Silicon Laboratories Inc (SLAB) 2014 Q2 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the Silicon Laboratories second-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Ms. Jalene Hoover. Thank you.

Thank you, Stephanie. And good morning, everyone.

This is Jalene Hoover, Director of International Finance and Investor Relations here at Silicon Labs. I supported Silicon Labs' business units as a financial controller for approximately 10 years, and have been working closely with Deborah Stapleton over the past year. Going forward, I will be assuming full responsibility for Investor Relations as we return this function in-house.

We would all like to thank Deborah and Alexis of Deborah Stapleton Communications for their many contributions over the past 15 months. They will remain onboard through the end of August. I look forward to being your primary contact and getting to know each of you better.

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 second quarter and then take questions.

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, and that 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 any 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 which identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

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

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

Thanks, Jalene. And good morning, everyone.

I'm pleased to report a very strong second quarter. And I am excited about our near-term outlook and strategic positioning for long-term growth. In Q2, we saw record revenue in broad-based products where our timing, microcontroller, wireless and sensor products all reached new highs. And we expect this trend to continue.

I'll talk more about our results and our latest product developments and business trends shortly. For now, I'd like to turn the call over to John who will review our second-quarter financial results and third-quarter guidance. John?

Thank you, Tyson. Revenue for Q2 was a record at $155 million, which included an incremental $5 million related to a patent sale. First, let me take a few moments to explain this patent sale.

Several years ago, we transferred certain CMOS power amplifier patents to Blacksand Technologies, an Austin-based start-up that used the technology to productize PAs for the cell phone market. This arrangement provided for royalty income to Silicon Labs that would have been realized over a number of years. With Qualcomm's recent acquisition of Blacksand, the parties agreed to accelerate the payment of that income, resulting in an incremental $5 million of unforecasted revenue in Q2.

Excluding the patent sale revenue, broad products-based revenue for Q2 was $150 million, which was above the mid point of our guidance range, and driven by record performance from our Broad-based portfolio. Broad-based products grew 10% sequentially to a record $80 million, exceeding our expectations.

We saw continued adoption of our MCU, Wireless and sensor products in Internet of Things applications. Overall, MCU wireless and sensor revenue grew to a record 31% of total product revenue.

We also achieved a record quarter in timing, exceeding expectations and resulting from increased volume at our Tier 1 telecom customers. In the second quarter, timing generated 15% of total product revenue.

Revenue from Broadcast was $50 million in the quarter which included the $5 million patent sale. During Q2, we enjoyed good growth in broadcast automotive products with strong ramps at Tier 1 customers. Overall, automotive represented 6% of total Q2 product revenue.

As anticipated, the 2014 ordering pattern for the video market has been more front-end loaded than usual due to accelerated demand for TVs ahead of the World Cup. As a result, video was down in Q2 from a very strong Q1. Second-quarter Access revenue exceeded expectations at $25 million, with strength across the board particularly in ProSLIC products for voice-over-IP applications.

Gross margins were excellent for the quarter. Q2 non-GAAP gross margin ended at 64.1%, reflecting a highly favorable product mix, good performance on inventory management, and a 1.2% gross margin lift from the $5 million patent sale, which has no associated cost of goods sold impact.

Non-GAAP operating expenses ended at $66 million, which was slightly higher than expected. Non-GAAP R&D for the quarter was stable at $35 million, down slightly from Q1. Non-GAAP SG&A expenses rose significantly in the quarter to $31 million. This amount includes $3 million in litigation expenses, approximately $1 million higher than we expected.

Overall, we are pleased with the Company's operating expense control in the second quarter and, indeed, for the first half where we have met our objective of maintaining a stable OpEx structure. Non-GAAP operating income exceeded expectations at 21.6%. Other expenses for the quarter were in line at around $600,000.

Our non-GAAP effective tax rate was stable at 22.4% and consistent with expectations. Non-GAAP diluted EPS ended at $0.58 per share, which was well above our guidance range, and includes approximately $0.08 of incremental benefit from the patent sale. Even excluding the benefit of the patent sale, non-GAAP EPS was $0.03 favorable to the top end of our guidance range, which is a very strong outcome for Q2 and primarily due to revenue upside and superior gross margins.

On a GAAP basis, second quarter gross margins were 63.7%. R&D investment decreased to $42 million and SG&A expense increased to $36 million resulting in GAAP operating income of $21 million or 13.4%. GAAP diluted EPS was favorable to guidance, as well, at $0.32 per share with stock compensation running at $9 million and intangibles amortization at $4 million, both in line.

