Silicon Laboratories Inc (SLAB) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

I would now like to turn the call over to Miss Jalene Hoover. Ma'am, you may begin.

Thank you, Brandy, 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 financial measurement tables are now available on the Investor page of our website at www.silabscom. 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 third 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 an obligation to provide updates in the future. There are 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 more meaningful comparisons of operating results, and more clearly highlight the results of our core ongoing operations.

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

Thanks, Jalene, and good morning, everyone.

I'm delighted to report record revenue in the third quarter. We established another all-time high in broad-based revenue, driven by our Microcontroller, wireless, and sensor products. Our Access and Broadcast products also exceeded expectations. These results reinforce our confidence in Silicon Labs' near-term outlook, and strategic positioning for long-term growth. I'll talk more about our latest product developments and business trends shortly.

For now, I'd like to turn the call over to John, who will review our third-quarter financial results and fourth-quarter guidance. John?

Thank you, Tyson.

Revenue for the third quarter was $158 million. Which includes $2 million from patent sales, and $156 million in product revenue setting a new all-time high. Strong seasonal performance in consumer markets, helped by new product ramps in wearables, elevated total revenue to above the high end of our guidance. During Q3, we achieved a number of revenue milestones. We continued to grow our Broad-based products, with revenue exceeding $80 million and representing more than 50% of our total product revenue.

Our Microcontroller, wireless, and sensor products delivered another record. Growing to 32% of total product revenue, with continued strong performance in the wearables, home automation and security, and smart metering markets. Third-quarter revenue from 32-bit MCU products obtained from the Energy Micro acquisition, have surpassed expectations accomplishing more than 100% annual growth. In internet infrastructure, timing was down slightly, ending the quarter at 14% of total product revenue. Our power products continue to gain traction in the market, with our digital isolators achieving a new record in Q3.

Turning now to Broadcast, revenue exceeded our expectations at $53 million for the quarter, including $2 million in patent sale revenue. Broadcast automotive achieved a new record, driven by the continued ramp of our AM/FM and digital radio products. Broadcast video was higher than expected, with strong performance in our demodulator products, which also reached a new high in the quarter. Access also outperformed our expectations, slightly up from Q2 at $25 million or 16% of total product revenue. Driven by strength in our ProSLIC and Power over Ethernet products.

Geographically, during Q3, we saw strength in Asia Pacific and the Americas, with Europe essentially flat to Q2. Our distribution business accounted for 63.1% of total sales, up 3.7 percentage points year-on-year.

Non-GAAP gross margin was 61.1%, which was toward the lower end of our guidance range, reflecting product mix. Non-GAAP operating expenses were slightly lower than we expected, ending at around $67 million at the low end of our guidance range. Non-GAAP R&D costs were up only slightly from Q2 at $35 million, with some of the new product development costs we had previously anticipated for Q3 rolling into Q4.

Non-GAAP SG&A costs also increased slightly from the second quarter at $32 million, primarily on higher legal spending. Non-GAAP operating income exceeded our expectations at $30 million, or 18.9% of third-quarter revenue. Reflecting strong top line performance, and good expense control. Other expenses were in line for the quarter, and our effective tax rate was slightly favorable at 22%. Non-GAAP EPS ended at $0.52 per share, exceeding the top end of our guidance range.

On a GAAP basis, third-quarter gross margins were 60.8%. R&D investment increased to $43 million, and SG&A expenses increased to $44 million resulting in GAAP operating income of $10 million or 6% of revenue. GAAP EPS for the quarter ended at $0.13 per share, which was below our guidance range of $0.18 to $0.24. GAAP SG&A expenses include a $6 million acquisition related charge, due to improved expectations regarding the achievement of the Energy Micro earn out. This charge was not reflected in our Q3 guidance and has an approximate $0.14 per share effect.

Turning now to the balance sheet, we ended the quarter with cash, cash equivalents, and investments totaling $340 million, which was flat to Q2. Cash flow from operations for the nine-month year-to-date period was $108 million, reflecting excellent cash flow performance. We executed $43 million in share repurchases during the quarter, retiring more than 1 million shares. Third-quarter year-to-date, our total repurchase amount is $54 million, with 1.3 million shares retired.

Just last week, our Board of Directors refreshed our stock repurchase authorization. Our newly authorized $100 million share repurchase program replaces the remainder of our previous plan, and runs through the end of 2015 allowing us to remain opportunistic buyers as we continue to return cash to shareholders. Accounts receivable ended at 41 days, and inventory ended at 5.3 turns, both in line with expectations. Our balance sheet remains very healthy.

