Silicon Laboratories Inc (SLAB) 2014 Q4 法說會逐字稿

Good morning. My name is Sean. I'll be your conference operator today. At this time I would like to welcome everyone to the Silicon Labs fourth-quarter 2014 earnings conference call. (Operator Instructions)

I would now like to turn the call over to Ms. Jalene Hoover. Jalene Hoover, you may begin your conference.

Thank you, Sean. Good morning, everyone, and thank you for joining us this morning. I am joined today by Tyson Tuttle, Chief Executive Officer; Bill Bock, President; and John Hollister, Chief Financial Officer. We will discuss our financial performance and review our business activities for the fourth quarter. After our prepared comments we will take questions.

Our earnings press release and the accompanying financial tables are available on the Investor Relations section of our website at www.silabs.com. This call is also being webcast and a replay will be available for two weeks.

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 call, and that information will likely change over time. By discussing our current perceptions of our markets, the future performance of Silicon Labs and our products with you today, we are not undertaking an obligation to provide updates in the future.

There are a variety of factors that we may not be able to accurately predict or control that could have a material adverse effect on our business, 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 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 core results of 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. 2014 was a pivotal year for Silicon Labs. Our broad-based products now represent more than half our total revenue, with microcontroller, wireless, sensors, power, and timing delivering record revenues.

Broadcast continues to deliver strong results, setting new records for automotive radio products and achieving more than 55% share of the global TV market. Access exceeded expectations for the year, surpassing 2013 revenue.

Before I turn the call over to John, I'd like to comment briefly on our acquisition of Finland-based Bluegiga, a leading supplier of wireless modules and software. This strategic acquisition rounds out Silicon Labs' wireless portfolio for the IoT and enables us to address a broader range of market opportunities and customer needs. Silicon Labs and Bluegiga are excited to join forces to expand our combined participation in the large and growing IoT market.

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

Thank you, Tyson. We are pleased to announce that revenue for the fourth quarter and full year established new all-time highs for the Company, with Q4 coming in at $162 million and reaching $621 million for the full year. Fourth-quarter revenue exceeded the high end of our guidance range.

During Q4, we experienced strong demand for MCU wireless sensors, which propelled our broad-based products to a third consecutive record, with $85 million in fourth-quarter revenue, representing 52% of our total revenue mix and achieving a year-on-year growth rate of 17%. MCU, wireless, and sensor products are meeting our growth expectations, with a 2014 annual growth rate in excess of 20%, well above the industry.

Timing revenue was about flat to Q3, reflecting continued softness in second-half telco spends.

Fourth-quarter broadcast revenue was stronger than expected and down only slightly from Q3, with our automotive radio products reaching a new record in delivering better than typical seasonal results in our broadcast consumer products. Broadcast generated $50 million in revenue for the quarter, representing 31% of total Q4 revenue.

Our automotive radio products continue to gain traction in the market, with a growing list of design wins at Tier 1 automotive manufacturers based on industry-leading performance, scalability, and integration.

Access outperformed our expectations with an eight-quarter high, delivering $27 million or 17% of total fourth-quarter revenue. This reflects strong demand for our ProSLIC products, driven by optical network rollouts in Asia.

Channel revenue remained strong at 62%, which is up around 50 basis points year-on-year. Geographically, we saw growth across-the-board for the quarter, with progress in the Americas the most significant for 2014, fueled by expansion in industrial and consumer as we increase our leadership in the Internet of Things.

Non-GAAP gross margin for Q4 was at the low end of our guidance range at 60.1%, reflecting products mix, including strength in lower-margin ProSLIC and broadcast products, combined with stable timing. Non-GAAP operating expenses for Q4 were slightly higher than expected, at more than $69 million, due to greater tape-out expenses, increased travel, and higher variable costs for the quarter with the revenue upside.

Fourth-quarter R&D expense increased to $37 million, and SG&A expense was about flat at $32 million. Non-GAAP operating margin was 17.2%.

