Silicon Laboratories Inc (SLAB) 2012 Q2 法說會逐字稿

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

I will now turn the call over to Shannon Pleasant.

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

I am 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 uncertainty. We base these forward-looking 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 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 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 we will clearly highlight the results of core ongoing operations.

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

Good morning everyone. We had another great quarter with all three of our major product lines categories posting growth. We delivered upside to revenue, operating income, and earnings, and we see product cycle momentum continuing into Q3. We announced a strategic acquisition, which will also begin contributing to the top line in Q3.

I will turn the call back over to Paul to review the specifics of the quarter, and then I will provide some further commentary on the business and our Q3 outlook. Paul?

Thank you Tyson, and good morning everyone. Second quarter revenue of $135.7 million was a new Company record. The 8% sequential growth was a $10 million increase over Q1 representing the largest sequential gains in nearly three years. This is impressive in that it comprehends the decline in our touch controller revenue from 8% in Q1 to just 5% in Q2. The strength was across all of our major product lines, with several reaching all-time highs. The Ember acquisition closed on July 3rd, thus our Q2 results do not reflect anything related to that deal other than transaction costs.

I'll start with the GAAP results which include charges related to the executive separation agreement, transaction costs associated with the Ember acquisition, $9.2 million in noncash stock compensation charges, and an $8.4 million credit from a one-time release of tax reserves. Second quarter GAAP gross margin improved to 61% . R&D investment increased to $34.2 million, and SG&A expense increased to $32.2 million,resulting in GAAP operating income of 12.1%. Because of a tax reserve released there was a tax benefit in Q2, thus our tax rate was a negative 15.3%, resulting in diluted GAAP earnings of $0.47.

Turning to non-GAAP results, gross margin increased meaningfully to 61.3%. A 7% sequential increase in Broad-based products and an 8% sequential increase in Access products contributed to the gross margin improvement. Our Broadcast products also increased 8% sequentially in Q2, driven by our audio business which was favorable to the margin mix within Broadcast. Mix continues to be the primary determinant in quarter to quarter margin fluctuations, and I expect that trend to persist in the second half of 2012. We project our Q3 gross margin will be at or near 61% depending on mix. This comprehends an expectation that the higher margin Access business will represent a smaller percentage of revenue in Q3, and the product mix within Access will be less favorable than Q2.

Moving down the P&L, operating expenses increased to $55.7 million as we anticipated. R&D increased $2 million to $31.3 million or 23% of sales. Q2 was a record quarter for tapeouts, and that was the primary driver behind the growth and spending. This year is proving to be very strong in this regard as we execute on our product road maps.

This pace of new product development is very encouraging as it is a meaningful indicator as the health of our pipeline. SG&A increased slightly to $24.4 million, but declined to 18% of sales. Strong performance in the business drove higher variable compensation, which was the main factor behind the increase. I anticipate operating expenses inclusive of the Ember acquisition will increase $3 million to $4 million in Q3. We expect this new run rate to remain relatively stable through the end of the year.

Operating income in Q2 continued to improve ending at 20.2% of revenue, an increase of 210 basis points. Other income was $1.4 million. Net income in Q2 increased to 16.4% of revenue. The Q2 tax rate was 22.6%. We expect our tax rate to be in the 21% to 22% range in the second half. Strong growth and improved gross margin provided significant earnings leverage resulting in earnings per share above our guidance at $0.51, a 19% sequential increase.

Turning to the balance sheet , I remain very satisfied with our inventory levels and the health of our financial position. In Q2 Accounts Receivable increased to $72.7 million or 48-days sales outstanding. Consistent with the growth in revenue, we continue to have no known collection or bad debt problems. Inventory was up slightly to $36 million, or 5.8 turns consistent with last quarter. The channel inventory balance declined 7% and ended at 40 days. Based on the last two quarters of channel inventory trends we believe that our distributors are shipping to end demand. Cash flow continues to be strong with cash, cash equivalents, and investments at $323 million. We repurchased 1.1 million shares during the quarterfor $38.8 million, and plan to continue to execute on our open authorization.

Wrapping up the financial discussion, we continue to make progress toward our growth and profitability goals. The Ember acquisition which is already contributing to our revenue growth in Q3, will be slightly dilutive over the next four quarters, but will support our gross margin model and ultimately contribute to continued improvements in our operating performance.

At this point I will turn the call back to Tyson.

Thanks, Paul. This quarter's results demonstrate what we have been talking about in terms of the uniqueness of the Silicon Labs business model. In a lackluster demand environment, and despite some headwinds from the touch business we have exited, we have been able to achieve strong growth. Because of our diversification our performance is not dependent on the health of any one end market, and our strong product differentiation enables meaningful market share gains, adding up this year to better than industry growth.

