Silicon Laboratories Inc (SLAB) 2011 Q1 法說會逐字稿

Good morning. My name is Celeste and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs first-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

I would now like to turn today's call over to Ms. Shannon Pleasant. Please go ahead, ma'am.

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. This call is being simulcast and will be archived on our website. 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, www.SiLabs.com.

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.

Our comments and presentation today will include forward-looking statements or projections that involve substantial risks and uncertainty. We base these forward-looking statements on information available to us as of the date of the conference call. This information will likely change over time.

By discussing our current perception of our market and the future performance of Silicon Labs 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 shortly and 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 Financial Officer, Bill Bock.

Good morning, everyone. I'm pleased to report first-quarter revenue was up 7% sequentially to $119.6 million. This return to sequential revenue growth sets us up with a good start to the year and is a better than typical seasonal result.

While GAAP earnings are in a loss position due to acquisition-related charges, our non-GAAP earnings exceeded the high-end of our guidance range at $0.40.

During the quarter, we successfully completed the acquisition and integration of SpectraLinear, a transaction we announced in January. Our GAAP results include approximately $11.7 million in charges related to the deal as well as typical non-cash stock compensation charges which totaled about $9.5 million in the quarter. GAAP gross margin was 60.3% for the first quarter, lower than usual due to a combination of product mix, and $1.1 million of the acquisition-specific charges I just mentioned.

R&D investment was up in the first quarter to $35.4 million and SG&A increased to $31.9 million. These operating expenses are inclusive of $5.1 million in one-time charges for SpectraLinear.

Our GAAP tax provision was also impacted by an acquisition-related charge of $5.4 million. This resulted in a fully diluted GAAP loss of $0.04 per share.

Turning to our non-GAAP results, the revenue increase was due to sequential growth in all three of our main businesses but was led primarily, as expected, by our video ramp. Gross margin therefore was 61.6%, reflecting the greater mix of video products, which represented more than 10% of revenue in Q1.

As I mentioned last quarter, we fully expect margins to improve throughout the year and we are forecasting an increase of approximately 100 basis points in Q2 as we benefit from cost reductions in the video product as well as mix improvements as our broad-based business growth accelerates. We continue to expect to be back to the midpoint of our target range of 62% to 65% in the second half of the year.

We were able to make adjustments to our operating expenses during the quarter to reduce the total spend from our initial forecast. Operating expenses increased therefore by only about one half the amount we originally suggested. Specifically, R&D increased to $29.7 million and SG&A was about flat at $23.2 million. The result was a reduction in operating expenses as a percentage of revenue in the quarter that would typically exhibit a much more notable seasonal increase.

Some of these expenses will roll over into the second quarter and we will experience a full quarter of operating expenses associated with the acquisition. But in total we now expect Q2 operating expenses to be approximately $55 million, well below what we had predicted previously and with all of the growth coming in R&D.

We are working hard to return to model profitability and we will be seeking to get above 20% operating margins in the second half.

For the first quarter, operating income was 17.3% of revenue and up slightly in absolute dollars at $20.7 million. Other income was about $800,000. Our non-GAAP tax rate was 15.3%, which is also favorable to our guidance due to an increase in the proportion of foreign to US income. This is likely to continue and the effective tax for going forward should be between 15.5% and 16.5%.

Net income was $18.2 million in the first quarter or 15.2% of revenue. Resulting Q1 diluted earnings per share was $0.40, ahead of our guidance.

Turning to the balance sheet, accounts receivable increased to $58.5 million or a more typical 44 days sales outstanding. We continue to have no known collection or bad debt problems.

Inventory increased slightly to $41.1 million but with turns improving materially to 4.5 from 4.1 in the prior quarter. We will continue to work towards our inventory turns target of 5.5. Channel inventory in the quarter was up about 10%, ending the period at a comfortable 49 days.

The decrease in our cash balance to $339 million reflected this growth in working capital as well as the payments to complete the SpectraLinear acquisition. Given these significant uses of cash, we chose to limit our share repurchase activity. We have $109 million remaining in our current share repurchase authorization, which we expect to utilize over the remainder of 2011.

Let me end by saying this will be my final earnings call as CFO. I will certainly participate in today's Q&A as well as investor relations activities in the months ahead, but as previously announced, Paul Walsh will become CFO in early July and he will lead the financial portion of the second-quarter call. You are in good hands and I have appreciated the opportunity to work with all of you.

