Silicon Laboratories Inc (SLAB) 2012 Q3 法說會逐字稿

Good morning. My name is Diane and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs third quarter earnings 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 call.

Thank you and 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 webcast 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 now available on our 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 effect 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 Labs GAAP financial results. We are providing this information because it may enable investors to perform meaning 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 Labs Chief Executive Officer, Tyson Tuttle.

Thank you, Shannon, and good morning, everyone. I'm pleased to report another record quarter reflecting strength across the business. Revenue was up 10% sequentially and we delivered solid operating performance resulting in earnings growth of 20%. I think it is fair to say that the market share expansion story we've been talking about for the last several years is intact. And, we're seeing our consistent investment in the R&D pipeline pay off. While macro uncertainty is a current business reality, we continue to be optimistic about our prospects despite the weak demand environment. I'll talk more about the various product lines and our Q4 outlook after Paul reviews the specifics for the quarter. Paul?

Thank you, Tyson, and good morning, everyone. Third quarter revenue of $149.5 million was up 25% compared to third quarter of 2011. The large sequential increase encompassed our recent acquisition and organic growth demonstrating the quality of this quarter's results. I will start with the GAAP results first. Third quarter GAAP gross margin was 57.9% which included $4.5 million of one-time charges associated with the Ember acquisition. R&D investment increased to $34.8 million and SG&A expense decreased to $24.5 million resulting in an increase in GAAP operating income to 18.2%, or $27.2 million. GAAP earnings of $0.24 was slightly below our expectations and included charges related to the executive separation agreement, other costs associated with the Ember acquisition, the net gain from the acquisition of our headquarters buildings, and $7.9 million in non-cash stock compensation.

Turning to our non-GAAP results, gross margin was flat at 61% and consistent with our guidance. This is a good result and we expect this margin stability to continue into Q4. Operating expenses increased as expected to $58.5 million due to the addition of Ember as well as strong performance of the organic business which drove higher variable compensation. Organically, operating expenses declined on a sequential basis demonstrating continued discipline around spending to improve leverage. R&D increased to $31.7 million but declined to 21.2% of sales.

SG&A increased to $26.7 million due largely to variable compensation but also declined as percent of revenue to 17.9%. I anticipate operating expenses will be flat to up $1 million in Q4 to accommodate additional R&D activity. Operating income in Q3 continued to improve ending at 21.9% of revenue. Other expenses were minimal and represent the debt service on our new credit facility. Net income in Q3 increased to $26.1 million or 17.5% of revenue. The Q3 tax rate was 20%. We expect our tax rate to be in the 20% to 21% range in Q4. Strong growth and stable gross margin provided significant earnings leverage resulting in a $0.10 increase to earnings per share at $0.61, up nearly 40% from year ago.

Turning to the balance sheet. Accounts receivable increased to $75.7 million, or 46 days sales outstanding, consistent with the revenue growth. We continue to have no known collection or bad debt problems. Inventory levels remain healthy. We've been watching inventory very closely as one of the indicators of our customers confidence and we believe we are generally shipping to end demand. Inventory increased in Q3 to $42.5 million and remained within our target range of 5.5 turns, consistent with last quarter. We're comfortable with the channel inventory balance which increased to 52 days, reflecting ramps of new business.

Cash flow continues to be strong with cash, cash equivalents and investments of $285 million at the end of the quarter. Of that, the domestic cash balance is about $95 million. During Q3 we completed the $72 million acquisition of Ember and closed on a $230 million credit facility which terminated the synthetic lease of our downtown Austin headquarters facilities and locked in a below-market occupancy cost for years to come. Finally, we repurchased 400,000 shares for $14.9 million and have $47 million remaining on our share repurchase authorization.

We recognize that our performance is running counter to what most of our peers are reporting. We can identify new product ramps and new design wins that are driving this out-performance. Ordering trends have remained consistent, and we've seen a book to bill over 1 throughout the year. Booking trends remain strong, giving us continued confidence in the breadth of our growth story. At this point, I will turn the call back to Tyson.

Thanks, Paul. Despite macro economic weakness, our third quarter results -- I'm sorry, our third quarter revenue grew sequentially in the communications, consumer, and industrial markets. Companywide we set a new record for design wins, crushing the previous record in nearly doubling the total from the same period last year. Our broad-based business was up 15% sequentially and 47% year over year and represented about 48% of total revenue. The strong growth this quarter was driven primarily by revenue highs in our MCU and power products.