Turning now to the balance sheet, we ended the quarter with cash, cash equivalents and investments totaling $340 million. Cash flow from operations for the six-month year-to-date period was $63 million. We also executed $11 million in share repurchases during the quarter, retiring around 250,000 shares. Going forward, we will maintain an opportunistic position on the buyback with $89 million of the authorization remaining.

Accounts receivable ended at 40 days and inventory ended at 4.9 turns both in line with expectations. The balance sheet remains very healthy.

Now, I will cover Q3 guidance. We expect Q3 revenue to be in the range of $153 million to $157 million, which includes an additional $2 million in broadcast-related patent sale revenue expected to close in Q3. The licensing or selling of IP is something that we have done from time to time over the years as part of our overall strategy to maximize the value of our technology. Going forward, we will continue to be opportunistic in this area, and the patent income we are realizing in FY14 is a useful offset to the litigation expense we are incurring this year.

We anticipate continued growth in Broad-based and we expect to achieve another record quarter led by our MCU, wireless and sensor products. Total Broadcast revenue will be about flat with an increase in broadcast product revenue offset by the sequential decline in patent sale revenue. We expect that Access will be down in Q3.

Non-GAAP gross margin for Q3 is expected to be 61% to 62%, which includes a 0.5 point lift from the Q3 patent sale transaction, and is in line with our gross margin model of 60% to 62%. On the operating expense side, we expect that non-GAAP OpEx will grow in Q3 to $67 million to $68 million due to an increase in new product development activity, combined with $3 million in ongoing litigation costs.

Our non-GAAP effective tax rate should remain stable at around 23%. And we expect non-GAAP EPS to be $0.45 to $0.51 per share. We expect GAAP EPS for Q3 to be in the range of $0.18 to $0.24.

Now, I'll turn the call back over to Tyson.

Thanks, John. We are very pleased with our strong second-quarter results, including record revenue in our Broad-based products. This is the fastest growing and most strategic part of our business, representing 53% of the second-quarter product revenue.

Over the last several years, we have diversified our Broad-based revenue and strengthened our portfolio, both organically and through key acquisitions. We are benefiting from a multi-year investment strategy for the Internet of Things and internet infrastructure. Collectively, these are large and growing markets where we offer leading technology, continue to gain share, and see exciting prospects for growth.

Our sales channel is an important building block in our strong positioning in the IOT market and vital to our broad-based strategy. Over the past decade we have made significant investments, growing our sales and field application engineering teams, while expanding our global distribution and catalog partnerships. We are also increasing our investment in web infrastructure and content marketing to help our customers quickly go from design idea to final product.

Since 2007, we quadrupled the number of unique products in our broad-based portfolio, increased our served customer count by more than a factor of five, and grew our channel revenue by a factor of six. Our microcontroller, wireless and sensor products are gaining traction in connected device applications for the Internet of Things. These products grew 10% from Q1 and 27% year-on-year, establishing record revenue in the second quarter. Design wins also set a new record with an approximate 20% sequential increase, and we expect this trend to continue.

The competitive strength of our IOT product portfolio includes energy-friendly solutions to help our customers reduce system cost and complexity. Our ongoing investment in our Simplicity Studio development platform has further strengthened our competitive advantage.

Available to our customers at no charge, Simplicity Studios streamlines the design process and gives developers the tools they need to test drive our MCUs and estimate real world energy consumption and battery life using their own code. We continue to enhance Simplicity Studio and recently added industry-leading cross-platform support for MAC and Linux operating systems in addition to Microsoft Windows.

Silicon Labs is a market leader in energy-friendly wireless mesh networking technology. With the acquisition of Ember in 2012, our ZigBee IP, protocol stacks, network analysis tools, and development environments are considered best in class. Our engineering teams are focused on developing next generation silicon, software and system-level platforms to further our market position and leadership.

Together with Nest, ARM, Samsung and other industry partners, this month we announced Thread, a new IP-enabled mesh networking protocol. We expect Thread to become a key open standard supporting secure interoperable robust and power-efficient connectivity across a wide range of IOT applications for the home. All of our ZigBee devices shipping today will be able to run Thread with a simple software update.

Since many IOT applications require easy-to-use human interfaces, we introduced a new family of ultra low-power MCUs, offering the industry's fastest most accurate capacity of touch control technology for embedded applications. Backed by our Simplicity Studio ecosystem, our new F970 MCU family enables the longest battery life for applications in the IOT, consumer and industrial markets.

We also introduced a new hardware and firmware development kit to accelerate, simplify the process of developing �Made for iPod, iPhone and iPad� accessories. Designed to reduce system cost to energy consumption, our kit provides an exceptionally cost-effective turnkey solution, enabling developers to get to market faster and focus on what matters most.