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

Thank you, Bill. It has truly been a pleasure. I am very glad that you will be rejoining our Board of Directors. I know we will continue to benefit from your good council and leadership.

Good morning, everyone. As Bill mentioned, media was the star of the quarter, so let's start there. Video represented more than a third of the $42 million broadcast business in Q1. The majority of the growth was from our silicon tuner product, although marginally the revenues doubled as well during the period.

Adoption trends continue to be very positive. All of the TV makers are intent on expanding their use of silicon tuners. We are closing in on several mid-year model design wins and our R&D pipeline remains rich, giving us an increasing number of products to offer customers as we compete for 2012 models.

Audio revenue decline sequentially, as expected, due to continued pressure on the FM business into handsets as well as the typical seasonal drop-off in shipments into portable media players. However, our AM account product line recovered in Q1 as customer inventory issues debated.

We expect the broadcast business to be up modestly sequentially in Q2 as the growth in video and consumer audio is projected to overcome the handset headwind. This headwind should be well behind us as we enter the second half of the year. Handset revenue will be about 5% of our total in the second half and consumer audio growth will start dominating the revenue profile.

As further evidence of the strength we are seeing, we secured 118 design wins in consumer electronics alone during the quarter.

Our broad-based revenue increased again sequentially to a record high, growing 20% year-over-year and representing nearly 40% of the Company's revenue. Growth in the quarter was driven by strength in both MCU and timing products.

In our MCU business, consumer-oriented applications remained seasonally weak while communications and industrial demand were both healthy. The strength was specifically led by optical transceiver customers, where several meaningful design wins ramped. This continues to be a strong application area for us where our integrated high-performance analog and small footprint are very highly valued.

We experienced strength in embedded USB applications and also saw demand improve at a host of industrial customers. Development kit shipments were up by more than 1000 versus Q4 and design wins were up by more than 50% year-over-year. In Q2, we expect this strength to continue and we are seeing momentum build in both our low power and wireless MCU families.

The timing business delivered record revenue for the 10th consecutive quarter. As Bill mentioned, we successfully integrated the SpectraLinear team and portfolio in the quarter and are aggressively marketing more than 100 new devices through our channel in Q2.

We also introduced the new oscillator family targeted at the lower end of the market. We are very pleased to report a number of greenfield opportunities emerging, which is a key objective of expanding the portfolio.

We are now serving over 500 distinct customers with our timing products. We expect that channeling both our newly acquired and newly developed low-end products through our global distribution partners will significantly enhance our market penetration.

Rounding out the rest of the broad-based products, isolation and wireless both grew in the quarter. These products have surprised us on the upside this year so far in terms of design wins giving us increasing confidence that they will be meaningful contributors in the future.

And finally, the access business. Revenue was up slightly sequentially with slicks down, modems and POE up. We continue to secure design wins in printers and point-of-sale terminals while set-top boxes remain at declining end markets for modems.

We are making progress in the voice-over-cable segment while maintaining our dominance in voice-over-DSL. We expect access revenue to hold steady in Q2.

Mature products, which represented about 4% of revenue last year declined to about $2 million in Q1. This category is expected to represent only about 1% of revenue for all of 2011.

We continue to have confidence in the annual targets we set in January and view the Q1 results as strong progress towards those goals. We are well on our way to being back to record revenue levels in the second half of this year. We have a strong start to achieving 20% to 30% growth in our broad-based business. We readily see a path to $60 million in video revenue and Q1 is proving to be a trough in terms of gross margin, all as expected.

I will say, though, that we are viewing the macro environment more cautiously as we try to assess the second and third degree impacts the crisis in Japan might have on the industry. In Q2 therefore, we expect revenue to be $124 million to $130 million. We are anticipating that access will be flat, broadcast will be up slightly, and broad base will be up double digits sequentially.

We expect gross margin to increase by about 100 basis points. We anticipate operating expenses to total approximately $55 million. On a GAAP basis, we are projecting earnings of $0.24 to $0.30. On a non-GAAP basis excluding stock compensation expense, we expect $0.43 to $0.49.

We are now ready 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. Operator, please review the question-and-answer instructions for our call participants.

(Operator Instructions) Tore Svanberg, Stifel Nicolaus.