We've worked hard to diversify our business to avoid reliance on commodity markets like handsets and PCs and gain critical mass in our broad-based business, particularly in our MCU and timing products. We have positioned the company to benefit from growth trends in energy efficiency, the Internet of everything, and the explosion in demand for bandwidth, all of which drive an increasing need for mixed-signal ICs. It has taken some time to refine the business, but our discipline and focus is producing the promised market share gains. The broad-based products are on track to total greater than 50% of our revenue in Q4. Our MCU products, which include wireless, represented 26% of total revenue and were up 29% sequentially in Q3.

The addition of the Ember 32-bit MCU family for ZigBee low-power wireless networking was a large part of this increase. But, record revenue in our organic MCU products also contributed. The MCU product line is gaining momentum even in the face of end market headwinds. Our 8-bit MCUs had another record revenue and design win quarter. The design win activity further improves the 2013 revenue pipeline as these products gain share due to their optimization for space constrained, analog intensive, and low energy embedded systems.

Both our broad-based and low power MCUs drove the sequential growth, bolstered by applications ranging from communications infrastructure to portable devices. During Q3 were introduced another MCU break through. Our latest products offer a very high accuracy and cost effective integrated temperature sensor in a small footprint. This provides an excellent solution for a wide variety of applications including optical modules, sensor interfaces, and motor control.

In addition to the continued momentum in our 8-bit MCU's, we jump started our 32-bit story with the addition of the ZigBee products. As I've mentioned before, the combination of wireless capability with an MCU core and embedded software allows us to offer a very differentiated solution to our customers. One of the hot spots is in home automation and security. Deployments of quadruple play services by cable operators and the availability of do-it-yourself security products in home improvement stores are both positively impacting our MCU revenue. So, while some are still debating whether the Internet of everything is here, we are already shipping products into these applications.

In Q3 we also introduced the industry's lowest power 32-bit MCU based on an arm cortex M3 core. This innovative device is supported by tools that enable our customers to highly benefit from the low energy consumption of our device but to take advantage of the unique features in our product to reduce their overall system power consumption. We've been steadily investing in the MCU business, in R&D, in software tools, in reference design, and other support resources, and in our sales network. The channel partners we've added over the last two years are driving meaningful revenue now. The steady introduction of new products and a scalable support model is enabling consistent market share gains against large competitors. As result, we are increasing penetration in communications and consumer and layering on new business in industrial and green energy.

We are forecasting the MCU business will remain flat at this higher revenue level in Q4 reflecting the strength of our market share gains. Based on the current ramps and design wins in the pipeline we believe the share gain story will continue into 2013. This is one of our most differentiated product areas targeting a clear set of customer needs and I'm expecting MCUs to be a major long-term growth driver for us. Our timing products represented 13% of revenue in Q3. Timing continued to be impacted by the weak demand for communications infrastructure equipment but delivered a solid quarter, about flat sequentially off the record revenue in Q2.

Demand from the communications equipment makers was spotty, with several customers showing some recovery and others remaining weak. That said, we continue to see strong demand from our non-communications customer base. Last quarter, I mentioned industrial customers now make up a meaningful percentage of the design wins and an increasing portion of the revenue. We're seeing a similar phenomenon in computing infrastructure, which is now our second largest category in terms of new design win activity. In Q4, we are expecting timing to grow sequentially. We expect some modest improvements from the communications infrastructure players, but the major driver will be our consumer and embedded timing devices which are expected to reach almost 20% of the total timing revenue in Q4.

Our power business had a great quarter in Q3 driven by our digital isolator products. As a key component in a broad range of applications, including motors and power supplies, our isolation products are enabling major energy and cost savings in these systems. And, they are complimentary to our portfolio, allowing us to expand our content with customers currently using our MCU, broadcast, wireless, and wireline technology.

Moving to broadcast, the business was about one-third of total revenue in Q3 and up 18% year over year. 8% sequential growth was better than expected, and was driven equally by the audio and video products. While the typical consumer seasonal ramp has not materialized this year, our consumer audio revenue was up by more than $1 million. The automotive segment also contributed to the growth during the quarter with wins ramping at several tier 1 customers. We are expecting audio revenue to be flat or to decline slightly into Q4 reflecting soft consumer demand. Video delivered a record quarter and was about 50% of the broadcast revenue. We were expecting demand to slow as the model year wrapped up, but our Korean and Japanese customers again surprised to the upside.

We also began our first shipments to new customers in China resulting in record revenue for video in Q3. We're seeing continued strength, but expect demand will modulate as we exit the year and customers work off any post holiday inventory and prepare for the new model year. We expect to end the year well within our objective of 30% or better market share and 2013 design win activity has given us a clear path to expanding share further next year. The access business surprised us with another solid quarter. Representing 18% of revenue, it was up sequentially by 3%. Voice Over IP and power over ethernet revenues were up again slightly, while modems held relatively steady.

