Silicon Laboratories Inc (SLAB) 2012 Q1 法說會逐字稿

Good morning, my name is Sara, 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). Thank you.

Ms. Pleasant, you may begin your conference.

Good morning, this is Shannon Pleasant, Vice President of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the Company's financial results. This call is being webcasted and will be archived for two weeks. The financial press release, the reconciliation of GAAP to non-GAAP financial measures, and other financial measurement tables are available on the Investor page of our website at, www.silabs.com.

I'm joined today by Tyson Tuttle, 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 our prepared remarks.

Our comments 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 affect on our Business, operating results and financial conditions. We encourage you to review our SEC filings thatidentify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

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

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

Thank you, Shannon. Good morning, everybody. We had a great quarter with strong results driving meaningful upside to both revenue and earnings. New product cycle momentum allowed us to overcome what is a typically a weak seasonal first quarter. Revenue of $125.7 million was down only slightly from a strong fourth quarter we reported, with share gains in TV tuners and [ramp in touch surprising] to the upside. While weakness in the telecom market and a general slowing in the consumer end-markets persisted, new design wins continued to propel our Business.

I'm going to turn the call over to Paul to review the specifics for the quarter, and then I will provide some further commentary on the Business and our Q2 outlook. Paul?

Thank you, Tyson. And good morning. As Tyson mentioned, revenue of $125.7 million exceeded our expectations,up 5% from the same period a year ago.

First, I'd like to cover the GAAP results, which included approximately $6.7 million in non-cash stock compensation charges, or $7.9 million, excluding a reversal of prior stock compensation related to Necip Sayiner's separation agreement. The Q1 impact of the separation agreement included a net $1.2 million credit to stock comp and a $300,000 cash component. The balance of the agreement will be recognized through Q3.

We also recorded a $950,000 one-time credit related to purchase accounting from a prior acquisition.

First quarter GAAP gross margin was 59.7%. R&D investment of $32.9 million andSG&A expense of $25.4 million offset the gross margin decline, and resulted in GAAP operating income of 13.3%, an improvement over the same period a year ago.

The GAAP tax rate was 16.3%, resulting in GAAP earnings of $0.33, a 14% sequential increase in a six quarter high.

Turning to our non-GAAP results; going into the quarter, we had anticipated that Broadcast would be down seasonally, Access would be about flat, and Broad Based would be up. Given that mix profile, we expected gross margin to stay about flat. As near-term gross margin is largely a function of mix, better than expected Broadcast revenue brought gross margin down to 60%.

Starting with Broadcast; as the quarter progressed, we saw significant strength in video, which was up by more than 15%. As a result, video largely offset the seasonal weakness in audio, and our Broadcast products in total ended the quarter about flat versus the guide down.

Access was down sequentially about 10%, as PON equipment demand slowed somewhat, affecting our SLIC business. And modems and set-top boxes continued their anticipated decline. Set-top box modems represented between 3% and 4% of our total revenue in Q1. This has become a much less significant headwind, particularly given the potential for growth in modems as we gain share in multi-function printers.

The Broad Based products were up by about 4%, driven primarily by strength in our touch controller at Samsung. Our MCU and isolation products also posted modest counter-seasonal gains during the quarter.

Timing declined about 7% sequentially, despite significant share gains across our target customers. Telecom end-market weakness was a driver behind lower demand. Softness in Timing also contributed to the lower corporate gross margin. On a long-term basis, however, this remains one of our most promising product lines, and we expect to return to growth as the market improves.

Moving down the P&L; operating expenses came in lower than initially forecasted at $52.7 million. R&D remained virtually flat at $29.3 million, while SG&A increased slightly to $23.3 million.

Despite seasonal increases in payroll taxes and salaries, some delays in hiring and tape-outs combined with spending controls, resulted in just a 1.2% rise in OpEx, considerably favorable to the 4% increase we guided. We expect operating expenses to increase sequentially, primarily in R&D.

Operating income, therefore, was better than expected at 18.1% of revenue, and net income was 14.9% of revenue.

The Q1 tax rate was 19.2%. As discussed last quarter, until the federal R&D tax credit is reinstated, we expect our tax rate to remain higher than what we have normally enjoyed. I expect it to be in the 21% to 22% range in Q2.

Solid operation results provided significant earnings leverage, resulting in earnings per share of $0.43, an increase of 7.5% year-on-year and above the high end of our guidance.

I remain very satisfied with our inventory levels and the health of our balance sheet. In Q1, accounts receivables increased to $61.4 million, or 44 days sales outstanding. We continue to have no known collection or bad debt problems.

Inventory was down sequentially to $34.3 million, or 5.9 turns. This is a meaningful improvement from 4.5 turns during the same period last year. Channel inventory grew slightly, ending at a lean 45 days, while the balance increased by 13%, sequentially.

Cash flow continues to be strong with an ending balance of $351 million, up $26 million, sequentially. There were no share repurchases in the quarter on the $50 million authorization that expired this month. I am pleased to report, however, that our Board of Directors has authorized a new share repurchase program of $100 million through January 31st, 2013.