Thank you and congratulations on the results. First question is on gross margin. I recognize it's a trough here and you're guiding it up 100 basis points. But with broad base being as strong as it will be in Q2, why wouldn't gross margin potentially even go up a little bit more?

We will continue in Q2 to have the impact of the video business on gross margins and it's a quarter in which we are continuing to work on cost reductions in manufacturing on that product line. So this is our best guess at the step function improvement of margins in Q2. Then we expect to see a continued improvement into the second half of the year where we should get to something around 63.5.

Great, and my follow-up question has to do with your revenue guidance. I'm just trying to get a gauge of your conservatism due to the macro environment. If you look at that $124 million to $130 million, just from a coverage perspective or even backlog or bookings, how should we feel about that qualitatively where we stand today? Thank you.

Perhaps I can provide some color on that, Tore. It is based on the data we are looking at today. The bookings as of late have been a rather strong. Some of this we attribute to possibly customer behavior post the Japan quake, but the near-term demand remains strong.

I think for the guidance range we provided, I would submit that if there is no second or third degree impact from Japan, we continue to see good bookings and good turns particularly in our timing business. That would gravitate us towards the high end of the guidance. If we see a slowing in bookings or the softness with which we started orders from Japan in particular persist throughout the quarter, that would gravitate us more towards the lower end.

Great, thank you.

Anil Doradla, William Blair.

Yes, Necip, coming back to your Japanese comment, from a timing point of view you talked about the second and third degree impacts from Japan. Help us understand from a timing when could you potentially see the impacts if there are any impacts? And I have a follow-up.

So as far as our supply chain is concerned, at this juncture we don't see any disruptions. We have secured and our suppliers have secured for us all the materials that is required to build products for us. However, for our customers to ship their equipment, they have to be able to secure all the components for that particular equipment, so if there's even a connector missing, they are not going to be able to ship and so won't we. So that's primarily what I refer to when I say second and third degree impact.

And I think the suppliers have stated that they have adequate supply and inventory for the next 60 to 90 days. That's been their stance ever since the quake occurred, so if there is such impact, I would personally expect these to emerge towards the end of this quarter and early next.

Great. Coming back to your gross margins, obviously there's lots of puts and takes especially with some of the stronger things like timing and everything kicking in. If I were to focus just on your broadcast video product line, can you help us understand and deconstruct what is going on specifically? Clearly the margins there are lower than your corporate wide margins. There's a competitive angle to it especially from the incumbency can tuner guys.

So walk us through the dynamics and how quickly the pricing perhaps in that environment changes and how would you look at it towards the second half of the year? From that product lines gross margins both from a competitive point of view and your next-generation product line, can you give us some color?

Sure, I think the dynamic is that the video product line tends to be on a model year basis, so we are currently shipping into 2011 television set models with the product that we were selling and marketing to our lead customers last year at this time. What's going on with margins currently is that as you point out, the video product line is below our corporate average and that mix is impacting gross margins in Q1.

Because we have such a strong ramp, there were early startup expenses in manufacturing and lower test yields than we would like in an optimal situation, which contributed to the low gross margin performance in Q1. We will improve these manufacturing costs in Q2 and this will help drive the 100 basis point improvement that I have alluded to.

In the second half of the year, this will continue to get better and as Necip pointed out, we do have the opportunity in the second half to win some midyear models. Those may well include our latest generation product that is beginning to sample to the market today.

The second half of the year will enjoy both of those effects and it improves our margin picture on video further. We are currently competing for 2012 model year television sets and there we have the challenge of competing with viable competitors that will put pressure on ASPs, but we have the advantage of competing with our next-generation products, which are designed for improved cost.

So I think the jury is still out on what margins will look like for video in 2012, but to the degree we can hold ASPs and enjoy our lower-cost products, we will see improvement again.

Great, thanks a lot.

Craig Berger, FBR Capital Markets.

Thanks for taking my question. Can you first of all just provide any insight into how much acquisitions are driving revenues, drove revenues in Q1 or are contributing in Q2 guidance?

There was about $2 million of revenue, Craig, from the SpectraLinear acquisition for the two months we had them in our umbrella and in Q2 we should see approximately an incremental $1 million for having them for the full three months.

Thanks for that detail. Can you give us a little more detail on the FM tuner business? I know you said handset is going to be down to 5% of revenues at the end of the year. Can you give us a little insight into how pricing is doing in your various segments and maybe how much AM/FM is of the total at this point?

