Silicon Laboratories Inc (SLAB) 2011 Q2 法說會逐字稿

Good morning. My name is Rashira and I will be your conference operator today. At this time I would like to welcome everyone to the Q2 Silicon Labs 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)

Ms. Pleasant, you may begin your conference.

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 at www.silabs.com.

I am joined today by Necip Sayiner, President and Chief Executive Officer, and Paul Walsh, Chief Financial 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 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 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 next week, that identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Also the non-GAAP financial measure 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, Paul Walsh.

Good morning, everyone, second-quarter revenue grew sequentially by a healthy 5% to $126.2 million. Strong operational performance yielded excellent earnings leverage and a return to the 20%s in non-GAAP operating margin.

First, I would like to cover the GAAP results which include approximately $8.6 million in non-cash stock compensation charges. GAAP gross margin was up slightly at 60.4% for the second quarter, which included the final SpectraLinear acquisition costs and a non-recurring charge from a negotiated cancellation agreement with a supplier.

Our R&D investment was down in the second quarter to $34.2 million. SG&A decreased significantly to $26.1 million and includes a credit related to the final purchase accounting for SpectraLinear, also a non-recurring item. The GAAP tax rate was 19.5%. All this resulted in fully diluted GAAP earnings of $0.29.

I would also like to highlight our continued progress in managing stock compensation expense down to our goal of 6%. It was not long ago that stock comp was about 10% of revenue. We are now in the range of the 7% to 8% and well on our way to achieving our long-term target.

Turning to our non-GAAP results, the revenue increase was due to sequential growth in all three of our main businesses, led by a record quarter for our broad-based products and a recovery in access. Gross margin is back in our target range at 62.1%.

Now our prior projections on cost improvements for TV tuner contributed to the sequential increase, but mix shifts between video and timing resulted in some unfavorability relative to our forecast. We are forecasting sequential growth in gross margin again for the third quarter.

We have demonstrated good operating expense control while navigating through an increasingly uncertain demand environment. On a sequential basis, second-quarter operating expenses were essentially flat and declined to 42% of revenue. R&D increased by less than $1 million to $30.5 million and SG&A declined by a similar amount to $22.5 million.

SG&A expense control has resulted in roughly flat spending levels for the last six quarters, creating solid leverage as we work to improve the top line.

While contending with market uncertainty, we will need to remain focused on profitability. We plan to tightly manage discretionary spending and limited headcount growth to critical hires. Those, in total, we now expect to Q3 operating expenses to be approximately $54 million.

In the second quarter, operating income improved considerably to 20.1% of revenue, ahead of our projections. Other income was about $600,000 and our non-GAAP tax rate was 15.8%. Therefore, net income increased to $21.9 million or 17.3% of revenue. Resulting Q2 diluted earnings per share was $0.48.

Turning to the balance sheet, accounts receivable increased to $70.4 million or 50 days sales outstanding. We continue to have no known collection or bad debt problems.

We made good progress on inventory, which decreased to $38.1 million or 5.0 turns, a material improvement over the last several quarters. Channel inventory in the quarter was up about 8% ending the period at 53 days. Once again, operating cash flow was very healthy with the cash and investment equivalents increasing to $351 million in the quarter.

On the buyback front, we were very active in Q2 repurchasing close to 600,000 shares for a little over $23 million. About $86 million remains on our outstanding repurchase authorization.

Before I turn the call over to Necip I would like to thank Bill Bock for making the transition process a smooth one. We are all very pleased that he will continue to serve the Company as a Board Director. Necip, over to you.

Thanks, Paul. While it was the video products that were the stars of the first quarter, in the second quarter it was our broad-based products that reached a new high, a real tribute to the diversity of the business. Our broad-based revenue increased 10% sequentially to a new record, now representing more than 40% of the Company's revenue.

The MCU business was particularly strong, surpassing the revenue peak achieved last year. Our latest generation low-power MCUs introduced a year ago are now ramping with particular success in portable applications.

Our precision mixed signal products also grew nicely sequentially due to increased demand in medical applications. And our USB products, which continue to be widely adopted, had a solid quarter in touch screens and other animated applications. Design wins in the quarter were at an all-time record, up 45% year over year, and development kits totaled nearly 8,000.

