Silicon Laboratories Inc (SLAB) 2013 Q2 法說會逐字稿

Good morning, my name is Wendy, and I will be your conference operator.

At this time, I would like to welcome everyone to the Silicon Lab second-quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. Ms. Stapleton, you may begin your conference.

Thank you, Wendy. Good morning, everyone.

As a reminder, this call is being webcast and will be archived for two weeks. The financial press release, reconciliation of GAAP to non-GAAP financial measures and other financial measurement tables are now available on the investor page of our website at www.silabs.com. I am joined today by Tyson Tuttle, Chief Executive Officer; Bill Bock, President; and John Hollister, Chief Financial Officer. We will discuss our financial results and review our business activities for the quarter, then 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 risk and uncertainties. We base of 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, our operating results and our financial condition. 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 statement.

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

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

Thanks, Deb, and good morning, everyone.

We're reporting $141.5 million in second quarter revenue, up 4% year on year and with a significant improvement in overall gross margins to 63%. Our broadcast video and timing product lines have record revenue in the quarter, partially offsetting declines in the legacy products. We announced the strategic acquisition of Energy Micro and launched our new CMEMS technology platform and oscillator product line. We will talk more about these two important growth drivers later in the call.

For now, I would like to turn the call over to John who will review our financial results in detail. John?

Thank you, Tyson.

Second quarter revenue of $141.5 million was within our guidance range, reflecting a 2.6% decline sequentially and growth of 4.3% year on year. As anticipated, during the second quarter we experienced a revenue decline of over $10 million in mature products including FM tuners and handsets, touch controllers and handsets and modems and set top boxes. Partially offsetting that decline was a 6% sequential increase in our growth products with particular strength in our timing and video products which achieved record revenue levels.

On a GAAP basis, second-quarter gross margin increased to 62.7%. R&D investment was stable at $37.4 million and SG&A expense increased to $32.4 million resulting in GAAP operating income of $19 million, or 13.4%. GAAP EPS was $0.29 which was $0.01 below our guidance range; however, I will note that GAAP results were impacted by charges totaling $1.6 million, or $0.04 per share that are related to the acquisition of Energy Micro and which were not included in the Q2 guidance. On a non-GAAP basis, gross margin improved significantly to 62.9%, primarily driven by an overall mix shift in favor of higher margin timing products. We expect margin to be in the 61% to 62% range in Q3 on a slightly lower timing mix.

We maintained effective expense control in the second quarter was only a slight increase in overall non-GAAP OpEx to $60.9 million. Non-GAAP R&D investment increased to $33.6 million related to additional hiring as a result of the success of our new college graduate recruiting program. Non-GAAP G&A expenses were down to $27.3 million based on reduced fringe costs. The combination of strong gross margin results with only a modest increase in operating expenses allowed us to leverage our operating income higher for the quarter to $28.2 million, or 19.9% of revenue. This represents an increase of $1.1 million, or 130 basis points from the prior quarter. Other expenses were stable at $600,000.

Our effective tax rate increased to 22% in Q2 driven by a shift in the mix of production test sites in the United States resulting in around a $0.03 drag on non-GAAP earnings. For comparison, our Q1 results included a significant tax benefit due to the implementation of the US federal R&D credit. Due to the effect of the increase in the income tax provision, net income declined to $21.5 million, or $0.50 per share, which is above the midpoint of our Q2 guidance range. This result is comparable to our earnings of $0.51 from Q2 of 2012.

Starting in Q3, we will exclude the expenses associated with the amortization of acquired intangible assets from our non-GAAP results. We believe this will provide more meaningful non-GAAP information and will bring our approach more in line with industry practice. We have provided details on historical amortization expense levels in the financial information section of our website. The guidance that we provide for Q3 will include the effect of this adjustment.

Turning now to the balance sheet. Accounts receivable were $68.6 million, or 44 days sales outstanding, which is consistent with our historical performance. We continue to have no known collection or bad debt issues. Inventory levels improved meaningfully for the quarter to $50.7 million, resulting in stable terms of 4.1. We anticipate improvement in inventory turns during the second half of 2013. Channel inventory was stable for the quarter.

