Silicon Laboratories Inc (SLAB) 2015 Q3 法說會逐字稿

Good morning, my name is Heather and I'll be your conference operator at this time. At this time I'd like to welcome everyone to Silicon Labs third-quarter 2015 earnings call.

(Operator Instructions)

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

Thank you, Heather. Good morning everyone. We appreciate you taking the time to dial in. Tyson Tuttle, Chief Executive Officer; Bill Bock; President; and John Hollister, Chief Financial Officer are on today's call. We will discuss our financial performance and review our business activities for the third 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 four 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 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 obligations 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 risk factors that could cause actual results to differ materially from those contained in any forward-looking statements.

In addition, 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 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. Strong top-line performance, combined with favorable OpEx, drove a solid beat in third quarter EPS. Despite a challenging macro environment, we delivered another record quarter in Infrastructure, with continued strength in IOT, and Broadcast automotive, and a less than expected decline in Broadcast consumer. I'll talk more about our product developments, market opportunities, and business trends shortly.

But first, 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. We are pleased to announce that the third quarter revenue was just above the high end of our guidance range, up slightly more than $156 million. And we delivered solid, non-GAAP earnings of $0.51 per share, exceeding the top end of our guidance.

Following a number of sequential record revenue quarters, our IOT products declined 5% sequentially to $65 million, or 42% of our total Q3 revenue, delivering growth of 25% year on year.

In Infrastructure, including our timing and isolation products, we achieved a record $31 million, reflecting 20% of third quarter revenue, and 10% year-on-year growth.

Third-quarter Broadcast revenue was $37 million or 23% of total revenue. Declining less than the 15% we expected, with the video market showing signs of greater stability. Broadcast automotive delivered another quarter of strong results.

We are delighted to report that on September 29, the International Trade Commission issued a final determination that all patent claims asserted against our TV tuner products by Cresta Technology, are either invalid or not infringed. The ITC also found that Cresta failed to satisfy the ITC's domestic industry requirement. In addition, to regaining lost US TV tuner market share with a top customer, as a result of this ruling, last week we also received a favorable final decision from the United States Patent and Trademark Office.

All patent claims asserted by Cresta against Silicon Labs, have either been invalidated by the US Patent and Trademark Office, or determined not infringed by the ITC. While we have some ongoing legal activity on this topic in district courts, we anticipate that the bulk of the legal spending on this matter is behind us, and that our SG&A expenses are now reflecting that benefit.

Access revenue declined 6% year-on-year to $23 million or 15% of total revenue. During the quarter, we saw a reduction in SLIC optical networking revenue in China combined with the normalization of the revenue trend for these products.

The importance of our sales distribution channel continues to grow, with third quarter channel revenue share increasing 4 percentage points sequentially to 71%.

We had no customer greater than 10% of total revenue for the quarter.

Geographically, in Q3 we saw particular softness in sales into the Asia Pacific region, fueled by the decline of our Broadcast consumer revenue in Korea and China. Sales into the Americas and Europe were relatively stable.

Third-quarter non-GAAP gross margin was at the high end of our guidance range, and flat to Q2 at 60.2%.

With the decline in our third-quarter revenue, we tightened expense controls, including some moderation of head count growth. Accordingly, Q3 non-GAAP operating expenses were lower than we expected, ending at $68 million. R&D expenses down slightly, to just under $37 million, reflecting lower new product introduction costs. SG&A expenses improved to approximately $31 million, with favorable fringe and variable compensation. Non-GAAP operating margin was 16.7%, which exceeded expectations.

Our non-GAAP effective tax rate was slightly better than we expected, at approximately 14%, due to the geographical mix of income for the quarter.

With favorable revenue performance, stable gross margins and positive OpEx results, our earnings for the third quarter ended at $0.51 per share, well above the $0.45 high-end of our non-GAAP guidance range.

On a GAAP basis, third quarter gross margins were 59.8%. R&D expenses declined slightly, to approximately $46 million, and SG&A expenses declined to just under $36 million. GAAP operating income was $11 million or 7.2% of revenue. GAAP EPS for the quarter ended at $0.23 per share, which was well above our guidance range.

Turning now to the balance sheet. We have a number of excellent results to report. During the quarter, we successfully executed more than $60 million of share repurchases under our existing $100 million buyback program and also received approval from the Board of Directors to implement an additional $100 million share repurchase authorization. Our third quarter diluted share count is at a three-year low, as our repurchase activity has significantly offset dilution from our employee equity grants.

Year to date, we have completed over $70 million of stock repurchases, and we have approximately $120 million remaining authorized. We ended the quarter with cash, cash equivalence, and investments totaling $256 million. Cash flow in Q3 was very strong, bringing our year-to-date cash flow from operations to $87 million.