The timing product line delivered another record quarter as well. However, the pace of order growth has slowed as the communications end-markets have cooled. We have seen a decline in demand from top telecom customers, particularly in the optical segment. This was offset by the revenue increases from a growing customer base as well as the newly acquired timing products.

We expect the business will continue to perform meaningfully better than the industry growth rate forecasted for 2011, even in the face of the optical networking headwinds.

What we have considered emerging products in the broad-based category grew in combination nearly 30% sequentially. In Q2, we announced a new wireless sensor node solution powered by a harvested energy source. This enables customers to develop self-sustaining, ultra low-power wireless sensor networks for home and building automation, security, medical, and other monitoring devices. It's the pairing of our very low power MCU and our high-performance wireless receivers that makes this innovative solution possible.

The newest of our emerging product lines, Human Interface, includes touch controllers and proximity sensors. Our initial success in industrial markets is promising and we shipped our millionth cumulative unit to industrial customers in Q2.

As you know, it takes a while for this segment to become meaningful given the long design cycles and the fragmented nature of the customer base. So we have also developed a touch controller optimized for the smartphone opportunity which we began sampling in Q2. That device achieves a very attractive combination of performance and cost.

I am pleased to announce we have secured our first design win at a Tier 1 handset maker that will begin shipping in Q4. This establishes our solution as a contender for many more opportunities in this space giving us confidence that Human Interface will be a meaningful incremental growth driver in 2012.

While we are satisfied with the continued share gains in the broad-based business, we also observed demand slowing in the back half of 2011 with revenue expected to be lower sequentially in Q3. We believe our initial target of 20% to 30% annual growth for broad-based revenue is intact, but, based on the current economic environment, we are likely to end the year at the low end of that range.

Turning to the access business, revenue recovered nicely in Q2 growing sequentially over 5% with ProSLIC revenue driving the increase. Modem revenue has mostly stabilized with the CPE portion of that product line now at only 6% of company revenue. Therefore, the lumpy nature of the ProSLIC business will dictate the modest sequential changes in the access business for the remainder of the year.

Broadcast revenue was up slightly for the quarter, totaling 34% of company revenue. Growth in TV tuner and AM/FM radios offset declines in FM tuners into handsets, which are also now 6% of company revenue.

In video, our TV customers are signaling to us that they see weakening sell-through and lingering inventory, particularly in Europe. We are expecting this weakness to translate into a sequential decline in Q3 for our video products.

Last quarter we talked about the mid-year model refreshers we were competing for and I am happy to report we have won those designs. Revenue from these new wins gives us continued confidence in our $60 million revenue target for the year.

Our non-handset audio business is expanding into a broad set of applications going into the seasonally strong Q3 period. However, that expansion isn't uniform. We are seeing lower than typical seasonal ramps for MP3 player and P&D customers where forecasts have come down based on lower expectations for consumer demand in the second half of the year. The net effect will be a slight sequential increase for audio in Q3, but clearly not to the magnitude we would expect to see in a more typical seasonally strong period.

Looking at the business in total, near-term visibility is a concern as end customers globally are much more cautious than they were even a quarter ago. An increasing number of well-publicized economic issues impacting consumer demand coupled with ongoing softness in the communications sector lead us to believe that revenue in Q3 will be down 5% to 10% to about $113.5 million to $120 million. We are anticipating that both access and broad-based will be lower sequentially and that broadcast will experience a larger sequential decline.

We expect gross margin to increase by about 50 basis points. We anticipate operating expenses to total approximately $54 million. On a GAAP basis, we are projecting earnings of $0.16 to $0.22. On a non-GAAP basis, excluding stock compensation expense, we expect $0.34 to $0.40.

While the near-term uncertainty is unsettling, we are very focused at this point on 2012 execution and setting the stage for a return to our target growth rate. Today, in our broad-based business, we are achieving a very attractive growth rate in a subpar economic environment. We believe this business will bring significantly more incremental revenue dollars in 2012 than 2011 due to a number of drivers.