I would like to start with our Broad-based business which delivered across the board in Q2, representing about 45% of total revenue. The Broad-based products are on track to grow by as much as 25% to 30% this year. Strong growth in Q2 was driven by new revenue highs in our MCU, timing, and wireless products. The timing products posted a record quarter with revenue up 20% sequentially. If you will remember, this high growth business slowed in Q4 and Q1 as carrier spending came to a virtual standstill. We continued to rack up record new design wins during that time with existing and with new products, in both our established customer base and in new markets.

In Q2 we believe the return to significant growth was driven by two factors. First we saw some of the pent-up demand materialize, as our customers replenished inventories to satisfy some resumption in carrier demand. Second, we began shipping into new business at customers supplying storage and security devices for cloud computing and other mid-range applications. While communications infrastructure remains the lion share of the timing revenue and design wins, industrial design wins accounted for 25% of the total in Q2. This is resulting from our expanded portfolio and compelling value proposition allowing us to capture share at the high end and push it into adjacent markets.

In Q3 we expect end market uncertainty will continue to drive caution from customers in telecom, but we are forecasting continued growth in timing that reflect share gains, the adoption of our new products, an increasing contribution from new applications. Our MCU products were up more than 10% sequentially,nearing 20% of total revenue in Q2. We benefited from growth and communications applications, as well as the ramp of new wins in consumer and portable devices.

Overall the MCU products achieved a new record in design wins during the quarter with one-third of those coming from brand new customers. The 8-bit MCU families are continuing to demonstrate strong customer attraction with new wins in industrial automation, security, and test and measurement. The 32-bit MCU family we launched earlier this year continues to generate a lot of excitement. We are now pursuing more than 250 new opportunities. We are preparing to launch additional 32-bit products that are highly differentiated, and will leverage our competitive advantage in power, precision analogue, and size.

Our wireless products increased by nearly 50% in Q2. These products include transmitters, receivers and transceivers that support point-to-point sub-gigahertz connectivity in meters, home automation, electronic shelf labels, garage door openers, and remote controls. These RF systems typically rely on an MCU as the primary system controller, making our integrated radio and MCU a powerful combination. The Ember products which we just acquired dovetail nicely into our wireless strategy, adding mesh networking and 2.4 gigahertz radios into out toolbox, and enabling us to provide a complete portfolio of embedded wireless solutions.

The combined portfolio has already inspired exciting ideas for the technology road map. Our goal is to become the leading supplier for the devices that form the Internet of Things. And I believe we are well positioned to accomplish that goal. Given the strong attach of our MCUs with our wireless devices, we are not going to be able to continue to break out wireless products separately from MCUs. Will therefore be reporting wireless and MCU together in one category. This is reflected in our Q3 guidance which anticipates the combined growth will be up sequentially, both on an organic basis, and as a result of Ember product revenue.

Moving to Broadcast, the business was about one-third of total revenue of Q2. Growth was driven by the strong seasonal demand for the audio products which were up nearly 20% sequentially. We continue to maintain dominant share in the consumer audio market, and we are expanding our footprint with new products. We just announced our latest high end radio optimized for High Fidelity audio equipment. As I have described before, our ability to take a single IC development and then use firmware to create different device personalities, has allowed us to offer portfolio products optimized for different applications and price points. This is very efficient from an R&D standpoint, and because our products are optimized for the distinct requirements of each market segment, we have been able to gain share quickly and hold onto it. You will see us pursuing a similar strategy across the Company.

Looking forward, we believe audio is back on track to be a growth business. We continue to maintain dominant share in the consumer market and we are layering on high quality automotive revenue in a steady fashion. There are products in the pipeline that will expand our footprint and provide additional growth sectors.

Video revenue was about flat sequentially off the strong growth in Q1, and we expect it to be about flat again in Q3. We have seen notable strength from Korean customers offset by softness in Japanese customers. Caution about the health of end demand is likely to persist among the TV makers this year, but the penetration of Silicon tuners continues to rise, leaving us confident in our ability to hit 30% or greater share in 2012. Q3 will represent the first of the ramps with Tier 2 TV makers in China, adopting the products we announced last year specific to that market. We also recently launched our fourth generation TV tuners and next generation demodulators. These devices further expand our differentiation, and given the strong customer pull for these new devices, we are expecting to ramp earlier than we initially anticipated with meaningful revenue in Q4.

Design win traction for model year 2013 is significantly ahead of our goals. Our competitive position remains very strong validating that the barriers to entry are high. I continue to feel very good about the growth story in this product line. The Access business had a great quarter with Voice-over-IP, modems, and Power-over-ethernet all posting growth. It is declining as a percentage of our overall revenue though, coming in at just under 20% for Q2. For the rest of the year, we expect some puts and takes as the modem business trends downward in set top boxes, offset by growth in Voice-over-IP and power-over-Ethernet. But in our view, the overall profile remains relatively stable on a run rate basis.