A new PBX program ramping into production and stronger than expected demand in voice over cable were behind this Q3 upside. We also gained share at our primary POE customer. We expect access will be down in Q4 as customers sell through their inventory, set top modems resume the anticipated steady decline.

Now, for Q4 guidance. We're currently expecting revenue in the range of $145 million to $150 million. This encompasses macro weakness across our end markets offset by continued strong product cycles. We're anticipating that broadbased will be up again, and broadcast flat to down slightly, and access will be down. As Paul mentioned, we expect gross margin to be about 61%. We anticipate operating expenses will be flat to up $1 million. On a GAAP basis, we are projecting earnings of $0.38 to $0.43 per share and on a non-GAAP basis we expect earnings to be $0.55 to $0.60 per share.

That's all we have for prepared comments. I'd now like to 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 for our call participants.

Certainly.

(Operator Instructions)

Steven Eliscu, UBS.

First question, just within micro controllers, we've seen over -- if you just look at the industry data from the SIA we've seen a lot of price compression, especially in 32-bit. And, can you give us an idea as to what you're seeing with regards to pricing trends and how you're offsetting that?

Right. This is Tyson, good morning Steve. Yes, in terms of pricing, the -- we've got a very differentiated solution with our MCUs. We take the arm core and surround that with a number of value added mixed signal peripherals. So, a lot of the pricing pressure out there is on what I would call pins and gates type MCUs that don't have a lot of differentiation that are more commodity type devices. But, in the applications that we're targeting, and we're targeting specific applications with our devices which rely on the mixed signal integration that we're able to deliver, we're able to extract the value for that. Reducing the board component count, we're delivering a performance that they can't get any other way. And, in those cases, we're able to maintain our -- both the design win and the ASP on the device.

We've been able to prove this on our 8-bit MCUs. That as the 8-bit MCU market is highly commoditized in some ways, but as we're coming in with these devices that are really, it's an embedded system. It's an MCU plus a lot of things around it. And so, we've been able to prove with our 8-bit devices and we're taking that mixed signal differentiation and bringing that to the 32-bit space.

Great. And, as a follow up, just trying to get an idea now that you have -- you've introduced 32-bit products, it seems the direction you're taking is more to integrated things like the temperature sensors and the wireless capabilities. Some of your competitors are focusing on products like the Coretex-M4 with the floating point capability. Pushing higher end on the compute side. Is that for -- where you're targeting, is that a direction you see anything over the next year or two? Or is it more about integrating as you've done with the temperature sensor that you talked about?

Right, so, we're coming at the micro controller business with a substantial position in the 8-bit business. So, coming at this with a set of customers and a set of applications that we've been addressing that are not relying on a high end processor like an M4. That being said, the Coretex-M3 has -- we believe that that was a good place to start with our portfolio. That has a good balance of cost and performance along with the entire arm echo system. So, we believe that that's a good place to start in terms of a processor core.

We also believe that over time we can expand both into the lower end and to the higher end as we gain some traction and build out the portfolio. That being said, again, the differentiation and the strategy that we have with the MCUs is about not just the processor core, which is the same core that a lot of companies are using, it's really about all the pieces that you wrap around it. The mix signal, you mentioned the temp sensor, the wireless peripherals, the low power consumption that we can achieve. Those are all areas where we believe give us a leg up on the competition.

Great, thank you.

Anil Doradla, William Blair.

Thanks, a couple of questions. When I look at broadbased business, you talk about contributing 50% of your revenues, when I look over the next 12 to 24 months how do you like the company to like, Tyson, does this become -- what is the revenue composition? And, second question was how much did Ember contribute in this quarter? Was it a full quarter? Thanks, a lot.

Thank you, Anil. On the Ember topic we are not breaking out Ember separately. We are giving some directional guide in terms of the organic business and MCUs grew. And, we also layered on the Ember revenue. So, that is the extent to which we're going to provide specifics there now and going forward.

In terms of the composition of the revenue going forward, we have been investing very heavily in the broadbase products. MCUs, wireless, power, and the timing products. So, that has been taking -- more than 50% of our R&D expenses have gone into those areas over the last two years. So, we believe that going forward, we're seeing the results of that, we're now marching toward and in Q4 we should be at 50%. I don't see any reason who those products would not be 60% even 70% of our revenue as we scale the company up to $1 billion and beyond.

Okay, but Ember did contribute a full quarter of revenues in Q3, right?