So in summary, we began 2012 on a strong note, exceeding guidance on the top and bottom lines. Operating leverage remains a key component of our near-term strategy, as we achieve higher revenue levels and control expenses to maximize the bottomline performance. Tyson?

Thanks, Paul. I'd like to start by acknowledging Necip Sayiner and his contribution to the good results we're reporting today. I would also like to thank him for the very smooth transition he presided over during the last few months. As I take the helm, I see tremendous potential for the Business as we hone our product focus and extract the maximum value for our innovative technology. We have a team --the team, we have the product line-up and the market runway to become one of the leaders in the semiconductor industry. I'm looking forward to guiding the Company forward as we break through and grow to be a larger force in our space.

Now I'd like to provide some color on the major product areas for the quarter. Let's start with Broadcast, which was about one-third of total revenue in Q1. Video revenue grew double-digits sequentially as the design wins we captured for 2012 TV models ramped in a big way. Even with the annual typical price declines, the business grew 30% compared to Q1 last year. Tier One customers continued to dominate the volume as they transition to Silicon tuners. We're also starting to see more activity from TV makers in China and Taiwan that could translate into revenue late this year and early next year.

The impressive start to the year in video may result in some inventory overhang in Q2, as module makers who ordered ahead of the larger TV, builds. We are, therefore, forecasting the video revenue to be flat to down slightly, as module and TV makers balance their inventory. There is still a cautiousness of the overall TV market, with little end-market growth anticipated. But given the strong conversion at our large customers to Silicon tuners, our dominant position and a very positive start to the year, we are comfortable with our initial expectation that we can grow our market share to 30% or greater in 2012.

The audio products declined in the first quarter, as expected. Q1is typically a seasonally weak quarter for this consumer-oriented business. FM tuners into handsets have stabilized somewhat, and are now less than 5% of total revenue. The non-handset business was down more meaningfully, with demand in Europe being notably weak.

I like the size of the opportunity we're addressing in the broader consumer and automotive markets, and see this as a growth business. We're continuing to add design wins across radio segments, which gives me confidence that we'll see a rebound near term as we benefit from seasonal improvements in the second half, and longer-term as our emerging automotive business ramps.

The Broad Based business was up again, and was 46% of our total revenue in Q1. I'll start with the touch product line, given its contribution to the outperformance in the quarter. We mentioned early in Q1 that we were seeing a strong ramp at Samsung in the Galaxy Y handsets. As a result, touch was nearly 8% of revenue in Q1.

While we've been steadily working to diversify our customer base in touch, I don't have any new customer wins to report today. At Samsung, we did add derivative handset wins to the two platforms we have secured. But we did not add any new platforms during the quarter. The revenue profile for the product line, therefore, will likely parallel the life cycle of the current Galaxy Y over the back half of this year.

As you know, this is a competitive and fast growing market. New entrants in Korea and China are having success establishing a foothold in low and mid range hands sets and pose a significant threat to incumbents. We have a compelling technology and a good cost structure, but with the market requirements rapidly evolving, I'm reviewing this business through a strategic lens to be sure it's one we'll be happy with for the long term.

The largest product line in our Broad Based category is our MCU business, representing about 17% of total revenue in Q1. MCU grew modestly on the strength of communications and industrial applications, while consumer was relatively weak. Regionally, Asia was down as expected, while the American and European distribution channels grew. Design wins increased by 25% year-over-year, and we added a new high volume win for wireless LED wrist bands. USB MCUs were also up again sequentially, due to notable design wins in portable medical devices.

Strategically, the Company added a new growth sector, with the introduction of our Precision32 MCU line. The new family of 32 bit arm micro-controllers gives us access to the fastest growing segment of the MCU market. Our new products offer a significant improvement in terms of power, flexibility, and ease of use, compared to solutions from existing 32 bit suppliers.

Following our successful strategy in 8 bit, we focused on creating a unique set of integrated mixed-signal peripherals that offer system savings, enable new features or interfaces, and are easy to design in with a common tool ecosystem. Early customer activity on the 32 bit products has been in test and measurement, home automation, metering, and portable medical devices. We plan to further expand the 32 bit portfolio this year, and expect to see early revenue this time in 2013.

The second largest piece of our Broad Based business is timing, which was about 12% of revenue in Q1. Timing declined sequentially, reflecting the continued weakness among our telecom customers. We did see good growth in non-telecom applications in Q1, including broadcast video, test equipment, medical equipment, and embedded computing. These growth areas are expected to gain momentum, given the design win pipeline.

Overall, we increased design wins by nearly 50% year-over-year in Q1, reaching record levels. The design wins were spread across the entire timing portfolio, with particularly good performance from some of the newly-launched products. So I don't have any concerns about the fundamentals of this business.

In fact, we continue to believe that operators will realize their plans to deploy higher speed optical transport equipment to lower the cost per bit, improve performance, and expand capacity. This move will benefit our high-end timing business. We also view an inventory snap-back as highly likely, given the market is undershipped relative to demand, for some time. Although we were not able to pinpoint the exact timing.