Now for Q3 guidance. We are currently expecting continued growth with revenue of $140 million to $145 million. We are anticipating that Broad-based will be up, Broadcast will be flat to down, and Access will be down. This comprehends a relatively weak macro backdrop, offset by the market share momentum we have discussed. As Paul mentioned, we expect gross margin to be about 61%. We anticipate operating expenses will be up by $3 million to $4 million reflecting the addition of Ember, which has a modestly dilutive impact on EPS. On a GAAP basis we are projecting earnings of $0.28 to $0.33 cents, and on a non-GAAP basis we are expecting earnings to be $0.50 to $0.55.

We would now like to now take your questions. Shannon?

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 questions to one with one follow-up. Operator, please review the question and answer instructions.

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

Hi, nice job on the results. Paul, can you just quantify how much of a contribution you are getting from the Ember business in your revenue outlook, and how much the $3 million to $4 million of OpEx increase was due to Ember?

Hello Craig, this is Tyson. We have talked about second half revenues in the $10 million to $12 million range, and we are not going to break that out further than that, but that is a reasonable assumption. And in terms of the OpEx, the bulk of the OpEx increase is due to Ember. I would say we hit the ground running with the Ember acquisition. It closed early this quarter, and we were able to start shipping right away. We have completely integrated the teams, and integrated that business with our own wireless business. We feel really good about the momentum, both of the Ember products and our own existing wireless products that will be helped by a lot of the expertise that came in.

Thanks for that. And then as a follow-up, looking at the microcontroller business, you did a nice job growing despite the [capacitor touch phasing out], how should we think about the growth dynamics in the core MCU business in the back half of the year, and then does capacitive touch get fully mixed out in Q3, or is that actually what you are doing?

You broke up a little bit there, but in terms of the growth of the MCU business, it was up 10% sequentially. We had a lot of growth in the communications, consumer portable area. We had a record number of design wins that are mostly still in our 8-bit product line and industrial automation, security, test and measurement. The record design wins, we have got our 32-bit stuff coming along. The growth profile of that business is solid. Going into the second half we think that we are going to continue to be able to gain share. We also the 32-bit products are getting a lot of interest. We think that going into 2013 that is going to be another good growth driver for us.

And the capacity to touch mix, Tyson?

I'm sorry, you just broke up.

The capacity of touch, when does that phase out 3Q or 4Q?

Well, it was 5% of business in Q2, and we anticipate that will tail off over the next three quarters.

Alright. Thank you.

Your next question comes from the line of Sandy Harrison of Wunderlich.

Great, thanks for taking my call. Just a quick question on the tapeout, you said that you had a lot of activity this quarter. How much of that is new products? How much of that is perhaps new processes to help cost controls, and what do you think the tapeout activity looks like for the rest of the year from here? Was Q2 sort of the big number and now we harvest, or are you going to continue to keep your foot to the pedal on that?

Sandy, this is Paul. I would say we don't really characterize it, we don't break it out between new product development and process improvement necessarily. There is certainly an element of both in there, but I would characterize it as largely new product development. That is really what we are focused on when it comes to fueling the growth for the next few years. And we don't try to manage our operating expenses by managing the timing of tapeouts. We encourage the engineering teams to hit market windows. We are keeping the pedal to the metal on tapeouts. We anticipate that will payoff in the coming years.

Got you, and then my quick follow-up. You talked a little bit Tyson about gen4, you might see some early revs in Q4 this year. Is that the fact that some of the manufacturers might be skipping some of the 2012 going into 2013 early, or is that new customers or new markets that are ramping ahead of that you weren't in before?

Well, those two questions are actually related. I wanted to comment once more on the tapeouts that we've got the majority of our tapeout activity is driving into new product development, and we also have quite a good execution. These are mostly brand-new tapeouts that are coming out. In fact our gen4 TV tuner will be on the first rev in production in Q4, and that's part of the reason the execution on that product is part of the reason for the ability to pull it in. But that's mostly on new customers that we are able to sample the part out and get going. The customers that are on our third generation device, those were won last year, and are going to for the most part be shipping throughout the year. I think the indication of revenue out of that fourth gen product is testing out to the execution. I would also just one more point is that the pace of product introduction that we have had, we are keeping the pedal to the metal in terms of new product tapeouts throughout the year.

Thanks. We will keep tuned in on that.

Alright.

Your next question comes from the line of Anil Doradla from William Blair.

Good job. A couple of questions, the comeback in the timing business, was that largely driven by kind of growth in the markets, or do you folks believe that telecom infrastructure is coming back? Any color around that would be great. And the follow-up was on the outlook, how much macro uncertainty have you baked in your guidance? What is your degree of confidence and level of conservativeness?

Anil, this is Tyson. In terms of timing in Q2 it was really, I think there was some pent-up demand in the telecommunication customers, and that was really one of the biggest factors. There was some new business that we started shipping into, and storage, cloud computing-type stuff, some other mid-range applications. We have been expanding our timing product line to have a complete portfolio at the high end, pushing that down to the midrange, and then down into even some of the consumer level things. We have also got a solid frequency control business in terms of the oscillators, and we have been pushing that down as well. It was an across the board, I wouldn't call it a recovery on the telecommunications customers, but certainly some strength there that was the main driver behind Q2. I will let Paul comment on the macro.

