Silicon Laboratories Inc (SLAB) 2007 Q4 法說會逐字稿

Thank you for standing by. Welcome to the Silicon Laboratories fourth quarter earnings conference call. At this time, all participants are are in a listen-only mode. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn today's meeting over to Shannon Pleasant. Thank you. 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, the reconciliation of GAAP to non-GAAP financial measures, details on discontinued operations, and other financial measurement tables, are now available on the Investor page of our website at www.SILAB.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 800-839-2341.

I am joined today by Necip Sayiner, President and Chief Executive Officer, Bill Bock, Chief Financial Officer, and Paul Walsh, Chief Accounting Officer. We will discuss our financial results and 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 presentations 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 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 materially 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 in early February, that identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Also, the non-GAAP financial measurements which are discussed today, are not intended to replace the presentation of Silicon Labs GAAP financial results, we are providing this information because it may enable investors to perform meaningful comparisons of operating results, and more clearly highlight the results of core ongoing operations.

I would now like to turn the call over to Silicon Laboratories Chief Executive Officer, Necip Sayiner.

Good morning, everyone.

In February of last year we stated that we believed the divestiture of our cellular business, would allow us to deliver on our target financial model more quickly, and I set a goal to hit 25% operating income by the end of 2007. We achieved 26% in the fourth quarter.

We set year-over-year growth targets for our major product lines, and met or exceeded those targets for our MCU, broadcast, timing and embedded modem products. This resulted in a 17% increase in 2007 revenue, far in excess of the industry's growth rate.

We plan to further diversify our product and customer base. We increased the number of MCU customers by 15% in 2007 to 11,000. We increased broadcast revenue from non-handset applications to 50% in Q4, with 20% coming from new products.

We also committed to control operating expenses. We reduced OpEx from over 50% in 2006, to 43% of revenue in 2007, and we promised proforma earnings expansion. In Q4, earnings per share increased by over 140% compared to the same period last year, and earnings for the full year increased by 65% over 2006. I believe our 2007 results demonstrate that we do indeed have a powerful business model.

Bill is now going to cover more detail on the financial performance. Bill?

Thanks, Necip. We again exceeded expectations on virtually every measure. The Company delivered record revenue of $100 million in the fourth quarter, a 34% increase from the same period last year, and revenue of $337 million for the full year of 2007, representing a 17% year-over-year increase. Earnings for the fourth quarter also exceeded expectations, and proforma earnings represented a record for the business.

I will begin with the GAAP results for the quarter. Gross margin was 63.5% of revenue. Research & Development investment was $21.5 million, and SG&A expense was 27.6 million. Other income, principally interest income on invested cash, was $6.3 million. The tax rate was 23.5%. The resulting total GAAP earnings per share from continuing operations on a fully diluted basis was $0.28. For the full year, earnings per share from continuing operations was $0.70, including the gain from the sale of our cellular business, 2007 fully diluted GAAP earnings per share totaled $3.64.

Our non-GAAP adjusted financials that follow exclude approximately $800,000 of a one-time charge, related to the consolidated of our facilities, and $11 million of stock compensation expense. This is a slightly higher number than historical quarters, and we expect stock-based compensation to average around $10.5 million quarterly in 2008. Non-GAAP gross margin increased to 63.9%, exceeding the high end of our range. This was due in part to better than expected margins for our broadcast products and favorable product mix.

All of our major product categories delivered quality margins in the period. While we are pleased to see this type of margin expansion in a single quarter, we continue to believe that the business will more typically operate within our target range of 60 to 62%. Operating expenses were slightly lower than anticipated, at 37.6% of revenue, with R&D totaling 18 million, and SG&A totaling 19.6 million. Higher variable compensation expense, and an increase in legal fees, were offset by savings realized on mask costs, and fewer new hires than forecast in R&D.

The increased revenue and margin improvements, we have discussed resulted in operating income of $26.3 million, or 26.3% of revenue. This is a major accomplishment, clearly demonstrating the leverage of our high gross margin business, and allowing us to actually exceed our target model and operating performance.