So, the 5% of overall revenue, that data point is for handsets only and we continue to enjoy good share for standalone FM tuners in that segment. But as you well know, the pie is shrinking due to both the effects of integration as well as ASP erosion. So we still enjoy a reasonably good share with our largest customer, but the overall volumes are going to continue to decline.

So in the second half of the year, as I mentioned, that should not be more than 5% of our revenues. So you will start seeing the consumer audio revenue to start dominating that profile. AM/FM has rebounded in Q1. Late last year as you would recall it had suffered from some inventory at customers that has now abated completely and we're looking for growth in that particular product line into the second quarter, which should continue into the second half just on seasonal strength.

We also would expect to see our portable media player revenue come up again in the second half just seasonally. So both of these factors are headed in the right direction. And with the handsets declining to the level they are, I think you are going to start seeing the consumer audio revenue take priority.

Can you just help us understand how much of that consumer audio is a AM/FM versus traditional FM and maybe how much goes into the automotive segment? Thank you so much.

I don't have that split, Craig, but AM/FM has been steadily increasing, so I think there will come a point especially with the inclusion of automotive, it will both in volume and in revenue be higher than FM. I just don't have the data in front of me to point to you when that will occur.

Thank you.

Arnab Chanda, Roth Capital.

Thank you very much. Before I ask a question, I just want to say thank you very much, Bill. Obviously it's been a great experience and certainly you have affected an amazing transformation obviously with Necip, so thank can very much.

Just a couple of questions. First is, if you talk about your video business today, where do you see that? You said that you're starting to see DMOD business start to improve here and then certainly the tuner business. Are there any -- if you could describe that business a little bit, where do you see the DMOD business and kind of what kind of segments do you see success there?

And then in this tuner, it sounds like the initial product was basically yield related and there is quite a big difference between the margins there versus your overall business. As we go through the second half of the year, is the next-generation business going to be able to dramatically improve that or is the pricing pressure going to offset that somewhat? I have a follow-up, please.

Sure. Let me address the tuner and the margin question first. As of today, we have been able to successfully improve the test time and yields to the point that we expected, so that will certainly be reflected in our margin results this quarter. And the next-generation product certainly provides us with a lower cost basis. I think it's fair to say that the video business in general compared to our other businesses will always present a margin challenge to us.

Our job is obviously to be able to keep the cost reductions ahead of the ASP erosion we expect to see in that segment. So there will be some improvement in the margin profile as the new generation device takes over, but the video business will always be measurably below the corporate average.

As far as DMODs go, we do have a number of products. These have been targeted historically to Europe with the DVB-T flavors and we have been able to combine it with satellite and cable to offer a highly integrated solution to our customers who want to have all of these in one chip. That is indeed the device that is ramping in the first quarter along with the tuners.

Great, and then just a quick follow-up on microcontrollers. It seems like in terms of opportunity set that seems like your biggest one. Could you talk how your -- the touch products, what we can expect from there as well as what the trajectory is for your 32-bit which you just announced? Thank you.

Yes, microcontrollers we have seen upside in in the first quarter and that appears to be one of the strongest product lines going into the second quarter here. The upside we have seen and we are seeing in the bookings is coming both from improved demand in existing customers as well as a ramp of new customers. I would roughly divide them to be two-thirds existing customer strength, one-third inclusion of new customers.

We are seeing strength in optical transceivers. We have seen some design wins ramp back in motor control. USB continues to be very strong for us. So one thing that I notice when I look at the bookings for second quarter in particular is that the strength and demand is very broad. It's coming from a variety of different product lines. So that gives us confidence that this will continue.

32-bit development is underway. Our target is to be able to sample our first product from that platform by the end of this year. And we are also making progress on the human interface front. We have just sampled a new release of a touch controller to our handset customers, a product that is optimized for use in handsets. We are working with a couple of alpha customers trying to win designs with that product.

Thank you very much, Necip. Thanks, Bill.

Craig Ellis, Caris & Company.

Thanks, guys. Bill, I just echo the congratulations on the real nice service over the years and congratulations on the move back to the Board.

Necip, in terms of the video ramp, you had set a target going into this year at $60 million. It sounds like you are still on track for that, but is the linearity playing out the way you expected and the design wins that are possible midyear, would that be upside to that $60 million?

