Silicon Laboratories Inc (SLAB) 2009 Q2 法說會逐字稿

Good morning. Welcome to the Silicon Laboratories second-quarter earnings call. All participants will be in a listen-only mode until the question-and-answer session. (Operator Instructions). This conference is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the meeting over to Shannon Pleasant. Ma'am, 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 financial results. The financial press release, reconciliation of GAAP to non-GAAP financial measures and other financial measurement tables are now available on the Investor page of our website at www@silabs.com.

This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 800-873-2051.

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 could have a material adverse effect on our business, operating results and financial conditions.

We encourage you to review our SEC filings, including the Form 10-Q that we anticipate will be filed today, and identify important factors that could cause actual factors to results to differ materially from those contained in any forward-looking statement.

Also the non-GAAP financial measurements which are discussed today are not intended to replace the presentation of Silicon Laboratories' GAAP financial results. We 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.

I am very pleased to report revenue of $104.2 million for the quarter, in line with our revised guidance and nearly a 25% sequential increase versus last quarter. Earnings were substantially above our updated guidance due to improved gross margin and lower operating expenses. We will discuss the details in the comments that follow.

Let me first cover GAAP results. These results include approximately $11 million in non-cash stock compensation charges. Second-quarter GAAP gross margin increased considerably to 62.2% of revenue. R&D investment for the period was $25.9 million. SG&A increased to $26.2 million. Other income, principally interest income on invested cash, was just under $1 million. GAAP diluted earnings per share, therefore, was $0.21, significantly better than forecast.

Turning now to our non-GAAP results, revenue of $104.2 million was up 24.5% sequentially. Ramps in new products and excellent recovery in our access and broadcast audio businesses fueled the revenue growth. Even more impressive, non-GAAP gross margin of 62.5%, a 150 basis point sequential improvement, exceeded the high end of our target range. The strong margin performance was seen across nearly all of our product lines, and reflects cost reductions we have implemented and outstanding performance by our operations team in response to the increasing levels of demand. We do expect these margin improvements to be sustainable, and therefore, gross margin should remain at these levels, exceeding our 60% to 62% target range throughout the remainder of 2009.

Operating expenses as a percent of revenue decreased significantly sequentially to under 40% of revenue, an improvement of more than 650 basis points. This encompasses an expected OpEx increase in absolute dollar terms to $41.6 million in Q2. We executed well to our aggressive tape-out schedule for the quarter, but were able to keep R&D nearly flat at $22.1 million due to benefits in tape-out related costs and continued expense control.

SG&A expenses increased to $19.5 million due to higher variable compensation and some headcount additions for application support. Operating expenses will continue to increase in the second half of the year, due primarily to two factors. Variable compensation will increase with the higher levels of revenue we are anticipating. And we are preparing to resume selective hiring in critical design areas to take advantage of what we believe is a unique opportunity to attract exceptional talent.

Operating income for the second quarter was 22.6%, an outstanding result and within range of our financial model objective of 25%. Other income in the period was under $1 million and is expected to remain at this level. The non-GAAP income tax rate was 22%. We expect the tax rate to be approximately 20% throughout the remainder of the year.

Net income, therefore, increased to $19.1 million, or 18% of revenue for the quarter. Resulting Q2 diluted earnings per share was $0.42, $0.05 above our prior expectations.

The performance of our business will allow us to achieve model financial performance even during the current economic recession. Gross margin is exceeding our target model already. Our anticipated rate of revenue growth will significantly outpace increases in operating expenses. Therefore, we expect to achieve model operating income performance of 25% throughout the second half of the year.

Moving on to the balance sheet, accounts receivable increased to more normal levels as demand improved throughout the quarter. Receivables ended at $62.9 million, or 54 days outstanding, a reflection of a strong June. Our customers and distributors have been paying promptly, and we have not had any bad debt or significant collection issues to date. We think receivables are in very good shape.