Before turning the call back over to Tyson, I will cover Q4 guidance. First, please note that Q4 is a 14 week quarter. The last day of FY14 will be Saturday, January 3, 2015. We expect fourth-quarter revenue to be in the range of $155 million to $161 million. We expect Broad-based to achieve a new high in Q4, led by our MCU wireless and sensor products the total Broadcast revenue will be down in Q4, due to seasonality and consumer markets, partially offset by continued growth in our automotive products. We anticipate another strong quarter in Access, which we expect will be about flat to Q3. While all geographies are forecasting sequential growth, the outlook is most bullish in the Americas.

Non-GAAP gross margin for Q4 is expected to be in the range of 60% to 61%. We expect fourth-quarter non GAAP operating expenses will grow to a range of $68 million to $69 million. Due to new product investments, the effect of the 14th week of operation, and headcount growth. Our non-GAAP effective tax rate should remain stable at approximately 23%. We anticipate a fully diluted share count of 43.1 million shares for Q4, and we expect non-GAAP EPS to be $0.43 to $0.49 per share. We expect GAAP EPS for Q4 to be in the range of $0.12 to $0.18 per share.

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

Thanks, John.

We are very pleased with our strong performance in the third quarter. Many of our investment businesses, including Microcontrollers, wireless and sensors, as well as Broadcast automotive delivered record design wins in revenue. Revenue from our MCU wireless and sensor products grew 6% sequentially, and 21% year-over-year. This excellent performance is a direct result of our increased investment in hardware and software platforms, driving steady growth in our IoT related revenue, as we continue to gain traction in connected device applications. Our position in emergent IoT markets, such as wearables, home automation, and security continues to strengthen on an absolute and relative competitive basis and will drive what we expect to be a record fourth quarter.

To succeed in the Internet of Things, it's imperative to offer platforms solutions and not just components. Unlike the mobile handset industry and other vertical markets dominated by a few large customers, the Internet of Things is a greenfield of tens of thousands of prospective customers ranging from startups to established name brands. Increasingly, customers are viewing Silicon Labs as a complete solutions provider enabling them to leverage our components, software, development kits in Simplicity Studio to efficiently create their own differentiated products.

Our solutions begin with a comprehensive portfolio of energy-friendly MCUs, high-performance radios, and smart sensors available through our global distribution channels. We believe Silicon Labs is one of the few semiconductor companies today with the ability to integrate these essential product building blocks into system-on-a-chip platforms to serve this broad market opportunity. As an example of our platform solutions, in Q3, we introduced environmental and biometric sensing development kits that have streamlined the process of creating IoT products that sense humidity, temperature, light, and biometrics. Target applications include security systems, smart thermostats, weather stations, smart watches, and other wearables. The kits operate on coin cell batteries, demonstrating the energy-friendly benefits of our solutions for battery-powered applications.

We are excited about our strong position in the connected home market. As the leading supplier of ZigBee Solutions and a founding member of the Thread Group, along with Google/Nest, ARM and Samsung, Silicon Labs is driving the future of wireless connectivity for the IoT. With an estimated 50 billion connected devices to be deployed by 2020, our customers need a connectivity solution that extends internet protocol to each individual node. These IoT nodes are predominantly low power, low data rate devices, often interconnected in mesh networks. The Thread Group is addressing this need with a new IP-based networking protocol that combines the best features in industry-leading standards, to securely connect hundreds of devices throughout the home.

Silicon Labs is spearheading the development of Thread's software, and we recently announced the creation of a beta program for selected customers and ecosystem partners enabling them to accelerate their product development plans. We now have Thread networks up and running in key customers using our existing ZigBee wireless SoCs.

I would now like to comment on the $6 million adjustment to the earn-out, payable to Energy Micro shareholders, that impacted our third-quarter GAAP earnings. While a charge against earnings, this is an expense we are delighted to incur, as it underscores the real success of this acquisition. We are outperforming our 2014 target, and also raising future year forecasts. As was our goal, we have accomplished making the July 2013 acquisition accretive to our financial performance in the second half of this year, and we are extremely pleased with the results of this transaction.

Accelerating demands for bandwidth are pushing internet infrastructure suppliers to develop networks and data center systems that support dramatically higher data rates. Timing technology is essential for upgrades, and Silicon Labs is the leading supplier of timing products. We enjoyed record design wins in timing in the third quarter, and we continue to expand our one-stop shop timing portfolio through further market penetration and a strong pipeline of new product introductions.