Our non-GAAP tax rate improved dramatically in the quarter due to the renewal of the US federal R&D credit, which drove about a $4 million benefit. Earnings for the fourth quarter exceeded our expectations at $0.57 per share non-GAAP.

On a GAAP basis, fourth-quarter gross margins were 59.7%, R&D investment increased to $46 million, and SG&A expenses decreased to $40 million, resulting in GAAP operating income of $11 million or 7% of revenue. GAAP EPS for the quarter ended at $0.23 per share, which was above our guidance range and reflects the US federal R&D credit discussed earlier.

Turning now to the balance sheet, we ended the quarter with cash, cash equivalents, and investments totaling $343 million, which was flat to Q3. We are pleased to announce that the Company achieved an all-time record in 2014 in operating cash flow at $137 million for the year, up around 14% from the $120 million we generated in 2013. Our success in this area is a testament to the high level of differentiation in our underlying business and products as well as our ability to operate efficiently with minimal net working capital outlays.

Further demonstrating our commitment to our shareholders, we executed over $70 million in share repurchases in 2014. We have around $90 million in authorized share repurchases remaining, and we have been active thus far in Q1.

Accounts receivable declined to $70 million or 39 days sales outstanding, which is a multiyear low. We continue to have no known collection or bad debt issues.

Inventory levels in creased during the quarter to $53 million, with turns declining slightly to 5 times. Channel inventory increased from 47 to 48 days.

Headcount for 2014 ended at 1,107, up 47 employees from the end of 2013. Going forward, we expect to see modest headcount growth as we resource critical IoT projects and integrate the Bluegiga team.

Before I turn the call back over to Tyson, who will provide more detail about the strategy underlying our acquisition of Bluegiga, I'd like to comment briefly on the financial implications. Bluegiga is a focused provider of Bluetooth and Wi-Fi software and modules.

We expect acquired products to contribute approximately $25 million to $28 million to our 2015 revenue at gross margins below our corporate average. We expect the acquisition of Bluegiga to be accretive, adding roughly $0.03 to $0.04 non-GAAP EPS to fiscal 2015.

I will now cover first-quarter guidance. We expect first-quarter revenue to be in the range of $156 million to $162 million. We expect broad-based revenue to increase in Q1, reflecting strength in MCU, wireless, and sensor products, which includes the addition of two months of revenue from Bluegiga of $3 million to $4 million.

Broadcast will be down for the quarter, reflecting typical seasonal declines in consumer products, partially offset by growth in automotive. Access will be down for the quarter.

We expect Q1 gross margins to decline to approximately 59% due to product mix and the impact of Bluegiga. While we foresee improving gross margins over the course of 2015, we are committed to drive an expanding module business; and accordingly, we are lowering our target gross margin model by 1% to 59% to 61%.

In Q1, we expect our non-GAAP operating expenses to be around $70 million. There are a number of puts and takes to our 2015 operating expense profile that I will describe briefly.

Incremental to our operating expenses are the additions of Bluegiga, general cost inflation, and some continued modest organic hiring. This is somewhat offset by an expected decline in legal expenses and the 53-week year reverting to a 52-week year. Taking these factors into account, we estimate that our 2015 non-GAAP operating expenses will increase by around 9% over our 2014 OpEx.

Turning to our tax rate, we are now realizing the full benefit of a long-term arrangement to transfer IP internationally, which will have a favorable impact on our near- and longer-term tax rate, lowering our overall tax expense and increasing our after-tax earnings. Based on our estimates of the geographical mix of taxable income, we expect our non-GAAP effective tax rate for Q1 and full-year 2015 to be 15%, down approximately 8 percentage points from fiscal 2014 on a comparative basis. Additionally, with the US federal R&D credit now back into an expired state, the 2015 rate estimate does not comprehend any additional benefits that may arise relating to the R&D credit.

We expect non-GAAP EPS for Q1 to be in the range of $0.42 to $0.48 per share, and GAAP EPS to be in the range of $0.08 to $0.14 per share. Now I'll turn the call back to Tyson.