Inventory levels increased sequentially by $3.1 million to $26.7 million, significantly below where we were a year ago at similar revenue levels. During the quarter, turns increased meaningfully to 5.9. Channel inventory was also up in anticipation of strong third-quarter demand. We expect our inventory to grow again in the third quarter and believe the supply chain is lean and in good balance.

We ended the quarter with cash and equivalents up sequentially by $10 million to $336 million. We purchased approximately $7 million worth of shares during the second quarter. We intend to remain selective purchasers of shares, as we anticipate continued strong positive cash flow.

I feel very good about the Company's financial position, which, when combined with the strong product cycles and market share gains we are experiencing, provides the platform for model financial performance and significant earnings power.

I will now turn the call over to Necip to discuss the positive business trends in more detail. Necip.

Hello, everyone. It feels very good to be operating at 2008 revenue levels at this point in the year, particularly with record revenue projected for the second half, and our expectation that full-year revenue will be up in 2009.

In the first half of the year, we benefited from a number of product cycles and relative strength coming from Asia. In the second half of the year, we expect to see broader geographic strength as customers globally prepare for some seasonal demand improvement. We are convinced that with a few exceptions, inventories remain low and there is little appetite at our customers for building inventory.

Our visibility has improved considerably, so we can now talk with greater confidence about the outlook for each of our businesses for the remainder of the year. Underpinning our strong performance, one theme is consistent. We are winning new programs and adding new customers across the board.

Specifically in the second quarter, the ramps of new products continued, and we enjoyed a very strong rebound in the access and broadcast audio products, also which were up more than 25% sequentially.

Starting with the access business, Q2 was just below the record revenue level achieved this time last year due to strength in both modem and voice products. Much of the modem growth was driven by improvement in satellite set-top box demand, primarily for V.90 modems for non-US set-top boxes.

Digital TV, [fax] and point-of-sale also recovered off the low base from the first quarter. Furthermore, the new design wins we talked about as net share gains recently ramped in the quarter.

The voice business was up, particularly for IAD platforms serving European service providers. We announced our latest generation of ProSLIC during the quarter, and have more than 40 design-ins with this new product.

We enjoyed particular success in residential gateway and wireless fixed terminal applications.

Overall, we still expect the access business to be down in 2009 versus last year, but that decline is likely to be less than 10%. While we expect a slight sequential decline in Q3, second-half revenues will be meaningfully higher than the first half, which is encouraging from a stability point of view.

In Q2, our RF business had a very strong quarter and represented about 35% of total Company revenue. Revenue increased by more than 20% year over year, and all three of the product lines grew sequentially, audio, video and short-range wireless. Demand among consumer audio customers picked up during the quarter, although the lion's share of the growth came from the success of media demodulators shipping into TV and our tuner products into handsets.

In handsets, we are gaining share as FM penetration increases and our largest customers grow their market share. New features we have introduced are selling well. For example, several new models from three large OEMs are shipping with our embedded antenna solution.

We are also pleased to see design wins with three of the top five OEMs for new handsets integrating our AM/FM offering, still the only AM/FM solution suitable for portable applications.

Our Korean customers continue to gain market share and included FM features into several new low-cost platforms, particularly targeted for South Asia. Samsung in particular continues to have very high demand for our products. In Q3, which has historically been their strongest buying quarter, we expect to sustain dominant market share and benefit from increasing penetration.

We are also making great progress in consumer audio, which was about 30% of broadcast audio revenue in Q2. Our AM/FM radio has become the solution of choice in Asia, with many new wins secured at large radio makers via ODMs during the quarter. We believe it will be possible to double our AM/FM revenue this year compared to 2008.

While competition and ASP pressure remain fierce, we expect to see demand across the broadcast audio business further improve in Q3 as we ramp new programs at large customers. And overall, we believe the audio business will grow year-over-year in 2009.