Also during the quarter, we introduced a Wireless M-Bus software solution to simplify the process of adding wireless connectivity to smart metering systems. A widely accepted standard in Europe, Wireless M-Bus enables seamless, easy-to-deploy, sub gigahertz RF communication between wireless smart meters, while enabling battery life of up to 20 years.

Our IoT products are winning prestigious awards in the China microelectronics industry, as well. Our EFM32 Zero Gecko family won an EDN China Innovation Award in the category of �Innovation Excellence: Leading Technologies.� And our EZRadioPRO wireless transceiver won recognition as the �Best Smart Energy Solution� in an awards program sponsored by the publication China ECNet.

Our timing and power products are being widely adopted in Internet infrastructure applications including core networking, wireless base stations, data centers and cloud servers. In Q2, timing exceeded expectations hitting a new record with strength across the product line and a rebound with our Tier 1 telecom customers. Design win activity grew a record 30% quarter-on-quarter.

Our CMEMS oscillator products are gaining traction in the timing market with new design wins and a growing customer base. We offer a one-stop shop portfolio of timing products to the world's top telecom and networking equipment vendors. Next week we will introduce a new clock family offering the industry's lowest jitter, highest performance, and best frequency flexibility.

Our new Si5340 family combines clock synthesis and jitter attenuation functionality to reduce cost and complexity. To simplify timing designs and speed time to market, we are also launching a new software suite called ClockBuilder Pro, enabling developers to generate sophisticated timing device configurations very rapidly.

We are also pleased to report strong performance in our digital isolation product family, targeting industrial control, data center and consumer applications. During the quarter, we introduced a new family of oscillators offering the highest channel count, performance, reliability and data rates for power and cost-sensitive application. Leveraging our patented CMOS-based digital isolation technology, these new devices replace antiquated optocouplers, significantly reducing variability across temperature and simplifying system design.

Broadcast represented 30% of Q2 product revenue, reflecting anticipated declines in our video revenue due to World Cup pull-ins to Q1. While we do anticipate growth in video in the third quarter, we do not expect to reach the record levels we saw in Q1. In Q2, we saw double-digit year-on-year growth in automotive, with strong ramps at Tier 1 customers, and we expect this trend to continue. Broadcast automotive offers an attractive opportunity in the 100 million unit per year car radio market, with high value solutions including AM/FM radios, digital radio tuners and advanced multi-tuner capabilities.

In closing, I would like to note two important anniversaries that occurred in the second quarter. In May, Silicon Labs International, based in Singapore, celebrated its 10-year anniversary. Serving as our international headquarters, the Singapore site supports a wide range of manufacturing, product development, and business-critical functions for our non-US operation. This is an exciting milestone in our history and highlights our commitment and ability to serve customers worldwide.

This month also marks the one-year anniversary of our acquisition of Energy Micro, which has significantly expanded our technology leadership and MCU portfolio. I am pleased to announce that Geir Forre, the former CEO and founder of Energy Micro is now Silicon Labs' Senior Vice President and Chief Strategy Officer. Geir is a highly respected entrepreneur with more than 20 years of expertise in low energy wireless and MCU technology. In his new role he will continue to report to me to help drive further penetration into the IoT market.

Thank you for your time and attention. Before we take your questions, I will turn the call back to Jalene.

Thank you, Tyson. Before we open the call for the question-and-answer session I would like to review the investor conferences we will participate in this quarter, including the Pacific Crest Global Technology Leadership Forum in Vail on August 12, the Canaccord Genuity Growth Conference in Boston on August 14, and the Citi Global Technology Conference in New York on September 2.

For those of you who were unable to attend our first Analyst Day at the NASDAQ MarketSite in Times Square in May, you may obtain a copy of our presentation and listen to the webcast in the investor section of our website at www.silabs.com under Events and Presentations.

And now for Q&A. To accommodate questions from as many people as possible before the market opens we ask that you please limit your questions to one with one follow-up. Operator?

(Operator Instructions)

Blayne Curtis with Barclays.

Hi, guys, thanks for taking my question. I was wondering if you think -- I know you don't want to guide for December but I was wondering if you could think about the different puts and takes. Video had an earlier correct. That's been really no seasonal pattern. I was just wondering if you could just think about what businesses will see seasonality and what businesses could you actually have some drivers that could offset seasonality? Thanks.

Yes, thanks, Blayne. This is Tyson. If we look at Q4, we typically have a little bit of seasonality on the broadcast side. The consumer portion of broadcast is typically down in the Q4 quarter a bit. And we are cautious going into Q4 in terms of the timing market.