I will comment on the macro in a second. Let me just add about timing, we believe that there was recovery in telco, but not a complete recovery, certainly. This was a record quarter for timing. To achieve that you are not just relying on the macro conditions to achieve a record quarter. You are getting that through share gains, and so what we have been getting from design wins that we also believe is beginning to payoff. On the macro uncertainty, what we have got baked into the guidance, Anil, is that uncertainty that is factored into the guidance. We don't anticipate any strong or strength and demand coming in the second half of the year. We are largely a product cycle company. We are relying on a lot of different product cycle momentum stories to carry us through this year, and what has given us some confidence though is what we have been seeing in our booking trends. Our booking trends in the past months, in the past few weeks have been very positive. That gives us a lot of confidence in our guidance range.

Great. Thanks a lot, guys.

Your next question comes from the line of Vernon Essi of Needham & Company.

Thank you very much. Nice results. Wondering if you could just dive in a little bit more into the strength in your Access business, and what specifically drove that. I understand what you are selling into, but you are guiding that to be down, and I am wondering if there was any unique reasons as to why the business was stronger this time of year versus the prior four quarters or so?

Yes, way just had strength across all of the major segments in Access in terms of modems, Voice-over-IP, the power over Ethernetwere all growing. The modems going to fax type applications, point of sale, a lot of industrial-type applications. We did see some strength in power over Ethernet that is mostly going to CISCO, so some strength there. I think that was mostly in share gain, and Voice-over-IP those are slicks that go into cable, DSL, voice terminal adapters. Again saw some strength in China on that one. It was an across the board good quarter for the Access business. We have seen the modems coming out of the set top boxes at a measured pace, and we think that is going to continue into the second half. Although it is a modest pace, but we still see strength in the other two pieces of that business. The Access business is looking good. If you look at it on a long-term basis, we think it is relatively stable.

Then with my follow-up question, do you anticipate hitting revenue thresholds up in this range maybe even in 2013? Or would you anticipate this to be a flattish to down business longer term?

I think it is on a run rate basis given the share gains that we have been able to achieve on the Voice-over-IP side, and I think most of the wind down into the set top box modems moving to lower speed modems, and pulling out some of the modems in some of the emerging markets where they are using SMS messages to order pay per view content on the satellite set top boxes, I think that is mostly behind us, so we think that on a run rate basis that will be stable moving into 2013.

That is helpful. Thanks.

Your next question comes from the line of Tore Svanberg from Stifel Nicolaus.

Thank you, and congratulations on the record revenue. First question for Paul , Paul, could you just give us the cash flow numbers for the quarter, please?

Well cash flow declined by about $28 million for Q2. We were $351 million in Q1. We were down to $323 million. But we repurchased nearly $39 million of our stock, so that was really the primary use of cash, so if you take that out, and you factor in the some of working capital growth just tied to the growth in the business, it was a pretty strong cash flow quarter.

Okay, very good. And as a follow-up, could you comment a little bit on your visibility and backlog trends? You mentioned bookings have been fairly robust the last couple of weeks. That is quite contrary to some other people. Help me understand how your visibility is going into this quarter?

We look at our, just like everyone we look at our bookings trends every week. Those have been trending very positively and very consistently. Our lead times that we typically see are six to eight weeks, and we are nearer the lower end of that. When you combine all of that together, and when you compare where we are targeting revenue guidance where we have been historically, we are at a place where we feel confident about that range.

Thank you, and again solid results. Thanks.

Your next question comes from the line of Blayne Curtis from Barclays.

Hi, on the guidance for the Broadcast business, I mean, typically to seasonably strong period in Q3. Obviously not a typical year. But if you could talk about kind of what is going on with consumer products in Q3, and then you don't want to guide for Q4, but typically that sees a down quarter as things built in Q2, Q3, how do you see the year playing out?

So this is Tyson. In Q3 we think that Broadcast came, it was up 8%. Audio was really strong in Q2, and that is typically quite strong seasonally. I think there may be a little bit of macro going on in audio. It is not up in Q3 like we would normally expect it to be, but it is probably flat to down . We have got a lot of new product momentum and a lot of design wins going on in that area, so we feel comfortable about our ability to continue to dominate the consumer segments there. But I think that is probably a little bit of an indication what is going on in the general economy. I think Q4 is typically down in audio.

On the video side, I think that will be about flat this quarter to last. So Q3 will be flat to Q2 of the that has, may again be a reflection. There is some conservatism on the part of the TV makers in terms of the build up to the holiday season, but we have got the ramp in China. We have strong design win momentum going into 2013, and believe that will be a strong growth business. I think in terms of share gain in both of those businesses, we are positioned very well.