Yes, Anil, this is Paul. We're very pleased with what we -- with the product lines in the first 90 days from Ember. And, that was a significant contributor. But, it was a significant contribution from our organic side of the business as well. But, it was a full quarter, to answer your question.

Thank you.

Craig Ellis, Caris and Company.

Question and nice job with the quarter and outlook, guys. Tyson, historically SLAB has provided color on expectations for out year growth around this time of year. I'm wondering if you can help us with your view of how would you expect the major segments to grow next year? And, if not, then provide some relative color if you can't provide specific growth bogies for the various segments.

Right, we're not providing full year guidance at this point. We'll be talking about that in January in the next call. I can, just in terms of the design win activity, we've been seeing across our timing products, across our MCU products and power products, all of that points to a strong year in 2013. As well as the traction we've seen on the automotive audio side as well as the video side. We believe that we'll be upping our share there but we aren't giving specific targets. So, we're bullish about 2013. At the same time we're all looking at the same news and somewhat realistic about the demand environment out there. So, it's a little bit early, I think, to be talking about what I think we can do in 2013.

Fair enough. Following up a prior question but at a deeper level of detail. Within timing, you've talked about design win mix shifting towards newer applications from communications. In MCUs you've got the 32-bit product ramp. So, in those two segments, how do you see the mix of business changing as you go through the year next year?

Right, I think that -- let's just take those one by one. Let's take timing first. If you look at timing, we've had a leadership at the high end with the communications infrastructure equipment makers. And, we've had very good design win traction there. I think that if that market picks up, that is going -- that business is going to do very well for us. So, if the end markets and the economy picks up, we stand to benefit given the fact that we've won a lot of the sockets in the boxes going forward. But, if you look, we've been investing over the -- again, part of that investment, we talked about earlier in R&D, has been directed at expanding our timing portfolio. Both in breadth at the high end but also pushing down into some embedded applications and some consumer applications with a full portfolio of clock devices.

So, I believe that -- we talked about the Q4 revenue, that the embedded and the consumer applications, and that's across a broad range of computing infrastructure and consumer portable type applications, is going to be 20%. And, I think that that number going into next year, I think you'll start to see a continued diversification of that timing revenue going into next year. But, I think that the new revenue that is coming in is going to layer on top of the growth that we should see in the communications infrastructure market.

Second part of your topic, in terms of 32-bit we've had good customer interest and some design win activity with the 32-bit products. Seeing a very nice reception there. I think that we'll start to see some revenue off of the new MCU products, but we've also got the Ember, the ZigBee products that have come in. And, those are also based on a 32-bit core. And, seeing a lot of new emerging applications in the Internet of Things, in home automation, security, metering. And, we're out-winning a lot of those designs as we speak.

So, I think that the complexion mix in terms of the 32-bit has got some critical mass now and is going to be a strong grower. And, at the same time, our 8-bit revenue is also in growth mode. We had a record number of design wins in 8-bit in a number of different areas. And, we believe that that is a growing business for us as well. So, we think that again, just like in timing, the new revenue is layering on top of the existing business and driving additional growth. We believe that's the same case in MCUs with 32-bit layering on top of the 8-bit. Both of which are healthy and growing and taking share from the competition.

Thanks for that, Tyson. And, lastly for me, you mentioned that design win activity is up 2X year-on-year, which is spectacular growth. So, are there changes that you've made either to distribution, your field engineering and sales force? Or is it just simply the diversification of the product portfolio that's leading to that increase?

I think it is a combination. We brought Arrow on a couple years ago, and we've been putting a lot of effort into making our products easy to support, scalable in the channel. We cannot talk to each one of the customers. We sell to thousands of customers through the channel. And, we've seen those design wins up in every product line quarter-on-quarter, every year. We really see this as a measure of the health of the business that's out there. And so, I think all that effort is starting to pay off.

Thanks, and good luck.

Thank you.

Sandy Harrison, Wunderlich.

Thanks for taking the questions, guys. So, the biggest question I had right now that hasn't been covered really is touching base in the video markets. I guess the first one is as you start to see '13 layer in that you talked about in your prepared remarks how are the ASPs looking here? Then also, how's your reach in the Tier 1 versus the Tier 2 and Tier 3? Then I have a quick follow on after that.

Okay, in terms of 2013 we're sampling our fourth generation tuner that is now driven the bulk of the 2013 design wins. That has a strong cost down for us. So, while we are addressing the market and being aggressive in taking share from the module makers and another Silicon tuner makers, we believe the margins in our video business are going to step up next year. So, that's an indication that are cost reductions are outpacing the ASP declines that we have in the market. That being said, the video business is not going to be up at the corporate total but it will be somewhat closer to the corporate targets going into 2013.

