Silicon Laboratories Inc (SLAB) 2008 Q1 法說會逐字稿

Welcome to today's Silicon Laboratories first quarter earnings call. At this time your lines are on a listen-only mode until the question and answer segment of the call. This call is being recorded. If you do have any objections, you may disconnect at this time.

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

Thank you Hope. 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 of our website at www.SiLabs.com. This call is being simulcast, and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 866-446-5477.

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 presentation today will include forward-looking statements or projections that involve substantial risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call. This information will likely change over time. By discussing our current perception of our market, and the future performance of Silicon Laboratories and our products with you today, we 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 may have a material adverse effect on our business, operating results, and financial condition. We encourage you to review our SEC filings including the Form 10-Q that we anticipate will be filed today, that identify important factors that could cause actual results to differ materially from those contained in the forward-looking statements.

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

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

Thanks Shannon. It is satisfying in light of the economic uncertainty in the larger marketplace, to be able to share with you another quarter of excellent results for Silicon Labs. We again exceeded expectations on virtually every measure. The Company delivered revenue of $98.2 million in the first quarter, representing a 33% increase from the same period last year. Operating income and earnings also exceeded expectation for the quarter.

I will first cover the GAAP results. Gross margin was 61.5% of revenue. Research and Development investment was $24.7 million, and SG&A expense was $24.6 million. Other income, principally interest income on invested cash, was $4.5 million. The tax rate was 30.6%, fully diluted GAAP earnings per share was $0.21.

Our non-GAAP adjusted financials that follow exclude $10.2 million of stock compensation expense. Non-GAAP gross margin of 61.8% was consistent with our guidance, and at the high end of our target range of 60 to 62%. We expect margins to remain at this level in the second quarter.

Operating expenses were lower than expected at 40% of revenue. R&D increased sequentially as expected, to $20.7 million, as we added headcount in engineering. We anticipate further R&D headcount expansion in the second quarter. SG&A came in favorable to our guidance at $18.7 million. The improvement in SG&A was due to lower than anticipated legal expenses, which we believe will continue to be favorable to our previous expectations, due to the formal resolution of our legal dispute with Analog Devices.

The strong revenue, strong gross margin, and lower expenses, resulted in operating income of $21.3 million, or 21.7% of revenue. We believe this is an outstanding operating achievement for the first quarter of the year. Operating income, which we view as a primary measure of our financial performance, nearly tripled over the year-earlier period.

Wrapping up the income statement for the first quarter, Other income in the period was $4.5 million, down significantly from the fourth quarter. Our non-GAAP income tax rate was 23.3%, which was slightly higher than our forecast. Net income therefore, was $19.8 million, or 20.2% of revenue, driving earnings per share above our guidance to $0.38.

Turning to the balance sheet, this was a very significant quarter, in terms of structural change relating to our cash position and investments. First of all, we continued execution of our share repurchase plan in a very aggressive fashion. Repurchases in the period totaled $137 million, or 4.5 million shares. In less than two years, our share repurchase programs have cumulatively repurchased 10.5 million shares, utilizing $350 million of cash. We have approximately 120 million remaining under our current authorization.

Secondly, during the quarter the traditional market for auction rate securities faltered, and the Federal Reserve enacted multiple significant interest rate cuts. During the quarter, we reduced our exposure to auction rate securities to approximately $70 million, and reclassified the majority of these remaining holdings to long-term investments. The net effect of the rate cuts and reduced holdings in auction rate securities is a significant reduction in our tax-free investments, and in the interest rate we are earning on all of our investments.

Quarter ending cash and investments therefore totaled $467 million, and continued to reflect a very strong balance sheet position, and more than sufficient corporate liquidity. However, the combination of a lower cash balance, and dramatically lower short term interest rates, implies that interest income in the second quarter will be approximately half that of the first quarter. We also anticipate that the tax rate will remain at the higher Q1 level, due to the loss of tax-free income, and the temporary lack of a Congressional approved R&D tax credit.

