Silicon Laboratories Inc (SLAB) 2013 Q3 法說會逐字稿

Good morning. My name is Rashyra and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

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

Thank you, Rashyra, and 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 measurement tables are now available on the Investor page of our website at www.silabs.com. I'm 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 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 markets, 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 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 discuss today are not intended to replace the presentation of Silicon Labs' GAAP financial results. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Silicon Labs' Chief Executive Officer, Tyson Tuttle.

Thanks, Deb, and good morning, everyone. We completed our first quarter with Energy Micro as a key part of the Company and are very pleased with our progress. The teams and operational systems are fully integrated and the product development road maps are aligned to enable the next generation of energy-friendly microcontrollers and radios. I'm also pleased to report that we delivered solid results in the third quarter, including record revenue in broadcast video. However, we are seeing declines in Q4 due to weakness in end-customer demand.

I will talk more about third quarter results and our fourth quarter guidance later in the call. For now, I'd like to turn the call over to John, who will review our financial results in detail. John?

Thank you, Tyson. Third quarter revenue of $146.9 million was above the midpoint of our guidance range, reflecting a 3.8% increase sequentially. The increase in revenue was driven by strength in our MCU, video and timing products, partially offset by expected declines in access products. On a GAAP basis, third quarter gross margins ended at 60%. R&D investment increased to $40.7 million and SG&A expense increased to $37 million, resulting in GAAP operating income of $10.5 million, or 7.1% of sales. GAAP EPS was $0.15, which was slightly above our guidance range. On a non-GAAP basis, gross margin ended at 61.1%, which represents a decline from the prior quarter due to product mix and sales of acquired products that were below our corporate average.

As expected, non-GAAP operating expenses increased in the quarter to $63.5 million. Non-GAAP R&D investment increased to $33.7 million due to the addition of the Energy Micro team and higher investments in new product tape outs. Non-GAAP SG&A expenses increased to $29.8 million, based on increased headcount, significant travel spending in the quarter for sales and integration activities, and higher legal spending. The combination of stable gross margin results and in-line operating expenses resulted in non-GAAP operating margin of 17.9%. Net other expenses were slightly higher than last quarter at $700,000 due to the reduced interest income from the acquisition cash outflow.

Our effective tax rate was 22.6% in Q3, slightly better than expected. Non-GAAP net income for the quarter ended at $19.8 million or $0.45 per share, which is at the top of our Q3 guidance range. On a sequential basis, this represents a decline of $0.09 per share from last quarter, primarily due to the dilutive effects of the Energy Micro acquisition.

Turning now to the balance sheet, accounts receivable were $68.5 million, or 42 days sales outstanding, which is consistent with our historical performance. We continue to have no known collection or bad debt issues. Inventory levels improved significantly in the quarter, decreasing to $44.8 million, resulting in improved turns of 5.1. This represents a stable turns level that we expect to sustain through year-end. Channel inventory was stable in the quarter. In Q3, we saw an increase in other non-current liabilities of $52.4 million that is largely related to the holdback and earnout components of the acquisition. For the nine-month year-to-date period, we have generated $95 million in operating cash flow, which is around $10 million higher than the same period of the prior year. We ended Q3 with cash plus short and long-term investments of $281 million, in line with our expectations. Our balance sheet continues to be very healthy.

On the corporate front, we are pleased to have announced a satisfactory settlement with MaxLinear. The agreement resolves all outstanding patent litigation between the companies and includes global cross-licensing agreement, covering all existing and future patents for the products involved in the litigation. The companies will refrain from bringing patent litigation against each other for a period of three -- for a three-year period. At this point, I'll turn the call back to Tyson.

Thanks, John. We're very pleased to deliver solid third quarter results. Our extensive product portfolio, enhanced by the integration of Energy Micro, further solidifies our diversification strategy. We continue to see the expansion of the Internet of Things market driving our business forward, with the adoption of smart connected devices and the ongoing need for lower-power, higher-bandwidth, and more data.