And finally, we have substantially expanded our timing portfolio over the last 18 months, allowing us to address the full spectrum of applications and market segments and drive further incremental growth outside the core telecom market.

The emerging pieces of our Broad Based business continued to show good promise, as well. Isolation, in particular, grew nicely in the quarter on the heels of volume in plasma TV and green energy applications. We announced our latest generation EZRadioPRO product line in Q1. These high performance, low power, sub gigahertz transceivers are capable of exceptional range and are targeted at applications from smart meters to security devices.

We see a large degree of synergy between our wireless and low power MCU products and continue to identify applications where this combination is highly valued by customers. The wireless and MCU products, along with our Broad Based technologies, are well-positioned to capitalize on long-term trends in green energy, smart energy and the Internet of Things. I see this as a key opportunity to propel accelerated growth in our Broad Based business, going forward.

This is the beginning of a larger strategic initiative to develop a suite of technologies and software that will allow us to own the content of the many embedded systems being interconnected in home, commercial and industrial applications. We're building a set of capabilities that I feel strongly are going to be the backbone of a very substantial and valuable piece of our Business in the future.

Now for Q2 guidance. We're currently expecting the strength of our Business to continue, with revenue up 3% to 7%. We're anticipating that Broad Based and Broadcast will be up, and Access will be flat. We expect gross margin to be flat to up slightly. We anticipate operating expenses will be up by about 2% to 4%.

On a GAAP basis, we are projecting earnings of $0.24 to $0.29. On a non-GAAP basis, we expect earnings to be up 5% to 16%, to $0.45 to $0.50. Thank you.

Thank you, Tyson. 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 question to one, with one follow-up. Operator, please review the question-and-answer instructions for our call participants.

(Operator Instructions). Your first question comes from the line of Craig Ellis.

Thanks for taking the question. And Tyson, congratulations on the new role. Just following up on the TV tuner product; can you give us an update where you stand with cost reduction -- efforts on that part? And how should we think about the Company's ability to impact the gross margin profile of that product line, as we go through this year?

Okay. Thank you very much, Craig. Yes. I'd be happy to share with you a little bit about our TV tuner business. The -- we're on our fourth generation TV tuner that we are currently locking in wins for 2013. And the current third generation part is what is in production this year.

So compared to what we were shipping last year, we've been able to achieve significant cost reductions for the parts shipping this year. And we'll see a further cost reduction going into next year. And we anticipate that those cost reductions will outpace the ASP -- natural ASP declines that we're seeing in the business. So we believe that going forward, that margin and that product line in video will improve, even as we grow units, and even as we grow revenue going into the second half of the year into next year.

Okay. And so you'd expect gross margins in that product line to improve half on half, as we think about 2012?Is that clear?

That's right. I don't believe that that's going to get to the corporate average gross margin. But as video has -- it's been a little bit of a drag on the corporate gross margin, it will become less of a drag. And also as you see the Broad Based business and the other businesses gain a larger fraction of our revenue, that will also diminish, in terms of its swing on the gross margin.

Okay. And then you mentioned doing a strategic review on the handset capacitive touch business. Can you expand a little bit more on your thoughts there? What is it that you'll be focused on? And over what time period will you be conducting that review? And when should we look for an update on what your findings are there?

Right. When we look at markets, we look -- certainly we look for a growing market, and this is certainly a growing market in terms of units. But we've seen some strong ASP declines in this market, not in terms of our sales, but just in terms of winning new sockets.

So if you look at the competitive landscape, there are a lot of low cost, low margin players that are getting their solutions to be good enough. And so these are, in particular, guys in Taiwan, China, Korea. And so that reviewing the competitive landscape, looking at the market, we actually believe that the market may be shrinking in overall dollar terms.

And then we also look at the integration trends and whether those are favorable to us, either in terms of this function getting integrated into a SOC, which is not the case here, but also into the driver ICs and trying to get our hands around that. In other words, we want to be confident that the further investment in this business is going to be justified, in terms of a long-term successful business for us, both in terms of profitability and our ability to hold onto it, in terms of integration.

We're currently going through that process right now. I don't have any update for you now. But we'll update you as soon as that is complete.

We still believe that the touch business is a strategic business for us, in terms of it has a broad range of applications. Our 32 bit product line that we just announced has touch capability integrated into it. So while the handset piece of this may get very competitive, we still believe that what we've learned in addressing the handset market will be broadly applicable into a number of different areas. So that's also a part of the review

Okay. That makes sense. And then lastly, this is for you, Paul. You mentioned there was a credit for stock comp in the first quarter results. Can you quantify how much that will be in Q2 and 3Q?

Yes Craig, the accounting for the separation is bit complicated. What it resulted in was a credit, as you know, in Q1. And then there will be a charge of about $3 million in Q2. And that's baked into our GAAP guidance since it's known and since it's public -- it has been publicly communicated. And in Q3, it will be probably between $0.5 million and $1 million.

All right. Thank you, guys

Thank you.

Your next question comes from the line of Sandy Harrison.