Our bookings and all that are quite solid right now but we see some of the stuff going out there in the market and are a little bit cautious about timing, as well. So, I would say that going into Q4, if you look across the broad-based product lines, we have great traction and great momentum in MCU wireless and sensors for IoT. We also have good traction in the automotive market but that's going to be offset somewhat with broadcast and potentially something in timing. But it's really a little bit too early to talk so we're just being a little bit cautious on that side.

Thanks. And then maybe on the OpEx side clearly legal costs, $3 million a quarter, again in September, can you think about, as the time line, as you approach the milestones for the trial, is this the right run rate going forward? Or does it accelerate as you get towards the trial. And then it's been a good offset to have the IP sales, that's the last bit of it in September?

This is Bill. Blayne, I think the expense level of $3 million a quarter is appropriate to assume for both Q3 and Q4. We are in the discovery process in the litigation activity, and so we'll not comment in significant detail about that case but we do expect first action from the courts at the end of the year. This will certainly roll over into 2015 but the activity level will probably not accelerate above what we're seeing currently.

Blayne, just to follow-up on the other part of your question, yes, the patent sale that we talked about for Q3 is what's in the pipeline right now. Again, we'll continue to be opportunistic in that area but that's what we can talk about right now.

Okay. And if I can squeeze in one more. Tyson, I was just curious, you mentioned the Thread opportunity. If you can talk about your positioning there and competitively, and whether there are other semi guys also participating here, and where that could really translate into revenue, or when that could translate into revenue.

Yes, so, we've been partnered with Nest really since we acquired Ember in 2012. So our partnership with them extends to not just Silicon and working with existing products, but also we've been working on this Thread stack with them, and it brought in additional partners. ARM is on the group, as well as Freescale and Samsung. So we've got some industry leaders standing behind us. And it was really, the Ember team had, I'd say, probably a dozen years of expertise and experience on low-power wireless mesh networking. So, Nest shows up as really the leading stack and IP technology for low-power wireless mesh networking.

Our team has been working with them, really taking all of the best-in-class standards around low-power mesh networking at 802.15.4 base. So, it's based on the same fundamental technology as ZigBee, but it adds IP. So, you have an internet address for each node, you're able to use multiple gateways. And it really simplifies the entire software set up. So, we believe this is really the evolution of that ZigBee technology. You can run this stack on our existing silicon and we believe that we're quite well positioned to roll this out more broadly into the market and to realize revenue.

It is going to be still in development right now. We've announced that we're bringing in additional partners. The goal is to make this an open standard. But we do believe that, that will solidify our leadership position in this area and continue momentum, both near term and long term.

Thanks for that, Tyson.

Suji De Silva with Topeka.

Hi, guys, nice job on the quarter. Can you talk about the sensor business -- you announced the capacity to touch product there -- as a percent of revenue, or really how important that is standalone and what sensor areas you think are most important for you going forward?

Yes, Suji, we actually break our sensors up two different ways. If you look at the capacity of touch sensors, which are really used for human interfaces, we integrate that functionality onto a large number of our MCUs. So, we actually count that really along with our MCUs. It's an integrated function that allows customers to add buttons and sliders and wheels and even touchscreen functionality into these broad-based applications very cost effectively. And we believe that our performance there is best in class on those types of devices.

The other types of sensors that we're working on, and have out into the market that we're seeing traction with, we have a set of optical sensors for proximity, ultraviolet to detect sun intensity and also ambient light. And, so, those are applicable to a wide range of applications, both in the home automation space as well as wearables as well as industrial various applications. Some of those devices are also used to detect pulse oximetry, such as pulse rate and blood oxygen content. And that's, again, very popular in the wearable space. And then we've also introduced a number of sensors, really looking at environmental conditions, things like temperature and humidity. And those go into a variety of home automation applications, as well as a variety of medical and industrial applications.

These are really sensors targeted at a broad range of applications. We call them our smart sensors. And that continues to be a very interesting area of investment for us in terms of R&D. We believe that our CMOS mix signal capability and our ability long term to integrate these sensors into our IoT platform, to integrate with micro controllers and wireless, provides a really unique opportunity for us. In terms of revenue it's still small. We put that in with our MCU wireless and sensor products, so those are all combined together as a revenue category. But it is one of our fastest growing areas and we are seeing significant traction.

Maybe a quick follow-up on the IoT market more broadly. Is this a case where a rising tide is lifting all boats? Or is there something differentiating you guys that you think you're outgrowing? And are these consortiums such as Thread really gating factors for the growth there? Thanks.

Yes, I think that having open standards and having ways of connecting all the various devices together is one of the important aspects of the growth of IoT. The usefulness of these networks really is proportional to the square of the number of devices that are connected. So, as you can connect various devices together, as you can connect the data together and the cloud, and through application, these IoT application areas become more and more useful for the various markets that you're looking at.