During the quarter, we saw record revenue in broadcast video and solid results for our broad-based product lines. Design win activity remains healthy and we continue to introduce exciting new products. Our broad-based portfolio consisting of microcontrollers, timing, power, and sensor products were $73.3 million, or 50% of revenue in Q3, up 6.5% sequentially. Microcontrollers were 28% of our total Q3 revenue, reflecting solid growth in our wireless and 32-bit ARM MCU products.

We announced our first EFM32 Gecko MCU since the acquisition, underscoring our execution of the Energy Micro road map. Our new Zero Gecko family is based on the ARM Cortex-M0+ core, the industry's most energy-efficient 32-bit engine. Shipping now at very competitive prices, the Zero Gecko MCUs enable developers to create embedded systems that are four times more energy friendly than comparable offerings. Our Zero Gecko family strengthens our position as the industry leader in low-energy solutions for Internet of Things. These MCUs are ideal for an array of power-sensitive applications, such as mobile health and fitness monitors, smart watches, security systems, and smart meters. MCU design win activity in the embedded market is robust, and we are on track with our 2013 revenue goals.

Further demonstrating our success in the MCU market, we're expanding our position in the Internet of Things through our wireless product lines. We continue to drive solid wireless design win activity in home automation, smart metering, and smart energy, and realized record revenue in the third quarter. We announced that we are providing sub-Gigahertz wireless technology to Robulink, a leading supplier of advanced metering infrastructure solutions to utility companies in China, southeast Asia, and Australia. Leveraging Silicon Labs' EZRadioPRO Transceivers, Robulink's AMI solutions enable utilities to quickly implement next-generation smart meters that communicate wirelessly through mesh networks. We expect our wireless RF products to be a growth engine in 2014.

During the third quarter, we introduced highly-integrated, feature-rich 8-bit microcontrollers, which are optimized for motor control and other cost-sensitive applications. These MCUs combine best-in-class analog and communications peripherals, small footprint packaging, and competitive pricing, making them ideal for a variety of applications. Our timing products performed better than expected in the third quarter and represented 15% of overall revenue. Timing was down only 1.5% from its record last quarter and was up almost 16% year-on-year. We see strong design win activity, growing momentum for our newer products and expansion of our customer base.

We continue to invest in our diverse timing portfolio and are a market leader in high-performance clocking solutions. During the quarter, we introduced the industry's lowest jitter, lowest power clocks for high-speed networking equipment based on the Synchronous Ethernet standard, which is gaining traction in telecom infrastructure market. Our CMEMS technology platform, announced in Q2, continued to attract strong customer interest during the third quarter. We expect our new CMEMS oscillators will contribute meaningfully to revenue in the second half of next year.

Broadcast products, including our audio and video tuner product lines, were $50.7 million, or 35% of revenue in Q3 and delivered another strong growth quarter, up 5% sequentially. Our performance in broadcast audio was again solid. We were pleased to deliver another record quarter in broadcast video. During Q3 we introduced our fifth-generation of TV tuners, offering the industry's highest performance and integration and the lowest system cost. The new silicon tuners provide TV and set-top box makers with exceptional performance based on five generations of patented architectural enhancements and a production history of more than 200 million tuner units shipped to date.

Solidifying our number one position in the video tuner market, we are supplying silicon tuners in high volumes to 9 out of the world's top 10 TV makers. Design win momentum for the 2014 model year is excellent and therefore, we expect to gain additional market share with our broadcast video product in the coming year. During the quarter, we also continued to diversify our broadcast video revenue. For example, we announced the world's most advanced digital video broadcast demodulators for TVs and set-top boxes. We have gained a substantial share of the DVB demodulator market by supporting the latest standards and providing highly-integrated solution like our new dual demodulators that enable customers to reduce cost and design complexity.

Access, comprising modem, ProSLIC, and Power over Ethernet devices totaled $22.9 million, or 15% of revenue in Q3, and as expected, declined 6% sequentially. We anticipate Access revenue will be down slightly in Q4, resulting in about a 10% overall decline in 2013 versus the prior year.