In terms of our traction with the Tier 1, Tier 2, and Tier 3 we've got a leadership position in the Tier 1. So, really all of the Tier 1 makers, certainly Samsung and LG and in Korea we've got a tight relationship with those customers and are doing a number of developments with them that are of course some of our higher value add products. So, there we are doing quite well in terms of the technology and the relationship. And, in the business they are increasing the share of Silicon tuners in their mix next year. So, we believe that that's going to be some upside for us as well.

But then, we've been putting a lot of focus on the Tier 2, Tier 3 makers in China, Taiwan. We are starting to see some of the China customers ramping coming up in Q4 and we believe that that will continue. So, it's -- we were about 30%, or will be about 30% or above this year in terms of market share for video. We think that share will grow next year, revenue will grow next year. We aren't ready to say exactly what those are going to be, but it is looking quite good across the board in Korea and Japan, Taiwan and China and some in Europe with the leading TV makers. So, very bullish about the video business going into 2013.

Great, thanks. And, my follow-up is you guys look pretty prophetic right now about getting out of the touch market and the handset business. It looks like it was a pretty good decision although at the time a tough one. Are you seeing applications outside of the handset market for your solutions that are built into your MCU family? And, if you are in what areas?

Yes, in terms of the touch, actually if you take a look at our 32-bit MCUs, you can look at that on our website, the latest 32-bit MCUs integrate touch functionality. And, we are continuing to see a number of industrial applications, a number of low power consumer applications where you need a small touchscreen or buttons or other types of human interface controls that are embedded into the system. It is not just a touch controller, but it is also the controller for the entire system, and are seeing some good activity. Those are good value added features. And, I would say that the fact that we engaged with the handset market and refined our solution in a high volume type application, that was actually beneficial to us. But, I do agree with you that the exit of that business was the right thing for us.

Just for housekeeping, how much of revenues was that this quarter?

We talked earlier in the year about that. When we -- I think Q1 it was about 8% and in Q2 it was about 5%. And, we are going to see that continue to ramp down. It ramped down somewhat in the third quarter. It's going to last maybe a little bit longer than we thought, but it certainly on the march down, becoming a small fraction.

Thanks, guys. Good luck.

Thank you.

Vernon Essi, Needham and Company.

Thanks, very much. Wondering, Paul, if you could give us an outlook on your tax rate going into next year and even further beyond that in 2014?

Sure. We guided 20% to 21% for Q4. As you may recall, the federal R&D tax credit was not reinstated for 2012. At this point, no one really knows when -- if and when that will be reinstated. I think -- so the outlook for '13 and '14 largely depends upon that. I think if you assume that it comes back we're probably in the mid to high teens.

Okay. And then, getting back to, I guess on the most recent question on the video side and then just in general on the consumer electronics market, you've seen a little bit of lift there. And, I guess I'm trying to discern whether you feel, Tyson, that's more or less a function of perhaps share gains on your front versus say just the end markets overall? And, since you also ship into the auto side are you really seeing any seasonality, if you will, in the consumer end markets on a global basis? Or has it been pretty much flattish from your perspective?

Yes, from our perspective, if you take in aggregate the broadcast we were up 8% from last quarter, 18% year-on-year. That is really a function of the growth in video, some growth in automotive, and some growth coming into the third quarter on the CE side. I wouldn't say that the market on the consumer side is strong. I think we've got a good position in the CE market and if the economy was stronger we would benefit from that. We also, in that number that 18% up, we did still last year have -- that was some decline on the handset side. So, we outgrew that with the CE, automotive, and video.

But, I think it is a market share gains story, in this case, with video taking share from mostly the can module type tuners. And then, in audio taking some share in automotive and continuing to penetrate into the CE market. We introduced a high-end consumer device this quarter and are seeing good traction with companies that really value our performance in integration and size and everything else. So, it is quite positive on the position that we are and the outlook going to 2013.

Okay. Thank you.

Tore Svanberg, Stifel Nicolaus.

This is Eric calling in for Tore. Just want to get back to the guidance. Your guidance seems to be very solid, now well above consensus. Just what gives you the confidence? What are you hearing that you think you can achieve this level? And, are there any downsides that you see that could impact results? And then, if you could just go through, I think I missed the GAAP and non-GAAP outlook for the fourth quarter.