Moving on, Receivables and inventory remain in very good shape. Accounts Receivable declined to $46.4 million. Days Sales Outstanding dropped to 42 days. Inventory also declined to $26.9 million. Turns were at 5.6, within our target range. Inventory in the distribution channel was also in our desired range at 45 days.

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

Thanks, Bill. In addition to the strong operational results we delivered in the quarter, we made significant progress on the new product introduction front. Our R&D pipeline is delivering new products at a record pace. We aggressively added to our broadcast, MCU, and timing portfolios this quarter, consistent with our strategy to further diversify, expand our served market, and strengthen our competitive advantage. I will talk more about these new product introductions in the business discussion.

Beginning with Broadcast, I am very pleased with the execution of our strategy in this business. This is clearly not a single product or a single market story. Some have questioned our competence, and the strong potential of our Broadcast business. We have achieved a number of milestones, that demonstrate the sustainability of growth in this business, and should put those questions to rest. First, we have proven we have a strong competitive position in handsets, enabled by an innovative roadmap.

While integration trends in handsets will persist when the economics are favorable, our design win momentum and revenue growth confirm, that our innovative roadmap will continue to thrive in both the low end segment in emerging markets, as well as in new, higher value handsets. Second, we have aggressively diversified the product line and customer base in a very short amount of time, putting us on course to double the product portfolio. This is complemented by an increasingly varied base of customers and applications served.

And third, Audio is only part of the broadcast story. We have invested in Video products that leverage our existing technology and IP. These investments will allow us to develop a growing and further diversified revenue stream for the Broadcast business.

In the first quarter, Broadcast was up 85% over the same quarter last year, and down sequentially as expected, due primarily to seasonal softness in the consumer segment. Handset revenue grew sequentially, in spite of what is typically a seasonally weak quarter for the end market. We enjoyed continued strength from Korean customers, and expect to see additional Tier 1 customer ramps into the second quarter.

Specifically in Q2, we will begin shipping our FM transmitter into Nokia handsets, and both the FM transmitter and the AM/FM receiver into Sony-Ericsson handsets. We have not seen any slowdown in design activity, related to either competitive pressures or economic weakness. We added a record 125 new Broadcast design wins during the quarter, evenly split between new handset models and non-handset applications.

As I noted earlier, Q1 was also a strong quarter for new product announcements. We introduced three new Audio families in Q1. The first FM receivers to support an embedded antenna, enabling FM to be added to any portable device, without the need for an external headphone cable. We introduced a even smaller footprint FM receiver family, that reduces board space by more than 40% compared to competing solutions. And we announced the smallest footprint data receivers to combine RDS and traffic message channels with static GPS navigation maps, to dynamically route drivers around traffic.

Our competitive position and new product in our pipeline, give us confidence that we will be able to preserve our edge in our Audio products well into the future. And as I mentioned, Audio is only part of the broadcast story. We are also expanding into Broadcast Video.

We introduced a video demodulator product in Q1, that is the first in a family of demodulators, tuners, and receivers for Video Broadcast. The new video demodulators are the smallest, lowest power, and highest performance solutions, capable of supporting multiple video standards in a single chip. Supporting DVB-T, C, and H, the new demodulators are ideal for integrated digital TV,s, set-top box receivers, PC-TV add-on cards, and personal video recorders. The new devices are sampling now, and are expected to start contributing to Broadcast revenue in 2009.

Given the range of video broadcast standards adopted in various geographies, it is clear to us that the optimal system partitioning for digital and hybrid fixed television equipment is to use one MPEG processor across platforms, while optimizing the receiver for specific regional standards or unique feature requirements. This allows customers to reduce the solution footprint, and eliminate redundant circuit blocks.

Our road map in the video market addresses this trend, and includes front-end receivers that integrate all circuitry from our input to demodulated output, for both digital and hybrid modulation standards. The R&D investments in this area leverage key technology and IP in our Broadcast group, and the investment needed to bring this roadmap to market, is already comprehended in our current income statement.