Finally, we are very excited to welcome Mr. Alf-Egil Bogen to Silicon Lab Board of Directors this week. A 20-year semiconductor veteran, Alf was the Chief Marketing Officer of Energy Micro as well as the CMO of Atmel, where he was co-inventor of the AVR microcontroller. He currently serves as CEO of Norway-based Novelda, an innovator in nanoscale wireless technology for ultra-high resolution radar. Alf's expertise in microcontrollers, corporate marketing, and branding will be extremely valuable to Silicon Labs as we continue to focus on driving high-quality revenue growth and market leadership.

Now for fourth quarter guidance. We expect Q4 revenue in the range of $140 million to $145 million, primarily due to declines in broadcast video, reflecting weak end-customer demand and pronounced seasonality. We do not believe this decline is due to any market share loss to our competitors. We expect fourth quarter declines in broadcast to be mitigated somewhat by growth in broad-based product lines, including strength in MCUs, power, and sensor products. In Q4, we also expect record revenue for timing, reflecting continued strength in the communications market.

Gross margin is expected to be approximately 61%, consistent with Q3. We expect non-GAAP EPS to be $0.40 to $0.45 per share with an effective tax rate of 21%. On a non-GAAP basis, we expect total operating expenses to decline by approximately $1 million. We continue to be disciplined with our SG&A expenses, including reducing our spending on legal cost. In Q4, this will be somewhat offset by higher R&D investments, primarily due to new product tape out expenses. Fourth quarter GAAP earnings are expected to be $0.12 to $0.17 per share and we anticipate fewer acquisition-related adjustments for the quarter.

Before turning the call over to questions, I'd like to note that we're executing on our vision of diversifying revenue across multiple broad-based product lines. Though disappointed by market conditions impacting near-term revenue, we are pleased with the design win momentum that we are seeing in our broad-based business, including MCUs, timing, power, and sensors. As we expected, the Energy Micro acquisition has proven to be a strategic and cultural fit with Silicon Labs. Thank you for your time and attention. We are happy to take your questions.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster. Srini Pajjuri, CLSA Securities.

Tyson, you talked about video being the weaker -- I guess the TV demand has been relatively weak. I'm just wondering, you also mentioned seasonality. I thought Q4 seasonality is typically stronger. I'm just wondering what your customers are telling you about the overall demand and how we should think about, this business as we head into Q1? And also, if you could talk about where we are in terms of the CMOS penetration? That would be helpful.

Okay. The -- really, in the video space, as we've seen in prior years, we haven't seen that pronounced a seasonality. If I had to put a peak within the year, it's probably in Q2 and then in Q4, you have a transition to the next model year at the beginning and that really happens more in Q1. But we've seen across multiple customers -- really, since the beginning of the quarter, a little bit of a slowdown in ordering patterns in video. We think that, that reflects on some end-market demand or maybe some inventory in the channel. We don't think that it's due to any sort of loss and we believe that, that should come back in Q1 at this point, but that's just what we're seeing. We don't believe it's anything other than an end-market condition at this point.

Okay, great. And then, you said, Access is on track to decline about 10% this year. How should we think about that business next year and, I guess, in terms of the overall legacy business, what would you say as a percent of sales, your legacy business to date?

Right. So the Access business -- I think, again, it's a slow and measured decline in that -- in particular, in the modem. I think the SLICs and Power over Ethernet are relatively stable in terms of their revenue profile, but I would expect that in 2014, the Access products would be down less than 10%. We took a step down in the set-top box modems in the middle part of this year, which was reflective in the results in Q3 and we think that, again, that's going to be relatively stable going into next year. So I think going forward into 2014, that's -- looks similar to the way it looked this year, although at a lower base. If you look at the total legacy products, we're pretty much out now of the handset touch controllers and the handset FM, so that headwind is largely behind us and I think the set-top box as well. So I wouldn't factor that into 2014. So I think at this point, the growth in 2014 hinges on our execution of the broad-based area.

Okay, great. And then one final question, Tyson. When you mentioned you expect revenues from the CMEMs product some time in second half of next year. Can you give us an update on what end markets are you seeing progress in? And also, if you can talk about a little bit about the competitor landscape? I think that would be really helpful. Thank you.

