expense commentary that you have provided, Bill -- is the benefit of moving into one facility incorporated in the expense outlook or would that be incremental to the commentary that you have provided so far?

No, it is included in our expectations; in the second and third quarter we will enjoy some benefit from the transition services agreement where we're able to offload some expenses to NXP as we help them transition to their own facility. In order to maintain that lower level of operating expenses as we get into fourth quarter, and transition into next year, we will have to accomplish this consolidation into our headquarter facility, get out of some of the outbuilding lease expense, and continue the work we've talked about already in terms of restructuring efficiencies.

Okay. And then switching to the near term revenue outlook. Necip, it sounds like you're expecting growth in the second quarter in all the businesses except ProSLIC. Is that an accurate read on your comments?

Fairly accurate. I think we're going to see sequential growth in our microcontrollers broadcast business. Slight sequential growth expected in the embedded modems. Voice business, as you pointed out, we are looking at a roughly flat quarter in Q2.

Okay. And then lastly for me, as you think about portfolio strategy, Necip, and a potentially putting the cash that you have to work, can you just comment on how you look at the opportunity to either add further scale to businesses that you currently have or to augment your current portfolio and market and customer mix by adding incremental lines of business?

That's certainly part of the consideration. Strengthening our existing businesses either by adding a complementary product portfolio or a business that would further extend our product portfolio within that business is certainly under consideration.

And do you have a preference for either of the two at this point or is it going to depend on the targets that you see?

I think we're open to do both. If we find right business that strengthens our existing businesses, that's to some degree preferable. I think we have a set of businesses today that can organically grow above and beyond the industry growth rate. So to add further strength to those businesses via adding customers or complementary product portfolios is very desirable. Okay. Thank you.

Thank you. Next, Satya Chillara Pacific Growth Equity, your line is open.

Hi. Good morning guys.

Good Morning.

Can we, Necip, can you talk about areas that you are looking at? There are not a lot of opportunities in terms of public companies and so on. In terms of mixed signal area what are the top three areas you're looking at that would be incremental to your business models here?

I think pointing out certain segments or product areas, publicly would not be advantageous to what we're trying to do, Satya. I can tell you that the businesses that we would look to acquire would need to have a gross margin profile that is in sync with the new business that we created here and need to have a long term sustainable business model in terms of sustainable competitive advantage, good synergy with our core competencies and so on. But at this point I'd like not to talk about specific product areas.

Understood. Maybe I ask the question little different way. Is this opportunity all the opportunities you're looking at mainly from Asia or are you still sticking with the North American based operations here?

That level of detail I'd like not to provide other than to say we have an open mind about geographies. We are really more interested in the makeup of the business that we would look for. One way -- one other way to say this is if we indeed engage in any meaningful acquisition, the resulting company would still very much look like Silicon Labs.

Got it. Necip, can we quickly talk about the Bluetooth FM and stand alone FM tuner business. First of all, how is your relationship with ST? What portion of your business is going to STMicro to package Bluetooth plus FM combinations and how much of your stand alone business, and what do you expect for second half please?

Okay. I think I can say that our knowledge, at this point in time the only combo solution shipping in any volume is through our partnership with ST. So with all the talk about Bluetooth FM configuration for the last several quarters, we are the only company who is shipping into combo solutions in hand sets.

This is still a very small portion of our revenues. A very large majority of our audio revenue is coming from stand alone FM tuners. Over the course of the year, the mix will start to change as we start seeing revenue from the new products that we've announced such as the transmitter. The transmitter actually is going to start contributing to our revenues in the second quarter of this year.

And we are also making a very concerted effort to diversify our customer base, especially with the new products that we've announced. I can tell you, for example, of the dozen design wins that we've won with our transmitters, 11 of those are with non-hand set customers.

Okay. So last question on the FM tuner as you exit '07, do you care to comment on NXP, what market share you will be ending up if you look at NXP together what kind of market share would you be exiting the year at?

Well, I think for 2006 as a whole, we believe we've achieved double digit market share in excess of 10%. I think our expectations for this year is for a significantly higher market share. We expect our unit volumes to at least double over 2006, and we are still very comfortable with the guidance of 50% revenue growth that we've provided.

Okay. Thank you. Next Sandy Harrison, Signal Hill, your line is open.

Just a quick follow up on some of the earlier questions. Could you help us understand a little bit more about the gross margin and sort of the revenue profile of the relationship with the ST? Is it a higher margin business? Could it be a higher volume? Just trying to get a little bit more of the dynamics to that relationship?