On the video front, the demodulator ramped aggressively at Samsung as expected, contributing to the strong performance of the RF business during the quarter. We also secured four additional demodulator design wins at Tier 2 customers.

We formally launched our 2170 TV tuner in the quarter and continue to believe we have the first silicon tuner with the required performance and cost structure to be able to ship in high volume in terrestrial TVs. We are in the process of securing design wins for 2010 TV models at large potential customers. We view 2010 as the adoption year for this innovative technology, and expect high volumes to follow thereafter.

The short-range wireless products grew nicely during the quarter. While still modest as a percent of total revenue, we are excited to see revenue from recent design wins materializing. Programs are ramping in both metering and security, and our radios are often paired with our MC offering as part of the solution. The significant design win traction is very encouraging and the opportunity pipeline is also impressive.

With the positive business trends I described, we believe the RF business will grow this year at its long-term target growth rate of 15% to 20% despite the economic environment.

Our Broad-based business was about flat sequentially, with growth in MCU and timing offsetting a sequential decline in the power product line. The decline in power was due to a customer pushout into Q3, and does not fundamentally alter the growth outlook we expect to see in the second half. Specifically, we are projecting that power revenue will more than double in 2009.

We launched our next-generation isolator products to market during the quarter, and have seen very good sales pull from other Silicon Labs products, which we believe will accelerate the isolator ramp.

We also had our first commercial shipment of our power over ethernet products to a tier 1 networking gear manufacturer, the final step in ramping our PoE revenue.

The MCU business grew nicely, essentially bouncing back to fourth-quarter 2008 revenue levels. The growth came largely from our small form factor and USB products. In addition to stronger order patterns from existing customers, we began to ship into a number of new programs, including a smart phone inductive charger, a stereo Bluetooth headset and automotive backup cameras. We continued to seek good pullthrough for MCUs into metering and wireless modules for medical applications as we get design wins for our EZRadio wireless family.

The number of design wins in MCU totaled about 350 during the quarter, and design kit shipments were around 6000. We are still relying on further recovery in the broader market to see the MCU business return to historical growth rates, but based on the current outlook, we expect second-half revenues to be meaningfully higher than the first half and down only slightly for the full year.

Timing revenue grew sequentially again, due particularly to strength in recently-introduced clocks and oscillators. Our any-rate clocks are ramping at all of the Tier 1 network and equipment makers. The oscillator business is expanding beyond traditional communications infrastructure. During the quarter, we converted a number of broadcast video opportunities into design wins, and we now have three broadcast video customers in the top 10 for oscillator revenue.

For the quarter, we logged more than 150 design wins for our clock and oscillator products. With growth in Timing revenue of 20% to 30% this year, we are far exceeding our end market's single-digit long-term growth rate and negative near-term growth rate, demonstrating the significant share gains we are achieving. Overall, the Broad-based business is expected to reach record revenue levels in Q3 and grow more than 10% for the year.

In aggregate for Silicon Labs, we expect the second-half performance to dramatically improve over what we feel has been a good first half. We project we will achieve model performance of 25% non-GAAP operating income for the remainder of this year. This is notable, given we are operating in the weakest macro environment in recent memory.

We expect to benefit in the third quarter from new customer programs, broader geographic strength, market share gains and seasonality. We therefore believe revenue will increase sequentially by 9% to 14% to $114 million to $119 million above our peak from the same period last year.

As Bill mentioned, we are currently expecting gross margin to remain strong and slightly exceed our target range of 60% to 62% for the rest of the year. We anticipate third-quarter operating expenses will be up about 5% sequentially. On a GAAP basis, we are projecting $0.27 to $0.32. And on a non-GAAP basis, excluding stock compensation expense, we expect third-quarter earnings of $0.48 to $0.53.

We would now like to take your questions.

Thank you, Necip. We will now open the call for 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. Operator, please review the question-and-answer instructions for our call participants.

(Operator Instructions) Craig Ellis, Caris & Company.