Okay. Well, the markets that we're targeting with our first set of products in CMEMs are kind of at the entry level. They're crystal oscillator replacements that can go into a variety of applications, that are more like digital systems, so things like computing, things where there's a lot of consumer applications. The first products are not targeted at wireless or handsets. But -- and as we go forward with the road map, we will be targeting higher performance and different types of functional integration with that technology, so it's truly a broad-based market that we're going after with these first products, and we're seeing fairly broad-based interest in sampling and customer activity. It's not just one particular market. It's truly all over.

And competitive landscape?

And the competitive landscape, it really -- competing against the crystal oscillator modules. So these are modules that have a piece of quartz inside along with a chip in -- built in a hermetically-sealed module and we're coming at that with a single chip solution. We don't see, really, competition from other MEMs providers. If you look, 99% of the market is crystal oscillator modules, so that's where we remained focused. And that's consistent with how we've approached a lot of the markets where we've targeted discrete solutions. For instance, when we targeted the silicon tuner market, we were really competing against the discrete can and not against the other silicon vendors, and we think that, that's a similar situation here.

Great, thank you.

Craig Ellis, B. Riley.

The first is a clarification on gross margin. I think in the prepared comments, it was mentioned that mix and acquired products were the factors that contributed to the sequential decline. What was the relative magnitude of those two dynamics?

Roughly split, Craig.

Okay, John. And then on the outlook, and sticking with the gross margin line, if it is down meaningfully and timing is up, it seems like there's a very favorable mix dynamic on the gross margin line and yet they're guided flat. So why wouldn't gross margins be higher sequentially in the quarter?

We have growth in the acquired products, which as we stated, were below corporate average. We anticipate improving that margin profile going forward as we migrate that product set into our supply chain. We see room for improvement in that area. We also see mix, as well, playing a factor in Q4. But the relative (multiple speakers) --

-- is much greater than the acquired products, isn't it, John?

I'm sorry?

The size of the timing business is dramatically bigger than the acquired business so it would seem that the growth of the timing business would overshadow any negative impact from growth in the Energy Micro business.

Well, certainly the strength of timing will help margins. That's accurate. And we will see mix as an issue in Q4 as well and in the balance of the business.

Yes, Craig, there's two other things to think about in terms of the margin. If you go back to Q1, we were at 60.5% and we had a good pop-up in Q2, due to some specific product mixes, so we're actually still going to be higher than that but also at a little bit lower revenue base. Some of our fixed manufacturing costs to weigh on the gross margin slightly. So, while it's true that there is, from a mix standpoint, with video being down and timing being up, there would be a tendency to push the margin up. The video margins have improved considerably since they -- since we first introduced this product line, and as we introduced the fifth generation cost reduction has been a key goal of ours.

Yes, Craig, this is Bill. I think this is really the key point here. While video margins remain below the corporate average, they have improved toward that midpoint significantly over the last couple of years so this decline in video is of a quality margin product now and not one that is a huge drag on corporate results.

How much of a beneficial impact will Gen 5 be to video gross margins next year and what does that imply for the trajectory of gross margins through the year next year?

So I think that it implies the video margins will be sustained and enhance with this fifth generation of technology. It is this set of technologies that are being won for model year 2014 designs, so I think this will be the product line that is shipping through the bulk of 2014 and will hold video margins in good stead throughout the year.

Okay and then switching to the timing business, Tyson. There's certainly been mixed outlooks. If I would characterize it that way, with some of the other semiconductor company competitors, with regard to communications, so what are you seeing in timing that's driving the sequential strength. Is it new design wins that are kicking in for you or is it increased share at specific customers? What's driving the sequential growth?

I would not say that it's improvement in the end-market conditions. I think it's really a result of our design win momentum. If you look in Q3, our design wins were up 32% year-to-date, and on a dollar basis, they were up 50% year -- over 50% year-to date and that's been a consistent story for the last year or more so we've been gaining share. We've been gaining more content per box and some of those design wins are starting to ramp into production and that's continuing to propel the revenue as we go into Q4 and into 2014.

And you don't see -- think there's any risk that the strength you're seeing in calendar -- or excuse me -- in the fourth quarter is pulling in what would typically be a seasonally stronger first quarter in that business?