Also in the automotive we are starting to see the ramp, in the audio business, we are starting to see a ramp on the automotive side which is high quality revenue, and that is going to continue into 2013. While the macro may be impacting the Broadcast somewhat, the bookings are strong, and we feel confident in the level of guidance that we, the share of the guidance that we applied to broadcast and feel good about where we are going in 2013.

Thanks, and if you can just touch on the step up in wireless, obviously pre-Ember, it was quite strong. What drove that?

In terms of the wireless business and the growth, 50%. It was a number of industrial metering, strong consumer applicationsin with wireless.

At this point it was about $5 million a quarter, the wireless business going in. We are not going to break that out in the future, but as we are combining that with MCU and Ember, that is the level we are going in. And if you look at the synergy there is between our sub-gigahertz wireless business, our microcontroller business, and the Ember technology and products that are coming in, there is a strong synergy, strong customer interest around all of those. So we think that is a very positive area for us to focus on both near term in terms of leveraging our sales force and all of that with the Ember products, but also long-term in terms of integration and all of that. We feel like the wireless piece of that in combination with the MCUs is going to be a big growth driver for us.

Thanks Tyson.

Your next question comes from the line of Srini Pajjuri of CLSA Securities.

Thank you, good morning guys. Tyson, you gave some guidance for the full year. I got parts of it, and I missed especially the Broadcast. Could you please go over what you expect for different businesses for the rest of the year, or the calendar year? Thank you.

Yes, we talked a little about trends, but we are not providing guidance for the full year. We are really focused on Q3. The visibility there is solid, but we are not providing guidance for Q4.

Fair enough. And then on the timing business, you mentioned telecom came back because of some pent-up demand. Could you remind us whether this is coming from any particular regions, and also if you could remind us what kind of applications within infrastructure that your timing product is going to?

Okay. There was one, we did talk about Broad-based for the year being up 25% to 30%. So we did talk about that in terms of the full year. I just wanted to get that straight. In terms of telecom, it was really across the board. This is mostly high end telecommunications equipment, it is optical networking, wireless base station, it is infrastructure equipment, high speed data communications equipment. We ship into the top, all of the top vendors in terms of our clocks, and most of them in terms of our off layers. It was those high end segments that drove the recovery.

And some even within those customers, some of the lower priced products and some of the portfolio fell that we have been doing over the last year or two has started to payoff. There are some share gains and portfolio expansion at the high end that was really driving it, and the resumption of some level of demand from them. Q1 and Q4 were quite tough in terms of those customers. So that has returned and overall the businesses is at a record level.

Paul on the tax rate I am just curious, should we think about 20% to 21% as kind of the normal rate as we head into 2013 as well?

No. If you recall at the beginning of the year we had mentioned that the federal R&D tax credit which expired at the end of 2011 was not reinstated. This applies to many companies I would assume. And we are waiting on that. So I think our rate is impacted materially by that, and assuming that gets reinstated at some point, probably near the end of the year, then it will come back to the mid to high teens.

Great. Thank you.

Your next question comes from the line of Craig Berger of FBR Capital Markets.

Thanks for taking my question. First on the modem business, another supplier in the set top box has noted continuing strength into the third quarter. I think that is different than what you guys are seeing. Can you give us a little more detail in what you are seeing in set top box, and is that still an ongoing and sustainable business for you guys? Thanks.

In terms of the modem, we don't believe we are losing share in the modem on a set top box side for, let me just be clear. The set top box that we ship into our satellite set top boxes mostly into the US. And the modem is used for billing of movies. This is where you don't have an internet connection. A lot of suppliers that are talking about set top boxes are talking about cable, so Broadcom for instance shifts their chips into cable set top boxes, and that is a totally different application. That may be what you are talking about. I don't believe that we are losing any share in the set top boxes. I believe the trends we have seen there have really been the shift of customers from higher speed modem, and the modem we are talking about is a telephone line voice band modem. It is not a cable modem. It is not any of that. It is a telephone modem chip, and they have been moving to lower speed versions, and in some of the emerging market economies, they have pulled out the modems and gone to SMS cell phone-type of communication. I think what you are hearing in terms of the market is other types of set top boxes.

Thank you. And then just as a follow-up in the FM tuner or the tuner piece of the business, or the audio, can you help us understand the relative magnitude of exposure between tuners going into handsets, consumer audio, and automotive?

Right, so over the last few years we have seen the FM tuner and handsets wind down. That is now less than 5% of revenue, and the remaining piece of that is stable, relatively stable. Shipping into the high end. But the consumer is the lions share of the revenue now, the AM/FM consumer applications like navigation devices, looking at boom boxes, home theater systems, iPod docks, and we are shipping, beginning to ship more and more into the automotive. The automotive is a small piece, but it will be on a continual growth trend over the next number of years. We are gaining share in the consumer space.

We just announced a radio at the high end of that which sells at a higher ASP, delivers a higher value. We feel good that business is back on track in terms of growth that the handset declines and that transition of the business is behind us, and feel good about the road map. We have got some new products on the road map that are going to also increase the dollar share going forward. That is the audio business. Was that another question?