Cash flow continues to be strong. For the first half of 2013, we have generated $66 million in cash flow from operations and we ended Q2 with $355 million in cash and investments. We acquired no new shares in the period, but our $50 million share repurchase authorization remains in effect through year end. Our balance sheet is in excellent condition.

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

Thanks, John.

We had an exciting and active second quarter with strong design win activity across our broad base and broadcast products. While we faced headwinds in Q2 from some of our legacy products, we believe we will resume healthy growth in Q3 and beyond.

During the quarter, we achieved two important milestones. The strategic acquisition of Energy Micro which closed on July 1 and the groundbreaking introduction of our new CMEMS technology platform and oscillator product line. We believe these accomplishments will help drive Silicon Labs growth in our broad-based products which are now nearly 50% of our revenue and represent our fastest growing and largest market opportunity. The Energy Micro acquisition is transformational for [EMC] business bringing a leading brand in nearly 250 ARM Cortex-M based MCU products to our broad-based portfolio for the Internet of Things.

Silicon Labs is shipping numerous MCU, wireless, sensor and power products into a wide range of Internet of Things application, including thermostats, energy, gas and water meters, building automation and lighting systems, security and surveillance systems, personal medical and other portable devices. The growth of this broad market is driven by the explosion in smart phones, cloud connected applications and consumer demand for comfort, convenience, security and energy efficiency. Our goal is to be the leading provider of these solutions and to develop revolutionary products to enable all things to be smart, connected and energy friendly. With our acquisition of Energy Micro, we believe we have all the technologies in-house required to execute on this goal including a broad product portfolio and world-class capabilities in low-power, mixed-signal and RF design, software and tools, networking protocol stacks, operations, sales and customer support.

The acquisition also adds new leadership and engineering talent to our MCU team. We're especially excited to have Geir Forre, founder of Energy Micro, join us as senior vice president and general manager of our MCU products. Geir is a 20 year semiconductor industry veteran and a successful entrepreneurial with an experience spanning research, development, marketing and management. He is a great addition to the Silicon Labs team.

Also it Q2, we introduced in the world's first oscillator solution based on an innovative single die manufacturing technology we called CMEMS, an acronym of CMOS plus MEMS. This rigorously tested technology enables MEMS structures to be fabricated directly on top of standard high-volume CMOS wafers. CMEMS is an important innovation for the timing market. CMEMS oscillators are designed to replace quartz state oscillators in high-volume, cost sensitive applications where liability, stability, size and costs are important. The first CMEM products have been sampling since January and are already garnering design wins. We plan to expand our CMEMS oscillator portfolio to address higher performance and higher integration timing applications going forward.

Now for a review of our Q2 business and our Q3 outlook. Broad-based products consisting of our MCU, timing, power, sensors and the legacy test controllers were 49% of revenue in Q2, up 2% sequentially and 9% year over year. Excluding legacy touch controller revenue, the broad-based products grew 10% sequentially and 18% year on year. Much of this growth was led by record revenue in our timing products and strength in our MCU products. We expect broad-based product revenue to increase again in Q3, both organically and including contributions from the Energy Micro acquisition, which we expect to be approximately $7 million in the second half of the year.

In Q2, our MCU products were 26% of revenue, up 10% sequentially and 22% year on year. We had record design wins which were up 34% sequentially and 42% year on year with notable wins in smart energy, home automation, consumer, automotive, communication and computing. Timing achieved record revenue levels in Q2 and was 16% of overall revenue, up 15% sequentially and 16% year on year. The communications market led the way with strength across the product portfolio at our top tier customers. We garnered a record number of design wins, which were up 36% year on year. We are seeing the expansion of the industry standard PCI express specification in the high-volume consumer embedded communications and enterprise applications. To address this opportunity, we launched a new family of PCIE clock generators offering the smallest package footprint and the lowest power in the timing market.