Wrapping up the income statement for the fourth quarter, Other income in the period was $6.3 million, down slightly due to reduced cash balances as a result of our share repurchases, which I will comment on in a moment. Our non-GAAP income tax rate was 22%, representing year end tax reconciliations that resulted in a full year tax rate of 16%. However, going forward, we continue to anticipate that our basic tax rate for the Company will remain about 20%, as we have guided previously.

Income from continuing operations, therefore, was $25.5 million, or 25% of revenue. Earnings per share from continuing operations came in at $0.46 for the quarter, and $1.30 for all of 2007. As Necip mentioned, this kind of improvement in a matter of quarters is a significant accomplishment for any company in our sector.

Turning to the balance sheet, Accounts Receivable decreased to $51.2 million, primarily driven by better linearity in the quarter, versus that achieved in the prior quarter. Days Sales Outstanding dropped to 46. We ended the quarter with inventory up slightly, but within our target range at $28.6 million, or about 5.1 turns. Inventory in the distribution channel was stable, increasing slightly to 48 days.

Capital expenditures for the year were approximately $12 million. Our capital expenditures requirements are relatively low, now that we have completed the move of all manufacturing activities offshore. We expect 2008 capital expenditures to be in the range of only 10 to $15 million.

Cash and equivalents declined to $573 million at year end, a decrease of 65 million from the end of the prior quarter. During the fourth quarter, we completed share repurchases totaling $112 million, or 2.9 million shares. We have now completed over a third of our $400 million authorization in only 5 months. I believe this clearly demonstrates our commitment to fully executing on the program. The fourth quarter also demonstrates strong, positive cash flows from operations, a performance characteristic that Silicon Labs has long enjoyed.

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

Thank you, Bill. 2007 was a critical year for us. We achieved a number of key milestones, as we executed to our strategy of building strong vertical businesses, complimented by high margin, horizontal broad-based businesses. This type of strategy offers an attractive combination of growth and profitability. Our broad-based businesses, which have become a meaningful piece of the portfolio over the last few years, continued to grow far in excess of the market. The microcontroller business ended 2007, up 40%.

Q4 was another record quarter for the product line, with double-digit sequential revenue growth exceeding our expectations, due to strong seasonality for consumer devices. Our small footprint devices, which lead the industry in what we call functional density, are still the biggest success story in our MCU portfolio. We added more products in this category during the quarter, and we believe we have the leading portfolio of small, high performance, mixed signal MCUs for space-constrained applications.

We shipped more than 7,000 development tools during the fourth quarter, and had solid design win activity, both of which are strong indicators of future growth. This product line is benefiting from differentiation, a large TAM, and cross-selling opportunities with the rest of our portfolio. We plan to accelerate the expansion of the product line in 2008. In order to reach our goal of addressing 50% of the $5 billion-plus 8-bit MCU TAM. At this point, we believe the MCU business could continue to grow at 35 to 40%, as it has over the last several years.

Our timing business grew at a similar rate for the year. The product line had a large step-up in revenue in Q4, driven by robust demand for our clocking products, and a strong ramp of our oscillators. We added a number of new revolutionary products in 2007, that will be the foundation for growth in 2008. A strong pipeline of design wins, continued CapEx spending by carriers, and penetration of broadcast media, test and measurement, and other infrastructure markets, are expected to drive strong double-digit growth of 40 to 50% this year.

The broadcast business overall grew far in excess of our 50% target, essentially doubling in 2007. Growth was driven in part by the adoption of our FM tuner into hundreds of handset models. More significantly, our non-handset business grew even faster, through the successful penetration of a number of portable applications with our FM tuner and FM transmit products. And in the fourth quarter, strong demand in portable navigation devices and MP3 accessories, were largely behind the revenue upside.

By continuing to pack more features into an industry-leading footprint, our broadcast audio family is the leader in both performance and size. We ended the year by our own estimates at about 25% market share in handsets, and greater than 50% market share in portable navigation devices. We continue to see strong momentum behind existing and new products. In Q4, we secured 115 new design wins for the broadcast family, about half in handsets, and half in non-handset applications.