I'm here. As far as the TV tuners, there's been some discussion about pricing in the market. And as I understand it, you guys locked that pricing in ahead of shipping, usually a year. Is it fair to say you're pretty much holding it here throughout 2012? And at what point do you start looking and discussing 2013 to give you more confidence, per your earlier remarks about having some margin expansion for next year?

Yes. Right now, we've locked in a number of wins already for 2013, and are in the process of locking down additional wins in 2013 right now. So I would say that by -- certainly into Q3, we will have locked in the majority of what we would have in 2013.

Looking at the pricing that we've been winning, our strong position of the Tier Ones, our encompassed position in terms of performance -- there's a very high bar to entry here. And we've been able to maintain ASPs through this process, which I believe will lead to margin expansion in this product line next year. So I'm quite confident, given where we stand, that we're in pretty good shape.

And Tyson, you sounded pretty excited about the 32 bit productsand the opportunity there. You mentioned a couple times, not only in prepared remarks, but in the Q&A. Can you remind us on what -- you view the TAM expansion for that product? And when you think you can start to recognize revenues from that?

Right. The 32 bit market is a multi-billion dollar market. We believe that the first products that we've introduced address about $1 billion of that. So that's incremental, I believe, on top of the 8 bit market that we've been addressing.

So just -- it does expand the types of applications that we're able to address within our existing customer base. We've got customers that are requesting 32 bit, so that we can expand our business with them. And so certainly those are some of our first target alpha customers for these products. And we also are integrating all of the software and the tools to make it very easy to migrate between the 8 bit and the 32 bit platform that we've developed. A lot of the peripherals that we've surrounded our micro-controller core with in 8 bit, we've carried over and have enhanced in the 32 bit platform.

We think that we have a really differentiated product. It opens up a whole new frontier of applications in an additional segment of [TAM] for us and we're very excited about the prospects for this.

Just in terms of modeling, the -- this is a Broad Based business, and we do believe that we'll start to see some revenue starting this time next year. But it will see that typical micro-controller ramp. So I believe these will also be very long-lived products and have a very favorable margin profile.

Just a quick housekeeping item for Paul; the higher R&D in the second quarter, I'm assuming that's some of the masks in way for costs that didn't come in in Q1?

Partly. And there is some planned tape-out activity that's -- that makes this a very strong tape-out quarter, Sandy.

Great.

There is a little bit of rollover and there's a lot of activity that's taking place in the first half of the year

Great. Thanks for taking my questions.

Your next question comes from the line of Anil Doradla.

Yes, guys, a couple of questions. Tyson, can you talk about the growth of the Chinese and Taiwanese players on the overall TV tuner business?These guys are very cost sensitive. You talked about your fourth generation, you talked about offsetting some of the ASP declines. But given that these guys can be very price sensitive, what makes you feel confident of the overall trends?

And the follow-up question I had was on the telecom side, especially from a timing perspective; any thoughts on when you can see some improvements? Or any thoughts on the overall telecom improvement from your timing products, in your point of view?Thanks.

Okay. Thank you. Got your two questions. Let's start off with the TV tuner in China and Taiwan. We started the TV tuner business going after the Tier Ones, where we believe that we -- they have the highest performance requirements, but also if we proved ourselves in that market, that we would have a substantial barrier to entry for the products. And so that position takes us -- we're coming at the China and Taiwan markets from a position of strength. When you say that there's a Samsung -- you're in the Samsung TVs or you are in some of the Tier Ones, they definitely listen.

A lot of the China makers use reference designs and we are working with the [SSC] makers in order to be on those reference designs to make it easy for these customers to design in the product.

We also believe that some of those -- while the Tier One makers are using modules for the most part and putting our chip inside of a module and then putting that inside of the television, we believe that a lot of the China and Taiwan players may put the tuners directly on board. And the way our chip is designed, it is very favorable for that integration on the board. We don't require any external components, and it's a fully-tested solution. So it reduces the yield issues that you would see with less integrated type solutions.

And just the pricing environment -- I would say that the higher volume Tier One business is similarly price competitive to the China and Taiwan markets. So I don't see any difference there, in terms of the profitability as we expand into those customers. It's a competitive market, but they still value the performance. A lot of these -- certainly the China market, analog performance is key. So having that performance advantage, I believe, helps us win in those markets, as well. And again, the fourth generation part that we're sampling has a very favorable cost structure.

That's on the TV tuner side. Hopefully, I answered your question there.

On the telecom side, we are well-positioned to benefit from a snap-back in the telecom market. We've seen some indications of improved bookings this area. But I don't think we're ready to predict when a full snap-back of this business would occur.

I think that our timing business is well-positioned there. We've also expanded the portfolio a lot and are gaining share outside of the telecom market. So I feel very good about our opportunities in timing, both within the telecom market with the build-out of the infrastructure and the increased demands on bandwidth. And that that's going to be a good long-term driver -- and also our opportunities outside. So hopefully that answered your question.

Good and congrats.

Thank you.

Your next question comes from the line of Vern Essi.