Broadcast products, including audio and video tuner product lines, were at 34% of revenue in Q2, down 6% sequentially and up 5% year-over-year. Broadcast audio was down with declines in SM handset revenue as anticipated, partially offset by TV tuner sales, which achieved record revenues in the quarter, marking the fourth consecutive quarter of video revenue growth. We expect broadcast revenue to be up in Q3, driven by continued growth in the video and automotive radio tuners.

We reached a major milestone in broadcast video; since launching our first TV tuner in 2009, we have shipped more than 200 million units. We are now supplying TV tuners in volume to 9 out of the world's top 10 TV makers, solidifying our number one position in this market. Our silicon tuner architecture has become the de facto standard for today's TVs, and we feel comfortable with our growth projections for the year and are on track to achieving greater than 45% market share in 2013. During Q2 we won in the number of major designs with tier 1 OEMs and Chinese customers, and we feel good about continuing silicon tuner penetration and market share expansion in 2014.

Access products, which comprise modems, power reconnect and ProSLIC products for networking, telecom and voiceover IP applications were 17% of revenue in Q2, down 9% sequentially and down 8% from a year ago. We expect that our access revenue will be down in Q3.

Now for Q3 guidance. Overall, Q3 revenue is expected be $144 million to $149 million, including contribution from Energy Micro's products and strength in broadcast and organic broad-based product. Gross margin as anticipated to be in the 61% to 62% range, down a bit from Q2 due to a slowly -- slightly lower timing mix. We expect non-GAAP EPS to be $0.40 to $0.45 in Q3 with an effective tax rate of 24% and excluding intangibles amortization.

Operating expenses will increase approximately $6 million due to increased headcount from the Energy Micro acquisition and high tapeout activity, reflecting the successful completion in important new product initiatives. With the acquisition, we anticipate a new steady state tax rate of 21%. The transaction will dilute earnings by approximately $0.10 per share in Q3, and we expect it will be accretive by the end of 2014.

Third quarter GAAP earnings are expected to be $0.09 to $0.13 per share, which includes one-time charges of approximately $3 million related to the acquisition as well as total amortization expense of approximately $4.5 million. We expect fourth-quarter EPS will improve considerably with the elimination of the one-time charges and a more typical level of tapeout activity. On a GAAP basis, including amortization and stock compensation, the Energy Micro acquisition dilutes Q3 earnings by approximately $0.21 per share, including one-time charges related to the acquisition in the range of $0.06 per share.

Going forward, our pledge is to grow into our new level of higher operating expenses with continued quarterly revenue expansion and minimal additional hiring. I'll note that the Ember acquisition of last year is now accretive, and we intend to have the same result with the Energy Micro acquisition by the end of next year. These temporary reductions in earnings are motivated by a strong belief in the long-term strategic value of this transaction, and we expect Energy Micro to yield major benefits to our shareholders as we grow our broad-based business into the future.

Thanks for your time and attention, and we are now happy to take your questions.

(Operator Instructions)

Tore Svanberg, Stifel.

First of all, it sounds like the timing business could be down sequentially in Q3. I was wondering why that is the case? Is it because of any specific programs?

No, this is Tyson, Tore. The timing revenue had, had particular strength in Q2 toward the end of the quarter, and while we see continued strong bookings in that area, we think it might be flat to down.

Okay, and then a question on the access business, it is now down to 17% of revenue and you are expecting it to be down again in Q3. Will we see a similar down sequential as we saw in Q2?

The access products are actually, slightly down is probably the more appropriate comment. It's the continued slow and steady decline in the access products. We had talked about a decline of less than 10% year over year and we still feel comfortable that we will be able to achieve that despite the step down in Q2.

Very good, and one question for John. John you mentioned you expect a material improvement in inventory for the second half. What exactly do you mean by that? Are we talking about inventory days coming down even further, turns going higher? Just talk a little bit more about that, please.