The AM/FM receiver ramped into production as expected in a variety of applications in Q4. A high end cable radio, a portable radio, and an iPOD entertainment system, and recently the first handsets offering AM radio were announced, validating the demand for this functionality in cell phones. These examples illustrate the broad applicability of the AM/FM product line to a number of large markets.

In addition to the success we are having with the current portfolio, we have also announced several new addition, including support for weather band emergency service broadcasts, and short wave and long wave frequencies, popular in Europe and Asia. The expanded portfolio increases our available market, and will allow us to grow the business in higher margin applications. This year we are anticipating that the growth in the non-handset business, will more than offset ASP declines and competitive pressures we expect in handsets, enabling the business to grow another 20 to 30%.

Our embedded modem business was relatively flat quarter-to-quarter in Q4, but was a solid contributor in 2007, growing by 5%. We estimate that we have modestly increased our market share in set-top boxes in 2007, offsetting ASP declines. We continue to see healthy demand among set-top box makers, along with growth in fax modem revenue. As a result, we remain confident that this product line will be a stable, highly profitable business in 2008.

Our voice business was about flat sequentially in the fourth quarter. Improved demand was offset by ASP declines, putting some pressure on this business. However, an expanding footprint of voice-enabled broadband modems indicates that the long-term trends are still intact for the residential market. We also expect to see our central office revenue begin to develop in 2008. Net of these trends, our voice business is expected to return to growth in 2008, increasing modestly from 2007.

Mature products, which have gradually become a very small piece of our business, representing around 10% of revenue in Q4, are expected to decline steadily this year. The growth of our investment business has far overshadowed the declines in these products, and we are expecting that will continue to be the case. So in summary, Silicon Labs is, and will continue to be a growth story. As we have stated before, we believe our organic portfolio can drive 15% annual revenue growth. We are focused and we know how to win.

Our products continue to grow, outgrow their end markets, increasing share. We are executing, and our performance reflects that. We expect our operating income to remain strong throughout the year. We have a solid pipeline of new products that we plan to launch in 2008, that will further fill out our portfolio, and set a strong foundation for the future.

And lastly, we make our decisions based on our long-term strategic goals, and we will continue to drive our business to optimize shareholder value. We have a number of promising areas targeted for additional R&D investments this year, and we will make these investments mindful of maintaining the profitability measures that we have worked hard to achieve. We realize that there is significant uncertainty in the economic environment, so we will be closely monitoring the health of end user demand, as we commit these incremental R&D investments.

At this point in time, we believe our customers and distributors' inventory levels are relatively lean, and remain well managed. Near-term demand trends are consistent with seasonal order patterns, that are similar to what we have seen in the past. With a typical seasonal decline in our consumer-oriented businesses, we are expecting Q1 revenue to be in the range of 93 to $97 million. We are expecting gross margin to be near the high end of our target range of 60 to 62%. We anticipate operating expenses in the first quarter will be impacted by salary increases, resumption of Social Security related payroll taxes, and new hires in R&D.

As a result, R&D spending in the first quarter is expected to increase, and SG&A expense, on the other hand, is expected to be relatively flat. First quarter net income per fully diluted share on a GAAP basis is expected to be $0.17 to $0.19. Non-GAAP EPS excluding a noncash charge for stock compensation is expected to be in the range of $0.34 to $0.36.

We would now like to take your questions. Shannon?

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.

All right, thank you. (OPERATOR INSTRUCTIONS) First question comes from Craig Ellis, Citi. Your line is open.

Thanks, and congratulations on the strength in the results. Bill, can you just quantify the degree to which the gross margin upside in the fourth quarter was driven by broadcast versus mix, how did that shake out?

The principle drivers were that the broadcast margins were better than we had originally forecast. This had a couple of components. One is that ASPs held up in the quarter, better than the relatively conservative forecast that we had entering the period.