Our view is that we're quite well positioned here. We have leading wireless technology. We have the leading low-power MCU technology. We have a growing portfolio of sensors targeted at these applications. We have about half of our R&D focused at developing the next generation platforms where we can integrate all these together and gain significant benefits in terms of performance, in terms of integration, in terms of cost, and in terms of energy consumption.

I think right now we are gaining share. This is the fastest growing and most strategic part of our business, and quite well positioned going forward with our road map. I believe that Silicon Labs has got great future potential in this area.

I would add, pointing back to Tyson's prepared remarks on our sales channel, it's significant that we have a sales organization that is set up to deal with a really broadly diversified customer set. So, our distribution channel and our ability to support customers online are both key enablers of the Internet of Things market. And is something that not every semiconductor company can boast.

Great. Thanks, guys.

Ruben Roy with Piper Jaffrey.

Thanks. First, for John, on the Access revenue, it seems like the first half of the year performed a little bit better. Are you still looking at potentially a 10% decline on a year-over-year basis for that segment?

Ruben, we'll see how that plays out. You're right, we've had a good first half, had a good Q2, in particular. And we think less than 10% decline is a reasonable view there.

Okay, thanks, John. And then on the patent revenue for Q3, the $2 million that's coming in, is that -- I might have missed this -- but is that related to the CMOS patents, as well? Or is that different? And do you expect that to continue into Q4?

Those will be classified in the broadcast categories, an area that we'll continue to be opportunistic on. And we don't have anything else to report on that right now, so the $2 million is the one item to comment on at this point.

Ruben this is Tyson. Just to note, that is not related to the Q2 sale of the CMOS power amplifier. It's a completely separate item.

Okay, got it. Thank you, guys.

Vernon Essi with Needham & Company.

Thank you very much. I just wanted to clarify, following on Blayne's question about seasonality. Tyson, you were talking about the broad-based business. Historically it's been flattish to down a little bit. You commented on some momentum there. Do you feel you've got enough escape velocity to get out of that seasonality this time around? It seems like you've got a lot of momentum. Just wondering where you're at on that.

The seasonality that we're seeing, we typically see consumer seasonality on the broadcast side. The Access piece is also somewhat seasonal there. On the broad-based side we are cautious right now about the timing market, a little bit of what we saw last year and also a little bit of some of the indications out in the market that we've seen from some of the operators and network equipment vendors. In terms of overall momentum into Q4, I think it's a little bit too early to say whether the momentum that we've got in IoT and automotive tuners and in other areas of broad-based would be able to offset those.

Okay, thanks for that. And then just a follow-up here. Didn't hear much prepared comments on the audio side for tuner. And I think I read somewhere about -- maybe I misunderstood this -- share losses possibly in the lower end. Could you just elaborate on what's going on in that market?

Our consumer radio market -- that's, I believe, what you're talking about in terms of audio -- this goes into a broad range of applications in things like boom boxes, iPod docks, home theatre systems, clock radios. And we've got a fairly substantial share of that market. It's a long-term market and it has been quite stable. So, I would say that our audio revenue, while it follows typical seasonal patterns, has been stable, both in terms of market share and in terms of revenue over the last number of years.

Vern, I would add that the FM tuner and handset product category is virtually gone at this point. So, it no longer represents a material portion of our revenue even in the audio category. The automotive audio, in contrast, is doing extremely well, and had another record quarter in Q2. And we expect to see continued growth in that automotive audio category.

Okay, I appreciate all that. The question, though, more is on the consumer side. You're obviously always coming in at a more cost-competitive solution. And you're feeling that your market share is basically holding on a market that I assume continues to get price competitive every year.

That's correct.

Okay, thank you.

If you look at the consumer audio revenue outside of handsets, the revenue is about flat year-on-year, and is actually up a little bit quarter-on-quarter. So, the consumer audio revenue is, I believe, quite solid.

Okay, great. Thank you.

Craig Ellis from B. Riley.

Thanks for taking the question and good morning, guys. Just a couple clarifications on the income statement, starting with gross margin. A lot of gives and takes given the differences in the royalty revenue quarter to quarter. But it looks like excluding that from both quarters, the core business gross margins are down about 150 basis points quarter-on-quarter. So, one, John, is that correct? And, two, if so, what are the gives and takes within the portfolio that are causing that?