Going back to your strategic overview on the touch front. And I think, holistically, you've always talked about this market as, you call it, human interface. Could you discuss some of the puts and takes of that, in terms of some of the other things that go into that bucket, and how they relate to your strategy longer term?I always thought the proximity sensor side would have been a good cross-sell with these touch solutions, how do you see that playing out overtime with what you originally outlined?

Right. So in the human interface bucket, we do include our infrared and proximity sensor, ambient light sensor products. And we've seen a broad range of traction with those products.

On the touch sensor side, you've got this -- everyone pays attention to the handset, and that is the very highly visible and high volume piece. But there are a lot of applications for touch sensor technology outside of handsets. I've always viewed the handset win that we got -- we started developing these solutions really with the micro-controller business and the broader range of applications in mind.

And as we were addressing the touch screens, we had a good solution that was suitable to design into Samsung. And we've had a long history with that customer. We've shipped them products for the last dozen years or more. We've shipped them products into their televisions, FM tuners in their handsets, and modems into their fax machines, isolators into their TVs. So in a lot of different ways we are engaged with Samsung, so this was an opportunistic win for us. We've remained focused on the broad range of applications, from buttons to sliders to screens, and lots of different applications in that capacity of touch technology. And continue to integrate that more deeply into our micro-controller platform.

So and in going into the handset, there are stringent performance requirements that they have. And we've gone through a learning curve there, as they've raised the bar in terms of performance. So the review that we're having is, do we want to go after, with both feet, this handset touch controller market? So you've got to understand where the competition is. And when you start to see companies in China and Taiwan and Korea that have competitive solutions, is that really something that's smart for us to go after, and would we be able to hold onto that long term?I'd be happy with that business.

That's the way I'm looking at it. I think you've got this as a fundamental core technology that will get integrated into a variety of devices. And that's really been our focus since the beginning. And will continue to be our focus, even as we evaluate the Samsung piece.

So to put that simplistically, it could play out, to some extent, maybe like your FM tuner business has in the handset area, where it would be deemphasized, then you'd be hitting revenue elsewhere, outside of the business, using those core technologies.

Exactly. For instance, our FM tuner went into consumer applications and automotive applications and that will be a significant business for us and a growth business today, going forward. We view this in a similar fashion

Thank you, Tyson. To switch gears -- Paul, on the SG&A side, can you review again what the causes are for why that's declining and looks to be relatively flattish, sequentially?

Well, we have a couple things going on with SG&A, Vern. One of the areas of SG&A -- one of the significant areas is G&A. And one of our profitability indices is such that we try to leverage G&A as the Company grows. And we make -- we do make modest investments in sales and marketing to support the R&D investment. But ultimately, the -- holding G&A flat will bring down SG&A, as a percent of sales, over time. And that will remain a goal for us.

Okay. And is there any -- a follow-on point to that -- I think in the past you had talked about bringing on a new distribution partner, I think in Arrow. Any changes in the terms of commissions that you've been paying out or anything that might move, in terms of percentages of sale, on the selling side?

Arrow has been growing. Each quarter they continue to penetrate the market even further. They've grown from a base of zero to being a significant contributor to revenue today. And we expect them to continue down that path. And what they're really helping us is in our Broad Based business. We see them as a long term strategic partner. Fundamentally, from the SG&A side, there's really no impact that they have on our spending there.

Okay. Thank you.

Your next question comes from the line of Tore Svanberg.

Yes. Thank you. Tyson, I was hoping you could talk a little bit more about the Q2 outlook. What are some of the moving parties. You are, of course, expecting growth. But I just want to understand what's going to drive the growth in that quarter? And maybe you could also talk a bit about the type of visibility you have towards the 3% to 7% guidance.

Let me see if I can help you here. We do anticipate the Access piece to rebound somewhat in terms of the -- it will be flat, in terms of the guidance. But we do believe that there is some strength in there, in terms of gaining share in fax machines and potential on the SLIC side, as well. So we feel comfortable with our flat guidance there.

In terms of Broadcast, we talked about the TV tuner having some inventory overhang on the modules and with the TV makers. We do believe that the audio piece will make up for that.

And on the Broad Based side, we see a fairly good strength across all of those businesses. So I think that the growth that we're predicting here is really driven by strength in the Broad Based pieces. And we do believe that touch -- the touch piece will continue to deliver. But we'll start to see the natural life cycle of that Galaxy business. So those -- we can get into a little bit more, if you'd like.

No. That's helpful. On the touch business, I think you mentioned it was 8% of revenues last quarter. Should we start to think that maybe that peaks here a little in the midterm, and then comes down and sort of stops at a certain level -- especially the level of your non-handset business. I'm just trying to see how we should model this, going forward, given your comments about the strategic change.

Right. We continue to look for additional opportunities with that in the handset market. And we do have some business in that touch and the human interface category outside of the handset. And we do anticipate that to continue growing. So I don't have anything additional to report, at this point, in terms of anything beyond what we've already won. And we do believe that the Galaxy Y handset will see its normal life cycle. So it will start tailing off in the second half of the year.

So just to clarify, the 8% is exclusively handset touch.?

The 8% is, yes, is the handset touch piece

Great. Thank you very much.