The profile is working out more or less as we projected. The Q1 was a little stronger, so that might slightly modulate Q2. And there is potential that the second half profile will look better than we had indicated. Especially if we are successful with the design wins we're working on for the refresh cycle midyear, I believe that will represent potential upside to our target. We are very confident with the $60 million revenue target at this point.

Okay, good to hear. With concerns recently about crystal supply availability, what has that catalyzed, if anything, in your customer base about the potential to move to a CMOS-based timing device like the one you offer either for communications infrastructure or for lower voltage more portable solutions?

I think that resulted in certain increased interest. I can't tell that any of the near-term strength is due to that, but we are certainly getting more increase from a customer base who have been using the oscillator modules coming from this one particular company who have been affected by the tragedy.

So I think that just gave a reason to -- customers to look for diversification and our short lead times have become obviously more attractive in that context.

Thanks, Necip. Good luck, guys.

Srini Pajjuri, CLSA Securities.

Thank you. Bill, first of all, good luck with your future plans. I just want to start off with the OpEx. You've done a pretty good job in Q1 and guidance for Q2 looks solid. I'm just wondering how we should think about the second half of the year.

Well in January, I suggested we would see a step up in Q2 and then OpEx would be relatively flat throughout the remainder of the year. Given the effort that we have applied to reducing operating expenses in the first half, I think what we will now see is a modest step up into the second quarter to the $55 million guide that we offered. Then probably another modest step up in 3Q. Perhaps as a function of variable compensation as we improve the profitability of the business in the second half and then pretty flat into the fourth quarter. So in aggregate, our spending for 2011 will be lower than we had imagined in January, but the ramp will be slightly different.

Okay, great. Necip, a couple of questions for you. Could you remind us the targets for different segments that you give us in January and kind of help us understand if all of them are tracking pretty much as expected? If so, how should we think about seasonality in the second half? Thank you.

The short answer is yes. We are tracking to all the targets we have established from a revenue standpoint in January. Broad base we said would be up 20% to 30% year-on-year and I think we had a pretty good start to the year and second quarter is looking very good.

As I responded earlier to Craig's question on video, I think the $60 million target we have high confidence in with potentially better results for the year. So I think things are going well in terms of revenue expectations and we are doing all the right things with respect to managing the margins as well as the OpEx. So, so far good progressive quarter.

And then my final question, I think you gave us the total percent of sales for the legacy products including the handsets and modems and some of the mature products. I believe it was about 17% and I recall you saying that it was going to go to 10% by the end of the year. I just wanted to get an update on that. Thank you.

Yes, I think that bucket would include FM tuners for handsets, which I indicated earlier would be about 5% of revenue. It would include mature, which we also said about 1% of revenue. So the remaining piece is the analog modems for set-top boxes and so forth and that too would be approximately around 5% of revenue I would project.

So all in all, I think we are looking at roughly 10% of revenue coming from those product lines and 90% is going to be in full growth mode.

Thanks, Necip.

Terence Whalen, Citi.

Good morning, thanks for taking the question. This one is on the timing business. As your mix of timing business perhaps includes more portable or consumer timing devices, do you expect the gross margin profile of the timing business to change into the second half or into 2012?

Not appreciably. I think while the gross margin profile of the products that we acquired may not meet the very high margins of our solutions that we have been selling into the telecom space, I think the mix still will be very favorable and margins will be way over the corporate average.

Okay, terrific. I apologize if this is a little repetitive, but Necip, based on your commentary that video was already over one-third of the 42 million broadcasts, this puts us over 14 million. So on an annualized rate already well over $60 million if you grow in the second quarter.

Do you have insight whether the video business is going to decline in this specific quarter? Perhaps you could you remind us of just TV seasonal builds, will that decline in the fourth quarter?

And then a little bit looking more into 2012, can you talk about the next phases of growth for that business, whether you are seeing the design traction to support good growth in 2012 based on existing customers increasing their mix of your product in this second gen? Thanks.

Sure, I think the profile we had expected from the business suggested that the fourth quarter would be a down quarter over the third. And I think for normal seasonality, that would still be what we expect that might be slightly different for us this year if we are successful in getting additional models won for half-year refresh which also would have applied some upside pressure to the video number.