First, our established businesses in timing and MCU have been enjoying strong design win momentum, which has consistently translated to market share gains in these product lines. Second, we expect that our emerging businesses in wireless and isolation combined could double in quarterly run rate by the end of next year. And third, our touch controllers will be ramping in smartphones providing a new incremental growth driver as we proliferate our solution in the marketplace.

We believe this growth in broad-based products will also be augmented by continued dominance in TV tuners. We know fully expect the silicon tuner adoption rate to hit 50% next year and we believe our solution will continue to enjoy the competitive leadership we have established with the leading OEMs. Admittedly, it's too early to be at all definitive about next year, but I do believe that the new product momentum is working in our favor irrespective of the market headwinds.

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.

Operator, please review the question-and-answer instructions for our call participants.

(Operator Instructions) Tore Svanberg, Stifel Nicolaus.

My first question relates to your guidance. Could you talk a little bit about just qualitatively what you think is going on here? Do you think this is going to be a one quarter correction due to some inventories, or do you think this is the beginning of maybe a broader-based correction?

I think in our video business we do see, Tore, as a single-quarter issue. When we talk to our top customers, both module makers and OEMs, they tell us that currently they have about four weeks of chip inventory, four weeks of module inventory, and another four weeks of finished goods.

This is higher than what is justified by the end-user demand, so we expect this to get worked through the quarter. But we do expect to see the video revenue to recover in the fourth quarter.

As it relates to the issues we see in the networking business and that is largely impacting our timing revenue and, to a lesser degree, our MCU business and optical transceivers, the long-term trends are very favorable. As you know, the demand for bandwidth continues to increase, that only increases the demand for the type of products we are talking about, both in clocks and MCUs.

If you talk to our customers they would say that they were expecting a better second half than what we are seeing today. So it's too early to say I think it is a single-quarter issue versus a longer-term phenomenon, but that is what we see in those two product areas.

Very good. And as my follow-up, could you talk a little bit about how you are expecting to manage your own inventories in Q3? You did a good job bringing them down in Q2; what should we expect for the September quarter?

I think we will continue to manage inventory tightly. There are a number of products we will be ramping in Q3 as well. As I mentioned, we are starting to send new products to our TV customers with our latest generation TV tuner as well as the ramp of the touch controller into handsets. So we will be building inventory in those areas as quickly as we can, but the rest of the business we are managing it very tightly.

Very good, thank you very much.

Craig Ellis, Caris & Co.

Thanks. Necip, just with respect to the comments that broad-based businesses would come in at the lower end of the 20% to 30% target, is that entirely attributable to timing or are you seeing that there are some other dynamics at play, given the macro weakness that you cited that will impact other businesses as well as you think about the growth in that segment?

I think if I look at the complexion of the broad-based business and the range we provided beginning of the year versus what we are looking at today, I think a large part of the deviation is in the timing business. But we are also taking a somewhat more cautious view for the second half of the year based on what we see in the macro environment, as well as the trend in bookings as of late. In the last four weeks or so the order patterns have been relatively weak and we are going into the seasonally slow summer season, particularly in Europe, so we are taking a more conservative view of the overall demand environment as well.

Okay. And then as a follow-up, you mentioned a touch design in a handset. Can you talk about whether that is a single handset model or if that is a platform and you will be designed into multiple models? And where is that positioned in your customers' handset portfolio? Is that at the high end of the smartphone mix or lower end, or is it a feature phone?

Okay, I can tell you what I can at this point. It is a low-end smartphone platform. The particular models we will be shipping into in Q4 is the first model on that platform with a number of others that will be derived from that platform that we are at this point designed into. So I do expect that opportunity to proliferate over the next couple of quarters relatively straightforwardly.

Thanks, Necip.

Anil Doradla, William Blair & Co.

Necip, quick question. Your ability to distinguish between inventory-related issues and demand environment-related issues -- you talked about the video kits and some of the inventory in the channel -- but across the board, from your vantage point of view are you able to distinguish between these two trends, at least in the near term?

These are difficult to dissect as you observed. I think in the TV space the inventory issues have been with us for the better part of the year. What is new here, however, is the extent of the imbalance between existing inventory and demands, particularly in geographies like Europe. So clearly there is an overall end-user demand that is not meeting our customers' expectations.