(Technical difficulty) with gross margins, with respect to some of the internal improvements you are making and how that is offsetting any pricing pressure that may exist in some of the businesses.

Craig, I think we missed the first part of your question. Could you please repeat it?

Yes, sure. The question was on gross margins, and I was asking if Bill could provide some more color on what operational improvements you are making to drive the magnitude of improvement that we saw in the second quarter.

Well, we improved by about 150 basis points. We are enjoying the results of cost reduction activities that the operation team has been working on all year. Certainly some of this is in costs passed along to us from our vendors. In addition, we are benefiting from the return to more normal volumes that we were experiencing at this point last year. The ASP environment has held relatively stable. So in general, we are the beneficiary of good trends across the board that resulted in this above-model gross margin performance.

Okay. That's helpful.

I would also add some activities with our product engineering teams, reducing test times and increasing yields, therefore reducing the cost of our product in general.

Okay. And then Bill, you mentioned there might be some select hiring. Can you just talk about areas of the business where you see an opportunity to add capability. Maybe that question is better for Necip on the engineering side. How do we think about the way the Company is viewing the potential to grow its either engineering or field sales or field engineering base?

We have started adding some resources in applications support, Craig. This is in order to support design wins with new products we've brought to market recently.

We also intend to start hiring selectively into our business units, particularly in design and applications. I think the environment is right for us to pick up some exceptional talent. And as we see the recovery of our revenues to be stable going forward, we feel it is the right time to start reinvesting in the business and fund some of the projects that we had in our new product funnel.

All right. Thanks, guys.

Adam Benjamin, Jefferies & Company.

Just curious. Obviously, you are hitting your target model here a lot sooner than you thought and business has recovered. But as you look beyond the second half -- and I know you tend to be a little conservative, and why wouldn't you, given the environment -- but as you look out to the four business lines that are ramping, it is still very early in terms of their size, and carrying it seems to be higher gross margin. I was wondering if you could give us some color as to how we should be thinking about next year and how the gross margin trend could proceed from here, as well as the operating margin target. Thanks.

Even though we are projecting the gross margin strength to continue into the second half of the year, we are reluctant to increase our gross margin target range. First of all, we are certainly not certain about the market environment for 2010 and beyond. But as importantly, with as many product lines as we have in an early part of their life cycles, we feel that raising the gross margin expectations would impact our pricing policy, and therefore the growth potential of those businesses. And we certainly do not wish to impede the growth potential of those businesses at this point in time.

Got you. And then just on the FM tuner business, obviously there has been a lot of focus on that historically, and you guys have taken a conservative approach to that. But with the ramp of the AM/FM providing some stability to pricing as the mix shift happens there, and then you talked about, Necip, 15% to 20% of that business growing and within your target, how should we be thinking about that going forward? It seems to continue much longer than you had thought, as well as others.

If you look at the audio business for the full year, we think that the handset business will grow modestly year over year. We will see a higher growth rate in our consumer audio business, part of which is going to be made up for in a decline for PNDs. We think that we are very well-positioned with our large customers in the handset market, who continue to increase their attach rate for FM functionality and continue to adopt the new features that we are introducing, such as embedded antenna.

I've mentioned a few top OEMs also started designing in our AM/FM radio into new handset models. We feel very good about the progress we've made in consumer audio with AM/FM, particularly in Asia, with large names as well as smaller outfits in China. And we think that trajectory will continue well into 2010 and beyond.

So I think potential for our audio business to continue to support the growth in the RF business is very much intact.

Got you. One last question if I can. You've talked about four business lines ramping that continue to grow. As we look into next year, do you think we should be hearing about any additions to that four?

I think the product lines who have supported our growth thus far are also going to carry us into 2010. Many of those product lines are still very early in their lifecycle, so we think there is a lot of runway in all of those product lines going forward.

Got you. Thanks, guys.