Our MCU business was up almost 40% over the same quarter last year, and down sequentially due to seasonal weakness, primarily in the portable navigation market. All business indicators remain healthy, with development kit shipments increasing, and continued design win activity. We began an aggressive lead generation campaign in the first quarter, and continue to add new customers at record levels.

We introduced a new product family of low power, low voltage MCUs during the quarter, that are the industry's first MCUs capable of operating down to 0.9 volts. Based on a very novel architecture, these new MCUs enable portable devices to be powered from a single cell battery for the first time without external components. For products powered by user replaceable batteries, such as wireless sensor networks, smoke alarms, handheld medical devices, remote controls, computer peripherals, and portable audio devices, the S900 family enables smaller form factors, longer battery life, and lower overall system costs.

We estimate the market for low voltage MCUs is about $1 billion. This segment today is served by outdated, mediocre solutions, so we have seen a very enthusiastic response from customers for this product. We expect the low voltage product family to be a significant growth engine for the MCU business beginning in 2009. We also further expanded our small form factor MCU product line, which continues to be among our strongest sellers. We have been adding to this portfolio of MCUs, to address cost sensitive applications, further solidifying our position in space constrained applications.

Finally, we recently announced TS-16949 quality registration, an important achievement that validates our ability to serve the automotive market, a strategic area of investment. We are expecting the MCU business to return to sequential growth in Q2, with some recovery anticipated among consumer-oriented customers, growth in revenue from industrial applications, and the addition of new customers.

The timing business grew double-digits sequentially in Q1, due to strong momentum behind our new products. We secured major wins in key networking OEM accounts, particularly in Europe and North America. We are benefiting from the trend towards multi-protocol systems, that create a strong need for the flexibility of our products. Our success is not limited to the networking space however, as we continue to expand the customer base at a very high rate.

About 20% of our oscillator revenue came from Video Broadcast in Q1, contributing to our diversification into new applications and new customers. We have been investing in our channels for these broad-based businesses, in order to expand our presence in distribution, and our reach into new customers. We nearly doubled channel wins in Q1, compared to this time last year, and timing was a strong contributor behind the acceleration.

Our Foundation businesses are also executing well in their markets. Our Voice business was up sequentially in the first quarter, due to strength in broadband service roll-outs. We are making further progress in the cable market, and secured new design wins in the quarter with a major supplier. Our existing engagements with customers in Europe are expanding, to include additional operators, creating port growth, and increased voice attach rates in residential gateways.

The embedded modem business remains healthy in Q1, particularly in the set-top box market, driven by the transition to High Definition equipment. We' are anticipating increased demand related to high profile sporting events, specifically the upcoming 2008 Olympics. As a result, we are expecting sequential growth in this business in Q2. We realize that there continues to be significant uncertainty in the economic environment, and we are closely monitoring the health of end user demand.

The global nature of our business, the positive impact of new product cycles, and the addition of new customers, should have a counter-balancing effect to the slowing U.S. economy. Therefore, we are expecting Q2 revenue to be flat to up sequentially at 98 to $101 million. We are expecting gross margin to remain relatively flat to Q1 levels, at the high end of our target range of 60 to 62%. We anticipate operating expenses will be relatively flat.

We expect operating income dollars to increase sequentially, while interest income will decline for the reasons Bill described. Therefore, we are anticipating second quarter net income per fully diluted share on a GAAP basis will be $0.20 to $0.22, and non-GAAP EPS excluding a non-cash charge for stock compensation, is expected to be in the range of $0.37 to $0.39.

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.

Okay. (OPERATOR INSTRUCTIONS). One moment. Romit Shah, you may ask your question. Please state your company name.

Thank you. Lehman Brothers. Nice quarter, guys. Question on Broadcast, does the addition of Nokia in Q1 change your full year target of 20 to 30% growth in Broadcast?

No, we have already comprehended the addition of Nokia and other customers with new products into our full year forecast, Romit.