In that business arrangement, we are getting royalties from ST. So it's pure margin for that relationship.

Okay. And then just as you look at some of the microcontroller offerings, you've been successful in providing standard product, if you will, or preprogrammed product or hard wire product. What are some of the newer segments you think you could go after in that product where there's an opportunity to capture some real market share and real revenue dollars?

If you look at our first quarter revenues, for example, Sandy, the growth really came from a very broad based customer base. So it was not driven by a single vertical or two. We have added significant first time customers in the quarter that help us achieve the record revenues.

In general, I would say that our small form factor microcontrollers are gaining a lot of traction in those applications where space is premium at the functional density required. The USB family of microcontrollers is also ramping very nicely. And just to wrap it up, I can tell you that all the product families we have in our microcontroller business today, even the oldest set of products, are still growing.

Okay. And then lastly if you didn't hit this earlier; if you did, I apologize. The power over ethernet controllers -- where you see that business at the end of the year? Where you see the opportunity with that? Is that something you expect do grow as the market grows? Is that something you expect to increase your market share out of What's some of the characteristics of that segment for you?

Sure.

Power is an area that we didn't specifically talk about as a segment today because the revenues from these products are still very modest. But it is part of our R&D investment. We have focused investment dollars about a year ago for power on two areas, one is power over ethernet and the other is isolators. I think we started getting attraction with the isolators. There's modest revenue coming in. Power over ethernet is still at a stage where we are sampling to our customers and trying to generate design wins. We do not expect more than sampling revenue for POE products in 2007. But it's among those products I alluded to when I said certain products will generate revenue for us in 2008.

And what sort of margin contribution do you look at? Do you think they will be above the corporate average? At corporate average? What are your expectations once they're up and running?

On a product family basis, we do not provide gross margins. However, I can tell you that for our product portfolio at the corporate level, the margin, gross margin disparity between different product lines is rather small.

All right. Thank you. Next Craig Berger, Wedbush, your line is open.

Good morning. Thanks for taking my question. First of all, housekeeping, tax rate going forward does that stay in the 23% range?

I think we previously guided, Craig, to 22% to 24%. We've come in at Q1at the low end of that range and that's probably where I would guide you to at this juncture.

So no change there. With respect to the FM tuner, are there any major new customers taking initial shipments in the remainder of the year?

On the hand sets side, we've said before that we're engaged with all the top hand set makers various stages so we are expecting revenue from all of them in 2007. And we've incorporated that into our guidance. There are new customers, or growing customers, on the non-hand set side where we are selling our FM tuners into navigation devices or MP3 players.

Okay. And then staying in the broadcast family, you alluded to the a little bit with the FM transmitter commentary. How about some of the other products? What's the timing and magnitude of revenue growth in some of the other broadcast transceiver, AM/FM receiver?

FM transmitter will start contributing to revenue in Q2. More meaningful revenues in the second half of this year. Transceivers and AM/FM products will likely not contribute any meaningful revenue this year. They are part of our growth story for 2008.

And what's the ramp profile look like for that stuff? Should we just look at the historical FM tuner ramp as a baseline comparison?

Two dynamics there. Customers that we already have in the applications that we are serving have a very clear upgrade path from the FM tuner to transceiver because we are providing [pre-]compatible devices as we move up in the road map. So that transition should be relatively quick.

On the other hand, with AM/FM solutions, the customer base that we are targeting is different than we have served until now, and with longer design cycles. So that ramp will likely be slower.

Excellent. Moving over to microcontroller, I want to reach back and see if you guys can dig up a metric on number of development that's been shipped or at least growth on the year over year basis or any other help us understand the growth trajectory in that business.

Sure. I don't have the exact numbers in front of me, but I know that in 2006, we've had a record year in terms of development kits shipments. I think in Q1 of this year, our run rate is approximately 5000 kits shipped. That is compared to lifetime number in the order of 70,000.

One thing I can tell you about our sales activity for microcontrollers is that we have recently increased the number of seminars we are offering worldwide and of course, there's a high correlation with the seminar activity and development kit shipments and ultimately design wins and revenue. All of those metrics that we look at on a quarterly basis are headed definitely in the right direction.

Great. Let me ask one more and then I'm finished. On the imbedded modem products there's been some suggestions that there could be an inventory build going on in the cable set top box market, where I believe you guys do some embedded modem shipping into that product. Do you see that possibly impacting shipments in Q2 or Q3?