The demand for more bandwidth drives the need for a wide variety of clocks at different frequencies. To address this need, in Q3, we introduced a new family of high-performance clock generators and jitter attenuators designed to reduce cost and complexity. Our new clock-tree-on-a-chip portfolio provides the industry's lowest jitter and greatest frequency flexibility, enabling developers to use a single high-performance clock to replace multiple timing chips.

Moving now to Broadcast, our audio and video products represented 33% of Q3 product revenue. Exceeding expectations, with strength across the board. Our Broadcast products primarily address two primary markets, consumer and automotive. In the consumer market, are TV tuner products have achieved more than 55% share of the worldwide flat-panel TV market. Q3 TV tuner design wins were at record levels as we continue to expand into new geographies and drive additional share gains through the adoption of multi-tuner technology, further penetration of our demodulators and expansion into the set top box market. Fourth-quarter demand looks solid, with expectations to be down slightly due to normal seasonality.

As we have reported previously, we are engaged in a lawsuit before the ITC with an entity named Cresta Technology. We were sued for patent infringement related to our broadcast video tuner product line, and are vigorously defending ourselves in this action. We believe the claims are without merit, and are hopeful for a resolution of this issue during the first half of 2015.

Moving on to Broadcast automotive, third-quarter year-on-year revenue growth again exceeded 50% as we continue to take share. The automotive car radio market, including AM/FM radios, digital radio tuners, and advanced multi-tuner systems offers an attractive $300 million opportunity. We believe we can continue to expand our market share going forward, and in Q4, we expect Broadcast automotive to set it's fifth consecutive revenue record.

During Q3, we introduced the industry's most advanced automotive tuner, IC family which offers a global radio solution, supporting all leading broadcast standards worldwide. These new radio products use our patented digital low-iF architecture. This scalable architecture allows infotainment system suppliers to leverage their investments across multiple product lines ranging from entry-level car radios, to cutting-edge multi-tuner, multi-antenna radios for premium vehicles.

Our tuner ICs exemplify Silicon Labs' core strength the ability to integrate multiple discrete components into single-chip solutions that deliver the highest levels of performance. Mixed-signal integration has been in our DNA for nearly 20 years, and our prowess in circuit design, software development, and platform solutions has enabled us to leapfrog the competition time and again. These capabilities are serving us well in the large and growing IoT and internet infrastructure market, where we are well-positioned for growth and technology leadership.

Our strategic investments are producing results, as evidenced by our strong third quarter. Our MCU, wireless, and sensor products generated record revenue in Q3, and we have guided that they will do so again in the fourth quarter. We see many exciting opportunities ahead in the IoT market, and plans to deliver new platform solutions that will give us a technology edge over our competitors while making the things in our lives smart, connected, and energy-friendly.

Looking ahead to 2015, we are very excited about what we have in the pipeline. We will support ZigBee, Thread, and Bluetooth Smart with system-on-a-chip solutions built on a common wireless platform. These solutions will consume the lowest energy on the market, and will support multiple wireless protocols on a single-chip. We are targeting the largest growth segments of the IoT and by continuing into expand our portfolio to markets such as Bluetooth Smart, we will expand our SAM and further differentiate ourselves as the leading IoT semiconductor company. It's an exciting time to be at the forefront of the IoT. We are well-positioned for growth in 2015 and beyond, and look forward to introducing new and disruptive silicon and software solutions to solve our customer's toughest challenges.

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

Thank you, Tyson.

Before we open the call to the question-and-answer session, I would like to review the investor conferences we will participate in this quarter including the Credit Suisse Annual Technology Conference in Scottsdale on December 4th, and Barclays Global Technology Conference in San Francisco on December 9th.

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? Brandy?

Your first question comes the line of Matt Ramsey with Canaccord Genuity.

Tyson, a couple questions if I could. I guess the first one is, obviously you're raising the expectations for the Energy Micro acquisition, and the MCU business did really well in the quarter and it seems like in the outlook. Others in the space have given a bit of different commentary on the overall market environment. And maybe you could just talk about how you see the microcontroller market overall and the distribution level of inventory in the market broadly? Thanks.

Okay. I can comment on the market, and then I'll let John comment on the inventory situation.

Overall, we are extremely pleased with the Energy Micro acquisition and the, product portfolio. And then the traction that we've gotten in the market in terms of ramping of design wins, and getting into a lot of new applications that are emerging in the IoT.