Perhaps more importantly, the initial shipments of new products, transmitters and the AM/FM radio, helped to prop up the margins for the overall product line. In addition, we had some one-time cost savings that were related to the increase in volume in the period. It really led to an exceptional gross margin result in the fourth quarter.

And so are you saying that the broadcast benefit and the one-time cost benefit were about equal, or was one significantly greater than the other?

They are similar.

Okay, all right. And then Necip, as we look at the business on a go-forward business, it would seem that given the dramatic increase that we saw in the fourth quarter, and with the shift away from consumer, I would think that would be more positive than negative for gross margin. So how do we reconcile some of the challenge you have going into the first quarter with the gross margin guidance?

You know, we operated the business consistently through 2007 up until the fourth quarter, in our target range of gross margin. As Bill mentioned, we are certainly benefiting from the increased volumes in the business, as well as the shift to newer products, and we are likely to enjoy the position we have with our customers, with those new products.

Much of the upside in the second half, particularly in the broadcast business, was driven by a strong ramp of the new products that brought strong margins with it, and obviously addressed the consumer market, non-handset markets in particular. And that is precisely the segment we think is going to be seasonally lower in 1Q over 4Q, and enhance the impact on the gross margin.

Okay, and then a follow-up would be, as we think about your desire to grow R&D, as you support new product programs, can you provide a little bit more color quantitatively, on the pace at which you would like to grow either staffing or dollars, or both?

Sure. I think at a very high level, when you start looking at things on an annual basis, our target from this point on, would be to grow R&D investment commensurate with revenue increase.

All right, thanks.

First order of guidance we can provide to you is to look at our revenues for 2007, and based on what you are projecting the revenues to be for 2008, take a similar view of R&D investment increase. And SG&A increase will be modest compared to the R&D investment increase.

Got it. Thanks, guys.

All right, thank you. Next Arnab Chanda, Deutsche Bank, your line is open.

Hi, thanks. Couple of questions. Your operating margin, 26% is actually higher than your longer-term goal. Is that something that we expect to be holding in 2008, or is it likelier to come down because, Q4 was seasonally stronger, and we expect that to kind of taper off in the first part of the year?

That is a good question, Arnab, and I think that this quarter really represents what we have been talking about all year, and that is that we think this business has the potential to operate at model performance levels, and we are going to have quarters like the one we just reported, where we are above model, and we are certainly going to have quarters where we are below 25%, and I do think that that is the case as we look into the first half of next year.

As we see the seasonal dip in volume associated with the consumer markets, combined with seasonal increases in spending, related to our annual wage increases, and the resumption of Social Security taxes, and other related costs. So I don't think we will see this level of profitability in Q1, but we are certainly trying to manage the business, such that our ability to attain this level of profitability in the second half of next year is intact.

Thanks, Bill, and then a question about your new product. It seems like as you are kind of going away from your legacy businesses, some of the growth rates are accelerating. However, we are also in kind of a more uncertain economic environment. If you look at your products today, what do you think are going to be the primary growth drivers for 2008, as you see today, for the next 12 to 18 months?

Arnab, I think the product lines that will drive growth for our business in 2008, are the same product lines that provided the growth for us in the second half of '07, namely the broadcast business, the microcontroller business, and timing business. All of which took a very sizable step-up in Q4 sequentially over Q3. And we expect that relative trend to continue into 2008.

Thank you. Last question maybe for Bill about the buyback program, you exhausted the buyback program somewhat. There is still obviously quite a bit left. What criteria are you using to sort of use it? Is it driven by stock price movement, or is there a certain amount you want to spend every quarter? If you could talk a little bit about that. Thank you.

Arnab, you could observe in the fourth quarter that we stepped up the program significantly, and this reflects the softness that occurred in the market, and what we thought was an excellent buying opportunity.

I think as you look into the first half of the year, we will manage our program in a similar fashion, and be more aggressive buyers at what we think are attractive prices, and perhaps less aggressive on spikes, but the commitment to execute the program, I think, has been demonstrated now over the last two quarters, and we expect to continue to be in the market, and executing against the $400 million authorization as we go through the year.