Okay. It seems like some of your competitors, like TI and Broadcom, Broadcom are being more vocal about their design wins in the FM tuner space, with their combo chips. Can you talk a little bit about your market share in FM tuners this year, and how you would expect it to trend?

Our position with our customers remains very strong at this point. There continues to be an increase in the attach rates for FM tuners. We continue to hold the market share that we have obtained with our customers. You have seen that in the first quarter as our handset-driven revenues in Broadcast Audio increased sequentially, bucking the trend of the industry.

Design win momentum is strong, as I mentioned. We have had a record 125 design wins in the quarter, so that sets up very well for the remaining part of the year. We are also encouraged by the adoption of our new products by the handset vendors, particularly the transmit and the AM/FM functionality. So we feel good about our competitive position in the handset market.

Terrific. If I could just, one last question. Bill, how will the changes with the cash balance and the current stock price, influence the pace of the buybacks going forward?

So we have executed a substantial portion of our current authorization in a very short period of time, and I think that we took advantage in the last quarter of depressed share price to be aggressive buyers. We will continue to execute against our share repurchase program in the remainder of the year, and I think the pace at which we execute will be a function of share purchase price as we go through the period.

Thank you.

Our next question is Srini Pajjuri, you may ask your question and please state your company name.

Thank you. Merrill Lynch. Good morning, guys. Bill, just a clarification on the tax rate. You said it is going to be flat in Q2. I am just wondering, should we model 20% for the full year, or is it going to be at that level?

I think for the moment, the prudent thing to do is to take the first quarter tax rate, and use it for the remainder of the year. We have a substantial decrease in tax-free interest income as a result of the rebalancing of our investment portfolio, and until Congress reenacts the R&D tax credit, we will be unable to take advantage of that in quarterly results. So I think for the time being, the first quarter rate is the right one to use for the full year.

Okay. And then Necip, you said you are not going to change your 20 to 30% guidance for the FM business. If I just take what you just reported, the flat sequential, and assume that it is going to remain flat for the next four quarters, I think that in itself accounts for pretty solid 25% growth or so, based on my own estimate. I am wondering, are you being conservative here? Wouldn't you normally see a seasonally strong second half in this business?

We would normally. Our conservative positioning in that regard does not stem from our position, competitive position with the customers, but more from uncertainty around the end user demand. We are being cautious about the handset unit growth this year. Clearly, if the seasonal patterns hold strongly into the second half, we are positioned to benefit from that. I think in the next 90 days we will get a better visibility into the second half demand, as well as finalize the design wins we are competing for at the moment for the fourth quarter business. So I will be able to give you a much better view for the full year for that business in 90 days.

Okay. And then finally, on the AM/FM, now that you are shipping, can you talk about what kind of reception you are receiving in the market, and what your expectations for that product are? Thank you.

Sure. It was satisfying to see that functionality being adopted by a top tier OEM. We are seeing interest from other top handset OEMs also for that functionality. I think the reception of that function in the regions that it is being targeted for remains to be seen. We are obviously supporting our customers with the ramp strongly. We expect these models to be available by mid-year.

Thanks, Necip.

Craig burger, you may ask your question and please state your company name.

Hi, FBR Capital Markets. Thanks for taking my question. Can we talk about the Broadcast business a little bit. Can you help us understand what your average selling price trends were in tuners, either sequentially or year-on-year?

The blended ASP in the quarter for all our Broadcast products went down sequentially, and that is a reflection of a product mix change, as well as a mix change between handset and non-handset applications. I mentioned overall Broadcast revenue was down sequentially, and that is due to reduction in demand from portable media players and personal navigation devices, compared to the strong 4Q. So that product mix change resulted in a blended ASP decline for us in the quarter.

Some of your other products in there include set-top box receivers, satellite set-top box receivers and tuners. Are those products more legacy products? Are you pursuing new investment there? How meaningful is that business?

The satellite receiver revenues are very modest at the moment, compared to the audio revenue. Clearly, we would like to see the video revenue grow into next year with the new products, but a large, very large percentage of revenues in Broadcast today are driven from Audio.