The 32-bit business was up 100% year-on-year which exceeded our expectations going into the acquisition, and allows us to have an accretive transaction here in the second half of the year.

So overall, the demand for the low-energy solutions and 32-bit is quite strong. The design win traction is quite strong, and positions us well as we introduce wireless capabilities and additional families of ARM products as we go into next year.

But I'd also like to say that our 8-bit business is quite solid. We've had very strong design activity in our 8-bit family.

We've continued to make investments there in new product development, and believe that there are a lot of applications that are (inaudible) 8-bit as we integrate that into our sensors and into our wireless low-end wireless solutions as well.

So quite bullish on our view of the MCU market, both the 8-bit and 32-bit market. And our positioning in those markets I think is quite strong, and indicates that we should be able to continue to take market share as we move forward into next year.

Matt, this is John. I would indicate the distribution inventory that we see as normal. We're seeing some increases in the balances on our side, but we see growing revenue numbers and a higher mix of distribution business for Silicon Labs. So I would describe that as normal.

All right, thanks. And as a quick follow up on the timing business. I think you mentioned in the prepared remarks, Tyson, some really strong design win traction there. Maybe you could give a little bit of an outlook as to how you see maybe growth recovering in the timing business because at least the way I view it, that's a very differentiated part of the portfolio that's maybe underperformed in recent quarters relative to the potential of the long-term business. Thanks very much.

In the second quarter, we had record revenue in our timing business, but that was off a bit of softness from the end of last year. And coming into the third quarter, we were a bit cautious about our outlook given the CapEx spending out there and some of the indications. And I think that that was borne out.

I think we still see some slowness in the telecom infrastructure market. We mainly play in the wireline side of optical networking high-speed backbone networks, and less on the wireless side. But we have seen kind of a mixed result here in Q3 on timing.

It was down just a hair from what it was off the record, and we actually think it should be up a bit. But probably not back up to record levels in Q4.

That being said, we've introduced really a fantastic new product. Our lowest jitter clock generator, which is targeted at that sweet spot of the high-end, it expands into some of the wireless infrastructure market as well. And we've had very tremendous both design win traction and customer interest in that part and so we continue to invest in the roadmap here. We continue to believe that the increasing demands for data are going to continue to drive demand for our clock solutions and we think that we are again well-positioned to gain share, and would stand to benefit from any improvement in the market conditions that we see out there right now.

Your next question comes relying of Ruben Roy with Piper Jaffrey.

Thank you. Tyson, John mentioned some new product investments. And I was wondering if you could offer some perspective on what you're hearing from your customers as it relates to loT, especially in light of the recent acquisition of Qualcomm, as a CSR by Qualcomm?

And I think Microchip was interested in that asset as well. And where you are on your connectivity roadmap, and what some of the new product investments are related to it? Thanks

Yes, so a lot of the activity that we've got going on in the second half of the year of our R&D investment is going into our next-generation platform for microcontrollers and wireless. It's a common platform that will be able to address a broad range of applications and there will be a portfolio products coming out of that. And as I said in the comments, that will support ZigBee, it will support Thread, it will support proprietary protocols, and it will also add Bluetooth Smart, which is the low-energy Bluetooth standard.

So that will dramatically increase the SAM. It they will also be interoperable between those various standards on a real-time basis. And we've got an incredible of interest from customers that want to have a robust wireless mesh network with ZigBee or with Thread, and also want to be able access those nodes with the smart phone.

So we think that that is going to be a very differentiated solution. It will include full MCU, low-energy MCU functionality, and it will have the lowest energy consumption on the market. And if you look at the vast majority of applications in IoT, these are battery-powered, lower data rate devices.

This platform is targeted squarely at that and I think that as those products are introduced throughout 2015 and into 2016, that that's going to position us quite well.

I think that Qualcomm certainly saw in CSR their past leadership in Bluetooth, and I think that has not traditionally been a strength at Qualcomm. And I think certainly a recognition of the value of connectivity solutions and that, but would we believe that on top of connectivity you also have to have a broad Channel. You have to have full portfolio of parts to address a broad range of applications, and that's where we believe our strength is and that seems to be proving out.

Thanks, Tyson. And then as a follow-up. For John, on the gross margin guidance, as broad-based continues to do well do you think that your gross margins will track towards the lower end of your longer-term target 60% to 62%? Thank you.