Sure, Craig. This is John. It was a very strong quarter in terms of our gross margin performance. We had 64.1% non-GAAP, all-in. Excluding the patent sale, would remove about 1.2%. So still well above 62% excluding the patent sale revenue. So, it was a very strong outcome and that's really due to product mix as the primary driver. We had a record quarter in timing, good growth in the MCU, wireless and sensor portfolio, and a down quarter in video, which we had anticipated. So those are the major drivers there.

The question was really looking at the third quarter, John, which is I think down 150 basis points off of that. Are you saying that it's really just video bouncing back a little bit and flattish, networking and timing and continued growth in microcontroller that's causing the decrease in gross margin? Or is there something that's happening on an intra-segment basis that's causing the stepdown?

Yes, okay. Yes, primarily product mix. And of course within these product lines there's mix down to the individual part number level where we saw some favorability in Q2, as well. But it's mainly broadcast coming back up in product revenue, and we'll see where we end up on the timing side. MCU and wireless should continue to be a strong growth quarter.

Okay. And then the second question is on operating expense. It looks like operating expense sequentially is up $1.5 million to $2 million. It's at the mid point. And the question isn't so much on that, although I'd like to understand the underlying drivers there. It's more about that rate of increase and whether or not that should be expected as we look out further into the back half of 2014 into the December quarter. And how are you thinking about the growth in OpEx as you look at 2015 given what we're seeing mid year?

Yes, we have a fair number of tape outs coming out this quarter in Q3. We talked about the new product development activity. We also have our new college graduate program continuing. So, we're continuing to invest in the various growth areas of the business. We have some seasonal fluctuations up and down based on the level of tape outs, but in general we see that as continuing through Q4, as well.

Thank you.

Anil Doradla with William Blair.

Hey, guys, a couple questions. On the patent sale, is that something that we can expect going forward or is this order and mix was a one-off event in terms of sources of revenue?

Anil, this is Bill. These are somewhat one-off events but we certainly have the opportunity to engage in additional IT licensing or sales over the course of a multi-year time period. While unrelated to the litigation that is going on today, it is certainly attractive that these IP-related sales have helped offset a substantial portion of the legal expenses that we're incurring this year. But do not expect this to be a regular every quarter kind of activity.

Bill, big picture, when I look at your results over the past several quarters, you see some level of volatility. We've got some very strong beats and then we've got some outlooks that sometimes get reset. I'm just trying to understand, as we progress over the next couple of years, as IoT picks up and some of these fragmented large end markets start coming into the revenues, are we going to see better visibility in your business? Or do you think visibility actually declines further? In other words, the volatility that we see, is that going to get enhanced or not?

No, I think the visibility improves over time. What you have observed is the broad-based category growing from a minority of the Company's business several years ago to 50% at the fourth quarter last year, now up to 53%. And that increased concentration in the broad-based category will provide more stability and predictability to the business over time.

It is classically the vertical businesses with the smaller customer set that are more volatile. And as we continue to transform this business increasingly to IoT and broad-based product, the visibility and the predictability will improve.

Great, thanks.

Srini Pajjuri with CLSA Research.

Thank you. Tyson, you talked about being somewhat cautious on the timing heading into Q4. Can you elaborate on that please as to what's giving you that caution?

Srini, let me add a couple points here. We have had a really good second quarter in timing. I commented last quarter that I thought we would see record performance return in the back half of the year, and I'm delighted that it actually occurred in Q2. We think the third-quarter performance in timing will be slightly down to perhaps flat with this outstanding second quarter.

Our caution on the fourth quarter is really driven by what we're seeing in the current earnings season, both from telecom equipment vendors and from some of our peers in the semiconductor space who are all talking about issues related to this business that could unfold by the time the year is out, including some major M&A activity in the telecom equipment space. So while right now our order patterns and our forecast for the third quarter are very solid, all we're trying to do is to suggest to you, given everything we've heard in the last two weeks, we're taking a bit more cautious stance for Q4.

I also want to just point out, in the timing space we've been investing very significantly in our portfolio in terms of new product development. And our design win activity in this area has been particularly strong. I think last quarter we were up 20% quarter-on-quarter -- or it was year-on-year, I'm not sure exactly which. But it was very strong record design win activity. And our multi-year investment in the product portfolio with our clock, our oscillators, our CMEMS technology are all paying off in terms of design wins. So, the overall long term trajectory of timing and our ability to gain share against our competitors, I think, is quite significant.

Great, Tyson. How big is CMEMS today for you? And, as we look forward, what kind of end markets are you seeing the most traction for that product?

The first CMEMS product we have is targeted at lower-end type of applications. It's quite broad. So, it's, really, if you look at the number of applications that we're engaged in, it is really all over the map, everything from consumer to lowering networking equipment to IT cameras, and even some consumer-type applications. So, the first product is quite broad. I can't point to a specific one.