No. I mean, is there any margin difference between the consumer audio piece and the automotive piece?

Certainly as we have gone from the handset into consumer it certainly held up. The audio business is compatible with our corporate margin targets, solid on the automotive side I would say that is at a higher margin level. As that business ramps, those are at higher ASPs and addressing a large market you are talking about close to 100 million units at multi-dollar ASPs there. It is a good business for us to be getting into, a good investment business and a good, stable long-term growth vector for us.

Thank you so much.

Your next question comes from the line of Ian Ing of Lazard Capital Market.

Yes, good morning, thanks. You are guiding Broad-based up 25% to 35% this year, but you have a lot of diverse customers you have to reach given your relative size. So are there any improvements you are making to your go to market approach, whether working with your distributors, EDOM and [Avant], or direct sales or should we just think of it as exposure to secular trends and new product cycles? Thanks.

Right, we have made a large investments on the tool side. I think having the collateral available and having the tools will make the parts easy to use, having reference designs that target specific applications, help to sell the existing products into the channel more effectively. So that is a large part of it. A large part of the growth is expansion into the portfolio, and moving into 32-bit is going to be a great vector for us. The ARM processors that we wrap our mixed signal content around, and then the synergy it has with our power and sensors and our radio technology is really strong.

The value proposition that we are able to deliver in terms of the precision mixed signal, low power type of designs makes the products very attractive, both for the distributors to take out to the customers, and for the end customers themselves, and you have got to make those products easy to use, and specifically targeted for as many of the applications as you can. It is definitely a challenge in terms of the breadth of all of the markets. I believe we have a solid portfolio and expanding portfolio, and a great opportunity for share growth there. We have got a small share, and there are a lot of opportunities. I think that is one of our brightest product lines and product areas for growth, and taking the Company to $1 billion.

Thanks. And then in the Access business, just want to confirm, set top boxes, modems in set top boxes, is that about 3% or 4% of sales and stable at this point, and Paul talked about some less favorable mix within Access, so is that transient, or would you potentially walk away from some business there? Thanks.

Ian this is Paul, yes, are you right on the percentage of revenue. It is in the 3% to 4% range. We don't comment specifically on sub product lines inside of Access, but every product line certainly has areas where gross margin is stronger relative to other pieces of that product line, and we certainly saw that in Q2 . I think what we are seeing in Q3 is that mix shifting away. Let me just say the Access business is one of the strongest gross margin businesses is the Company. So movement away from, or an unfavorable mix within that product line isn't necessarily very low margin either. It is just relative to the other product lines.

I got it. Thank you.

Your next question comes from the line of Steven Eliscu from UBS.

Thank you. First question on TV tuners, does the gen4 ramp that you expect to see in Q4 have the potential to offset your typical seasonality that you have described as being down? And just looking a little further out, just given your current visibility, do you expect the TV tuner business to grow in 2013 versus 2012?

Hello, this is Tyson. In terms of the gen4 wins, they are still relatively modest in terms of the overall revenue, and I think that if you look at the business for the year, going into the year we talked about getting greater than 30% share of the unit volume, and we feel comfortable that we are going to be able to hit that this year. So I don't believe that will be much different from the typical seasonality there, but I would say that overall the video business doesn't see the same magnitude of swings that maybe the audio business or some other consumer-type businesses have. So that's about all the color I can give you there.

In terms of the growth of the business long-term and going into 2013, we are seeing extremely strong design win traction with our gen4 tuner across a wide range of applications and set top boxes and in TVs, both with the Tier 1 makers and in the Tier 2 makers in Taiwan and China. We believe we will be able to grow share significantly going into 2013, and we will also see a good revenue growth in 2013 over 2012 as well. We think that will be a strong growth driver for us in 2013.

And a question about Ember, I mean, that business has been around a long time. Clearly there were some interesting assets and revenue stream, but in terms of being able to get some growth from Ember's own core business, you did refer to some synergies near term if we look at the say next 18 months, specifically what are some of the programs that you have in place to be able to jump start some of the near term revenue opportunities Ember may have so that core business at least gets some more significant growth than it is has had historically?

Right, so certainly our sales force has a much larger reach than Ember was able to achieve by themselves. And we also have a lot of synergies in terms of our manufacturing supply chain and are able to go in and be more aggressive with these products to win share and to drive new applications to convert over to ZigBee. And they also had some strong customer relationships in the metering space where we also had a footprint with some of those same customers. And so we were able to come in with a more of a bundled solution and win some business. And there are some early indications that strategy is going to be successful.

And then you have got customers in the home automation and security space rolling out security systems, the cable operators are rolling out security systems, and that is a large growth driver. And there is a lot of attach, it would be where a cable operator would give you quadruple play. So you would have TV, internet, phone, and then they would also offer security competing with a company like ADT. So that roll out is occurring with the Ember products, there are a large number of devices that will hook to the central controller in each home. So there is a high attach there, and we also believe that there is some synergy on the home automation and power side as well.