Sure. We have indicated previously and would reiterate that our strategy is to grow the top line, and we want to be sure that we're not leaving business on the table. So we're working inside the Company to price these products, to win in the market. So we view the 60% to 62% range as a responsible range to manage the business toward.

Thanks, guys.

Your next question comes the line of Craig Ellis with B Riley.

Thanks for taking the question, and congratulations on the strong revenues in the quarter and outlook.

I wanted to start off, Tyson, with a question regarding your prepared comments on wearables. Can you give us some further color on the types of applications you're getting designed into, and the visibility that you have for multi-quarter growth in that area? And then related to that, as the IoT business starts to scale, how are gross margins comparing to the corporate average, and what would you expect as that business grows further?

On the wearables side, we have had a significant amount of traction with our low-energy MCUs into wearables. I don't believe I'm at a position to announce the specific customers that are ramping but these are with some of the name brands type of devices that need a longer battery life, and need the flexibility of the ARM architecture.

And you can think of, over time, the wireless functionality being integrated into that. So we have a nice roadmap targeted, not just at wearables, but that plays very well into that space.

The other area that we're getting traction in wearables is with our sensor products. And with a number of our developments, we can sense things like blood oxygen level, you can sense the pulse rate, and there's various aspects of sensing that our products have ended up having a nice level of differentiation and a very low power consumption as well. So the solutions are able to measure the activity of people, and that's an important function in wearables.

So I would say right now, it's predominately microcontrollers with some good traction on the sensor side. If you look just overall at the IoT, we've talked about the -- we are being very aggressive at going out. And where we see a strategic market and a strategic customer, we're going out to win that business today.

And in general, we would have a very strong roadmap, and we've got our top talent doing just that here with this next-generation platform and even looking further out. So I believe that long-term, certainly our products are mixed. We've got our timing products and our broadcast automotive products that are well above the corporate average.

We've got our video products, which are somewhat below, and the rest of our business is in line with the corporate margin targets. Our focus as a Company is to grow the top line, to scale the revenue up, scale the Company up. We believe we've got the technology and the talent and the product portfolio to do that.

And so we're out on the market to win, and we're investing to win going forward. But overall, we feel comfortable with the overall gross margin targets of 60% to 62% going forward, and that we'll be able to continue to grow the business within those two strengths.

That's helpful. Thank you, Tyson.

And the follow up is to John. John, you mentioned the fourth quarter is a 14 week quarter. Can you quantify the extent to which that extra week impacted your revenue guidance?

And then a longer-term revenue related question. At Analyst Day, you framed the 10% to 15% annual growth target for the Company. Do you feel like you're at a point where you can start to see a line of sight to get the business into the lower end of that range? And if not yet, when would you expect that to have that line of sight? Thank you.

Sure. Craig, it's a bit hard to call the precise impact that the 14th week has, I know it's a slow week toward the end of the year around the holiday time period. But there clearly is some effect. I would probably best couch it as a partial week impact, is about the best color I can give.

And as far as the line of sight, we think we're on track to deliver the kind of growth that we've targeted in the broad-based product portfolio and really the key for us is to have that portion of our revenue become more the predominant element of our mix.

We're now exceeding 50%, and need to let that continue to rise over time and sustain those growth rates. And that's the imperative that we have as a Company.

Thanks, guys.

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

Hey, guys, congrats from my side too.

Tyson, you talked about auto actually picking up during the quarter. As I look out in 2015, you've got three parts of it, you've got the auto, you've got the consumer audio, and then obviously the video part.

Can you walk us through the dynamics, whether 2015 will see the auto offsetting any headwinds in the consumer or even broadcast video? So, would love to hear how the dynamics play out in 2015.

Yes. So certainly looking out into 2015, we anticipate continued strong growth out of our automotive radio product line. As there's good visibility into those design wins, and those ramps out for a substantial period of time. So we think that that product line is going to continue to do quite well.

On the consumer side, if you lump the radio products together with the TV products, I believe that the right way to look at that is that that's a stable piece of the business. We've got good position on the consumer radio side, and some opportunity for share expansion into the analog tuned segments. And on the TV tuner side and demodulator, we've got expansion into set-top boxes.

We do believe that we may be able to get some level of additional market share next year. We haven't quantified that specifically at this point. And we've got incremental opportunities with our demodulator in set-top box applications, and in some additional markets for the flat-panel TV.

That would of course offset any sort of ASP declines. But overall, I would say that the consumer business is stable going into 2015, and that the automotive business is going to continue to perform nicely. And I think it was about 6% of revenue in Q3, and so we expect that percentage of the overall revenue to march up steadily as that becomes a larger fraction of the overall revenue.