Sure, so yes, the comment is really is respect to turns. Inventory turns in the range of 5 to 5.5 is our goal. We're not at that point today, but we feel that we can make progress toward that goal in the second half. In terms of the inventory dollars, we will just let that adjust based on the revenue level, and we do anticipate revenue growth in Q3, as Tyson indicated.

Srini Pajjuri, CLSA Securities.

Tyson, just on the video side, you said your market share is about 45% this year. I'm just curious if that is a market share within the silicon tuners or if that is the overall market share. And then as we head into next year, how should we think about that trending?

The 20 -- 45% refers to the entire TV market. I think if you count just silicon tuners, which this year we anticipated were around it two-thirds of the market, we have probably -- we have more than two-thirds of the silicon tuner market. And as we go into 2014, I think we will continue to see penetration of the silicon tuners into the overall market increase. And just from the design win activity that we've had with the tier ones and the expansion of our business into China and Taiwan, we feel comfortable that we will be able to expand our share next year.

And then looking at the quarter, I think the AM/FM business actually came in a little bit below your expectations there. I'm wondering what is causing that. Is it just a quarter to quarter lumpiness, or are there any other underlying trends you are seeing for that business to be weaker?

The step down in broadcast audio was due to the FM handset business that was part of the legacy wind downs. We had about a $10 million step down, in little more than $10 million from Q1 to Q2, and a chunk of that was the FM tuner and handsets. Other than that, the audio business did well in the second quarter and that was partially offset by the TV business, the video business. But the step down in broadcast was almost entirely due to the FM tuner and handset.

Okay, and then finally, can you talk a little bit about the CMEMS opportunity? What end markets do expect to ramp first? And as we look into 2014, how should we think about the linearity of the ramp? Thank you.

The CMEMS technology, the first target for that is really at high volume, consumer type of applications. It is a very broad market. Anything from computers to cell phones to set top boxes. Virtually everything that has electronics in it had a crystal inside, and that would be a target for our -- targeting the low end first. Based on the fact that we have footprint compatibility, we do have a lot of advantages in terms of size and reliability and frequency stability as well as the entire CMOS supply chain as opposed to quartz, which requires some manual manufacturing methods. We think that actually this product, the segmented that it is addressing, that high volume segment and the fact that we are compatible, we think that it could ramp fairly quickly. It is a little early days. We aren't ready to give specific numbers to what we think it could do next year, but we think that it can really move the needle in 2014 based on a broad range of applications for this first product family that we've introduced.

Do you think the ramp will begin in the first half, or is it is more likely to be in the second half?

I think it is going to -- we will have small revenue in the second half of this year based on some of the early design activity that we've had, and I think it will ramp smoothly into next year. It could ramp quickly. It is really a little too early to tell right now, but it is definitely the type of product that is very easy to use. You can just drop it onto an existing board and keep going. So, that is why we targeted this high-volume application to start because we thought that that was going to be the fastest ramping. And then as we move forward, we can go to higher performance and higher integration type devices, which take a little bit longer to get into the market.

Craig Ellis, B Riley.

Tyson, can you clarify if there is any legacy business declines that are Incorporated into your calendar 3Q outlook?

If we look at the legacy revenue in Q2, it was down to about 6% of revenue. And we have got a couple more percent to go here in Q3, but it is really small compared to the growth in the rest of the business.

Okay, so if I back out Energy Micro, which assuming is $3 million to $3.5 million, it looks like you are driving the core business to flat. So, relatively what I think would be mid single-digit seasonality, what are some of the puts and takes that you are seeing in the business?

We certainly had a strong quarter in Q2 with the timing products. We had healthy bookings activity in June coming into July, and so that points in the right direction. But the broad-based business should be up, the broadcast is this will be up, the access will be down slightly, but we had a strong quarter in video and in timing in Q2, and so the net result is where we guided.

Okay, and then John, on your side, the gross margin line as we think about the mix dynamics with timing, certainly a high margin product. But if the gross margins are pulling back at the midpoint more than 100 basis points, is there anything else of that is impacting gross margin, for example, Energy Micro, et cetera, that is causing gross margins to move back off of 2Q levels?