So we feel quite good that the Ember business as it came in, and our ability to drive it both with those devices as well as attaching it to some of our wireless devices and our microcontrollers, and various customers, and then you look at the integration path of being able to drive our technology in with theirs, and being able to drive the road map forward, and there are a rich number of opportunities and vectors that we can pursue.

Thank you.

Your next question comes from the line of Brendan Furlong of Miller Tabak.

Good morning, thank you. A couple of follow-ups more than questions. On the video side as we ramp into gen4 products in typical seasonal March quarter for that in 2013, will that be a mix, gross margin mix enhancing for the year?

Right, so the gen4 product in general the designs start in Q1 and will ramp. The majority of the parts that will ship next year will be on the gen4 platform. That does come at a strong cost down. Going from our gen3 to gen4 device we had a very strong cost down that will exceed any amount of ASP reduction that we will see in the market next year. We think it will be positive to the gross margin in the video business. I would say that I would not set the expectations that business gets up to the corporate level, but it will get reasonably close.

Thank you. And the other question and a follow-up is on the MCU business, which is typically kind of macro driven and obviously the macro is kind of weakening here, but your outlook is pretty positive on design cycles and design wins. Is there any particular area that you are gaining a lot of traction on market share in the MCU market? Thanks.

Right, in the MCU market with our 8-bit products, we have seen strength in industrial automation, there is a broad range of applications. There are motor drives, lots of sensing-type applications, in home security applications, test and measurement. We also have got a stronger communications consumer markets, and consumer markets as well. A lot of low power wins, a lot of USB connectivity wins in the MCU. There is a lot of activity there, across a real broad range of customers and applications.

Great, thank you.

Your next question comes from the line of Suji De Silva of ThinkEquity.

Hi Tyson, Hi Paul, congrats on the quarter. Nice job. Tyson, you have a couple of quarters under your belt now. Can you talk about the Company's product pipeline relative to historical, how you would characterize it now, and within that, what are the sub-segments you think willing drive the best growth in the next six to 12 months you could highlight?

Alright, so in terms of the product pipeline, we have been diverting more and more of our R&D resources into the Broad-based businesses. You look at the opportunities that we have and what internationally we refer to as embedded systems. You have got the microcontrollers, you have got power applications, power sensors and wireless. That is really where you layer on multiple technologies that we have into integrated solutions that are going to really drive tremendous differentiation. So I think in the broad-based products all of the areas where those devices can touch has been a strong focus for us in all of those areas.

You also look at timing, the timing area and we have been focusing on a lot of development on expanding the portfolio and enhancing our differentiation on the high end. You look at the market opportunity there and it is quite large. We think that in both this embedded systems area and in the timing area that we have got tremendous growth opportunity and potential. That is where we have been directing a lot of our R&D resources.

In terms of going forward, the next six to nine months in growth, I think you saw the Broad-based products as a whole 25% to 30% growth from last year to this year which reflects strong share gain. I think we are still in that mode. We have got our 32-bit products that are starting to get traction, and starting to ramp into production. On the timing side we also have the expansion of the portfolio there into additional new applications for timing devices. I think those again will be out growth in terms of driving the growth going into 2013. If you look across the Company with Access stable, we have audio and video both growing into 2013. If you look across the broad base of products, especially with the addition of Ember, the Company is firing on all cylinders right now. We are looking at a strong 2013.

And a quick follow-up in terms of micros, 32-bit versus 8-bit, does the wireless business disproportionately drive 32-bit demand up, or is it more even, and does that help the margins some if that is the case?

It is actually both. The wireless, there are a lot of lower end applications that require simpler functionality where an 8-bit processor is perfectly optimized, and that is with our existing wireless products That is what we have had integrated. You can put a small stack on top of that, and have that work effectively in a lot of the lower range applications, and then the ZigBee and the wireless mesh networking really folds on top of the 32-bit. I think if you look and drive down Moore's Law into the next generation of devices, those low-end ARM processors are going to more and more be used across the range of wireless devices.

Great. Thanks.

Your next question comes from the line of Terence Whalen of Citi.

Hi, good morning. Thanks for taking the question. This one refers to the deferred income to distribution line. It looks like it declined sequentially. Can you just comment on what channel inventories did during the quarter, and perhaps comment where channel inventories are across your different regions? Thanks.

Hi, Terence, this is Paul. Yes, channel inventory declined sequentially. It ended at 40 days which I think is a very comfortable level for us. We like to be in the 40 to 50-day range. I think what it is indicative of is while we are shipping into distribution, we are shipping to end demand also. It has been a very consistent level throughout the quarter, and it has been fairly consistent over the past few quarters. In Q1 it was 45 days. And in Q4 it was in the same range. Our distribution business is significant for the Company. It represents almost two-thirds of our revenue, and it is something that we watch very closely.