Okay. Eric, this is Paul. I will take those questions. For the guidance what we've been seeing is similar to what we saw last quarter. We've, as I mentioned in the earlier part of the call, we've seen consistent strong bookings, trends, I think this really reflects a lot of the product cycle momentum we have across many of our product lines. And, certainly we're not immune to the macro environment. So, I think that plays into -- that is also comprehended in the guidance. But, what we've seen from ordering patterns in the past month and into this quarter is what gives us confidence in that range of $145 million to $150 million. And, on the guidance we had guided GAAP at $0.38 to $0.43 and non-GAAP at $0.55 to $0.60.

Ian Ing, Lazard capital.

Yes, thanks for taking my questions. Could you talk a bit about the macro impact out there? Is it impacting the number of design wins that make it to market or the volumes of some of the current designs? Perhaps a little bit geographic and market granularity. Thanks.

All right, thank you, Ian, good morning. In terms of the regional, we had some strength in Asia. I would say that Europe and North America were weak but stable. A lot of times when the economy is struggling we actually -- it does create some opportunities. And, I think that customers that are driving for differentiation in the market, driving for cost downs or further integration can be driven to our products. But, I think in terms of the -- the communications infrastructure market is not strong. The consumer market is not necessary strong. So, if we look there we do see some impact from the macro demand.

But, overall, it is hard to tell given the trajectory of our design wins either we are doing the right thing with the products and the product strategy that we've got and that's starting to really take -- get some traction or there is demand out there for the types of products that we do. The fact that we've been targeting these at some of the new and emerging areas I think is also potentially somewhat immune to the specifics of the macro. Given that these -- the things, energy efficiency, a lot of the Internet of Things applications where people want to connect devices up to the Internet and to themselves for security home automation type applications. And, a lot of the need for bandwidth, the design win activity in the communications infrastructure market has been strong while the demand has not been necessarily reflective of that design win activity. So, a little bit of a disconnect there. So, we're -- that's where we are.

I see you've got some TAM expansion opportunities with integrated products. Then, just a bit on -- now that you've talked about smartphone declines, how about some of the other secular decliners, FM handsets, set top box modems, mature business, is that a long tail or is that falling off?

Ian, this is Paul. That's been gradually declining. We ended last year and that was about 11% as we exited the year, 11% of the company, those two product lines. And, it is now probably in the 8% to 9% range. So, we will continue to see that step down, but at a somewhat moderated pace.

Okay, congrats on the results. Thanks.

Cody Acree, Williams financial.

Thanks, guys and congrats on a good quarter. I guess back to maybe the last question. Maybe if you can handicap or look at the company as a whole, take a look at your product lines and maybe your end markets, what percentage do you think is really being impacted by the macro in seeing something maybe more consistent with what we are hearing from some of the larger players? And, what percentage is that product cycle driven or some new design wins? I guess try to get a feel for when things do find the comeback how much dry powder do you have that starts to contribute? Is it a small piece or is it a much larger piece of the total revenue?

Right, this is Tyson. If you look across our businesses, let's take broadcast for instance, there's a lot of consumer products in there and I would say that those are impacted. And, if things come back I would think that people would start spending more money and driven there. If you look through the broad-based business I think it is a similar story. I think that we saw the 8-bit market decline this year. The whole semiconductor market has declined. And, I think that if we see some strength that that's going to just broadly raise all of the markets that we are dealing in within there, so communications, consumer, industrial, probably consumer more than the others but certainly the communications has been impacted. I think that the strength of our results and the growth that we are going to see into next year and the growth that we are seeing right now is really the result of R&D activity driving product development, getting the strategy right, and targeting these new emerging applications and driving design wins and product cycle. So, I think it is blocking and tackling with all the work but seeing the results of that finally starting to pay off.

Tyson, you mentioned that especially with the Korean TV makers that you are seeing increased penetration. Can you give us some color on how far into their product lines you are today and how much room you've got left to go?

Yes, Samsung has been our largest customer for a long time. As a company we sell them multiple products. On the video side we have a great relationship there and also with LG. And, those two customers have been taking a lot of share from other companies in particular the Japanese brands have come down. So, I think we have benefited disproportionately from their -- or proportionally with their success. And, I think that will continue to be the case going into 2013.

Do you think you have a significant amount of room left within their portfolio, though?

I do. This year they did not -- they had a substantial fraction of their models which you still use the discrete tuners. And, so they are increasing the penetration of Silicon tuners in their product portfolios.

And, I think that a lot of the other -- if you take China and Taiwan, those were mostly discrete tuners and those are going to be converting over to Silicon tuners over the next couple of years. So, I think we will see an increase in Silicon tuner penetration globally in the flat-panel TV market, the ID TV market in 2013 with probably the rest of it converting over into 2014.