Craig, the Energy Micro business is below the corporate average gross margin today at the time of closing. We expect over time, as we migrate that product set to our full supply chain we can improve that to be more in line with our overall corporate gross margin. So, we are planning for improvements in that area.

Suji De Silva, Topeka.

The gross margins for video, whether they are closer to corporate average and whether there is room for further improvement at this point?

Yes Suji this is Tyson. The video gross margins are -- continue to be somewhat below the corporate gross margin level, but are not substantially below. And we've been driving some dramatic cost reductions in the video area, moving our -- into the fourth generation as we ramped into this year. So, we have seen some level of improvement there and actually continue to drive cost down in that area. But I think, as we've said in the past, we don't think that the video products will be able to achieve the corporate gross margin, but we are certainly putting work into that area and also they are reasonably healthy, so.

Okay, Tyson. And on the MEMS side, can you talk about the CMEMS product, how much they expanded to TAM and whether there are other applications for MEMS outside of timing is technology developed?

The MEMS, if you look at the -- well, let's talk about the applications outside of timing. Certainly, MEMS is used in a lot of the inertial sensors that go into cell phones, so InvenSense, for instance, uses MEMS technology for accelerometers and gyroscopes. And that is an interesting application, although not the one that we targeted. We're targeting frequency control where you are generating a frequency and replacing quartz. But there are a variety of sensor -- pressure sensors, microphones, a lot of different things that can be driven out of the MEMS technology. I'd say that there are so many opportunities inside of timing for the MEMS that we've developed that I think that that is going to remain our focus for the near future.

And the increase in the addressable market with CMEMS]?

Yes, the increasing addressable market, we think it can be up to -- over time, up to about $2 billion. We think that the initial set of products can address about $1 billion of additional [SAM]. And again, it is a very broad market today, mostly served by the quartz oscillator makers. If you look, there are about 15 billion quartz oscillators sold in the market, so it is quite a large market for us.

Anil Doradla, William Blair.

Energy Micro for September quarter, how much are revenues, is that contributing?

We have said that Energy Micro is going to contribute $7 million in the second half. We haven't broken it out between Q3 and Q4.

Why are you not breaking it out?

You can divided 50/50 if you'd like.

I don't think it is a material, Anil. Probably 50/50 or maybe $3 million in the third quarter and $4 million in the fourth.

Okay, now there was a $10 million softness from FM tuners which you talked about last quarter in our June quarter guidance. Sounds like it was worse than that. Is that fair to say, and how much more worse was it?

Anil, it came in at about $10.5 million down from the 1Q level. We will have a little bit more, as Tyson indicated, of decline in Q3. But we really think that these legacy business headwinds are significantly behind us and not a topic that we are going to need to discuss with investors in any significant way going forward. The core growth businesses are all in very healthy shape. We've looked at design win momentum in the first half of the year and across all of the broad-based businesses in the key product components and broadcast. Each are setting records in design win. I think that while we would like to see the third quarter stronger than we are able to guide right now, all the trends are in the right direction, and we think we will see solid growth in the business in the fourth quarter and again into 2014.

So, when I step back and look at your fourth quarter with the core business being kind of flattish, is it fair to say the culprit is really access? That is what is really bringing it down, or is there something else going on here?

I think that effectively, Anil, we have got some decline in access, a little bit further decline in these legacy products that we have talked about. We simply entered the quarter with less backlog then we would like to have to provide a stronger revenue guide,. And our objective is try to be too conservative with these guys and give you the numbers that we feel confident that we're going to hit. That is essentially what we are doing today. I think the fundamental health of the business is really good and the momentum coming off that Q2 down is going to be all up going in the second half of this year and then next year.

And I know you guys don't guide beyond the quarter, but when I look at 2014 and look at the gross margin outlook, is it fair to say that 2014 should be a better year than 2013?