And when we think about the video demods that you guys just put out, how long does it take for that stuff to become a meaningful contributor?

Demods will be our first products in that space, and we expect, based on the design cycles in that space, we expect the revenues to start contributing in 2009. Obviously, we have plans to come out with additional products in that space, so that should be a growing portion of Broadcast revenues into '09 and '10. But at this point I am not going to be able to give you a number for out years.

And can you tell us how meaningful the timing and clock business is for you at this point? Is it 3% of revs? 5? 10?

Still in single digits, growing a single digit number but not quite 10% yet.

Thanks a lot, guys.

Adam Benjamin, you may ask your question, please state your company name.

Thanks. Jefferies. Just a couple questions. Bill, on OpEx, last quarter you guys stepped it up, and now you are guiding for it to be flat. Can you just talk a little bit about the dynamics there, and kind of how you expect the rest of the year to play out there?

Yes. I think that as I indicated, we are adding headcount in the engineering organizations. We did so in Q1 and that will continue this year, so we would expect the R&D line to move up slightly in 2Q, and will continue to grow in the second half of the year, generally tracking our growth in revenue.

Operating SG&A expenses will be flat to slightly down in the second quarter, and we are going to hold the line very tightly on SG&A all year, so I would expect that line to be relatively constant as we go through 2008.

All right. Great. And Necip, on the timing business you seemed very encouraged about your prospects there. You have talked about 40 to 50% year-over-year growth before. Do you care to up that estimate or do you think you can do better than that?

Certainly the traction we are getting with the customer base today increased our confidence that we can hit that 40 to 50% target for the full year.

Okay. And then just two questions on Broadcast. First, you usually provide the breakout between portable audio and handset. What was that in the quarter?

We were at 50/50 in 4Q. That tilted towards handsets in 1Q for the reasons I described. It became more like 60/40.

Okay. And then just a follow-up on the conservatism you have talked about on Broadcast, do you care to quantify if you break out between just your own competitive dynamics and share gains, share losses within the handset market, versus just your concerns regarding the end market growth in the second half, can you just break those two out, and quantify how you are getting to your conservative full year guidance?

The conservatism solely comes from caution on the end user demand. As I indicated earlier, our competitive position with the top handset OEMs remain as strong as they have ever been. I think our design win numbers reflect that. The additional features that we are providing in our FM tuners, such as the embedded antenna, are being embraced by many. So we have concern or caution about end user demand, how that might shape up, but from a competitive position, we feel pretty good at this point.

Great. That is all I have, guys. Thanks a lot.

Thank you.

Craig Ellis, you may ask your question and please state your company name.

Thanks, company is Citi. First, congratulations on the revenue, and Necip, just general productivity you are getting out of the engineering team on your products. Sounds like you are comfortable with your full-year targets for timing and Broadcast. Can you just comment on MCU versus the 35 to 40% number you put out last quarter?

We are also sticking with that number. Obviously, a slow start for the MCU business, due to weakness primarily in the PND market, but we look for sequential growth in 2Q.

If you look at the MCU revenues for the first quarter, just to add a little color, this decline in the consumer space, such as personal navigation devices, or toys and such, the decline in revenues from those set of customers was actually larger, than the overall decline in MCU business. So that is another way to say that the rest of the business actually grew sequentially. So in 2Q, while we expect the overall PND market to remain soft, overall we expect the MCU revenues to grow.

All right. That is helpful. Bill, the gross margins remain high overall. Given some of the mix dynamics in my model, I would have thought they would have shaken out a little bit higher in the first quarter since timing was up. Can you talk about the gives and takes sequentially and how we should think about gross margins as we look out through the year as the Broadcast business probably increases as a percent of mix if we think about the second half?

Yes, I think that there were a lot of mix movements in the quarter, as Necip has commented on. The consumer business was soft. It caused the handset portion of Broadcast to be a higher portion of our overall mix. We have also indicated that the MCU business was also down in the first quarter, which is historically a good margin product line for us.