Accounts receivable ended at $61 million, or 35 days sales outstanding, which is a multi-year low.

Inventory levels improved significantly in Q3, declining to around $52 million and reflecting turns of 4.8 times. This is exceptionally strong performance, given recent industry volatility. And speaks to the efficiency and agility of our fabless model and operations team. Channel inventory increased in Q3 to 44 days, up from 41 days at the end of Q2. We view this as a positive sign, indicating healthy demand for our products.

I will now cover fourth quarter guidance.

We expect fourth quarter revenue to be between $156 million to $161 million, With growth in Broadcast, modest growth in Infrastructure, IOT flat, and a decline in Access.

Fourth quarter non-GAAP gross margins are expected to remain stable at 60% plus or minus 50 basis points.

With continued expense controls, we estimate that our non-GAAP operating expenses will be $70 million. Our non-GAAP effective tax rate is expected to be stable, at approximately 15%.

We estimate fourth quarter non-GAAP EPS would be in the range of $0.45 to $0.51 per share, and GAAP EPS will be in the range of $0.05 to $0.11 per share.

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

Thanks, John.

Our strategic growth products now represent more than two-thirds of our revenue, up from just over 50% just one year ago. We continue to target large, diversified growth markets, and have developed a well-positioned product portfolio to address these opportunities.

During the quarter, revenue from our expanding portfolio of IOT products grew 25% year-on-year. We're seeing increasing momentum in the adoption of our MCU, wireless connectivity, and sensor products across our target markets, with particularly strong performance in Smart Metering. In Q3, a large metering manufacturer joined our top ten customer list, and our participation in the industrial market segment continued to grow, ending the quarter at more than one-third of total revenue.

Despite some weakness in the second half revenue due to macro trends and seasonality, our new IOT product development pipeline remains strong, responding to the needs of this emerging market, and continuing to fuel record design-wind activity. As we execute on our product road map of energy-friendly solutions for smarter, more connected world, we expect our IOT products will continue to deliver annual growth rates of greater than 20%.

Earlier this year, we acquired Bluegiga to gain market-proven Bluetooth and Bluetooth Smart stacks, as well as a leading wireless module business. We've made substantial progress in the Bluetooth market, accelerating our road maps, growing our customer base, and greatly expanding our SAM. Silicon Labs' modules provide a pre-certified plug-in-play RF design, which integrates the antenna, speeding time to market and reducing cost, complexity, and compliance effort. Our customers also have the option of migrating from modules to cost-efficient SOCs for high volume applications, with minimal redesign and full software reuse.

As an increasing number of consumers use their smartphones to control and monitor internet-connected devices, the Bluetooth Smart market has become the largest and fastest growing low-powered wireless connectivity in the IOT. To meet this growing market demand, during the quarter we introduced a pre-certified Bluetooth Smart module. Combined with our best-in-class scripting language and software stack, this new module enables our customers to develop their applications with the lowest R&D investment to get their products to market quickly.

In the connected at home market, we're seeing a growing trend in voice control, which provides an easier, hands-free way to search, explore, and experience content and services. To address this trend in Q3, we introduced a reference design that reduces the cost and complexity of creating voice-enabled wireless remote controls. Based on our comprehensive portfolio of software stacks and wireless SOCs, our new reference design provides an industry standard way to bring the power of voice to TVs, set-top boxes and connected home products.

Moving on to Infrastructure, our timing and isolation products delivered a new record, growing 10% year-on-year. In the timing market, Silicon Labs offers the highest performance, lowest jitter, and most flexible clocks and oscillators. We continue to deliver a solid pipeline of new products, which are producing strong market traction in core network applications, where the bulk of our timing business exists today, and we are expanding our SAM into data center and wireless applications.

Networks are transitioning from circuit to packet switch systems to increase efficiency and flexibility while reducing cost. During the quarter, we introduced a groundbreaking synchronization clock family, offering the world's smallest form factor, highest performance, and lowest power. As Synchronous Ethernet and IEEE 1588 standards become more widely adopted, networking equipment designers are demanding timing solutions like our new clocks that easily integrate into existing hardware architectures in infrastructure applications, broad band networks, and data centers.

During the quarter, our isolation products established a record revenue. Our digital isolators are used in power supplies for high-speed switches, servers, and base stations. They are widely deployed in industrial automation and in green energy applications, which demand higher product reliability and longevity. During Q3, we introduced an isolated amplifier delivering best-in-class performance, and supporting product lifetimes of up to 100 years. Our new isolated amplifier provides a robust current measurement solution for power control systems, operating under demanding conditions such as industrial motor drives, solar inverters, power converters, and electric vehicles.

In Broadcast, third quarter revenue declined 7% sequentially to $37 million. While we believe macro trends continue to curtail the global demand for TVs, we saw increasing orders during the quarter, from our primary tier one customers in Korea, and we expect continued improvement in Q4.