Yes, we think the gross margin trends are also favorable. We have got the broad-based category achieving 50% of the Company in aggregate. That is only going to increase, and it includes product lines like timing that are rapidly growing as we get into next year that will definitely help gross margins over time. I think that the low point on gross margins was in Q1, and we will see 61% to 62% gross margins in the back half of the year.

Cody Acree, Williams Financial.

Tyson, could you talk a little bit about what is going on in China in your video broadcast business after the subsidies were pulled, I think it was back in May? We've seen so far-off in TV volumes there and just if you see an impact flow through.

Yes, we really are -- the story in China for us is a share gain story. So, I think whatever the total number of TVs shipped in China, if it is up a little bit or down a little bit, it isn't really material to the ramp that we are able to achieve. Because really, last year we didn't sell much into China at all. This year we've garnered some level of design wins into China and then going into next year, we think that can continue to increase. So, we've been displacing the discrete tuner modules with the integrated silicon tuner, and that is where a lot of the silicon tuner penetration has been driving into. We've also been to displacing some of the incumbent solutions -- silicon tuner solutions that are there as well. It is really more of a share gain story than it is an economic factor in terms of our sales into that market.

And so can you give us any idea on relative size of that revenue or maybe just relative contribution to growth that you are expecting out of that segment?

We just had our fourth consecutive win -- or fourth consecutive record quarter with video, and we've had great momentum in the tier 1. That has been the bulk of our revenue up until now, and so the Taiwan and China OEM/ODM markets there have been certainly something that has helped. We haven't broken out the revenue specifically between tier 1 and tier 2 and tier 3 but certainly, our proportion of revenue coming out of Taiwan and China is greater today than it was a year ago or even six months ago.

And with Energy Micros, you looked beyond the second half. Could you just talk about some applications, what is the initial low hanging fruit that you expect to become more a material contribution? And what are your longer-term goals for the size of that the business, given, of course what that acquisition cost?

The Energy Micro acquisition brought 250 new products, and they came in with about 750 design wins. We've had just overwhelming response and interest from our existing customers and some new customers that have come on board that when Energy Micro was a private small-company, now that they are part of a larger company, they feel more comfortable at using those products. We think that the revenue growth into next year is going to be substantial.

If you look at the size of the market that we are addressing, the overall MCU market is about $30 billion. We think that we are addressing about $67 billion of that today and with really a leadership position and low power and ARM-based MCUs now with the combination of our MCU portfolios, we think that we will be able to garner significant market share in this ARM-based market. And that is the fastest growing market, where the ARM-based MCUs are replacing the proprietary solutions in 32 and 16 bit. So, it is a very, very large market opportunity for us. My expectation is that this MCU business could be 50% of our business as we approach [$1 billion] and beyond. It is a very, very large market opportunity, very exciting and also very broad-based.

You asked about the markets today, if you look at the markets we are selling the 32-bit into, the revenue's fairly evenly split. You've got some energy metering, gas water meters, building automation, both commercial and home automation. Security systems, portable medical devices, fitness devices and some other portable-type devices that connect to smart phones like smart accessories. It is a very broad range of applications, and the low power and ARM areas is one that's just that a lot of design activity out in the market and is a great place to be.

I will add just to give you a sense of scale here that we are integrating our organic 32-bit business and the Energy Micro business under Geir's leadership. But to achieve our stated objective of making this acquisition accretive by the end of next year, the math suggests that we are going to have to take our total 32-bit business and more than double it by the second half of next year from where we see it today, and that is exactly what we are planning to do.

Excellent, and then lastly for me on the comms infrastructure side, I'd just maybe like to get just your view on the health of that market. We have been hearing from different companies, maybe a mix of opinions, and you are seeing -- you saw a very good second quarter. What did that health look like overall?

We are cautiously optimistic about the second half, really just across the board, but in particular in the timing market. We had particular strength in our tier 1 customers in Q2, and while we -- and that was pretty much across the board. We are little bit cautious about whether it can continue at that type of a level, so it is hard to predict whether that was just some product cycles that were going on, but it seems to point in the right direction, where we came out of Q2.