But I was really pleased with how the overall margins held in the quarter, at the high end of our target range. I think if you will recall, that is almost exactly what we told you to expect 90 days ago.

Looking into 2Q, we think some consumer demand will come back. We think MCU will recover and on balance, we think that the mix shifts going into Q2, will allow us to remain at the high end of our guidance range, someplace very close to 62%.

Thanks, guys.

Tayyib Shah, you may ask your question and please state your company name.

Hi, guys. Longbow Research. Necip, can you talk about what is happening to your revenue content within the Broadcast arena, per unit. Obviously you had some mix shift change there. But if you disregard that, with the FM transmit and AM capability, what is happening to your overall revenue content because of that?

So to recap, the overall Broadcast revenue was down sequentially. The handset revenue was up, driven by strength in Korea, in particular. On the non-handset side, our AM/FM revenues continued to ramp. We have obviously seen a reduction in tuner and transmit revenue from non-handset applications in the quarter, and looking into the second quarter, I expect to see the handset revenue grow a little further sequentially over 1Q, and we expect that the PND market will remain soft, so those revenues we expect to be lower in the quarter, total Broadcast revenue will likely be around flat sequentially in the second quarter.

And if you look at your revenue content per device, how is that tracking?

Well, are you asking about the ASP trends?

ASP versus getting more FM transmit content within those devices, as well as AM capability.

As I mentioned earlier, the overall blended ASP was down in the quarter, and that is driven solely by the mix between handset and non-handset applications. We continue to enjoy a premium in our higher value products, such as transmit and AM/FM.

Okay. And Bill, when would you expect to be out of auction rate securities, and what is the average maturity of these securities?

So at the time that these securities were purchased, the maximum time period that we anticipated was 35 days, with the failure of a number of auction rate security auctions during the month of February in particular, a number of these assets have much longer maturities, but are extremely high quality. Either municipal-backed or U.S. Federal Government backed securities, that we think are very high value assets, so we will probably remain in auction rate securities, and not attempt to liquidate early. We may have some long-term investments therefore, for a considerable period of time, but we think the value of those assets is very high.

Okay. And with your demod product, would you expect to get some wins with the top tier OEMs, especially in the TV space this year?

We have been sampling our demod device for a few months now, and we are competing for design wins for 2009 models.

Okay. And finally, Necip, what is the outlook for the Voice business this year? How much do you think you can grow that business this year?

Well, we are pleased to see that there is a renewed interest in voice attachments in residential gateways, particularly in Europe. We benefited from that trend in the first quarter. We also won a design win with one of the major suppliers in the cable space, so that should start being reflected in our revenues in the second half. So as I said, our confidence in some of the targets we have established for the product lines for the full year increased over the last 90 days, and voice over broadband is no exception.

Thank you.

Arnab Chanda, you may ask your question and please state your company name.

Deutsche Bank. Thank you. Couple of questions. First of all, Bill, if you talk about, I think there was a question on gross margins, but I just wanted to maybe drill down a little bit. If you look at your businesses today, is it fair to say that excluding the handset portion of your Broadcast, gross margins within the company are relatively, the new products have the same or maybe a little higher than where you are today?

Arnab, I think one of the attractive parts of our business today is that all of our product lines enjoy attractive gross margins, and the spread between the highest gross margin products and the lowest is relatively narrow. So while we are certainly seeing significant mix shifts from quarter-to-quarter, it is not driving dramatic changes in the overall corporate margin profile. And I think we had a very strong Q1, and with what we see looking into the remainder of the year, we are expecting margins to continue to perform very well.

Okay. Great. One other question on the expense side. It sounds like you are going to be relatively conservative on the SG&A, and you are going to continue to invest in R&D. Is there a certain expectation that at current rates of growth we should assume R&D as a percent of sales remains about the same, or goes down? How should we think about that line item versus revenue growth?