I -- the booking patterns and timing remain strong in both in the fourth quarter starting out in the first quarter so I continue to believe that the timing business is going to continue to perform for us.

Thank you.

Tore Svanberg, Stifel.

Hoping you could first comment on your relative visibility for your guidance, either qualitative or quantitative, we're talking about your background coverage?

Tore, this is Bill. The guidance in our coverage is similar to our historical pattern in the -- we take Access or assessment of every piece of data we've got coming up to this call and then attempt to give you a guide that we feel highly confident that we can meet. The reality of this month is that we have run a book-to-build below unity for the last several weeks and that has been principally in the video product category so we are providing this guide on the strength of the information we have presently but we think it is a conservative guide and one that we're in a good position to deliver.

Very good. And a question for Tyson. Tyson, on the video side, can you maybe comment on where your share stands today, either by your revenue or silicon tuners? And then would you expect that business to still be a growth business in 2014?

Yes. I think, we're on track to exceed our target of 45% share this year and the overall TV market is not growing but the silicon tuner penetration into the market is continuing to advance. We see strong displacement of the can tuner or the discreet tuners in the latest round of design win, in particular, in China and Taiwan. And we've locked in -- I think we've locked in the tier 1 business that we were chasing so I think that we'll be able to maintain and grow our share in the tier 1 accounts and also expand significantly our business, in particular in China.

So I -- my expectation is that our unit share is going to increase in 2014. We also have increased content with multi-tuner solutions into some of the high-end TVs as well as our demodulator products are gaining traction and are going to be generating a significant amount of revenue growth in 2014, as well, and that's mainly targeting the European Standard televisions with our demodulator, the advanced demodulator that we just introduced. So overall, looking into 2014, I think the video business is quite healthy.

Very good. One last question on the Micro business. You're now obviously becoming a force across the board in the microcontroller market. I'm just wondering, at 32-bit, is that today primarily a direct business or have you also signed up some new distributors in the 32-bit MCU market?

Yes, the microcontroller business is primarily a distribution business. It's -- we've got 10,000-plus customers on the 8-bit side. When Energy Micro came on board, they brought with them a number of distributors, and we've kept a number of those distributors and expanded the opportunity with them. We've got Arrow and Avnet and a number of distributors in Asia who market these products so it's -- really, and then there's a number of direct customers as well, but it's primarily a distribution business. And I think that taking the Energy Micro products and putting them within our distribution channel is having a major impact on the design win trajectory going forward.

(Operator Instructions)

Anil Doradla, William Blair.

Can you, Tyson, remind us, when you look at 2014, what are your design wins in TVs and how much visibility you have in, perhaps, your overall designs?

So in the broadcast video area, I think that the -- at least with the Tier 1s, the design win season is pretty much done. We've locked in the Tier 1 design wins and believe that we'll maintain or grow our share with the Tier 1s going into 2014. There's a number of new opportunities with multi-tuner and with the modulators that we'll layer on top of that at the Tier 1s. In China, though it's not quite a model year and there are these design wins come up on a more frequent basis and we continue to have significant design win traction with all the Tier 1 TV makers in China. So I think that the visibility there is a little bit less but, overall, the -- given that we didn't have that much business in 2013 in China, we're certainly looking at some significant growth in that region as well.

And again, when I look at your business, can you help us understand what percentage is bookings versus turns in any given quarter?

Anil, Bill again. Generally speaking, our lead times from customers are on the order of six to eight weeks, so most typically when we enter a quarter, we have less than half of the quarter in backlog. So there's a substantial amount of turns business that we rely on to make any fiscal quarter result. Hence the range that we provide and the guide and we track, then, our performance against this turns business the remainder of the quarter to deliver on the results that we indicate for you.

There are no further questions at this time. Ms. Stapleton, do you have any closing remarks?

Thank you, and thanks everyone for joining us today. Before we go, I'd like to invite all of you to the first Silicon Labs Analyst Day, which will be held at the NASDAQ Time Square site next May the 12th. Please save the date and we'll be in touch about further details as we get closer. Thank you, and goodbye for now.

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