If you talk to our top OEM customers in module suppliers in the beginning of the year, they were looking for a repeat of last year where they have grown their units by about 20%. Of course we have tempered those expectations significantly when we provided our target for the year of $60 million and their forecast has significantly come down, of course, from the levels they have communicated to us.

So in spite of the additional wins we are talking about for the second half, we are only meeting that original target today, which really speaks to the weakness of the end-user demand and the disconnect that exists between that demand and customer expectations early in the year.

And your reference to Europe in your commentary; can you maybe frame the exposure to Europe and the weakness that you are talking about? Is that something you are witnessing beyond Europe or do you think it's Europe specific? Thank you very much.

It is not Europe specific, but when we get feedback from our customers they would say that the demand they see is the weakest in Europe, followed by Japan for the second half of this year, and then North America. So this is not a Europe only on the phenomenon, but I think in general for our business Europe continues to lag. For example, in the second quarter all of our regions showed incremental growth sequentially but Europe did not.

Thank you.

Craig Berger, FBR.

Hey, guys, thanks for taking my question. You said in your commentary that FM tuner in the handset and CP modems are 12% of revenues. Can you help us understand how big is FM tuners going into handsets? Is it a total of the FM tuner business and how big is CPE modems as a piece of the total modem business?

Well, the handset FM tuners are at 6% of revenue, 6% of company revenue and that is out of broadcast revenue that is now just about a third of the overall company revenue. As it relates to CPE modems, that too is at 6% and the access business that is reported in is 23% of company revenue. Does that give you all the data points, Craig?

Yes, that is helpful, thank you. And then I guess on the video products, what type of -- you talked about growth in the fourth quarter. Is the weakness in the third quarter more of an inventory issue, a demand issue, or both? And then how do we think about the slope of the recovery in the fourth quarter?

Well, provide the data point on the extent of issuing the third quarter; the first-half revenues from video is actually ahead of the $60 million run rate. So it's down more than $30 million in first and second quarters combined.

We are going to see a large sequential decline in the third quarter that should certainly help to reduce the imbalance between the inventory and the end-user demand. Most of our customers are showing reduced forecasts into third quarter. The only exception being the customer where we won the media refreshes with our new TV tuner.

The third -- the fourth-quarter revenue levels should swing back to what we have enjoyed in the first half of the year, particularly with the full ramp of the new models at that customer. So I do think that $60 million is very achievable. Of course, with the new win we would have expected significantly more.

And then last question, just based on the design wins' progress that you are already making in LCD TV tuners for 2012, how do we think about the year shaping up?

I think there is a lot good happening in that front, Craig. Obviously this win that we are talking about for the second half is going to translate into a larger share with that customer in 2012. And this has been a customer that has been relatively timid in adopting the silicon tuner, so that is a big net win for us.

The other customers we have been enjoying business with are also looking to us as their major supplier, in some cases sole supplier, of silicon tuners in 2012. And they do intend to increase the amount of business they direct to silicon tuners that they did in 2011.

Thank you so much.

Steven Eliscu, UBS.

-- on the TV tuners. Just trying to understand in terms of the ramp here; would have thought that customers converting to your solution would have been adopting -- still in the adoption phase. So is the decline related to competition or is it just the slow TV market slowing the overall adoption of this switch to silicon tuners?

Steve, just to give you the profile of what you can expect in this business, they do have a model years, so a big portion of the new designs start ramping in the first quarter. Occasionally they do introduce media refreshes, although that is a small portion of their overall volume.

So once you are designed in in the beginning of the year, you ship with that model for all of that calendar year. So there are no -- other than the refreshes that can take place, there are no changes throughout the year in terms of the share you can enjoy. So the revenue trajectory that we are talking about here sequentially is completely dictated by the end-user demand and the inventory that they are holding today.

Okay, that is very helpful. And then switching to the touchscreen controllers. In terms of gaining more substantial traction beyond the initial platform that you have announced today, how do you see yourself doing that and becoming strategic as a touchscreen controller supplier versus just being used to get better pricing and being used as leverage from the incumbent touchscreen controller vendors that you are competing against?

This type of device is really in our sweet spot in terms of a technology provider because this requires a high-performance device at a better cost point than the competition. In many other high-volume markets we have shown our ability to do that.