John Vihn, Pacific Crest Securities.

First question is, I think you mentioned that Energy Micro was $0.10 dilutive in Q3, how much more progress should we assume that you're going to make in Q4 in terms of getting closer to your accretion goal?

Yes, John, this is John Hollister. We envision a similar level for Q4 with some progress in Q4, but really, as Bill indicated, the rapid revenue growth of the business through 2014 will be the factor that drives that into an accretive position.

Great, and then my follow up is on wireless. Can you talk about what your wireless revenues are today. You've obviously making some acquisitions to position yourselves for the Internet of Things opportunity going forward. Are there any other assets that you feel that you need to put in place to more aggressively pursue that opportunity?

This is Tyson, you've got the wireless revenue are combined into our MCU product category. And so a lot of the wireless devices that we are introducing are combined with the microcontroller, so it is really a complete SoC. And we haven't been breaking out the wireless revenue separately. The wireless is running at record revenue levels, and we've had record numbers of design wins, both on the MCU side and on the wireless side. The momentum with ZigBee, with Energy Micro coming in, we're going to be going after the Bluetooth low energy type of applications. You've got a variety of sub gigahertz applications there which has been a long investment for us and is paying off nicely right now. I think that we have got everything that we need to address the low data rate, the low power applications, a lot of Internet of Things applications for the markets that we mentioned. And so I think at this time, we've got everything that we need to be able to compete, it's really just execution from this point.

Great, and then last question for me, you talked a little bit about the legacy revenues being down another 2%, and then ultimately I assume maybe we should -- how should we model that legacy revenue as going away? Should that be a gradual long tail, or should we more aggressively think about the 4% to 6% of those legacy revenues going away by the end of 2014?

Yes, buy the time we get to Q3, the handset touch controller will essentially be gone and the handset FM tuner will essentially be gone. What remains in that legacy category is set top box modems, and those will have a very long tail. They are not going away. But there was some unbundling that happened here in the second quarter and also the move to some of our lower cost to devices. But we actually think that, that level in Q3 will be quite stable over time, and it is our plan to stop talking about it.

Blayne Curtis, Barclay.

Question, I just wonder two things, I wanted to clarify, I was confused why timing would be flat to down. It seems like the trends from those tier 1 customers sound a bit better. You think you just shipped a little bit ahead in Q2, or is it something more end market related? And then on a -- when you look at the growth --

I think you have got it right. The only reason timing is soft in Q3 is because it was so strong in Q2, and we probably shipped ahead in Q2 and enjoyed that mix shift that helped the gross margin percentage in this quarter. The timing business could not be in better shape and with the introduction of CMEMS, the product portfolio is that much broader and that much stronger. So, we are sure we will see a second half for timing that is substantially above the first half and above what we did a year ago. Timing business in 2014 will just continue to accelerate.

Okay, thanks. And then when you look at the guidance, you have broadcast and broad-based growing. If you didn't have Energy Micro, would broadcast be -- which one would be the stronger segment? And then if you could just comment on, my know it is a tough question, but there is no normal seasonality really, but in December you have had some down years. Could you talk about different puts and takes as you look into December as far as drivers?

The broadcast -- Energy Micro goes into the broad-based category, so broadcast is going to be up in Q3. It is not as seasonal as it was in the past. The handset in the past has given us a pretty strong bump in the third quarter, and that's not going to be here this time. On the broad-based side, it will grow both with and without Energy Micro. And that is really the strongest growth that we think that we're going to see in the second half, is out of the broad-based category, both organically and with Energy Micro.

Any thoughts on the puts and takes into December?

Could you repeat the question, please?

Any thoughts on the seasonality into December, the different puts and takes? You had some businesses like a video that are typically down. It seems like timing should be coming back up. Is there any other kind of drivers you could talk about?