Thanks, John. This week we announced our acquisition of Bluegiga, a leading provider of Bluetooth and Wi-Fi modules and software. We project that nearly half of all low-power wireless devices will ship in module form in the next few years.

This purchase greatly accelerates our roadmap, enabling us to offer a complete, market-proven family of modules, software stacks, and development tools. These solutions complement our expanding portfolio of ZigBee, Thread, and sub-gigahertz connectivity options for the Internet of Things.

Pre-certified by the FCC and other standards bodies, wireless modules simplify our customers' designs and accelerate their time to market. Our strategy is to offer customers a one-stop shop for connectivity, with leading wireless protocols targeting a wide array of IoT applications. Additionally, we will provide customers with a seamless migration path for modules to ICs for high-volume, cost-sensitive applications.

With this acquisition, the combined portfolios and development ecosystems will enable Silicon Labs to address a broader range of market opportunities and customer needs.

We're very pleased to have ended 2014 with record revenue for the quarter and for the year. Our revenue grew 7% over 2013, fueled by the growth of our broad-based products, which are achieving critical mass. Year-on-year, design win activity increased by almost 20% and we expanded our customer base by nearly 30% to greater than 25,000.

Total revenue for the fourth quarter increased 11% year-over-year, exceeding the $160 million mark. MCU, wireless, and sensor products represented 32% of fourth-quarter revenue, growing 6% sequentially and establishing a third consecutive record revenue quarter.

Revenue for the year grew 23% over 2013. We see steady growth in our IoT-related revenue as we continue to gain traction in home automation, security systems, modules, wearables, and smart-metering.

Silicon Labs has been at the forefront of the sub-gigahertz radio market for many years. In Q4, we introduced a new generation of EZRadio and EZRadioPRO devices to meet demanding application requirements.

Operating on a single coin cell battery, our latest radios offer the highest levels of RF performance and single-chip integration in sub-gigahertz wireless IC market. Providing a versatile multiprotocol wireless connectivity platform, these devices are well suited for a wide array of IoT applications from wireless sensor networks to smart meters.

During the quarter, we also added a new family of digital temperature sensors to our growing portfolio of environmental and optical sensor products. With temperature being the most-pervasive environmental metric that embedded developers need to measure, today's designers expect exceptional power efficiency, accuracy, and price performance from these sensing solutions. Our new sensors offer industry-leading power efficiency while maintaining accuracy across the entire operating voltage and temperature range.

Timing continues to be a strategic area of investment, as we expand our high-performance frequency-flexible portfolio and development tools to meet the stringent demands of data center, wireless base station, and core network applications. Fourth-quarter timing revenue grew 11% year-over-year to 13% of Q4 product revenue.

Design win activity remains strong, establishing a new record in Q4. As the communications market transitions to higher-speed, higher-bandwidth networks, the demand for high-performance timing technology is increasing. We have a significant market share with Tier 1 customers in high-speed applications such as 100-gig networks, and as this technology shifts from long-haul to metro networks we expect share gains to follow.

Turning to broadcast, our consumer and automotive products represented 31% of Q4 revenue. Broadcast automotive set its fifth sequential record revenue quarter in Q4, reflecting growth of more than 10% over Q3 and 45% year-over-year.

We expect broadcast automotive to set another record in Q1, reflecting continued market share gains, including Tier 1 wins and growth in China. We now have a number of design wins at Tier 1 suppliers to automotive OEMs in the Americas, Europe, and APAC.

During 2014 our TV tuners achieved more than 55% share of the worldwide flat-panel TV market. Silicon Labs continues to lead the broadcast industry in TV tuner shipments, shipping more than 400 million units to date and with nearly 3 times the market share of the next closest competitor. Our newest, sixth-generation TV tuner family extends our lead and competitive positioning in the global market.

2015 will be an exciting year of growth and innovation for Silicon Labs. We're starting the year on a high note, with a major presence at Embedded World, the industry's largest event devoted to embedded applications and held in Nuremberg, Germany, later this month.