And, lastly on that, on the Chinese and Taiwanese. Sounds like you are just getting into some of those at a time when maybe seasonality is going to start to work against you. Do you expect that the early penetration into some of those newer customers is going to be enough to offset that seasonality or how should we look at that?

Right, you really have to look at the video business in terms of model years. So, we are currently shipping towards the tail end of the 2012 model year. There's a conversion from 2012 to 2013. So, a lot of the 2013 wins were made earlier in the year. And, those start to ramp, some of the ones in China are ramping now in advance of the Chinese new year, but then if you go into next year those will continue to ramp. And then, the Tier 1 players typically convert in Q1.

Thanks, guys. Great job.

Thank you.

Terence Whalen, Citigroup.

Congratulations on the results. This question refers to a comment that you made earlier, I believe, Tyson, referring to consumption tracking -- revenues tracking to consumption. I want to understand that comment given that you did see a fairly large sequential increase in your channel inventory.

And, also [Eden] grew about 17% sequentially in the third quarter in a weak Asia consumer environment. So, wanted to understand your view of whether there's risk, that channel inventory at this point is too high? Thank you.

Terence, this is Paul. I will take the channel inventory question. The channel inventory did grow, grew to 52 days on a unit basis. That's a backwards looking measure. There are some specific new product ramps that are in there that we are well aware of and we know where those will be shipping in the near-term. So, we are quite comfortable with that level of inventory.

Okay, and so, as a follow-up question, it seems like Ember is doing well. Can you describe, given that other companies, Linear Technology, MAX, some other well equipped analog companies are competing similarly in the space, can you just help us understand what's allowing Silicon Labs to win designs? And, what differentiates your approach to low powered wireless versus some pretty impressive peers? Thank you.

All right, so, this is Tyson. So, if we take the ZigBee products -- you've got to differentiate between the low power type devices which are really for control and sensing type applications where you have a large number of nodes that are connected, take a home automation system for home security system you have door sensors and window sensors and smoke detectors and thermostats and temperature sensors throughout the home and those all connected into a central place. So, this relies on mixed-signal interfaces. It relies on very low power. It also relies on top-quality software and the network protocol stack. And, that was really where Ember had a lead in the market. The main competitor there being TI but also companies like NXP and others that are competing in that space.

So, we have a leadership position both in terms of market share and in terms of software maturity there. And, I believe that if you look at the Silicon platform that we have and where we can take that, given the skill set that we have and the expertise that we have on the mixed signal side, we are very well-positioned in this Internet of Things. Which I view as one of the large emerging markets that's going to drive the demand for mixed signal devices going forward. And, I think across the board, we've got all the pieces and are out there delivering that today.

Thanks, that's helpful. Best of luck.

Thank you.

Blayne Curtis, Barclays.

Thanks, good morning. I just want to follow up on the video product. I know you don't want to frame up for a revenue number, but I was wondering if you could just frame the market, the potential ranges for Silicon tuner adoption next year? And then, we've seen some press releases from some new guys like an RDA Micro. Can you just talk about the competitive environment and pricing environment as you go into next year?

Right. We talked about the fact -- we've locked in most of the 2013 design wins at this point. And, in terms -- we feel confident that our cost reductions will outpace any ASP declines. I think you have to be careful when looking at -- somebody can call a product a tuner, but the tuner that we have is addressing hybrid applications which means it receives analog and digital television. And, those have to have a very high degree of fidelity.

There's also a difference in the tuner that goes into mobile applications and in the ones that go into flat-panel TVs. With the one in flat-panel TVs being the most difficult problem to solve. You have to have very, very high levels of performance and you also have to have proven performance around the world. The TVs ship into every geography, every city, every standard and you have to have that level of experience. So, this is, I believe, a -- the product that we have in the position that we have and the fact that we went after the Tier 1s and have the dominant share at the Tier 1 makers, puts us in a very good competitive position going forth.

And, I also want to note one other thing that a lot of people have talked about the sustainability of this business long-term. I fundamentally believe that this function will not be integrated into another device as we saw with the FM tuner and handsets. And, so I believe that our market position, our pricing leverage that we have given our performance and our track record and the penetration of the Silicon tuner is going up here over the next couple years, that we've got a really good couple of years. And, we are going to have this as a good strategic business for a long time to come.

Thanks. If you could just comment on just your perspective, as the design wins are locked down, just the adoption of Silicon tuners in the TV market. Seems like a fairly flat market. But, you are expecting an increase in adoption. Can you just frame what ranges that could be?