Your next question comes from the line of Alex Gauna.

Thanks so much for taking my question. I know you're not coming out to offer full year guidance here, but I'm wondering the puts and takes of the timing and the video, which I assume comes back seasonally in the second half? At least from a year-on-year perspective, would you expect gross margin accretion on a full year basis at this juncture? Or would the video outlook -- expect it to compress versus last year?Thanks.

Hi Alex, this is Paul. I would expect gross margin accretion through the year, if the trends that we see in Q2 persist, meaning that Broad Based begins its recovery across timing. There are a lot of predictions in the industry that there's going to be a second half snap-back in the telecom space, which we'll be a big beneficiary of that. So if Broad Based continues to show the strength that we see in Q2, that will bring some natural accretion to gross margin as the year progresses.

Okay. Thanks very much. And not to belabor the part on the touch sensor with the Galaxy Y, but in the beginning prepared remarks, I believe you mentioned some derivative wins. But then you also mentioned the tailing off. Does that mean that there is a next gen Galaxy Y coming in the back half that you are not in? And that's how we should think about modeling it?

Yes. Samsung has a number of different platforms. They take a specific platform and then regionalize that and cost reduce that. And so for the Galaxy Y, that we're aware of, we're in all of that. But there are additional platforms that we are not in. They've got a lot of different platforms and a number of different suppliers, in addition to the top two suppliers and some of the Korean suppliers in their winning models. So that's where we stand

Thank you. Congratulations on a strong start to the year.

Thank you.

Thanks, Alex.

Your next question comes from the line of Blayne Curtis.

Good morning. Thanks for taking my question. Just want to follow-up on the video seasonality. Obviously, it's hard for you to gauge. You saw a big Q1 last year. It obviously upsided you this year. Maybe you could talk about how you see seasonality progressing?You obviously see it -- you think there may be some inventory in Q2. Does it come back in Q3? If you could just walk us through your thoughts on seasonality, that would be helpful.

Blayne, I'll start this and I'll let Tyson add some color to it. We do see -- Q1 was a strong quarter for video. And as was mentioned, there is a little bit of inventory out there, but it's not a dramatic drop-off that saw, say in the second half -- or the beginning of the second half last year. And we're -- where the seconds half for video plays out, remains to be seen. But we definitely see a lot more -- see a trend that's a lot more comparable to a normalized TV year than what we saw in 2011.

Okay. Thanks. And then on Tyson, maybe just share some thoughts on what TV OEMs will be looking for the fall refresh and next year. Whether they will look for adjusted tuner only or tuner plus analog demod? Any thoughts on, just broad level, what you think the mix could be? Thanks.

Right. We certainly see a number of segments within the TV market going to what we call a [half-Dem] where the analog demod is not integrated. And we've certainly got very competitive solutions for that partitioning. We've also got a very strong position, in particular in the high end sets of the Tier Ones, where the analog demod is integrated. And we've done some specific versions to address needs at a number of these Tier Ones. So we're very strong in Korea, we've had a very strong -- and have a very strong position in Japan. And the Taiwanese and the Chinese guys are -- they have, again, a mix of the market sectors there. So we're able to leverage this whole portfolio solutions. We can address with the other demod integrated. If you don't have the demod integrated, we've got a very low [bomb] and we're competing out there with our fourth gen part, which is extremely competitive. So I believe that we're well-positioned in -- both in terms of the incumbency that we are enjoying right now.

Thanks. And Paul, quickly, the tax rate; does that carry through the year?

No. It will somewhat abate and we'll see a little improvement in the second half of the year. Some of it -- I don't want to go down a rat's hole with the dynamics of the tax rate, but some of it is just how the rate is positioned by quarter. And so this quarter is particularly -- or the current -- Q2 is particularly higher than normal.

Okay. Thank you.

Your next question comes from the line of Srini Pajjuri.

Thank you. Good morning, guys. Tyson, the touch business -- I'm curious when you guys started the review?

And my longer term question is; this is a large market, plenty of opportunity. I understand the gross margins somehow are going to be great. But if you decide to exit this kind of markets, what will you be focusing on, going forward, to drive growth? The question is, can you sustain you know 60% plus gross margins, and yet outgrow the industry, if you take a two to three year view?

We're starting that review of the touch business now. We've been accumulating a lot of knowledge, in terms of the market in the competition and understanding where we stand. I think the real question is where do we put our resources to drive this growth that you're talking about? To be able to succeed in the handset market -- we know what it takes to succeed in these markets. And we've done that multiple times, both in our wireless business and in our broadcast, the FM radio business, and you've got to drive significant R&D to stay on these cost curves. So do we invest the money there? Or do we invest it in areas where we think have a better long term potential and a higher margin potential? And so it's always that process of optimization that we're going through.

If you look at the opportunities that we've got in the micro-controller area, the wireless area, and all the intersection and the big picture trends that are going there and the traction that we're seeing. And then you look at the timing area and we've got a shot to be one of the, if not the leading supplier of timing ICs. There are huge opportunities there and the market we're addressing is very large, they're growing markets.