So the product that we are talking about here that is optimized for smartphones does provide a superior performance to what you might find in the marketplace today at a more attractive cost point.

So we do believe that we will be able to leverage this across many other platforms. The customer we are engaged with today is no stranger to us and knows us well and knows our technology well. So we are confident we will be able to expand our footprint inside this customer, but also we will be able to leverage that across other customers. I do think that we have just started innovating in this space.

Great, thank you.

Ian Ing, Gleacher.

Yes, you talked about optical communications cooling off a bit and just wanted to confirm that is typically these pluggable optics used in enterprise, WAN, SAN, and storage. And is this fairly consistent among all your customers? How much runway do you have in terms of penetrating this opportunity with your small form factor MCUs?

Okay, so the exposure we have to optical communications spans SDH/SONET [boxes] to DWDM for optical backhaul for wireless infrastructure to fiber optic transceiver components that you are alluding to for MCUs. So the most visible demand issue appeared with our top telecom and datacom customers in Q2, which appears to be going into Q3 as well.

With the MCUs it's a little bit of a mixed story because in the first half we have also ramped a number of new customers and programs with our devices in this sector. So on one hand we are ramping new customers and growing share. On the other hand from pretty much all these customers we are seeing a slightly lower demand.

So it is not a huge reduction in demand as the video segment, but it is broad and it is coming from a number of different customers.

Thanks. And then a question for Paul. You talked about -- I think on the last call we talked about comp -- Q3 compensation going up a bit and OpEx going up but then flat in Q4. Is that still the case? Should we expect fairly flat OpEx in Q4?

Yes, I think given the current market conditions, if they persist you will see OpEx in Q4 to be not terribly dissimilar from Q3. Q3 is going to be up about $1 million as we talked about, and basically OpEx is our lever for managing profitability. So we are going to manage discretionary spending pretty tightly and limit our hiring to the most critical needs.

Okay, thanks.

Alex Gauna, JMP Securities.

Good morning, thanks for taking my question. I was wondering, you have addressed quite a bit on the timing front, networking front, but can you say does it map pretty closely onto some of the disappointments, negative pre-announcements that we have seen it during the quarter; does it go beyond that? And how are your customers framing the duration of the slowdown?

Well, we are cognizant of that news as we provide guidance in Q3. The orders in the last four weeks or so have been subpar in our broad-based business. So one of the reasons that we are guiding that business to be lower sequentially is due to that.

When we talk to our customers, the overall expectations for the second half have come down quite a bit from the earlier expectations. But in general, I don't think anybody is -- with the exception of the challenges in the TV space, I don't think anybody is expecting a significant decline or anything of that sort.

Okay. Then as a follow-up, I was wondering if you could talk about are there any areas where you have any pricing leverage? It is a tough environment for anybody. I know it is an odd question to ask in an environment like this, but it seems like some of the merchant semiconductor manufacturers that have been managing through this tough time have done so through pricing. Do you have any areas where you have considered that or have that leverage?

No. I mean we are not into commodity parts where we see those wild fluctuations driven by demand. But I think the overall environment for ASBs, I would say, have been somewhat favorable compared to what you might ordinarily expect. So the ASB reductions that we have seen sequentially or year-on-year have been okay.

Okay, thanks very much.

Vernon Essi, Needham & Company.

Thank you very much. Necip, I was wondering if we could just go back and revisit your point about the emerging market size of broad-based, and if you could just kind of qualitatively walk through where you are seeing the most activity in the middle of the year.

I mean, obviously, the touch controllers the highlight there, but how are the other businesses faring and how do you see them shaping up towards year-end?

I think the MCU business is doing very well. There is a lot of activity there. We have talked about a record number of design wins earlier and we feel good about what is happening in that space as we continue to offer solutions in home automation, security, metering and so on. We are making good progress in our emerging product areas in broad-based, in wireless and isolation. Wireless continues to do very well due to the higher performance we are able to offer in our target markets.

So as I said, wireless and isolation combined albeit at a small base today is set to show a very attractive growth rate over the next six quarters and we are looking for it to -- for it to double for us.