Romit Shah, Barclays Capital.

Thanks for taking my question. Necip and Bill, another good quarter. Just -- I wanted to follow up on your comments about the second half. Every semiconductor company expects good sequential growth in the current quarter. But at the same time, most are still highly uncertain about the impact of the macro on real demand and historical seasonality in Q4. It doesn't seem like you expect any sort of choppiness in the second half, and so I'm just curious what is driving this confidence so early in the sell-through period.

Well, at this point in time, we are ramping a number of new programs with large customers, particularly in our RF business. We are enjoying product cycles in video and Timing and power. So these cycles and ramps are going to mitigate any uncertainty that exists in the macro environment for us.

We don't see any inventory buildup. Perhaps there are a couple of notable exceptions to that, with some customers seizing the opportunity to increase their market share in their respective segment. But by and large, the inventories remain low. Our visibility has increased considerably over the last 60, 90 days.

So while the sequential growth into 4Q may be modest and be moderated by the macro environment, we feel that we can manage our business to maintain model operating income for the entire second half.

And Necip, you mentioned that channel inventory grew in Q2, and that is your expectation for Q3 as well. But you are still overall comfortable with the absolute levels?

Yes, we are.

Okay. And then last question for me. Bill, just -- I haven't done the math, but is it still accretive to buy back the stock at these levels?

I believe the calculation would still show the share repurchase would be accretive. You will notice that in the last couple quarters, we have scaled back the level of our repurchase activity considerably from where we were during 2008. So while I would expect us to remain selective buyers in the market, our pace will be more likely similar to the first half of this year than it was to the 2008 level.

Okay. Thank you very much.

Tore Svanberg, Thomas Weisel Partners.

Thank you and great quarter. First of all, you talked about the silicone timing market and how that will probably rarely show any growth this year, yet your business will be up dramatically. So can you just talk a little bit about where we are or perhaps in what inning we are in as far as your share gains and constant growth in this marketplace?

I believe we are still in the very early innings in terms of our growth in the timing business. Our product portfolio as it stands today addresses a market of roughly $800 million. In spite of the considerable growth we are able to show this year, we still have relatively low market share.

Many of the programs that are ramping this year have been won 12, 18 months ago. And we have seen an increase in our design win traction in that period, which would favor going forward the revenue growth that we would expect to see from this business.

In addition, we have brought to market several new products in the second half of last year, and we've continued to develop new products to fill the portfolio. So I would say we are really in the very early innings for our timing business.

Great. And then a question on video. It is obviously starting to ramp now. Could you give us a sense of how big that has become as a percentage of broadcast? And will this product line maybe eventually cross over consumer audio as far as contribution to revenue? Thanks.

This year, our video revenues are solely from demodulator products, and primarily from one customer, Samsung. We have won in the last 90 days new programs with some Tier 2 customers, particularly in IP set-top boxes.

I think the growth in that business will largely come in future years from our TV tuner. We have made very significant progress in the last quarter with our alpha customers, working very closely with them to mature the product and make sure that all the needs of their application have been addressed. Roughly six months after we started assembling the product, I think it is notable that we still are providing product from the same base layers. For a product of such complexity and performance spec, I think it is very impressive and talks to the technical quality of the product.

Great. Just a quick one for Bill. Bill, did you give the cash flow from operations number on the call?

No, I don't think we specifically addressed that. Go ahead, Paul.

Tore, this will be filed in today's Q, so you will see it all there.

Great. Thank you.

It's approximately in the $10 million to $15 million range.

Very good. Thank you.

Alex Gauna, JMP Securities.

Thanks very much. I'm wondering, you've guided now to some persistence in gross margin above your target levels. I'm wondering if you could drill into, say, what some of the market trends are in your higher-margin product areas. For example, in networking, where, if I understand, current conditions are still relatively muted, so if we actually seen business pick up at the end market level, couldn't we drive even further beyond your target margin levels? What are your thoughts on that, if we get recovery? And maybe are we already seeing recovery on a run rate basis?