I think that we spent a tremendous amount of energy in 2007 getting the income statement in balance. And we indicated last quarter that we thought that the R&D line was essentially consistent with our expectation. And therefore on a percentage basis, we will probably stay similar going forward. There is still plenty of opportunity to improve in SG&A, and we will continue to strive for improvement in that line item throughout the remainder of this year, and certainly into 2009 as well.

Okay. Great. And if I can ask a couple questions on products. If you look at your timing business, under what timeframe do you think that business can be sort of breaking out of that sort of minority segment, into it's own segment like Microcontrollers did? Is it more in late '08 or is more in 2009?

In terms of the annual growth rates, the timing business at this stage is certainly tracking to at least what the MCU business has done for us. We certainly think that the timing business can achieve the level of revenue that the MCU business has. Probably behind a couple, three years, compared to the MCU business.

But the number of new customers we are adding every quarter, and the proliferation of our products inside those customers are both very encouraging to us. So I don't see it getting to a 10% product line this year, because of the strong growth in other parts of the business, but we would see that happen in 2009 or '10.

Okay. Great, quick question on MCUs. You said that you are talking about your growth rates in the MCU business. It seems though that your TAM was expanding quite dramatically. Should we assume that the growth rate you have seen historically could continue for a couple of years here, or is there a reason that it should slow down?

We set a target a couple of earnings calls ago, that we would get to about half the TAM available by the end of 2009. We are certainly on-track to achieve that, as you observe, we are expanding our served market quite significantly, especially with the introduction of the low voltage MCU family.

And so this is really what we need in order to maintain our high growth rate. Clearly the revenue base is getting larger, so the revenue growth in dollars is going to be bigger, and to be able to achieve that kind of growth rate, we need to expand aggressively, as we have done. So our targets for the product line remains intact, in that for the next couple of years we would like to continue to see that business grow at that high rate.

Just a reminder, we are taking one question at a time for one person. Sandy Harrison, you may ask your question, and please state your company name.

Yes, Signal Hill. Good morning everyone.

Good morning.

Just a quick question on the MCUs that you had highlighted Necip. Some of the $1 billion market for the low voltage designs. Is there a particular segment in that $1 billion, that you guys particularly see as one, or is it sort of the opportunity by a lot of different segments?

There are varied applications, everything that you can imagine that requires a AA battery or two to operate from. An area that we have not participated in in the past, and our new products would fit nicely are the handheld medical devices. That represents a large and growing market, because of the demographics also. And our products are very well-suited for that particular application. But it also addresses portable audio devices, computer peripherals, wireless sensors, so the market is really large and fragmented.

Is there a particular competitor in there? Is this done maybe with the volume by Asix? What is the competitive position by which you guys enter in?

There are a number of existing competitors out there. One of the larger ones is Texas Instruments with their MSP430 series of MCUs. And the 0.9-volt series that we have announced competes very favorably, in terms of power dissipation spec, and the level of integration compared to that device.

And as far as lead times with these markets, the consumer markets, they can be pretty quick to sample, or from design to production, the medical obviously sometimes a little bit longer, but what do you see as when you could potentially start to generate revenues from this particular product?

Well we have set the target as 2009. We have an enormous amount of leads after the launch of the product, that we are competing to turn those to design wins this year, and certainly have revenue expectations from those products for '09.

Great. And thanks. And Bill, one for you as far as the hiring of R&D. How is that going? Is there a steady stream of potential candidates out there? Are you having to raise the bar a little bit to get the quality in? Just kind of what is the environment about hiring engineers?

The standards we have in this employee category are very high, but we are executing on our plans. So we are aggressively recruiting on a national level and adding, but only when we can meet our internal standards.

Got you. Is there a particular area that you are looking to hire, or are you just looking to hire athletes that you can then put into spots where you can use them?

No, I think in each case it is specific. So each of our business units have got specific requisitions open for needs in defined programs. So the skill sets are very distinctly defined.

Our next question is from Suji De Silva. You may ask your question and please state your company name. I am sorry. Could I have you queue up again, sir, by pressing star 1.