Okay. And then just as a follow-on, going over to the MCU side of the house. How would you characterize the market? Obviously there has been a lot of turbulence the first half of the year. Do you believe you are still gaining share?

And just in general do you feel that your approach to the market is going to yield further results in 2012 without having to go upstream to 32 bit? Thanks.

Well, I do think that we are gaining share. I think that is evidenced in the numbers. MCU business hit another record as well in 2Q and will have a record year this year. So there is no doubt in my mind that we are gaining share.

Of course, every MCU provider is telling you the same thing, but you can look at our numbers and judge for yourself. I do think that 32 bit is going to provide a significant opportunity to expand our addressable market, and we are well underway in developing the first couple of platforms in that space.

Thank you.

Brendon Furlong, Miller Tabak.

Question on the new tuner on the refresh with the new tuner product. As we go into 2012 will this new tuner product be gross margin enhancing as you had previously expected?

Yes.

Okay. And then I guess a question just on the MCU side. A lot of talk there on the comms but how was your industrial end-market on the MCU side?

That was one of the end markets that provided good support for the business for us in the second quarter. Particularly in China region we are seeing a lot of strength coming from industrial, and I think that is likely going to continue into the second half at current run rate.

Okay, thank you very much.

Arnab Chanda, Roth Capital.

Welcome, Paul, and thank you very much, Bill. A couple of questions. First is exactly when did you see the weakness which seems broad-based, was it throughout the quarter or was it more towards the end of the quarter?

And then a quick question on your touch business. What exactly do you think caused you to be successful this time around in the handset versus in the past? Is it a new product or the fact that you can sell both sensor as well as the microcontroller? And what does that mean that for, say, future tablet and smartphone design?

So your first question first. On broad-based we have seen orders weakening compared to the second-quarter run rate in the last four weeks or so.

Some of this is not unusual this being a slower summer season. But connecting it with what we are hearing from some of the customers, what we know is taking place in the optical networking sector, and what we have heard from some peers as well, we believe that this will lead to a sequentially lower revenue base for the third quarter.

Your second question was about touch. As I said, this really is in our sweet spot. When we decided to develop a revised product optimized for that space, we wanted to make sure that we will be able to hit the cost points that would be attractive to our end customers and also achieve a performance at or above the competition. And I think we have done that.

For us this isn't the end of the road. There are several follow-on products on the roadmap that will both enhance the performance of the device as well as continue to drive the costs lower. So we certainly have aspirations to be a major player in the market and that will eventually lead us to participate in the larger screen sizes as well. The current device is limited to smartphone sizes, but the technology is very applicable to larger screen sizes.

Thanks, Necip.

Blayne Curtis, Barclays Capital.

Just a couple on timing, if you could just give me whether -- just relative strength with the SpectraLinear acquisition, did that business, ex that, grow? And then how will you look at the guidance, maybe just for the whole broad-based segment? And if you could give any perspective as to the relative strength of this segment.

Okay. SpectraLinear revenue base did grow quarter on quarter but that is also due to an additional month that we have had the business in. And that, more or less, explains the growth that we have seen in the timing business. The rest was flat quarter on quarter for the dynamic side I described.

Now when we look at the overall broad-based business, I think the growth and timing still will be superior, significantly ahead of the overall growth rate in broad-based this year. The emerging product lines, of course, are growing at a very high rate as well, albeit from a slow base.

And I do expect that growth to continue into next year as well. Of course that will be augmented further by the growth in [HI].

Got you. And then just finally on the video side, just trying to understand the flow back in December and what is driving that. Do you think that business can get back to the record level to hit that $60 million for the year?

So I said the first-half run rate was ahead of $60 million. So even with the decline in 3Q, unless everyone decides to stop buying TVs, we should be good for $60 million this year. And I do certainly think that we will get back to revenue levels -- record revenue levels. Whether this happens in 4Q or 1Q I don't have that visibility yet, but the business is certainly trending in that direction.

Got you. Thanks, Necip.

Blake Harper, Signal Hill.

Thanks, a question for Necip. Just wanted to hit on the timing markets again, and just outside of the communications I guess what are you seeing there? I know you just talked about the SpectraLinear stuff, offset them, but if you could kind of break it by different markets and what you are seeing there?