Thanks, Bill. Thanks, Necip.

Thank you.

Thank you. Next, Srini Pajjuri, Merrill Lynch, your line is open.

Thank you. Bill, I guess on the gross margin, going back to 60 to 62% in one quarter seems a bit aggressive to me. I am just wondering, are you seeing any more price pressure in recent weeks in some of your product lines, or are you just being conservative here?

Well, I think that it is both. You know, we have been dealing with anticipated price pressure from competition. Typically other companies offering combo chips into the handset market, those competitors continue to address the marketplace, and we expect that that pace will only increase in 2008.

I also think that it is prudent to be conservative going into the new year, given all of the talk about the economic environment, and the fact that this spike in gross margins is a one-time event, that we have only seen in the most current quarter. So we are looking into next year and trying to take a prudent course, and I think that the guidance that Necip indicated, is to feel comfortable forecasting the high end of our target range, but I think for now that is the most appropriate place to be.

Okay, and then on the inventory front, you said the disty inventory went up slightly. I am just wondering going into a seasonally weak period, why the distys are taking their inventories up?

Well, the inventories, the summer of '07 for us, were very low from historical measures, but also to our comfort level. So in 3Q, we wanted to increase the inventory levels and it went up. And the increase in spite of the strength in the fourth quarter went up only slightly in the disty channel.

As I mentioned in my prepared remarks, Srini, what we see at this point in time with our customers and distributors inventory levels is that those are well-managed, and on a relative basis lean, certainly we don't see the same situation that we have seen 12 to 15 months ago, when the industry went through an inventory correction.

Okay, and Necip, do you still expect the FM business to grow north of 25%, but you also said that you were seeing some ASD pressures. Can you layout in terms of where the growth will come from, both in handset, if it is penetration, share gains, or any new applications also in the non-handset market? You talked about, you know, portable navigation devices and MP3 players. If you can expand on that, and maybe give us a little bit more idea where you see growth coming from in 2008? Thank you.

So in the near term, just in the first quarter, if you look at the broadcast business, we expect the revenues that we drive from handsets to remain about flat to fourth quarter levels, but we are going to see a decline in the consumer segment, particularly in personal navigation devices and MP3 accessories, particularly the PNDs were very strong, as I am sure you are aware from other reports for the industry in Q4, and we benefited from that, having gained a sizable market share through design wins earlier in the year.

And going into 2008, I feel that we are well-positioned with our customers, both on the handset side, as well as the non-handset applications. I think that we are looking at a healthy pipeline of design wins on both sides. We expect that we are going to continue to maintain our share.

The AM/FM is just starting to contribute to revenues, so that will become a larger contributor as 2008 unfolds. We are getting more and more design wins with that product for a variety of applications, and it is also encouraging to see that we are seeing signs of interest and use of our AM/FM technology of the AM/FM functionality in handsets going forward. So these are going to be the growth drivers for the business in '08.

Thanks, Necip.

All right. Thank you. Next, Adam Benjamin, Jefferies, your line is open.

Yes, thanks. Just to further drill down on the broadcast segment, you know, you talked about 100 design wins on the handset side. Can you give us some better view into the customer base there, if there are a couple customers representing a significant portion of the handset piece of the broadcast segment, and then you have previously talked about the percentage break-outs of broadcast versus the portable audio side. You know, can you talk about, you were 50/50 exiting the year. Can you talk about where you think that could be as you exit '08?

Okay, Adam. Just a clarification first. You know, I mentioned 115 design wins for the product line. That is about halfway split between handsets and non-handsets. And really that represents an increase in the number of design wins over the prior couple of quarters, so we continue to be positioned very well with the handset OEMs, and our customer base has been and continues to be pretty broad. I think in 2008 we will be able to say that all of the top handset OEMs are our customers for our broadcast products.