I think at these revenue levels, our timing business probably is not the best proxy for the health of the networking business, Alex. We feel that our revenue growth is solely being driven by market share gains, although the first half in networking usually tends to be seasonally healthier than the second half, as you know.

So if you do get improvement in enterprise spending and then in operator CapEx, we would certainly benefit from higher run rates. But at this point, we think that the benefits in the timing business that we see are all driven by market share gains.

And if I could follow up on that topic, you mentioned where you are seeing some customers maybe look to take advantage of the current market softness to pick up share. Can you comment, A, on maybe what some of those specific areas are where you are seeing strategic inventory build specifically? And then maybe in your instance, you are taking share in a lot of different categories, clearly. Can you give any color about where the market environment might be helping you in addition to your technology strength?

Well, I am not at liberty to talk about specific customers or even segments where this market share gain opportunity may lie for our customers. But I can respond to your question on the pricing dynamics.

In one of the most cost-sensitive segments we compete in, in handsets, the competition continues to be very fierce. I think we are able to respond to the needs of our customers by continuing to focus on cost reductions and also continuing to provide very good value in terms of performance and additional features. But the overall market environment for pricing continues to be challenging for all suppliers.

Okay. Thank you very much. Congratulations. Powerful quarter.

Suji De Silva, Kaufman Brothers.

Good morning, Necip and Bill. Good job in the quarter, guys. Did you say what the percent of revenues was from video, either in broadcast or total?

The entire RF business was about 35% of revenues. Obviously, a very large majority of this at this point is coming from audio.

Okay Do you still expect -- do you expect more Tier 1's in the 2010 timeframe, on top of Samsung? Is that your expectation?

Well, certainly with our TV tuner we are engaged with a number of household names, large TV makers, yes.

Okay, great.

(Multiple speakers) to report yet.

Okay, good. Thanks. And then on the microcontroller side, you've talked about autos being a potential opportunity. Is this backup camera opportunity sort of the beginning of that, or are we still very early in that opportunity?

Well, this has been an ongoing string of design wins, some of which have already started being reflected in revenue. But there is much to come in terms of revenue because of the long design-in cycles.

Okay. And then lastly, on the product pipeline here, it has been very robust for the last couple of quarters. How does it look in terms of new launches as we go to the second half of this year and 2010 versus what you have already been able to accomplish thus far in '09? Thanks.

I think we feel we made the right decision early in the year by not compromising any of the new product developments. We feel good about everything we have in the pipeline. And as I mentioned earlier, given the stability that we see in the business, we will be in position to start putting in incremental investments into our R&D pipeline later in the year.

Okay. Thanks, guys.

Gus Richard, Piper Jaffray.

Nice quarter. Thanks for taking my question. On the AM/FM tuner and the cell phone, you mentioned you had three out of the five top suppliers. What is your expectation of the transition from just FM to AM/FM and where do you think the attach rate goes over the next few years?

Including the AM/FM feature into handsets with the requirements on the antenna has been a challenging undertaking for handset customers. But at this point, three of the top five have invested and been successful in implementing it in their phones.

Those phones are, at this point, largely targeted for South Asia and South America. I think the attach rate and adoption rate will depend on the success of those early models from those customers. So I think it is going to be a little premature to project what kind of attach rate we can expect to see in handsets.

Okay. And then the second question, on your access business, it looks that you had a really good quarter in embedded modems and voice-over IP. Is that primarily driven by market share gains, and sort of how sustainable is momentum in those product lines?

There is an element of market share gains. We've talked about point-of-sale share gain in Europe, as well as a set-top box gain in Europe last quarter. Both started ramping in the quarter, so we benefited from that.

But also, we have seen higher digital TV sales in Japan. I think the pay-per-view broadcasters have been relatively immune to the downturn, and we will continue to benefit from our large share there. We've also seen some upside from tender business in the quarter from some satellite set-top box customers.