I am going to go to Cody Acree. You may ask your question. Please state your company name.

Stifel Nicolaus. Congratulations on a great quarter. Maybe we can go back to the Microcontrollers. I think this is the first time that MCUs have been impacted by some degree of seasonality. Is that more the norm going forward? Has microcontrollers grown large enough now that seasonality tends to be more of an issue, and if so, what are we to expect from normal seasonality there?

Yes, we have had good success last year, the second half of last year, in bundling our MCUs with some of our Broadcast products. So the portion of MCU revenues coming from consumer in the second half of '07 went up dramatically. So we are seeing the seasonal impact of this in 1Q. But there is an underlying revenue growth in all our segments underneath that overlay of seasonal changes. It is I think too premature for me to say this is going to be the rule going forward.

Okay. And Bill, you gave a little bit of color, you gave more color on the gross margin mix, expectations for the second quarter, given that you have got a pretty tight range on gross margin delta, still as you look at the mix through the remainder of the year, would you expect that mix to be a positive impact, or kind of a flattish impact through the rest of the year?

Yes, I think as we go through the second half of the year, we should see the consumer segments rebound, particularly if the macroeconomic environment is good or improves. I think that the challenge we have looking out into the second half of the year is really ASP pressure and competitive pressures, and it is the combination of these two effects that causes me to suggest that the range that we have indicated to you is appropriate going forward.

Okay. Great. And then lastly, you mentioned the ASP pressures. What are you expecting? It sounds like your design activity, your design wins in the Broadcast segment are solid. But what do you expect, outside of just mix, just pure pricing sensitivity in that segment, maybe not just in Q2, but throughout the remainder of the year?

The price declines, particularly in the handset, is consistent with what we have seen in prior years. Clearly, we are going to benefit to some degree from the introduction of newer devices, higher value add devices, but on existing plain vanilla FM tuners, the ASP reduction that we are planning is consistent with the prior years.

Not seeing any indications of any increased ASPs? I know a lot of new competitors are at least talking about coming in, is that having an impact on the ASP visibility?

Not any more than what we have seen in the last 18 months.

Great. Great. All right. Thank you.

Suji De Silva, you may ask your question.

Hi, Kaufman Brothers. Can you guys hear me now?

Yes.

Good morning. Congratulations on the results. FM tuner, can you repeat, Necip, what the mix was this quarter, handset versus non-set, and where you expect that to trend?

In the neighborhood of 60 to 40 in 1Q, favoring handsets. We would expect this to tilt a little further in the second quarter, because we were expecting the handset revenues to go up sequentially, slightly, and non-handset, PND in particular to go down slightly.

And then exiting '08, where do you think that trends?

I think the best guess I can share with you at the moment, would be closer to 50/50, as we achieved in 4Q of last year.

Okay. Great. And the microcontroller business, the seasonal patterns we are seeing in '08, is that indicative of how this business should track seasonally going forward?

That was a question just a few minutes ago on this. I think it is too premature for me to state that this is going to be the seasonal pattern going forward for MCU. We are clearly coming off of a very strong 4Q for the PND space in particular, so the sequential comparisons is a little unfair in that regard.

Okay. And then on the cash levels, can you update us on I know the buybacks are aggressive here, can you update us on the strategic processes you are going through? I know you are looking at targets out there. What is kind of the update on that process?

We continue to be very active in reviewing M&A opportunities. As we have indicated previously, much more so in the private segment of the market, as opposed to public companies. We have had an active program going on now for a year and that continues. We are anticipating that we could be in the market during 2008 or 2009.

Great. And lastly, one last question. Have you seen, Necip, anything tangible from your customer conversations or order patterns, or Bill, that would give you the kind of caution you are guiding toward, or is it just sort of macro uncertainty?

It is the macro uncertainty. We haven't gotten any signals from our customer base to verify that.

Thank you. I will now turn the call back over to Shannon Pleasant at this time.

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

You may now disconnect. Thank you.