On the non-handset side, obviously we are getting design wins with a set of new customers that we haven't served before, particularly with AM and FM, AM/FM solutions. That will continue at a high level to drive the portion of revenues that we get from non-handset up. I don't have a number to give you as an exit rate for 2008, but I would imagine that, it will be at the 50% fraction or higher for the non-handset.

Okay. Maybe asked a different way, if you look at where your handset percentage of broadcast exits the year, and if you are saying it is going to be roughly flat in Q1, on a year-over-year basis that is up a decent chunk, almost 50%. Are you based on the 20 to 30% growth for the total broadcast business for the year, are you looking at that number to be kind of flat as you go throughout the rest of the year?

Part of the guidance that we are providing you here at least for the broadcast business, where the design win cycles are short, has to discount some uncertainty about the second half of the year. We have talked about the economic environment earlier. There are some uncertainties in that environment.

In the near term, we are not seeing that in our order book, but are mindful of that, especially in North America. So there is some lack of visibility for that business for the second half. Therefore, we are providing what I would call a conservative guidance, in terms of the growth rate for the broadcast business. Qualitatively we are positioned with our customers, both existing and new, as well as we have ever been.

Just to be clear, the conservatism is based on the economic backdrop, and not on the competitive dynamics?

The competitive dynamics will enter only from an ASP point of view, as Bill articulated earlier. We continue to see significant ASP pressures, particularly for the FM tuner business in handsets. I think we have dealt with that relatively well in 2007, but those pressures, I believe, are going to continue to be with us in '08.

Great, thanks a lot.

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

Thank you for taking my question. Back on the handset business, could you guys describe the order activity at your Korean accounts versus some of the other Top 5 OEMs?

What I can tell you is that the attach rates, particularly for the receive FM tuner function, and especially in low cost platforms have seen a measurable increase in the second half of '07 and the attach rate particularly is going up with the OEMs in Korea, and we have had good market share, and good design win momentum at these accounts. So we certainly benefited from that trend in the second half, and that is intact and we are still positioned well with those customers going forward.

And Necip, you mentioned earlier that, you expect to be shipping all 5 OEMs this year. Could you give us a little bit better timeline as to when you think that will take place?

I am not really at liberty to provide more details at this point, because that ramp will be driven by the customers' announcements of those models and platforms. So stay tuned.

Okay, fair enough. Just lastly, you know, Bill, on the cash balance, if [Aero] took an impairment charge on some longer-term marketable securities that were impacted by the credit mess, have you guys reassessed the fair value and liquidity of your cash and marketable securities?

We have, and I am pleased to say, I don't think we have any exposure to mortgage-backed securities that would cause us any difficulty.

Great, thanks a lot.

Thank you. Next Auguste Richard, Piper Jaffray, your line is open.

Yes, thanks for taking my question. Could you talk a little bit about, again the broadcast position, and potentially new products for the TV market and when those might come out?

Well, we haven't made any announcements in that regard. You know, clearly we had made an acquisition in '06, that brought us the demodulation expertise, so I can tell you that we have the fruits of that investment in the building, but we have not yet made any announcement. Again I have to say, stay tuned.

Okay, thank you.

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

Thanks, I appreciate you taking my call. Couple of questions relating to the timing opportunity. What are some of the applications? You provided some color on some of the other product segments. What are some of the applications where you are having the strongest success with your timing products? And then from that, the clocks versus the oscillators, is there a similar dichotomy in some of the markets with those products?

Sure, Sandy. Previously, the portfolio of products in the timing business, primarily addressed the networking segment, so some of the robust demand that we have enjoyed in the second half of this year came from those set of products from networking customers. Also, one of the newer products that we announced in the year, innovative clocks, the demand for that product is really exceeding our expectations, even though it is really in the very early stages of its lifecycle.

On the oscillator front, you know, the customer base is diversifying very fast. This is a data point for you, in Q4 we had 145 unique customers with our timing products, and that represented a 20% increase just over the prior quarter. So significant momentum, again a lot of networking customers, but especially as we start bringing to market products that address a bigger portion of the TAM, a broader set of customers outside of networking as well.