Great. Thanks. That's it for me.

Arnab Chanda, Roth Capital.

Thank you very much. A couple questions. First of all, I just wanted to make sure I understood this properly. I think, Necip, you mentioned that the access business was going to be down slightly in Q3 and then meaningfully higher in the second half. Could you talk a little bit about what the drivers are for that?

I think all this is saying is that we had a horrible first quarter in terms of our volumes in the access business, and now we are back to the revenue and volume levels that we enjoyed same period last year. It's not uncommon that we would see a decline into third quarter from the second quarter, if you look at historically. So this is all a reflection of a very weak first quarter, which is behind us.

Great. And then one other question about that. Obviously, in your mature product line, you are seeing modems start to get replaced in PCs. Is there a possibility or can you talk a little bit about what the longevity of your modem business is in the embedded modem market?

Sure. I think that we have been able to increase our volumes in embedded modems for a number of years now. And that has been a combination of stable overall volumes and our market share gains and our push into new markets, particularly in the fax area.

I think that the near- to mid-term is pretty stable for embedded modem business. If you look out five, ten years, you would certainly see the volumes eroding as some of the analog modems get removed from certain equipment. But for the next several years, I see the volumes stable -- relatively stable, and we are making a dent in the fax area, which compensates for some of these dynamics.

Great. And then a question about your video business, your TV tuner that you just launched. If you could just explain the TAM opportunity there a little bit. Does it differ by standard or by -- digital TV standard, geographic standard? Or is this tuner basically address the possibility of the entire TV market worldwide?

The tuner product we brought to market addresses the entire TV market. It has -- it supports all the digital TV modulation schemes, but also analog TVs. So we are able to compete worldwide with our tuner. And when you think about a few hundred million TVs being sold every year and multi-dollar ASPs, that is a very significant TAM for us.

And then last question about the trajectory of the mature business. It seemed like it kind of bounced up in Q2. What do you see that going towards? Is it basically going to stay here at these levels, or do you still expect that to decline over time? Thank you.

Let me give you a perspective. Last year, mature business was just under 10% of our revenues for the full year. We are now running just under 5% of our revenues. So mature product revenues are cut in half year over year, and we expect that the mature products will stay under 5% for the remainder of the year and will decrease further in 2010.

Thank you, Necip. Thanks, Bill.

Sandy Harrison, Signal Hill.

Thanks for taking my question this morning. On the MCU side, as you look at your new opportunities in that segment and your investment in that segment, where do you see the direction going as far as adding tangential or adjacent functions?

So we continue to build our portfolio, first of all. We also have identified a number of applications where we are making some targeted investments to provide more support, more collateral to the customer base to increase the design win percentage.

And the numbers that I alluded to for the quarter have been record numbers in terms of design wins for MCU, and we are certainly benefiting from that additional strategy of identifying the verticals and supporting them. Metering is a good example of it. We've made a targeted push into smart metering. We have other products that we can pair with MCUs, particularly wireless products. So that strategy is paying off, and we have a number of those that we are working on today, as well as developing new products for.

Are you comfortable that your current microcontroller technology is where it needs to be to accomplish that? And do you feel as though you need to move upstream for some of these other applications or to expand the TAM, or are you comfortable staying kind of where you are with your baseline technology?

Sandy, if you are referring to investing in, say, a 32-bit MCU, I think this is something that we are certainly going to do down the road. At this juncture, we continue to see more opportunities and better return on investment in staying where we are and just supporting more applications, and do an even better job in getting traction in those applications.

You read my mind. Thanks for taking my questions.

Craig Berger, FBR.

Great job on the quarter, and thanks for taking the question. I know your crystal ball isn't probably any better than ours, but how should we be thinking about sequential growth or the lack thereof in the fourth quarter?