For 2012 we were -- we guided to 30%. We will hit that or exceed that this year. We are the dominant player in terms of Silicon tuners, in terms of volume, number one supplier of those and that number will go up next year. I would hesitate to speculate on what that will be next year and the following year. But, I think over the next couple of years you will see the complete adoption of Silicon tuners. But, today, 2012, we still have a lot of the module tuners and in '13 you'll still have a fair number of modules. But, I think that over time those will -- are not competitive in terms of size, performance, and cost. I'm just not prepared to give a specific number at this point.

Fair enough, I appreciate that. And, just a quick housekeeping for Paul. And, this may be obvious, but the Ember deal is in MCUs, you use to break out short range wireless. Is that an MCU as well or are you still breaking that as a separate category?

No, we've essentially combined MCU and wireless into one category.

Yes, Blayne, the rationale for that is that the ZigBee devices have a Cortex-M3 core inside. A lot of these systems are really embedded where you've got the wireless as a peripheral and those processors are serving as the main MCU in the system. So, it is really difficult to break those out separately. So, we think that the right thing to do is to just put that all into the MCU category going forward.

Yes, it's very synergistic.

Okay, great. Nice job, guys, thanks.

Craig Berger, FBR capital.

Hey, guys, thanks for taking the question. Nice job. Wanted to just ask, I know you're not providing guidance on Q1, but can you help us understand what's historic seasonality? Also, it seems like more of your business is broad-based industrial. That tends to do better in the first quarter. How do we think about seasonality and any factor -- other factors that might be in play?

Craig, this is Paul. Historic seasonality would suggest something like 5% or 6%. But, that norm hasn't played out in a number of years. So, I hesitate to speculate what the first quarter of '13 would be. We have so many different businesses now that operate on different seasonality cycles that it is becoming more difficult to predict. And, it is also muting the overall impact that we used to see historically a number of years ago.

Great. The other question I had was just a brief update on power over Ethernet. I think that's in the access business. About how big is it? What kind of traction are you seeing in that business? Thanks.

Craig, this is Paul again. PoE is a relatively small contributor. It's in the low single digits as a percent of revenue for the company. And, it has been pretty steady at that level in recent quarters.

Thanks for the detail.

Arnab Chanda, Avian Securities.

Thank you, very much. Two questions. One, Paul, it seems like you always had a very good balance sheet. It seems -- it is still pretty strong but you are increasing your debt position. Is there a change or is it just because of the acquisition?

Then, one question for Tyson. If you look at your embedded market, especially the market your addressing, the Internet of Things, your main competitor in TI, forgetting about their size but obviously lack of focus, they also have technologies such as -- other kinds like WiFi and some companies like Qualcomm are trying to use a cellular radio strategy in the similar market.

Do you think that it is necessary to have higher speed wireless technologies or do you think that your partnership strategy kind of works there? If you could explain that. Thank you.

All right, Arnab, this is Paul, I'll take the first question. Yes, we continue to have a very strong balance sheet even with the debt. We took on debt at historically low rates. We took advantage of this opportunity. And, we used that, the proceeds there, to finance -- basically finance the acquisition of buildings which were under a synthetic lease which would have expired next year.

But, we were able to buy these buildings at a sub-market rate. There was an option in the agreement that we had. So, that's really some of what's behind that. And, the balance sheet remains strong across all areas.

All right, so in terms of the Internet of Things applications. I believe that a lot of the growth in units is going to be driven by areas outside of handsets and PCs. I think that you look at all the sensor and actuators, everything from light bulbs to electric switches to temperature sensors, thermostats, all of these require low-cost and low-power and also embedded operations. So, a lot of the devices that companies like Qualcomm have are optimized for handsets and those require a different optimization point. That being said, we've been through the analysis and if you look at the energy conception of a ZigBee network, it is one to two orders of magnitude less than a WiFi-type system and certainly far less than a cellular system. And, these are applications where ultimately those batteries have to last 5 to 10 years.

So, we believe that there is space for another wireless standard to be widely deployed, similar to the way Bluetooth and WiFi coexist next to one another. That being said, a lot of the applications for WiFi, there's multiple opportunities for partnering there. And, certainly there are some of our embedded applications which require that, but we believe that the top-tier makers have a mature solution and we don't know exactly the differentiation that we could bring at that point. But, certainly there are applications for Bluetooth, for instance, with the low energy applications that could be interesting at some point. But, we believe that ZigBee, in terms of these industrial home automation security type applications are going to be broadly deployed and that's the right technology going forward. And, that's the one we're focused on in terms of the embedded applications and also the integration path going forward.

Thanks, Paul and Tyson.

Thank you.

Thank you.

All right, that concludes our call today. Thank you, very much, for joining us.

This does conclude today's presentation. You may now disconnect.