Broadcast automotive continues to deliver, including record design-win activity based on performance, scalability, and integration. We anticipate share gains in all regions to fuel revenue growth for these products.

Despite the challenging macro environment, we are confident in our strategy and proud of our accomplishments. Over the past three years, we have transformed Silicon Labs into a leading IOT solutions provider, including the successful completion of three strategic acquisitions. Our growth products now generate two-thirds of our total revenue. We have a rich product pipeline and see strong demand for our silicon and software. We're engaging with a top industry leaders who are adopting our IOT solutions, and propelling our design-win activity to record levels. We're executing on our vision and strategy and excited about what lies ahead.

Before closing, I'd like to thank Kurt Hoff, our Senior Vice President of Sales, who will be leaving the company in Q4 to pursue other opportunities. Over the past decade, Kurt has played an integral role in the growth and transformation of Silicon Labs revenue, as well as the development of our distribution channel. We wish him luck in his future endeavors.

Our sales organization will now report to Bill Bock while we complete the search for Kurt's replacement. Bill's background includes sales management as well as 15 years in association with Silicon Labs. We expect to have the Senior Vice president of Sales position filled during the first quarter.

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

Thank you, Tyson. Before we open the call for the question-and-answer session, I'd like to review the investor conferences we will participate in this quarter, including the Credit Suisse 19th Annual Technology Conference in Scottsdale on December 3, and Barclay's Global Technology, Media, and Telecommunications Conference in San Francisco on December 8.

We would now like to open the call up for your questions. To accommodate as many people as possible before the market opens, we ask that you please limit your questions to one with one follow-up.

(Operator Instructions)

Your first question comes from Suji Dasilva with Topeka. Your line is open.

A nice job on the quarter here. Can you talk about the IOT segment in terms of the quarter-on-quarter growth drivers in the 2016 to keep the momentum going here? And was the distribution increase really driven by IOT increasing?

Yes Suji, this is Tyson. If you take a look at the IOT segment, we were up about 25% year-on-year and that's been driven by, significant design-wins across our micro controller portfolio, in particular, 32-bit, as well as our wireless connectivity solutions, which have been up strongly over the year, both organically and with the addition of Bluegiga earlier in the year.

Going into next quarter, we do have some level of consumer business in there as well as some specific China-Oriented revenue within the micro controller portfolio. Which has provided a little bit of head wind on the IOT segment. But if you look at the design-win trajectory that we have going on in to next year, we believe that the IOT segment is going to be growing quite strongly.

And I'll let John comment on the channel.

Yes, Suji, certainly the channel mix was aided by the performance of IOT as well as Infrastructure. A fair amount of Infrastructure business is in the channel. Just in general, the lower portion of the mix could be like Broadcast consumer, which tends to be more direct. Those are the key drivers.

I just want to point out in that in the call we did mention that we expect the IOT segment, which includes all the micro controllers, connectivity and sensors. We expect that to continue to grow at 20% or greater going forward.

Great. And my other question around the Broadcast business, I know Samsung's a tail-wind for you there. Does that continue into the first half of 2016? And do you broadly expect the television demand market to stabilize in that time frame from your current look?

We believe that actually the TV revenue is stabilizing now. But we took a step down from the higher revenue levels that we were seeing in the first quarter, that was partly due to some loss of share. Due to the Cresta Tech law suit, we did lose some share at Samsung and we have now won that back. We also, have seen our Korean customers potentially lose some overall share within the overall TV market, where we have 100% share. High shares within the Korean segment, a little bit lower share in China. We've been increasing our share there as well.

So, if you look, going into 2016, we think that Q4 is going to stabilize, but this is probably the new normal of revenue for the Broadcast consumer. Given that we have annual changeover into new model year, as well as some level of ASP declines and -- that's balanced a little bit by the share gain that will get with the Korean customers and within the rest of the market. But, overall, we think that this will be fairly stable as we move in to 2016 at these revenue levels.

Very helpful comments. Thanks, guys.

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

This is Erik calling for Tore. Nice results. I wanted to just circle back with that last question on the Broadcast consumer. What do you think your percentage of revenues will be from that Broadcast video business next year? You talked about some stability, but obviously some growth in other areas, which would probably assume then that it would be a lower percentage of your business.

Yes Erik, this is Tyson. Broadcast consumer this year will be about 50% of the overall TV market share. We do believe that we will be able to increase that market share next year. We haven't given it a specific target yet at this point. So our share this year has gone down a little bit over the last year because of the effect of Cresta and also some of the share transitions going on, potentially between Korea and China. And we'll let John make comments.