And I fundamentally believe that that Broad Based piece, even if we exclude the touch, will certainly become the majority. It was currently at 46% minus eight. If you count the touch in that piece, that will be over 50% and 60% of our business. That is the fastest growing piece of our business, the highest margin piece of our business. And we're addressing the largest TAM there.

So you look at the traction we are getting. And you look at products that we're developing, the 32 bit and all of the things that has, all of the wireless opportunities, and all of the way things are getting connected; that's the future of the Company. And so we've got -- and touch is a part of that, in that Broad Based scheme. All these devices -- or many of these devices are going to have to be interfaces to people. And that's going to be one of the primary ways.

So whether we go after this handset market or not, I think it's somewhat of an opportunistic play. And if it's something that is not sustainable, that's not the place we should invest our money. But I couldn't be more optimistic in our prospects for growth across our businesses, video and audio, and the opportunities there,but in particular, on the Broad Based side.

Okay. Great. And again, looking longer-term, can you help us understand how you're thinking about the Business from a topline growth potential standpoint, as well as your business model standpoint? And also, how do you plan to get there? Is it organic, internal investments, or are you looking -- are you open to kind of future potential M&A, et cetera?

Certainly, my charter coming into this job is to grow the Company. Our stated model is 15% growth. And when we get there, we can talk about changing the model. But so that is my charter. I think the way to get there is primarily through organic growth and proper choice of investments and delivering greater and greater R&D efficiency and picking the right products to work on. That being said, we selectively look at M&A to fill gaps in that technology portfolio or the product portfolio. And certainly remain engaged in looking at a variety of different opportunities there.

So my primary goal is to grow the Company and grow it organically. And I believe we've got a great team and a great base from which to work from. We've gained critical mass in our micro-controller business now. We've gained critical mass in our timing business now. That's occurred here over the last few years.

And I think that building from that base, as we can gain scale -- and additional scale will drive that further efficiency and help us drive additional growth. I also -- we very much believe in profitable growth in maintaining the gross margin and profitability of the Company. So I remain firmly committed to that, as well.

Srini, this is Paul. This is some specifics around that. As Tyson talks about the opportunities in Broad Based, for us, today, it's about a $9 billion [SAM] as we talk about -- and that excludes anything in 32 bit,where we are getting some good traction today. So that's only go to add to that, anywhere from $1 to $3 billion over the next few years. And we only have a small share of that. So this is where the best opportunity is for us.

We come from a position of strength. And there are many more barriers to entry there. And it's a very profitable business. So that's where the focus will be long term. And that's where we'll see profitability accretion, as well.

Okay, great. And Paul, one clarification, as a touch declines as a percent of revenue in the second half, will that help your gross margins? And if so, to what extent?Thank you.

Touch today has not been an outlier in gross margins. So I don't expect to see any material swings positively as a result of that.

Thank you.

Your next question comes from the line of Ian Ing.

Yes, thanks. Tyson, congratulations, I'm happy for you. First question here; for the China customers, are you seeing any impact of the (inaudible) strengthening the Yuan throughout the year, making the products more expensive?Is it somehow impacting the yield of the design wins that ramp, or the pricing dynamic? Or does it make the customers you work with more resilient?Thanks.

Thank you, Ian. Yes, China is one of our strong regions. And we've been very competitive there throughout our product portfolio. We've got -- certainly it's a center for our consumer audio business and some of the automotive audio business, we've got a lot of strength in timing, and in our micro-controller business, and in wireless, there. So a lot of engagement in the China market. And we've made a lot of investments there to be successful.

In terms of the currency, I think that is probably a minor factor, in terms of the pricing environment. And certainly, it's a very competitive environment. But I don't see that as being a primary factor or an issue for us there in that market. Paul, you may have some comments there, as well.

No. I fully support what Tyson's saying in that. So I don't have any additional color to add to that.

Great. And my follow-up is on the timing business. You've got some differentiation with [NA rates] features, but it looks like IDT still has some dominant share there and a broad reach. Could you talk about, given the design wins you see, how share shifts play out in clocks and oscillators? Thanks.

Sure. Certainly, IDT is the dominant supplier there right now. We have spent the last few years making heavy investments into our portfolio and expanding our reach, in terms of having solutions that address a broader segment of the market. We've had a lot of strength in the telecom side, in the performance side, both on the oscillators and on the clocks with our flexibility and robustness and the -- just the numbers that we can hit with our solutions, and continue to push that forward.

So I believe that you will see additional traction in that business outside of the core telecom area. Certainly the design win traction and the record design wins that we've gotten, and a lot of those being outsides of our core area that we've traditionally been serving, points in the right direction. We are also making investments on the MEMs side for oscillators to replace crystals and have a lot more to talk about on that side in the future, as well.

Your next question comes from the line of Steven Eliscu.

Yes. Thank you. First question here -- I'm trying to get a better sense of longer term strategy. You've laid out some opportunity for synergies between wireless and micro-controllers. Do you see other opportunities for synergies within the product lines that you have? And does that suggest that there are particular pieces you may need to acquire?