And just a question on that, is this more Silicon timing devices replacing traditional cans and others, or is this a combination of that, as well as you guys getting market share?

I think we are going to be driving the replacement of quartz-based oscillators with Silicon-based oscillators. Our products provide the same level of performance in CMOS as quartz-based solutions do. So I think we are going to drive this plan, and we are seeing pretty strong adoption from our customers at this point.

Okay, and then a quick question on the MCU biz, obviously without sort of pre-releasing what you are working on, what are some of your thoughts that you are looking towards to markets that you want to expand that product in? In other words, what could we be looking for to see some announcements from new devices there?

Yes, I don't want to take the thunder away from that product line, but I can tell you that, since we are now addressing today about 20 to 25% of that market, and we have publicly stated a goal of hitting 50% of the market by the end of '09, this will generally come from large volume, large revenue, large TAM product line. So especially the couple of products that we will be launching later in 2008 is going to significantly open this up.

We are also building on the existing portfolio, Sandy. I mentioned that we are having a lot of success with small footprint products, and we are just bringing more and more flavors of those products into the market, getting into a different set of applications, just customizing the MCU for additional opportunities.

Got you. Then Bill, a couple quick housekeeping items. As far as expenses this quarter, you had talked about less mass costs than others. As you introduce some of these new products, Necip, that you were talking about, are the mass costs going to increase a little bit, or are they not, or is that already figured into your outlook, as far as same spending on R&D as sort of growth in revenue?

It is factored into those comments. We do anticipate that with increased head count, and increased momentum in all of the business units, we will continue to see new tape-outs and mass costs occurring as we go through 2008, but they are definitely built into the guidance that Necip provided earlier.

So the real leverage you would say to your model going forward in '08, after we get through the seasonal part, would be with R&D spending increasing at the same rate of your revenue growth. SG&A spending increases would be, what, half of revenue growth, which is where your leverage would come from?

We are certainly going to stay very tight on SG&A, Sandy. I think that our goal there is to continue to drive that category of our income statement to lower percentages of revenue over time. So you will see us maintaining very tight control, in terms of head count additions in SG&A, and we will get leverage from that line item in this coming year and next.

Great. Thanks for answering my questions, guys.

Thank you.

Thank you. Next, Cody Acree, Stifel Nicolaus, your line is open.

Thank you. Necip, maybe back on the broadcast segment, you talked about the competitive pricing pressures, specifically competition and pricing pressure coming in, moreso in the handset mode, rather than the non-handset side. What is it right now that gives you confidence that as we push through '08, we don't see more of the similar competition pricing pressure into the non-handset market as well?

You know, different business models, when we are talking about handsets, we are talking about a handful of customers, maybe tens of customers that are buying in very large quantities. With the non-handset, particularly when you start talking about the portable radio, table top radio kind of applications with AM/FM, now you are talking about hundreds or thousands of different customers that are buying it at much lower quantities.

So the business model changes. The sales channel obviously has adapted to that change, but it is a more favorable pricing scenario than you would see with very high volume handsets.

Necip, today is your non-handset revenue, especially with personal navigation and MP3, is that a little more concentrated today than you would expect it to be over time?

Yes, definitely. I think with the introduction of AM and FM, we have opened a whole set of new customers for the Company, that we have engaged over the last six to nine months, and the design wins that we are getting with this set of customers comes to fruition, the revenue base will certainly be diversified further on that side.

And that should ramp throughout '08?

Yes.

Okay, great. Lastly, you have given us some general breakdowns of revenue in the past, with the growth of broadcast and microcontrollers and timing. How does the revenue mix look today? Could you maybe just give us a level set on how this breaks out?

I am not prepared to give quarterly updates on the revenue breakup. I think we have provided a starting point earlier in the year, and have given sequential changes from that. Obviously broadcast and MCU, because of the growth that they have experienced have become a larger portion of the revenue base.