Highlighting our latest solutions for the IoT, Silicon Labs will demonstrate next-generation MCUs, Thread and ZigBee mesh networking software, environmental and biometric sensing solutions, an expanded Simplicity Studio development ecosystem, and other new products. I am also honored to deliver the opening day keynote address at Embedded World, an unparalleled opportunity to share our IoT vision with the industry's top engineering minds.

Looking ahead, we believe the IoT market will coalesce this year around three key wireless connectivity technologies: Wi-Fi, Bluetooth, and mesh networking solutions based on ZigBee and Thread. With the acquisition of Bluegiga, we now have all these protocols in our wireless portfolio, expanding our SAM and enabling us to address a broad range of 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 question-and-answer session, I would like to review the investor conferences we will participate in this quarter, including the Stifel Technology, Internet and Media Conference in San Francisco on February 10; the Morgan Stanley Technology, Media and Telecom Conference in San Francisco on March 5; and Piper Jaffray's Technology, Media and Telecommunications Conference in New York on March 11.

We would now like to open up the call for your questions. 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. Sean?

(Operator Instructions) Tore Svanberg, Stifel.

Yes, thank you and congratulations on the record results. The first question is on Bluegiga. Tyson, could you talk a little bit about where Bluegiga's revenues are today, either by market or application?

And as we think about this module strategy, could you also refer to, a little bit, the competitive landscape? Are you at the forefront now, or are you starting to see more and more competitors coming out with similar module-type solutions?

Tore, thanks for the question. Bluegiga sells into a wide range of markets. They've got a very broad-based business, and their model is to be able to support both medium and smaller size customers in large numbers.

So they come in with a fairly rich pipeline of opportunities across everything from industrial, consumer applications, some automotive applications -- it's actually quite broad. Their business today is more focused on Bluetooth than on Wi-Fi. They've recently introduced Wi-Fi modules, and that's a new growth area for them as well.

If you look at the competitive landscape, there are a number of other module providers out there, including other semiconductor companies. Bluegiga has had a lot of success in the market by differentiating their products as very easy to use, cost effective, and highly capable from a technical standpoint -- the RF performance and these types of things.

But again, it is a broad market. They have a decent share, but there are a number of providers.

We think that having this capability in-house, to have a captive capability for modules, has a number of benefits for us. One, we can take our silicon and apply that into modules in more creative ways, and make it easier for our customers to get to market. We're also able to, in high-volume applications, be able to seamlessly move customers from a module solution to an onboard design; and we believe that that is more sticky.

So we get more visibility into the customers. We get to hold on to those customers as they move from medium volumes into high volumes. And overall, it just really simplifies our customers' ability to get to market quickly.

Great. Thank you. As a follow-up, I had a question on the broadcast business. The momentum there in automotive has been quite impressive, and you probably don't break it out -- or you're not willing to break it out yet.

But is automotive becoming close to a third of your broadcast revenue? And if not, at what point should we expect it to become that type of a size?

Yes, I would say that now it's not at the level of a third, although it is a significant contributor to the growth in revenue. The growth in the automotive area is -- we view that as offsetting any potential declines that we have on the consumer area as we reach market saturation there.

But we had a very nice 45% growth year-on-year, and a nice quarter-on-quarter. We see the broadcast automotive revenue just having a nice, steady increase as we move through the year. But we don't -- I don't think it will be at the third level; but it will certainly exit the year with a good trajectory.

John Vinh, Pacific Crest Securities.

Hi, thanks for taking my question. Just a follow-up question on Bluegiga. Does Bluegiga have any wireless ICs? Are they strictly modules?

And then can you also just talk about any customer overlap that you have there?

The Bluegiga modules today are based on third-party silicon from a number of different suppliers. Going forward, we intend to continue offering those types of modules, but also to integrate our own silicon technology as time goes forward.

We've talked in the past about our roadmap to include Bluetooth capability; and certainly that would be first on the list. But you can also imagine solutions around ZigBee, Thread, and sub-gigahertz applications as well. And I think that that same simplicity will apply.