For next year, as I mentioned in my prepared remarks, all the TV makers are intent on expanding their use of silicon tuners next year. Some -- the TV OEMs have been reluctant to put a lot of their models on silicon tuners and I think that's very quickly changing. And I think we are in a good position competitively to continue to do well in this space against can tuners. There will be other competitors of silicon tuner suppliers that we will have to compete with, but I feel good about our potential to increase our share against can tuners and grow the business in 2012.

Great, thank you, and congratulations again to Bill as well. Thank you.

Sandy Harrison, Signal Hill.

Yes, thanks. Bill, I will join the chorus wishing you luck going back to the Board. Just a quick follow-up on some of the timing questions. Timing continues to be an area of opportunity you guys have highlighted, including your recent acquisition. What are some of the drivers outside of your existing products that you see that are going to drive timing above industry growth rates? Is it simply just greater adoption of silicon-based products or is there more systems things going on out there specifically in communications that would give you some opportunity in the timing market?

Well, Sandy, as you well know, the adoption for 40 gig and 100 gig equipment is accelerating particularly in North America specifically second half of this year. Those applications require -- put more stringent requirements on the timing solutions used in that equipment. So that sort of trend is favorable to suppliers like us, who play at the high end of the pyramid. So we're looking to see some help, get some help from that macro.

The network buildout in general to deal with higher data, higher bandwidth, is also having a very similar effect. We are participating in the back haul for the wireless infrastructure with our clocking devices.

We are continuing to expand the customer base with the oscillators and our new distribution partnerships are proving to be very instrumental in that regard. We have already surpassed the 500 mark in terms of number of customers.

So I think that business is benefiting both from some of the macro trends but also the proliferation of customers and our business with existing customers.

Great. And just my follow-up. I mean, as you look at your product mix and some of the changes that you have seen over the last couple of years with your new product additions, including going after the TV guys and now timing, the salesforce, how has your salesforce adjusted to different selling, different companies, different customers? How has that evolved over time to meet the changes in the product as well?

It has been an evolution for the last several years. We have become a lot more distribution-oriented. Now roughly two-thirds of our revenue is coming from distribution. So our salesforce have evolved five years ago from a team that has been calling on some large accounts to a salesforce that is much more distributed and relying more and more on our distribution partners and supporting them.

As we introduce new products and go after new applications with our existing products, we are also commensurately increasing our sales channel and reach to a new set of customers. So I think it's been going well. Obviously there's more work and more opportunity ahead of us.

Great. Thanks for taking my question, guys.

Ian Ing, Gleacher & Co.

First of all, congratulations to Bill. First question is could you give us a sense of which product lines could be most exposed to Japan impacts? It's interesting, you are guiding video intact for the rest of the year despite some headlines on LCD panel factories in Japan shutting down. Care to think of where there could be some (inaudible) shortages?

Well, I think we are capturing some of that caution in our guidance in 2Q. And as I alluded to, the quarter started. It got softer in terms of demand from our Japanese customers. That particular customer base is most exposed to our broadcast business both in video and audio.

On the video front, some of the customers we have in Japan do have a significant portion of their manufacturing outside of Japan, but there can still be issues related to other components. But so far with what we know and with the data available to us, all of that has been incorporated in the guidance we have given for broadcast business. I said it's a slight improvement in revenue over the first quarter and that's one reason why.

Great, thanks. Given Japan, have you had to do anything to secure suppliers or capacity from your manufacturing partners?

Well, we have done what we can in terms of securing the raw materials. We don't have as much exposure to some of the raw substances that have made the headlines. But we have done what we needed to do and in some cases also have affected PC ends to have our customers qualify additional sources if the need arises down the road.

Great, thank you very much.

Brendon Furlong, Miller Tabak.

Good morning. Thank you, just a quick question on the gross margins in the back half of the year. Is the improvement to the 63.5% purely TV-related or is there some -- you are expecting some blended mix issues on the timing in MCU to help out the gross margin there? Thank you.

It's the latter. I mean, certainly we do intend to see continuous improvement on the video product line, but the 20% to 30% growth rate in the broad base business will drive MCU and timing content higher in the second half of the year, which will also contribute to the improving corporate margins.

Okay, great. Thank you, that's it.

I will now turn the call back over to Ms. Pleasant.

All right, thank you very much for joining us this morning. This now concludes today's call.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.