So one thing I can tell you is those growth businesses are probably now north of 50%, and these are high growth businesses, MCU, broadcast, and timing, anywhere from 20 to 40% rate, and the rest is comprised of embedded modems, which have shown some growth in 2007, and the voice business that we expect to grow modestly in '08.

Thank you.

Thank you. Next Tore Svanberg, Thomas Weisel Partners, please go ahead.

Yes, good morning, and a great quarter! A couple of questions. Maybe follow-up on what Sandy asked about the microcontroller business. As you get to that goal of 50% of your TAM, do you really need to work in a completely new architecture, or would this just be some tweaks to the functional density aspect you have to your solution?

I think with the MCU, if I understand your question correctly, we feel that we have a lot more runway with the 8-bit MCU, before we take a big step and address 32-bit applications. Our next, natural step at some point in time would be to address that space also. But given where we are with the 8-bit, and the opportunity that we see ahead of us, at this point in time, we continue to put the incremental investments in just further developing this 8-bit portfolio.

Great, and you mentioned the broadcast business could grow 20 to 30% in '08. How much of that would come from new products and new programs, versus the current run rate of existing programs?

I think qualitatively, I can say a very large majority of that growth is going to come from new products. You know, the products that we ramped in the second half of the year, transmitters, AM/FM and various flavors of the original FM receiver to support additional functions, will drive much of the growth in '08.

Great, and finally, do you have any updates on your power [over Ethernet] business?

Yes, we don't talk about it a great deal because it is still in its infancy, but you know, the design win momentum with these devices look pretty promising at this point, both on the power device side, as well as the PSC side. It will provide some modest contribution to revenue in 2008, I expect, but it is still pretty small that we don't separate it out at this point.

Great, thank you, and great results.

Thank you.

All right, thank you. Our last question comes from Suji De Silva from Kaufman Brothers. Your line is open.

Yes, good morning, Necip, Bill. Congratulations on the quarter! Bill, you talked about R&D growing in-line with revenues. Should we think of '07 as a typical year for your product pipeline development, or is it a little more aggressive, in terms of trying to get products out?

So I am not sure I understood that question. Can you repeat that?

Would R&D grow in-line with revenues typically, or is this year one that has more products you are trying to get out in the pipeline, relative to others?

Yes, I think this year would perhaps be more aggressive than in the past year, but our intention is to continue to invest in these business units and product lines, so you will see a steady drumbeat of new product introductions from Silicon Labs in 2008, and in the years following.

Okay. That helps. And then can you remind us what a typical June looks like from a seasonality perspective, and whether we are somewhat set up for that, given the visibility in the second half is weaker still?

I think what we will do is reserve comments about 2Q to this time at the next earnings call. We clearly have a significant seasonal effect in the first quarter, but we won't have great visibility into 2Q until we are a little bit further into the year.

Okay, and Bill, you talked about gross margin one-time impact from volume, I believe. Can you help quantify what that was this quarter?

Modest, but it certainly contributed to the high level of gross margin in fourth quarter. You might expect you have got a certain level of fixed costs in any manufacturing activity, and when you get an upside in revenue, you benefit from that, and we certainly saw that effect in the fourth quarter, with guidance to slightly lower revenue in Q1, that will be muted.

Was it sort of less than 100 basis points, 50 basis points, sort of that magnitude?

Yes, I don't think I will comment to that degree of specificity.

Last question, handset share, you guys are in a good position here, what do you think your share can go to in the '08 timeframe, for FM tuner specifically? Sorry.

You know, I think our experience with the handset, in general indicates that it is pretty tough to go beyond the 25% kind of market share, from what we have seen from various elements. So I think it is the first degree, I can tell you that we are going to maintain that share. This 25% is our own estimate of course, of the share that we have. But, you know, compared to several quarters ago, there has not been any negative change in our position with the customers, and obviously the increase in the attach rate of this functionality is helping us with the volumes.

Okay, thanks. Good luck in the quarter, guys!

Thanks.

All right, thank you for joining us today. This now concludes our call.