In terms of the customer overlap, actually, because they serve such a broad range of customers, we're in similar areas and we do have a few common customers. But in general, they're bringing a new set of customers into the mix and have been very successful at serving a very broad range of customers through distribution. So we think that for the most part, this is completely additive in terms of our traction.

Great, thanks. And then just my follow-up question. You gave us some perspective on 2015 on the OpEx line. In terms of the segments, I was wondering if you could give us some additional color.

I know you guys have talked about -- looks like broadcast is back on track to grow at the 15% to 20% long-term outlook. You've got, obviously, the automotive broadcast business growing quite nicely. Is that enough to keep broadcast flat into 2015?

And on the access side, that segment continues to outperform, despite you guys talking about that could decline over time at a more modest rate. Could we also see another flat year in access?

Yes, John; this is John Hollister. Yes is the answer on broadcast. We think the automotive growth is sufficient to maintain a stable mix for the broadcast category overall, with some decline, with a -- flat to slight decline possible with the market saturation and ASPs on the consumer side, but having that offset by growth in automotive, as you mentioned.

On the OpEx side, I provided some color there. We've got some incremental hires yet to make, but we are pleased with the progress on change in the mix of operating expense to be more heavily weighted toward R&D here in 2015, with the legal expense rolling off some, so that's a nice benefit.

And the final point I'll make is the improvement in the tax rate will certainly help contribute to our bottom-line results, which will help as well.

John, this is Tyson. Just one more color, just to complete the picture on the revenue. On the access side, we had given guidance earlier in 2014 that that business would be down 10% or less for the year; and we actually ended up with a slight increase year-on-year for access.

But again, in 2015 we believe that that category will decline 10% or less for 2015 versus 2014. So just so you can fine-tune your models there.

Suji De Silva, Topeka.

Hi, guys. Congratulations on the acquisition here. Can you tell me if you -- did you offer a module before, or would this be initiation of that? If so, were you missing business because you didn't offer a module?

And how quickly can you get other SLAB products into that module format? Is it a couple of quarters, or so forth?

We actually sell a number of our chips to a number of different module suppliers, and we've done that for years. In the broadcast category, some of the tuners go into modules.

And then in the wireless area, we have a number of partners that we believe will continue to use our products and really look at the addition of this module capability as an expansion, especially into the Bluetooth and Wi-Fi side, where we haven't yet participated. So that's completely additive both from a module standpoint and in terms of the release of those -- our own internal silicon into the Bluetooth area.

We do anticipate that happening this year. We haven't had a specific announcement around it yet, but it's in process and we believe that this is the quickest path to get that type of silicon into the market quickly.

Okay, great. That color helps; thanks, Tyson. Then also in terms of the timing business, looking into the first-half 2015, I know the end markets have been somewhat muted. Can you talk about the prospects for that business and the end-market circumstances going into the first half?

We actually, in timing, have seen decent bookings coming into the quarter. We believe that timing is not -- the market is not necessarily completely strong in the areas that we serve, in particular the core networking area, the core communications network infrastructure area.

But as we move through 2015, given the design-win momentum that we've had and the visibility that we have, we believe that that business will have a resumption of growth as we enter into the year and march through the year.

Craig Ellis, B. Riley.

Thanks for taking the question, and congratulations on the results, guys. The first question is on Bluegiga, and it's got two parts.

The first part is: what are the drivers to the full-year accretion? Is it revenue growth or some type of optimization?

And related to that, with the Bluegiga product portfolio now part of SLAB, how does the management team look at additional technology needs or additional areas where you may have to go out and do further deals such as this most recent one?

Hi, Craig. Yes, the drivers on the accretion are really around the revenue growth in the business. We will continue to look at optimization and areas where there may be some ability to take advantage of a bit of overlap. But the main driver is going to be growth in the revenue performance for the acquired products.

Yes. I'd just add that this was a profitable business coming in. They've been able to differentiate their products in the market and drive nice growth over the last number of years, and that's dropping to the bottom line. So that made this a very attractive acquisition.