Sure. I can comment on that in a number of different ways. Certainly, these embedded applications where you've got -- there will be a micro-controller as the heart -- and let's take a thermostat or a smoke detector or a security sensor or one of these Internet of Things devices; you're going to have a micro-controller, you're going to have sensors. And we're making investments there, in terms of environmental sensors, proximity sensors, touch sensors -- lots of different ways to acquire data. And so there -- a lot of these devices can be integrated in with the micro-controller and provide the differentiation for that product. And a lot of those are additional things that you can integrate with it.

Then you've got -- a lot of times these devices will be controlling things. So you would be controlling a motor, you would be controlling something that's powered, or you would -- so that there may be -- there are a lot of applications there which involve our power and our isolation business. And I believe that there's a lot of synergy there, where that can take place.

And then certainly on the wireless side, you have -- currently, we have sub gigahertz wireless capability. And you certainly see a lot of activity on the 2.4 gigahertz base with 15.4 and 6LoWPAN, and ZigBee and Wi-Fi and all of these things -- that we are developing capabilities in that area. That's certainly a hot area that we keep an eye on, in terms of all the wireless connectivity pieces and all the software that goes around that.

So that is a very rich base, in terms of synergy, among all the different technologies we have. And you can even imagine some of the timing products and the MEMs activity that we have going on could also come in there. So it's -- that is a very rich base, in terms of growth and integration and differentiation that we think we can deliver.

Okay. That's helpful. And as follow-up question, I'm just trying to understand some of the dynamics you've seen in the 8 bit micro-controller space. If we look at prior to the downturn -- the 2008, 2009 downturn, you grew significantly faster than the market. And then the growth has slowed. Can you give us a sense of sort of what were the headwinds that you've seen in the last year or so in that business? How that business now, you believe, it may be positioned to outgrow again?

Right. Our 8 bit micro-controller business is still growing. We've continued to invest in that area. And have continued to introduce [costs] through the new functionality into that segment. And I think it's got a place, certainly at the low end that the smaller applications -- where that is going to continue to be a player. Some of the headwinds -- certainly, we've also been investing in the 32 bit space and that has taken some toll, in terms of the pace of product introduction in the 8 bit. But we had a real strong year in 2010, and took a little bit of a pause last year, and are resuming a pretty good growth trajectory right now.

One thing I'd like to add to it on 2011, though, Steve, is that we grew in 2011 in MCUs -- single digits. But the market itself, the 8 bit market, declined in the high single digits. So I think that's indicative of the softness in the market last year. But it's also indicative of the market share gains that we had in 8 bit.

Great. Thank you.

Our final question comes from the line of Gus Richard.

Yes. Thanks for answering my question. Real quickly, Tyson, when you think about growth versus gross margin, how do you think about trading that off, going forward?And if you had to optimize one versus the other -- you could get to 20% growth but have 59% gross margins, or lower growth but maintain the model;which way would you go?

Certainly, I think that if we saw the gross margins accelerating like we saw back in 2009 and 2010, anything above our target model, we will then favor growth. But I'm a firm believer that if we do our job right, that this -- it's not just going to be about trading off lower pricing for faster growth. I believe that we can have both -- we're very committed to our model and are committed to getting back to the model. We're at 60 now and our model is 62.

And you look at the profile of our automotive radio business, as that grows. You look at the profile of our timing business, a lot of the micro-controller and a lot of these Broad Based markets have a higher gross margin profile than where we're sitting right now. So certainly, to the extent that we can leverage that and leverage pricing to grow faster within the model, that's where my head is at. But we're not going to give up profitability.

It takes a lot of discipline to have gross margins where we are. It's real easy to take a 60% gross margin business and turn it into 50% overnight by lowering your prices. But you've got to sell the value of your products in the Company to your customers. And you've also got to have a strong discipline around cost reduction and maintaining competitive cost structure in the products that you're offering. And that's something we've been good at for many years and remains a focus for the Company. So we're not giving up on this goal of faster growth, and at the same time profitable -- at the same time.

Got it. And then just as a follow-on, on the Internet of Things, there is a number of various standards. Which standard in wireless -- which standard do you think wins first and in what markets?

Right. Certainly, you see Wi-Fi as a very large installed base, and it's going have its reach. Certainly, if you have to do higher data rate, that is the standard to pick. If something is plugged into the wall, where you don't have to worry about power it's certainly a contender.

I think if you start looking at some of the devices that are using energy harvesting or running off of batteries, I think that Wi-Fi starts to see some difficulty, in terms of maintaining the battery life or even being able to operate. If you look at some of the Zigbee and some of the Z-Wave and some of the 15.4 base technologies, I believe that those are starting to get traction in the market, and are going to have a place in the market, as well.

So we're looking at all of this. And I think that similar to the way Bluetooth and Wi-Fi had a space in the market, I think you're also going to see the emergence of some additional standards over Wi-Fi in these low-powered, energy harvesting Internet of Things type application. I hope that helps.

Great. Thanks.

Thank you

All right. Thank you very much for joining this morning. We appreciate it. This now concludes today's call.

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