Good. And finally, I think you might have mentioned this, but the 14th week that you have, the dynamics played out there. How much contribution were you modeling due to this week?

As John said earlier, the 14th week is really it's a pretty slow week. It's right there at New Year's time, and so we're only modeling a partial week of a small amount of revenue coming from that 14th week. But it does have an impact both on revenue side a bit, and also a bit on the expenses, payroll and such.

Great, guys. Thanks a lot.

(Operator Instructions)

Your next question comes the line of Eric Rasmussen with Stifel.

Hello, congrats on the numbers. I just wanted to ask, on the IoT theme, it looks like you have a lot of momentum and design wins. What do you think you're going to exit the year in terms of percentage of your overall business?

Yes, this is Tyson. Bill made some comments at the Analyst Day that we should exit about the 20% range in terms of IOT revenue. I think that overall for the year, we'll be ahead of that for 2014 and certainly would be exiting well above that.

Just to remind everyone, we're counting the IoT revenue in this breakout with our low-power 8-bit products, our connectivity products in 8-bit, as well as all of our 32-bit and wireless revenue, plus our sensor revenue. So those are predominantly chips that get sold into connected device and low-power applications. So that's going to be, for the year, better than 20%, and should be edging well above that as we go into 2015.

We'll update on the specific number as we close out the year. That's not something that we update on a quarterly basis.

And then on top of that, you'd have to add the rest of our 8-bit business. So if you look at the MCU wireless and sensor piece of our revenue, it was almost a third of the revenue. And if you look at that total, that total should again continue to march up as we gain share in these connected device applications, and continue to expand the 8-bit business as well.

Thanks. And just -- I don't know if maybe I missed it. But does your outlook include any patent sales from the broadcast business?

Hey, Eric, this is John. No it does not. We had the one deal in Q2, and then a follow-on deal in Q3. But there is nothing in the outlook for Q4.

Great. Thanks so much.

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

Good morning, guys. Nice results. Just, Tyson, on the earn-out for energy, could you just remind me what the time frame of that earn-out was for? And then it looks like you're GAAP guidance. Are you seeing a further payout into December? And I think Broad-based came in close to what you guided to, is the upside more December, or I guess it's -- or is it more next year? That would be the question.

Hey, Blayne, this is John. Yes, so that calculation is a long-term calculation, that earn-out is actually structured around a five-year view of the business. And it scales with growth of the business, so it's a bit of a complex calculation and that goes through some Monte Carlo situations out in time. But fundamentally, it's reflective of the strength near-term, and greater confidence and strength longer-term is what's driving that.

That was very helpful. And then, John, you guys partially answered this. But the 14 week impact on OpEx is maybe a little easier to calculate, but you do have potentially shutdowns or what in that same time period.

As you look into Q1, you should get some benefit. You actually were able to offset that pretty well in December. But can you just talk about the moving pieces in the Q1? And you obviously have merit increases, you have the litigation, but then you should get some benefit as that 14 week reverts back.

That's right. There's a few puts and takes here, and we'll be able to comment more on that in January. But the trends are that you would I yes revert back to a normal 13 week cycle.

The legal cost profile is likely to continue through Q1, and we will also, as you mentioned, have merit increases and the annual reset of the fringe benefits, like the FICA and Social Security. So there's some puts and takes in there, and we'll be able to comment more on that in January.

Thank.

Your next question comes the line of Suji De Silva with Topeka.

Can you talk about your wearables opportunity here, whether it's somewhat concentrated on flagship wins and those ramps? Or whether you feel like it's more diversified in the design win profile?

Yes, I would say that it's pretty diversified. There's a lot of startups that are in the wearables space that are looking for the lowest energy MCU, and are both valuating and putting our MCUs into production. So that's been a point of particular differentiation, especially with the levels of energy consumption that we're able to achieve in those applications.

So it's not just a single flagship win. We do have a couple of nice higher volume wins within the wearables space that are shipping here into the holiday season. But I would say that it's -- this is a pretty diverse market.

There's quite a few players, and it's a pretty broad opportunity for us. And it's also one where we see that there's just a -- the market is growing, and that there's a lot of different applications. And not just watches, but things like fitness trackers, sports and fitness applications, those are quite energy sensitive and one where we'll certainly target.