Well, actually the rest of the business and timing that pertains to other end markets are doing pretty well. As a matter of fact, in 2Q when I talk about the timing business, excluding SpectraLinear which was flat quarter on quarter, we have seen a decline of -- (inaudible) decline in top telecom customers, but the rest of the customers grew to make up for that decline. And it takes a lot of customers to make up for that revenue base.

So I am happy with the growth in that other base, but still the majority of the business in timing is coming from networking. And there is a demand issue we are impacted.

Got you. And then just a follow-up on that. What percentage approximately is the communication market of the timing business now?

I want to say overall at least two-thirds.

Okay, thanks.

Srini Pajjuri, CLSA Securities.

Thank you. Good morning, guys. Necip, the legacy business that you mentioned is I guess total of 12% of sales. How should we think about how that is going to trend for the next several quarters? Do you expect it to remain at that level or do you expect it to come down?

I expect it to come down, but I do think that it's going to be at a very measurable pace. I don't expect to see large, steep declines. So you can take this and for modeling purposes reduce it by a percent or two for the next 10 quarters.

Got it. And then on the touch business, Necip, just curious you said you are pretty competitive when it comes to the pricing of -- for the low-end markets. Comparatively, who are you seeing out there, who do you think is your biggest competitors?

And then as this product ramps, and maybe for you, Paul, how should we think about the gross margin impact overall?

You know, I think you know the major players -- (inaudible), Cypress -- and they continue to dominate that space. But it is a crowded space with many other suppliers, large and small, entering the market so you really need to differentiate in providing value proposition between the performance of your device and the cost point of your device. And we feel pretty good about what our current product represents and even better about what the next set of products in the roadmap would translate to.

And, Srini, on the gross margin front I think this product would fit within the sweet spot of our corporate gross margin.

Okay, great. And finally, Necip, you know to still have a very strong balance sheet. Just curious as to what the plans for your cash are going forward? Thank you.

Srini, I will take this. This is Paul. In the second quarter we repurchased over $23 million worth of shares, about 600,000 shares. We have about just under $90 million left on the existing authorization and we will continue to remain active in that in the second half of the year, no doubt.

Any potential M&A, Necip, given that you just closed one deal?

Given the environment, we will probably stay -- sit tight for the time being. We are going to integrate the SpectraLinear business successfully and leverage it the best we can. Of course, there are things that we are looking at on an ongoing basis but I wouldn't expect anything imminently in the second half.

Thank you, Necip.

Suji De Silva, ThinkEquity.

On the video business, I understand how quickly that next-generation product cuts over. What percentage of that unit is exiting 2012? Will it be -- and is that the delta between gross margin being at the low-end versus the midrange roughly?

I wouldn't suggest that the majority -- perhaps a large majority of our TV tuners in 2012 will be the new generation device.

And is that really [what has held up] in the low end?

Yes, what I would say on gross margin, Suji, is that video -- the video product line in the near term is down; that puts a little bit of upward momentum on gross margin. But, with the broad-based revenue being down as well, that puts a little bit of counteracting pressure on gross margins.

So I think even -- long-term we do have a cost roadmap for video and we have demonstrated improvements in video, even in this past quarter. And we will continue to see that. But it will still remain below the corporate gross margin average.

Thanks, Paul. And the other question I have is on OpEx being flat and you guys kind of maintaining control there. Should we worry about your ability to fund the product pipeline? Are you redeploying people within your headcount to be able to continue to bring new products to market? Can you just talk about that a little bit? Thanks.

What we are doing with OpEx is, as we talked about earlier, is managing it tightly. But we have a lot of confidence in what we see in 2012 on the new product side so we really don't want to cut investments per se. We are just going to manage our discretionary spending as tight as we can.

We will have some hiring, but it will be really limited to the most critical needs and projects.

And there are some redeployments of resources that are taking place to optimize what we have on the roadmap.

So that is how you can fund new growth, the growth opportunities, [by redeploying]?

Yes, there is no compromise there.

Okay, great. Thank you.

And there are no further --.

Sorry, go ahead.

And there are no further questions at this time. Are there any closing remarks?

I would just like to thank you for joining us this morning. This now concludes today's call.

This concludes today's conference call. You may now disconnect.