If you look at the need, I think that this does fully round out our wireless portfolio. If you look at our organic R&D internally, the silicon that we are developing, plus the module capability that's coming in, we think that on the whole we've got a complete development around all the various IoT technologies.

That being said, we have a very strong position in terms of our cash balance and are looking for strategic acquisitions that would augment our IoT vectors and really solidify that. But right now, we think we've got the core elements of microcontrollers; we've got a number of sensor products; we've got a complete suite of wireless networking technologies; we've got a lot of efforts ongoing in building the channel and our ability to serve a broad market. And we think that we are very well positioned to continue to take share and grow that IoT-based revenue strongly as we move forward.

Thanks for that. The follow-up question is a longer-term question, and it relates to the target model. You mentioned the adjustment on gross margins. On revenue growth and operating margins, any update to those?

And related to that, any thought on when the business will intercept the revenue growth and operating margin targets?

Yes, if you -- we are not changing our target operating income or growth targets, our growth targets being 10% to 15% and our operating income targets being 20% to 25%. As we enter the year we are operating slightly below that operating income level. We finished the year out at 7% revenue growth.

But as we see some inflection on the broad-based products, those being the fastest growing as well as being over 50%, we believe that that will be able to tick up our revenue growth closer up to the target range. And we believe that as the business scales we can achieve profitability in the range of 20% to 25% over time, with the caveat being that we are investing very heavily to win in the market.

So that's why we wanted to update you on the OpEx that we are going to see this year and give more clarity into that. But overall, we feel comfortable with the overall model.

On the gross margin side, just because the modules are coming in with a slight -- somewhat lower gross margin model than the Company has, we felt it was prudent to trim the overall gross margin level to reflect that.

Ruben Roy, Piper Jaffray.

Thank you and congratulations, guys. First question is around IoT. Tyson, I think John mentioned modest headcount growth coming, related to some IoT projects. You've got the Bluegiga acquisition.

I am wondering if you could just characterize how you are seeing design activities specifically around IoT over the last quarter or two, or maybe relative to this time last year. And if you would take a shot at what you think the IoT growth rate might be for 2015. Thanks.

We have incredible design-win activity going on in IoT across a broad range of applications. The broad -- home automation, security, wearables, the -- just lighting, a lot of different broad applications within IoT.

I would say that if you look just across the Company both from a revenue perspective and from a design-win perspective, that is our strongest area, and we have been vectoring an increasing proportion of our R&D activity into this area. We've also been adding software capability.

Largely Bluegiga coming in is adding a significant software capability focused on connectivity. But there is a number of different areas there where we believe we have to make selective adds as we move through the year to bring in additional talent to be able to meet the market opportunity that we've got in front of us, as well as all of the next-generation platforms and products that we have in the pipeline.

So we believe that that's the right thing to do, given the market traction. And we're trying to be as prudent as we can to maintain our investments on the infrastructure side and timing, and to maintain our business on the broadcast and access side as well.

So overall it's a careful balance, but I think justified given where the markets are. I think that the markets are really coalescing around IoT this year, around the various wireless standards.

I believe we've got a best-in-class microcontroller platform and roadmap, and we are just marching ahead with all those developments. I think the results for the year are going to prove that out.

Thanks, Tyson. A quick follow-up for John on gross margin. As Bluegiga ramps to a full quarter of revenue in Q2 and beyond, is it reasonable to assume that we are going to be at the lower end of the gross margin target range that you provided?

And then do you need the chips -- your chips to ship into the module to improve from that lower end? Thanks.

Yes, Ruben, I would not necessarily target you toward the low end of the range. We provide a range to create some band around that.

But there are opportunities for us to improve margins over the course of this year with the growth in the timing business, which is, as you know, above the corporate average. That can help lift the margin some.

And there are likely some things we can do to help improve the module margins. Clearly the item you mentioned is a major step that would be forthcoming and further out in time.

So certainly you have the opportunity to improve margins over the course of 2015 with growth in timing.

Matt Ramsay, Canaccord Genuity.