I think I can give you the following trends. We talked about our Broad-based business hitting a record level in 3Q. We are likely to maintain that strength into 4Q.

The access business historically has been flattish into 4Q. So the trade-off really comes in our RF business. I think we will benefit from the ramp of some customer programs for the second half. Some of that may be mitigated by the ordering patterns of some large customers. In particular, Samsung historically have had their volume -- peak volume quarter in Q3. So there are some puts and takes there. I would say that if we do see a growth into 4Q, that would probably be modest.

Thank you. And then I guess the next question is when we look at the FM tuner, the traditional tuners or with integrated antennas or some of these newer features, but basically looking at the tuners and looking at the top customers, how far into the mainstream have these products penetrated thus far, and where do you think that penetration rate is going over the next year or two?

You're referring to handsets, right, Craig?

Yes.

Penetration -- or attach rate, I should say, certainly exceeding, on current new models, 50%. So large customers are putting in a majority of their models that kind of feature.

Our market share with our large customers is very strong, and in some cases improving. Our market share is particularly strong on the low-end segment. And that is where any growth in handsets has been in 2009. So we benefited from a combination of higher attach rate, slightly higher market share gains and an introduction of some higher-value products into mainstream.

Last question, on microcontrollers. Is there any kind of indicators you can give us about what growth might look like there in 2010? You used to report kind of design kits shipped. Or any other commentary around that business? Because you've only got about a point of market share overall, which suggests there is still plenty of growth potential. Thank you.

I think even with the slightly down year we are projecting for the MCU business, given how some of the other MCU players are forecasting revenues to be for this year, that still points to a share gain for us. And I would certainly expect that gain to continue into 2010.

But it's, I think, too early to really be able to put a number on what kind of growth we expect to see. We, as I said in my remarks, need the macro environment to improve further before we can target our historic growth rates. Certainly, the current design win traction rate and the number of kits shipped are encouraging.

Thank you.

Srini Pajjuri, CLSA.

Thank you. Good morning, guys. Bill, a lot of questions on gross margins. I am just thinking about the first half of next year now. Obviously, your consumer business is going to be down, and I am guessing that should help your gross margins, not actually hurt. And I am trying to think about the puts and takes as we enter 2010 and what gives you some comfort (inaudible) and what are some of the concerns?

I think the biggest questions for us looking out into 2010 relate to what the state of the macro economic environment will look like. We are obviously enjoying a strong period presently in an environment of recession. And currently, we don't have any more clarity into what 2010 will look like on a macro scale than anyone else. So we are cautious about that.

We do know entering next year, we are going to go through a new round of ASP declines with most of our customers, which is typical. So we would expect to see continued ASP pressure and competition in several of the markets in which we participate. For those reasons and those concerns, we are holding to our existing model of 60% to 62% as being appropriate, and we will give you more visibility into what we think gross margins can actually be as we get a little closer to the beginning of next year.

Fair enough. And then Necip, for you, on the AM/FM business, the strength is somewhat, obviously, surprising, even though Samsung and LG are gaining share. But my question is as you look out to the next few quarters, and besides your customers gaining share, do you see any further share gain opportunities outside of just your customers gaining share? And then if you can talk about the puts and takes of just the handset part of the business.

I think in the handset business, I know we would generally target to hold our share, and wherever possible, move our customers to the higher-value products with additional features. There is obviously an opportunity in handsets with AM/FM feature if that feature were to be taken up significantly now that we have more support from handset OEMs for the future.

We continue to be most excited about the opportunity in consumer audio, however. We have registered design wins with household names in home audio and home theater in Japan and Korea. We continue to register a large number of new design wins in China with boombox and iPod docking station makers. And it is just that the design wins are proliferating at a very strong rate. So we are most encouraged in the strategically important area of consumer audio for us going forward.

Thank you. I would like to now turn the call back to Ms. Pleasant.

All right. Thank you for joining us. This now concludes today's call.