Great. And then my other question is on the Energy Micro product. It's doubling year-over-year, it's doing a really good clip there. I'm wondering if it's able to sustain that level of growth, and if not, then what kind of growth are you expecting over the next year for 32-bit products from Energy Micro/

We're not really ready to give full guidance. Certainly 100% growth is a high bar, but we certainly -- just looking at the moving parts of our revenue going into next year, we believe that the MCU wireless and sensors area is going to be our fastest growing area just in raw dollar terms. And we'll be able to provide more specific guidance as we move into Q1.

But overall, the design win traction has been very, very strong. We've got a strong pipeline of new products coming out, and continue to believe that that product line is going to deliver nice growth.

And looking at the earn-outs charge that we had to take here in Q3, that's an indication both of the near-term and the long-term performance of that product line. And that's how the earn-out was structured, and we're glad to be paying that.

Great. Thanks, guys.

Your next question comes the line of Tore Svanberg with Stifel.

Thank you, and congratulations on the results. So my first question, and I usually don't look at this very often, but it looks like your ASPs were up 1% year-over-year. Is that (technical difficulty) of your broad-based business being a higher percentage of revenue, or is there anything else going on?

Tore, this is Bill. That degree of change is not significant to us. Our ASPs have typically averaged around $1. They tend to bounce around a few cents from quarter to quarter. That has continued. So I don't think there's any fundamental change in the ASP structure in the business right now.

Very good. And as a follow-up to Tyson. Tyson, at that the Analyst Day, you talked about some new distributors, and especially with some emphasis on Europe. I think at that time, you indicated you expect the bulk of that benefit to be in 2015. So I was just hoping you could update us on that particular topic. Thanks.

Right. We, over the last I'd say five years, we've brought on Arrow and Avnet, and have been working to broaden our footprint within those companies. In terms of additional product development, in terms of training, and relationship and partnerships with them. And I think that we were up -- we're at 63% distribution revenue, and some of that goes into Asia.

We have a number of distribution partners in China, as well as the global distributor relationships. So that's been a multi-year investment strategy in the channel. A multi-year investment strategy in products that are appropriate for the channel, and then making the investments in marketing and training and collateral to be able to fully leverage those additional feet on the street.

So it's not just Europe, we have a big focus in Asia as well. And we've seen quite good results of this. In particular, in the Americas here in the second half, a lot of those customers are owned by the distribution channel or they're the main interface.

One of the important aspects of broadening the channel is that we only have so many salespeople. So we need additional feet on the street, and help to be able to serve the tens of thousands of customers that we need to reach with our broad-based products. And so I believe that that multi-year investment strategy is beginning to pay off, and certainly it's helping here in the second half and going into 2015.

Very helpful. Thank you.

Your next question comes the line of Srini Pajjuri with CLSA Research.

Good morning, guys. John, your gross margin guidance for Q4, given that broadcast is coming down and access is holding up and broad-based is growing. I would have thought gross margins would be a little bit better than that. So, can you give me some puts and takes as to what's going on there?

Sure. So, the IoT portfolios is pretty well at corporate gross margins. We're seeing strength in that category.

The timing business, we're foreseeing some resumption in growth, but not anticipating record quarters for timing. So that's provided some drag in terms of the mix on the margins. So it's really, again, on the product mix is the primary factor.

Srini, I would add that we do not have any patent sale revenue and very, very high gross margin business in the fourth-quarter that we did enjoy in the prior two. So that's also a contribution to the change in mix.

Got it. And then in light of your 14 week quarter for Q4, how should we think about your Q1 seasonality for your different segments? Do you expect it to be normally seasonal, or do you expect it to be slightly worse?

Go ahead, Bill.

Srini, I do think we will see a normal seasonal pattern going into Q1. So we'll have a typical fall-off in our consumer business that was quite strong in Q3, and continues into the months of October and November, but will drop off in December and into the first quarter. So we'll see a typical seasonal profile as we roll into the first quarter of next year.

Okay, great. And maybe one final question. On the access business, obviously, it's been holding up better than you thought. Is there anything that's coming back, any particular product segment? And as we look out to the next year, should we continue to model that business to decline at this pace of mid single-digits, or do you think it's going to go back to double-digit declines? Thank you.

I'll continue. Srini, I think you do need to continue to model that that business will show modest declines going forward. We're enjoying good strength in the business in the second half of the year, but access has always been a bit lumpy and we've got some significant customers that manage the inventory in that business.

But the longer-term trends, particularly in modems, has to be down. So when you're building your longer-range forecasts, continue to forecast that access will decline slightly on a year-on-year basis.