Good morning and thank you for taking my questions. Tyson, just a couple more follow-ups on Bluegiga. Maybe you could characterize this and give some revenue guidance ranges for 2015.

Maybe a little bit of commentary around the growth profile of that business versus last year and what you guys are expecting in the acquisitions there, to grow going forward?

Certainly, Matt; this is John. This has been a solid double-digit growing business for several years now. We've been impressed with the market traction The Bluegiga team has been able to execute on.

We provided a range for 2015 of $25 million to $28 million of new revenue for us. That covers an 11-month period of time starting from the closing date on January 30 through year-end.

Great. Great; thanks, John. Then I guess to follow up on the gross margin side, maybe you could give us a little bit of thought about what the weightings are there. I think there's multiple moving parts here, with the Bluegiga integration; maybe some timing that's going to be a little bit softer in the beginning of the year and hopefully improve through the end of the year; and I know there was some IP-related revenue in broadcast that happened in 2014.

Maybe some thoughts about all those moving parts, and just the granular nature of those, and the gross margin changes, and outlook. Thanks.

Certainly. First of all, we are very pleased with our gross margin performance for 2014. As you mentioned, we had some of the IP revenues; but even excluding that we were solidly at 61% margin for 2014. So we feel like the Company did a good job executing in that area.

You touched on some of the moving pieces. You've got modules coming in somewhat below the average; a possibility for timing to grow, which is above the average. Broadcast automotive we believe will be a grower in 2015 and beyond, which is above the corporate average. So those things can certainly help.

We do not have any IP-related revenue on the horizon right now. We'll keep evaluating that area, but there is nothing to talk about right now on that particular vector.

Anil Doradla, William Blair.

Tyson, congrats on the good results. Bluegiga's (technical difficulty) is that how we should look (technical difficulty)?

Anil, this is Tyson. You are breaking up. We cannot understand your question, if you could try to repeat it.

Yes. No, my question on Bluegiga was on Bluetooth and Wi-Fi more specifically; are you getting the modules for them and the protocol stack software. And they use third-party silicon? Or I mean, what exactly components do you get beyond just the module?

Right. They have their own Bluetooth and Wi-Fi stacks both for Bluetooth Classic and for Bluetooth Smart. They have a Wi-Fi stack and some additional software as well.

And today that is running on third-party silicon, so it's not our silicon inside the modules today. They also use some microcontrollers which again are not our microcontrollers. But you can imagine that those will switch over time.

But also over time, we will be -- as our roadmap intersects with the module roadmap from a silicon standpoint, we will be using that module capability to drive further sales of our own internal silicon. But we intend to carry both of those models forward in the near, the medium term, where we are still partnering with third-party silicon providers to offer modules across a complete suite.

And more significantly, the software that we have will run on that third-party silicon but also run on internal silicon as well. So the software capability in some ways is more significant than the module capability per se.

It's also very good that we were able to -- as customers using our silicon in a module achieve high volumes and want to move on to an onboard design, we can facilitate that in a seamless fashion. So we believe that having this captive module capability really helps us serve the full needs of the customer and connects us in a more significant way into the customer base in the channel.

Very good. On broadcast audio for the automotive segment primarily, given the growth and potential contribution, which is becoming material, is there any seasonal patterns? Will you see some seasonality in this part of the business?

Yes, I mean at this point the ramp is so steep that it would be hard to detect any seasonality. We did a 45% year-on-year, and at this point it's just quarter-on-quarter we see continued growth in that automotive revenue number as we ramp a number of Tier 1 wins as we move through the year and into 2016 and 2017.

It is a very nice gross margin profile, as well as we have today a fairly small share. So it's a pretty large market that we can continue growing into for a significant amount of time.

Ian Ing, MKM Partners.

Yes, thanks and congrats on the Bluegiga deal. Just a clarification. You said eventually half of Bluetooth would move towards the module approach. Do you expect an eventual similar mix in ZigBee and Wi-Fi, or for reasons would that be different?

And what are the implications long-term on gross margins as just more connectivity moves towards modules?