Blayne, I think you're right in terms of what to expect from timing, and video is a true question going into the fourth quarter. As Tyson has indicated, we have been enjoying good success in design wins for 2014 model years with key TV OEMs. Presently, we have virtually no backlog or orders for next year products which sometimes begin to materialize in the fourth quarter. So, one potential upside for us is as we get toward the end of the year should be if we begin to see orders coming in from design wins at we are securing today. That has happened in the past, but at present, we are currently not forecasting any of that.

Ian Ing, Lazard Capital Markets.

First of all, for CMEMS oscillators, what is your view on gross margins relative to the rich timing business as you displace the quartz oscillators for high-volume apps? Could there be a replay of what happened in TV, can tuners getting price aggressive?

We think that the CMEMS products have a very favorable cost structure because they are made as a single die in a high-volume CMOS foundry, so we are using SMIC as the first foundry there that we talked about during the launch. I think in terms of the gross margins, I think it is going to come in closer to the corporate average as opposed to really high as it is with the communications business. And as we work on the roadmap on CMEMS, as we're driving higher performance and higher integration, I think that there is some very good upside potential. But it is our intention to leverage our cost position and to go out and drive some volume with these first products, and I think that will come in close to the corporate average as we get the production ramped up.

Do you think the quartz oscillator vendors will keep their pricing or get more aggressive in this environment?

It is very much a mature market, and you've got probably a dozen significant quartz oscillator vendors that have been fighting with each other for a long, long time, and I think that a lot of the profits that they have had have been taken out. I don't think that there's a lot of margin left in the quartz oscillator modules, although that's -- I probably would have said the same thing about TV tuner modules back when they were a couple dollars too. But I think we've got a very favorable cost position on this, and I think we will be able to use that to garner significant share in this market.

Great, and then for the Energy Micro acquisition, dilutive by about $0.10 in Q3, accretive exiting in 2014. Is that a sort of fairly linear progression every quarter, or is there some step up at some point in terms of --

I think that is a reasonable way to forecast it. We are going to be rapidly driving market share and growth in the 32-bit category, and a linear expectation is as good as anything at this point in time.

Okay, and then lastly, what is your view on 10% customers? Is a fair to say Samsung is probably go to drop off given the touch and FM tuner exits, and is there a chance of a new 10% customer on the horizon?

Certainly, Samsung was a large purchaser of the FM tuners and the touch controller. That being said, we ship our modems into their fax printers, multifunction printers. We ship some of our power products into their plasma TVs, we ship certainly our TV tuners and video products into the entire range. So, there's still going to be a substantial customer whether they're going to be over 10% or not, probably so, still.

My expectation is Samsung will remain a greater than 10% customer into next year, and we have at least one other customer who is definitely approaching that level, but not over it yet.

What sort of products do they buy? Was sort of customer?

Also in broadcast. If you look at the top 10 customers, they were about 40% of revenue in Q2.

Terence Whalen, Citi.

Just a quick question on MCUs, was there any demand linearity? I know you mentioned with timing that there was higher demand towards the end of the quarter, was there a similar pattern with MCUs?

We had a good month of June in terms of broad-based bookings across timing and the MCU product lines. Our bookings level remained pretty active in July as well. That was not the case early in the quarter as we went through the April and May timeframe. So, we have seen some strengthening in our order rates that we are encouraged by, but we enter 3Q was a bit less backlog then we would like, hence the guide today. But overall macro condition feels pretty solid. Not particularly robust, but also nothing that we are too concerned about. So, we are cautiously optimistic that the order patterns will continue to be solid as we go through Q3 and set us up for a better Q4.

And then just on OpEx, did you give a guide for Q3?

Tyson indicated that operating expenses are anticipated to be up $6 million for the quarter, and you get to components of that. One piece is the incremental overhead coming from Energy Micro, additionally we will have tapeout expenses associated with the new projects that are completing in the third quarter that will drive in excess of $1 million of incremental spend as well.

There are no more questions in the queue. I would like to now turn the conference back over to Deborah Stapleton for closing remarks.

Thank you, everyone, we appreciate you being with us today, and goodbye for now.

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