Thank you.

Your next question comes the line of Harsh Kumar with Stephens.

Congratulations on great execution. I wanted to ask a question on the OpEx management, perhaps the philosophy of that. Do you guys have a rule or a mechanism were you manage OpEx as a percentage of growth?

Or is it a situation where you're still feeling like you're in a hypergrowth mode with your IoT business? And that ultimately, with revenue growth, it will settle out and the absolute dollars of OpEx will stay the same for now?

Harsh, our long-term model is to get back into this 20% to 25% operating income range. We've been operating below that for the last couple of years, or the last year. We've touched that, and if you pull out our legal expenses this year and also pull out the patent sale revenue, we're not far from that here in 2014.

And we had the Energy Micro acquisition last year that we've been growing into as well. That being said, we also have a huge opportunity sitting in front of us with the Internet of Things in particular. And there's a lot of investments that are required in terms of software, and tools, and solutions, and platforms, product portfolio, tape outs.

And we do not want to undershoot those opportunities by under investing, and so we are continuing in a judicious and careful way. We are adding some level of resources to address those needs, especially in areas that are new for us or were we really need to change our mix. In particular, on the software side, as the mix of our R&D trends up over time more bias towards software than hardware engineers.

And we are being careful about that, but we are investing to win in this market. And with the goal to continue to grow the top line of the revenue and get back within that 20% to 25% operating income range as soon as we can.

Hey, guys. Appreciate the color. And as a follow up, I wanted to follow up on the question about the first-quarter seasonality. Do you feel, at this point in time, that we should expect your IoT business or even maybe the broad-based business to be flat to slightly up in 1Q?

Well we will give you more specific guidance on each of these businesses in January. But I would suggest that the consumer business is going to be down across the board. That will include both the video business, the consumer audio business, and portions of our 8-bit microcontroller business.

So you should forecast a decline in revenue in Q1. We'll be much more specific about the absolute dollar amount of that when we're closer to it and give you a guide after the fourth-quarter results.

Hey, guys, congratulations again. Appreciate it.

And your final question for today is with Ian Ing with MKM

Great, and I share my congratulations. The first question on this Cresta Tech litigation getting a result in the first half. What gives you confidence now in that timeframe? And the December ITC hearing, would that potentially pull in or push out the resolution?

So there has been no change in the schedule regarding this lawsuit. We have a hearing that is scheduled to occur before the ITC the first week of December. That will be enlightening to us, because we'll get to actually observe the case being presented and the judge's reaction to it.

But it is unlikely that we will get a ruling in the month of December. My expectation is that we'll get formal input from the ITC in the first quarter, and that's why the legal activity will continue at least through that timeframe. We're very hopeful that we get a favorable outcome, and that we can put this whole issue to bed by the first half of next year. But this is still an action that is to be determined.

So dependent on the timing, the communications, equipment (inaudible) coming back, or is it still a [capturate] some design wins?

Could you repeat that again, Ian, I think you dropped out.

Yes, sure. Let's try that again. So just an update on Siemens bus leaders. Is it a matter of -- I know it's still early innings of adoption, but is it more reliance on the comms equipment market coming back, or is it more a matter of capturing some more design wins at that point?

Yes, the Siemens products, we continue to get some design win traction. The first set of products are targeted at more high-volume applications, so they are not targeted at the communications infrastructure piece. We were hoping for some replacement business where people would drop our solutions into existing sockets, and that did not materialize the way we had anticipated.

And I would also characterize the design win traction with those products being somewhat behind our internal projections, just based on the size of the opportunities that we -- the large number of opportunities that we have to go after. And with this particular first product being a little bit slower to adopt. So that has not contributed to the extent that we had hoped for 2014, and that will extend into the ramp as we move into 2015.

But we continue to offer these products out into the market, and have the products in production and continue to push those products forward on a roadmap basis. So while I think it's a little bit less than what we had hoped, it is something that we still continue with.

So is it a matter of respinning these products, or just the marketplace still coming around to adopting them?

I think dividend that the first product that's out into the market it's really very programmable and flexible, but standard crystal oscillators. So the functionality is fairly basic. Really, it was there to ramp volume, and improve the technology as we move it into different areas.

But we had predicted that the revenue there would be ramping faster than it is. But we continue to get design wins, and to get traction in the market with these products.

Okay, thank you very much.

Thank you

I would now like to hand the call back over to Jalene Hoover.

Thank you Brandy, and thanks to everyone for joining us today. Goodbye for now.

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