Yes, we actually believe that this adds several billion dollars of potential SAM to the Company as we are able to directly address the module revenue on top of the silicon revenue. And that's not just in Bluetooth. I mean, in the ZigBee and Thread space and even sub-gigahertz we have a number of customers who today use modules, and we think that that's going to follow a similar, if not even a greater, trend in those areas compared to Bluetooth, given the diverse nature of the markets that those serve.

And today on the Wi-Fi side, the majority of Wi-Fi because of the RF complexity ships into modules. And that's even true on the handset side, which -- so it really underscores the importance of being able to develop solutions around modules and then make them easy for the customers to use.

If you look at the long-term implication on gross margins, the way I view it is that the core module, the added cost of the module outside of the silicon will fundamentally be at a lower-margin profile than the 60% range that we have on our silicon sales. And that's really driven by the fact that we are going to be aggressive at offering value to the customers, and out and offering competitive prices, and gaining share, and growing revenue.

I think if you look at the overall gross margin dollars that we will achieve for modules compared to silicon sales, the gross margin dollars will be significantly larger in a module sale compared to a silicon sale into a module provider. So we believe that on a gross margin dollar basis it's a net win.

And we believe that as we introduce our silicon into the modules that we will be able to -- even in the presence of being aggressive in the market -- to grow the revenue and also bring the gross margin profile of that business up somewhat closer to where we are as a Company.

Thanks. Then my follow-up for John. Channel business now is 62% of sales; I think that's up from a little more than half in prior commentary. Do you have any granularity on Edom and Avnet as a percent of sales? I think those were 21% and 11% last year.

Yes. It's similar levels, and the distribution business will continue to be very important for us. In fact, Bluegiga has an extensive distribution business themselves, so that folds in nicely in terms of the overall channel strategy.

So, yes, the channel is increasingly important to ourselves and will continue to grow as a percentage of our sales.

Ryan Goodman, CLSA.

Hey, thanks for taking my question. Wanted to talk about the timing business. Just -- could you talk a little bit about the relative exposure by geography?

I know you guys are pretty widespread there. But just maybe which areas do you have the highest exposure in? Could you talk about some of the trends you saw in Q4 and what you expect in the first half of 2015?

Right. If you look at the exposure from end application area, the majority of the revenue is going into the core communications infrastructure market, so the wireline, optical networking areas; and that has a fairly even exposure across the US and Asia with some exposure in Europe as well. So that's a -- we are shipping to the top 12 networking companies in this area.

We ship broadly across the industry and don't have any specific customer concentration in timing. We have introduced and are introducing additional products that address the data center market and address the wireless base station market. That is an expansion of our SAM, and we also believe that that will be broadly exposed geographically, although we do see a lot of the rollout activity in Asia driving some of the volume there. But that's more of a share gain opportunity into these new applications that we haven't been able to serve in the past.

Okay. Then I guess for my follow-on, you had mentioned -- or it was mentioned in the initial comments that the litigation costs could go down in 2015. I think something was supposed to happen with that in January. So just any update with where the litigation is now and what, I guess, the next milestone that we should expect there is?

Sure. The litigation had a formal hearing in Washington, DC, before the ITC the first week of December. That was completed successfully, and each party provided a brief to the presiding judge.

The judge has until the end of this month to issue a ruling, which is a recommendation to the full ITC for approval. So

the next milestone will be a formal ruling from the presiding judge toward the end of this month.

That will be very significant in terms of suggesting to us and all the other parties in this particular action of what direction it's likely to go. But it will not be final until later in the first half of this year.

From a litigation expense point of view, we had a very significant buildup of expenses in the second half of the year leading to the hearing. They are tapering off in the first half of this year and, hopefully, will largely dissipate entirely if we prevail in this case. We will be able to give you a much better understanding of that when we report first-quarter earnings in April.

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

Thank you, Sean, and thanks, everyone, for joining us this morning. This concludes today's call. Goodbye for now.

Thank you and thanks to everyone for joining us this morning. This concludes today's call. Goodbye for now.