We're also working on a number of products on the road map which takes the performance level up more into the enterprise space, and also the integration up and integrating that technology with additional functionality, which will open up new market opportunities. We're quite excited about the potential for this technology. And we're also quite excited about our ability to prove that out with this initial product. We are seeing modest levels of revenue. We're not breaking that out separately from the timing revenue overall, but we are beginning to see the ramp of those products here in the second half at a modest level.

Great. And then, Tyson, as we look out to 2015, how should we think about the broadcast business? How does your design pipeline look? And should we expect seasonal patterns or do you expect to outgrow the market or in line with the market? Thank you.

Let's break the broadcast business, really, into two pieces. If you look at the automotive radio business, where we've had tremendous traction and are seeing ramps with our Tier 1 customers, we believe that, that is a very strong growth area for us. Just a point of reference, year-on-year the broadcast automotive area was up 50% year-on-year. So, we are seeing a very interesting ramp and we believe that, that's going to just continue as we move into 2015. But, again, that's a fairly small percentage of our overall revenue. Overall automotive, which includes some other products that we sell in that area, was about 6% of revenue in Q2.

If you look at the consumer piece of the market, we talked earlier in the call about the automotive, the audio business, and that is a stable piece of our business in the consumer area. We do have some growth vectors there with our digital radio products. But overall I would say that the audio and the video are probably stable at the level that you see them right now. On the video side, this year we're moving our penetration of the TV market up from 45% last year to over 50% this year. That's on track, and we believe that our market share, we'll be able to hold or increase that share of the TV market next year.

We also have exciting opportunities with our demodulators. We have opportunities for expansion into the set-top box market. There's a number of areas in video where we have invested and continue to see very good traction. But our market share is quite high and you do have that year-on-year ASP decline. So overall, I would say both the audio and the video business in broadcast consumer would be stable going into 2015, with a growth vector in automotive.

Great, thank you.

Tore Svanberg with Stifel.

Yes, thank you. I was hoping you could elaborate a little bit on your last point there, Tyson. You mentioned maybe some potential expansion into the set-top box market. I'm just trying to understand if that's a near-term opportunity, is it something you're very serious about. Just trying to understand your diversification efforts in your video business.

The video business, we have maintained a regular pace of introductions to maintain our share and grow our share on the TV side. And that includes our demodulators where we enjoy quite significant share with our advanced demodulators in Tier 1 TV makers. The demodulators are also applicable to terrestrial set-top boxes. Our latest tuner introduces features which are very interesting for the set-top box market. And we are garnering design wins today that will be driving additional revenue in 2015. So, if you look overall, we believe that our investments in video are sufficient to continue that business in a stable revenue level in the long term.

These are functions that are not going to be integrated into other SoCs because of the performance level requirement or because of the regional variation. And we have sufficient investment and sufficient market traction in these additional areas to offset any annual ASP declines, which we also believe will, as we really achieve market dominance here, that those will subside over time. If you look just overall at the video business, it is a solid, long-term, cash-generating business for us that we are in. And we're very proud of the achievement that we've been able to make in terms of the market share and the technology that we've developed.

Sounds good. And on IoT, I don't know if you care to update us on what your percentage is there. I think you've talked about 15% before. Obviously home networking has been the main vertical or application there. Are there any other areas within IoT that are starting to span out as far as revenue contribution?

Tore, we're enjoying good IoT performance in several categories. The historical strength in smart metering simply continues. We're also seeing good momentum this year in home connectivity and a new emerging area in wearables. I commented at Analyst Day that we thought for 2014 our IoT revenue share of the total Company would go up from 15% in 2013 to 20% in 2014. With the strength we're seeing in our MCU, wireless and sensor business, that forecast looks to be slightly conservative.

Very good. Just one last question, if I may. The litigation, I understand the expenses there. But could you talk about in a little bit details, the process there? Is there going to be a trial in Q1 and that's why you expect expense to come down? If you could update us on that, that would be great. Thanks.

Sure. There are actually multiple actions that are all related to this same basic case. But the principal case is with the ITC, with a hearing that is currently scheduled for December. So, the activity that is going on now is in preparation for that event. The hearing will not conclude the action, so we will have rollover into the first half of next year. But we will have some pretty significant information that we can convey to you once that is complete.

That's very helpful. Thank you very much.

Ian Ing with MKM Partners.

Yes, thanks for taking my question. I'm not sure how much you can talk about this, but given the uncertainty of when the defensive litigation costs end, how does this change your view on the ROI or attractiveness of the video business? And at what point would you start considering maybe divesting or winding down the TV tuner business? How long can you monetize IP? You talked about doing it this year, so far right?