Terrific. And the follow-up question is on the TV tuner business. Just to be clear, it sounds like composition of growth next year will really come from some of the Tier 2 players. Do you expect your Tier 1 revenue from video tuner to grow next year? And just how is the different composition in the customer base, how does that affect things like your pricing strategy and your inventory strategy? Thanks.

Well, if you look Tier 1 business this year is a mix of Silicon tuner and discrete canned tuner. So the penetration of Silicon tuners within the Tier 1 will increase next year, which will drive growth. Also with a number of the Tier 1s we have been able to customize the parts, and integrate some value-added IP which tends to drive additional value with them. So I think that if you look at the Tier 1 business next year, we will see growth. You will also layer on top of that growth in the Tier 2 and the Tier 3 makers in China and in Taiwan, and that was an area when we first entered this business we focused on the Tier 1s, which we thought required the highest level of performance and we set the highest bar. We did not focus as much on the Tier 2 makers. And they are now converting from the discrete tuners into the Silicon tuners. And so that is a second driver. In terms of pricing, we have got an optimized portfolio across the range, from the high end with the Tier 1s, all of the way down to the low-end type of devices for set top boxes in the Tier 2 and Tier 3. We feel like we have a got a great position moving into 2013 with the TV business, with multiple growth vectors at hand.

Your final question comes from the line of Cody Acree of William Financial.

Hello? Tyson, can you hear me?

I can hear you now.

Sorry about that. Tyson, maybe at a high level this being really your first full quarter, and congrats on the good quarter here. What are some of the changes on a high level that you think you have tried to began to implement, and what might we see to drive future growth?

Right, so one of the first things we did was redirected our efforts in the handset touch, and really those resources have moved into and are focused on our microcontroller business. Really they were working, those were similar-type technologies. That has been able to accelerate our road map on the microcontroller side, in particular on the 32-bit.

We have been working on applying some additional rigor into our new product introduction, quarterly milestone tracking-type stuff, and just applying some diligence into our business practices. I think that is going to pay off in some improved execution and visibility into our performance. We talked a little bit earlier in the call about aligning around our Broad-based technology platforms, and being able to leverage those technologies across a wide range of applications, layering on software tools, and firmware and algorithm expertise on top of that, to be able to target them at specific applications to be able to drive increased differentiation in a lot of these areas.

So there has been a lot of activity, a lot of excitement around here about all of the opportunities that we have got in front of us. We are just trying to focus and execute, and we have got a great team. We have to make sure that we are working on the right things, and I think we have a lot of opportunity in front of us in terms of growing the Company from $0.5 billion now to $1 billion and beyond. So a lot of excitement. Thank you.

Any other areas that you are deemphasizing that we have not discussed?

No, the realignment, the handset touch, and we have continued to focus on touch and Broad-based applications that we are comfortable with all of the rest of our businesses. We talked about the Broadcast is in great shape, the Access is stable, and across the Broad-based product areas there are multiple growth vectors in places where we were putting the pedal to the metal.

And then --

No more surprises there.

Alright, very good. Lastly on the TV tuner side, could you maybe categorize or maybe give a bit of definition as to where you think the penetration rates now are with the Tier 1s? We know that Sony is using some internals, what the competition looks like? Trying to get a sense of what is the headroom left into the Tier 1s, and what is the size of the opportunity in the Tier 2s, and how quickly do you think you can move into those?

Right, with Sony, yes, the Sony corporate models, they have used the Sony tuner. There is some ODM stuff that is open, but within the Tier 1s, it is not 100%. It is probably, it is hard to say, but it is more than half, but less than three-quarters probably in that range. There is some headroom in terms of unit growth there, and then in the Tier 2 and Tier 3 we are engaged with that entire market and all of the major makers in Taiwan and China. So that is a substantial opportunity. Having a great position with the leaders in that industry, and having the shipment history, and being proven in the market, having the leading analogue performance, puts us in a great position to be able to gain share as we move forward.

And I guess the size opportunity of Tier 2 versus Tier 2/Tier 3 versus Tier 1?

It is hard to break that out in terms of absolute dollar terms, but certainly those are lower in models whereas the Tier 1s have a higher value per socket, but it is a substantial number of units. There is a lot of headroom going from the modest amount of revenue this year to substantial, more substantial share. So you have total TV market for TV tuners and hybrid tuners is probably on the order of 300 million units. So you have got going from where you are today we have got several years of solid growth ahead of us in this business.

Do you think the Tier2/Tier3 is a quarter of the opportunity, half? Any relative size?

It is probably close to half of the overall market if you really add up all of the units and all of the opportunities, yes.

Great, thanks, guys.

Thank you.

There are no further questions at this time. Management, are there any closing remarks?

Thank you very much, Kristi. No, today that now concludes our call. Thank you very much for joining us.

Thank you again for participating in today's conference call. You may now disconnect.