With our customer base with embedded modems we are not seeing any inventory builds; as a matter of fact, for our business, we have coming at the high end of our expectations and this was partly driven by up sides on the embedded modems.

Thank you very much.

Thank you. Next, Jeremy Bunting Thomas Weisel Partners. Your line is open.

Just a very brief one. Of the five business groups which you've defined here, are you able to rank them in expected growth rates say the next 12 months? What order?

Yes, Jeremy. In 2007 we expect the broadcast business and the microcontroller business to provide the largest revenue growth in dollars over 2006. And on a percentage growth basis, our timing business will be up there, but that's from a relatively modest base.

Thanks very much.

Thank you, Jeremy.

Thank you. Next, David Wu, Global Crown Capital. Your line is open.

I've got two quick one, the first one is acquisition -- potential acquisition of private companies or divisions of multidivision businesses out of the larger companies. In terms of the criteria that you set, are you adverse to a dilutive deal? In other words, if they are as good as you want it to be, the price is not going to come cheap.

I think the expectations in that regard goes up as the size of the acquisition goes up. So I don't think we would make a meaningful acquisition that is dilutive or we would have a very high bar if we chose to do that. I think for smaller acquisitions, high growth businesses that are still in the early stages of their revenue generation, they tend to be dilutive. But we would want to see that business to become accretive in a very short period of time. When I say that it's a number of quarters. Not unlike the experience we've had when we acquired the microcontroller business a few years ago. That business was dilutive at the time of the acquisition but turned accretive in two or three quarters as we helped that business grow their sales through our channels. And something like that, you know, a successful acquisition like that we would like to duplicate.

Okay. Are there any geographical limits to that? That was a very convenient one. They were both companies in Austin. I was thinking about whether a non-U.S. or non-Texas deal would make sense for you in a new configuration. If it's a big deal, I assume a little debt on the balance sheet is not something you would object to.

In terms of the geography, we're certainly not limiting our search to Austin or Texas. But we are mindful about the integration challenge. Last year we engaged in a couple of small acquisitions that we were able to integrate very successfully, very quickly. And those were largely international acquisitions. So we don't mind doing that. Our criteria is really around the business model and the competitive advantage those businesses have.

Okay. I guess a quick one. On the -- when I look add your mixed signal business in Q1, the numbers were not broken out the right way because they included FM in your cellular business in Q4, a good part of the FM. On the apples to apples basis, what was the growth rate on your mix signal business?

Our business over Q4 of last year was down 1% sequentially. We had a record revenue in that -- in our new business in Q4, and we were down a percent from that.

Okay. Thank you. Our final question comes from Tayyib Ali Shah Longbow Research, your line is open.

Hi, guys. Congratulations on improving the profitability. My question is on the FM tuner business, can you give us an idea of what ASP declines we are seeing in that business and do you think you can maintain your 62% margin if the ASP in that business goes below 60% this year?

Well, when we provide the gross margin target range for our business, we have certainly incorporated a very significant ASP reductions for the plain vanilla FM business going into hand sets which is a portion of the broadcast business. We've been expecting significant reductions in ASPs for a long time. And for 2007, you know, the average ASP into the hand set market is certainly below a dollar. But we have a very attractive cost basis with our FM tuner. So we can really go and compete effectively with the incumbent and maintain our corporate gross margin target.

And then another question about margins if you can provide any color on what kind of margins you are seeing in the FM tuner business versus the rest of the business. That would be very helpful. And if you can comment on how do you maintain your current margin profile if the FM tuner outgrows the rest of the business?

As I've said earlier, we're not going to be able to provide gross margin targets for every product line. I think your expectation, or your assumption, of FM tuner gross margins being lower than the corporate average is correct.

However, we, as I mentioned, are adding to our portfolio of broadcast products, the transmitter, the transceiver, the AM/FM, these are all higher value products where we have a unique advantage over the competition. So the blended ASPs and gross margins would still support the gross margin range we're talking about at the corporate level.

Thank you. And finally, anything you can say about the progress in building on the beachhead you've established at one of the largest hand set OEMs for your FM tuner business and displacing the major competitor there. That would be very helpful.

As I mentioned earlier, we're engaged with all the top hand set makers and we expect to see revenue from all of them in 2007. Once we establish ourselves with any of those big hand set makers, obviously, our goal immediately becomes expanding our market share. But anything in that regard, will really affect positively our revenues in 2008 because most of the models for 2007 at this point are decided upon.

Thank you very much.

Thank you.

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