We believe that this litigation will run its course in the time frame that I have described to you. Obviously, with the litigation expense we are incurring, we're deadly serious about this business. The video business is one we've invested in significantly over time, and, as Tyson just reviewed, represents a terrific cash flow opportunity for us for years to come. So, we are pursuing this legal action with the intention to win. And we expect the video business will be back to normalcy by the second half of next year.

Great. And as my follow-up, should we still assume Access gradual declines each year down about 10%? You did cite some strength in voiceover IP. How much of the modem decline is left at this point?

I think Access will continue, as we have suggested previously, with a decline that is modest, probably on the order of 10% a year. Once again, as was indicated earlier in the call, we are seeing better performance out of that business in 2014 than we suggested at the beginning of the year. So, the decline this year will probably only be in the single-digits. But for 2015 and beyond, I would continue to project about a 10% decline.

And modems is how much percent of sales at this point?

Modem is probably about two-thirds of that total -- no excuse me, one-third of that total.

Okay, thank you, Bill.

(Operator Instructions)

Amanda Scarnati with Citi.

Hi. Thanks for taking the question. Just on shareholder return, is there a specific target that you're seeking either as a portion of free cash flow or as a portion of that $89 million that's left in buybacks that you'd like to achieve on a quarterly basis, or a specific time that you'd like to see that $89 million return to shareholders? Thank you.

Hi, Amanda, this is John. We have not set specific guidelines along those lines. We'll continue to be opportunistic in this area. We have a good track record of executing shareholder return, and have returned over $800 million in share buybacks since 2007. So, we're pleased that we've been active in Q2 and we'll continue to be opportunistic.

Thank you.

John Vinh with Pacific Crest.

Hi. Thanks for taking my question. Tyson, you talked about broad-base being able to sustain a growth rate of 10% to 15% over the longer term. Can you talk about 2015 and the puts and takes and how we should be thinking about that business next year?

John, the growth rate for the model that we have for growth for the Company, the long-term growth rate, is 10% to 15%. So, that would be inclusive of the Access business and the broadcast business as well as the broad-based business. If you look at our broad-based business since 2007, it's been on a CAGR somewhere between 20% and 25%. Those businesses have been the beneficiary of the lion's share of our R&D, as well. So, I think if you look at the broad-based growth that we're achieving in 2014, and looking out into 2015, we believe that, that is going to continue out into the future.

We see very good momentum with our MCU, wireless and sensor products. We see really targeting the Internet of Things. And that's just a large and growing market, which includes the traditional broad-based microcontroller market, as well. You look at our timing in power products that are targeting internet infrastructure, and the [SAM] expansion that we're going to achieve with the new product introductions that we are launching, as well as our isolation and power products going towards a lot of industrial automation. These are quite broad-based.

So, we see very good growth potential across the board in the broad-based category. Again our cellular products, the touch controller, that revenue is gone, both in the FM tuner broadcast, as well as in the broad-based category. So, really, it's a pure play in terms of the broad-based revenue. I would also note that broad-based was over 50% -- it was 53% of revenue in Q3. So, as the proportion of broad-based continues to grow, it's at the fastest growing piece, I think that, that will provide a long-term uptick in the overall growth rate of the Company going forward.

Got it. And then my follow-up question is on CMEMS. You've talked about getting some new design wins and some new application areas. How long is it before we start to see CMEMS becoming more disruptive in some of the traditional application areas like telecom?

The CMEMS technology that we've been developing and maturing and deploying into mainstream CMOS fab is applicable at the high end. There's additional performance improvements and product developments that are needed there, both in terms of the integration and achieving all of those very difficult specs.

We have a good level of confidence that this technology will be applicable across our oscillators, clock line, and will be a key differentiator for us versus the competition going forward. But it's going to take some time. The initial product is starting the revenue ramp here in the second half at a modest level. We do have in development a number of higher-performance products that will take that to the next level. But, again, this is going to play out over a multi-year period.

Thank you.

(Operator Instructions)

Harsh Kumar with Stephens.

Hey, guys, thanks for letting me in. Most of my questions have been asked. I just had a quick clarification. Your royalty sales in September quarter, is it 150 BPs or 50 BPs?

50.

Okay, thank you for that. And then is that the last of the royalty sales you anticipate?

Yes, that's what we have in the pipeline right now. We'll keep looking at it but that's all we have to talk about right now.

Appreciate it, guys. Thank you. Best of luck.

I'm showing we have no further questions in our queue at this time. I'll turn the call back over to Ms. Hoover.

Thank you. And thanks to everyone for joining us today. Goodbye for now.

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