Sure, for Q3 Broadcast was around 23%. Tyson's comments about how the consumer portion of that would be stable at these levels. That's part of the new normal, whereas we do expect continued growth in both IOT and Infrastructure. So, I think the thesis of your question is sound. It would be accurate to predict the mix for Broadcast. Broadcast consumer in particular to decline over time.

Great. Thanks for that. And maybe just on the Infrastructure business. Obviously, you have new products to address that market, and possibly data center and wireless base station, but, what are the market dynamics you've seen right now in the comm space? This obviously [is] some conflicting data points that we're seeing out there. I guess is it just how the bottoming process works? And maybe what might be driving your confidence in your Infrastructure businesses as we head in to 2016?

This is Tyson. We mainly sell into the core network applications, optical networking applications, and we've seen consistent demand in that market. We've seen some softness within our Chinese customers, but we've seen that balance by strength in some others.

So, while it's basically fairly stable, the revenue, with a slight upward trend due to the design momentum and new product introductions, and what we believe is some level of share gain in some of these new applications. We do not have a strong exposure in the Infrastructure segment to the Chinese wireless build out, and so that has not been something that we have been subject to. We have certainly seen others in there, but we do believe the large traction that we have in base station applications, wireless and in data center applications, both for our clock and oscillator products, as well as our isolation products is going to continue to propel this Infrastructure segment going forward.

Thanks so much.

Your next question comes from the line of Matt Ramsey with Canaccord Genuity. Your line is open.

Thank you very much, good morning gentlemen. Tyson, maybe you could talk a little bit about the Broadcast automotive business. There's been a few questions about the TV tuner business obviously, but what percentage of that Broadcast revenue bucket is now automotive? And how do you see that growing in to next year? Thanks.

Okay, I'll be happy to talk about it. The automotive segment now is about 8% of our overall revenue. So, it has continued to rise as a percentage of our revenue, and we have continued to ramp a number of tier one automotive makers in the US and Europe, as well as some of the after market in Japan and China. So, we have had a nice revenue ramp, consistent revenue ramp in automotive.

This is a high quality business in terms of margins and in terms of longevity. We expect that the growth will continue on a measured pace as we would go in to 2016 and into 2017. As I said in the past, I believe this business could be well north of $100 million annual revenue in automotive, whereas today it's, less than that.

So we think that the differentiation in the products, the flexibility, the performance, the feature set that we've been able to deliver. The tier one automotive makers and the tier one automotive radio makers are quite excited about having us in the market. Overall, if you look the overall market's $300 million to $400 million. And a nice set of products, and a disciplined -- a limited competitive environments. Mostly in XP and a little bit of ST in there. We think that we can continue to gain our fair share of this market.

Thank you for that. That's helpful. John, in follow up, you talked about OpEx being relatively clear of some of the legal expenses. It sounds like there is still a little residual in there. Through this year, you guys had taken down OpEx growth guidance for the full year from [$9 million] into [$7 million] it looks like [$5 million] now. Maybe you could talk about what to expect from organic OpEx growth rate in to next year would be helpful, thank you.

Sure thing, Matt. We had indicated $9 million earlier in the year. We certainly had expectations of stronger revenue performance this year. We had the issues arise in the world live video market that we've talked about at length. We did make a concerted effort to slow down that growth in OpEx. We had (inaudible) this year. But we wanted to preserve profitability in light of the declines, and the business opportunity on video.

We do need to continue to invest for success in the internet of things market. One thing we've done, over the last number of quarters, is continue to transition resources internally from some of these more mature product lines onto the IOT road map effort. So we have increased the investment level on IOT, and we will continue to do that.

Heading in to next year, some of the trends to keep in mind, is that in the first half in particular, we have a high seasonality with our fringe and compensation costs. So that's one thing to keep in mind. We'll be better positioned on the January call to give more color on what we see for the full 2016 year, as we are now deep into our annual operating plan process. So hopefully that helps some.

Understood, thanks very much.

Your next question comes from the line of Craig Ellis, with B. Riley. Your line is open.

Thanks for taking the questions and nice job on the quarterly execution. Just following up on the comments on the $60 million and buyback in the quarter. Tyson, can you just give us your perspective on how you're viewing the portfolio and your desire to add further technologies through acquisition versus really being more patient there, and maybe letting some of the cash that the model is generating flow back to investors through buybacks as we saw during the third quarter.

Craig, we continue to be opportunistic about our buybacks. As we saw that with the pullback and the share price, that this was a good time for us to increase our buyback, both in terms of execution to our plan as the price came down we were buying back more. So the Board of Director's authorized another $100 million to fully anticipate to continue to execute on that.

The overall strategy of the company is sound. We pivoted the Company towards IOT, we've transitioned internal resources, we have added incremental resources, and we've done three strategic acquisitions around IOTs, and we now feel like a critical mass of technology there and are really focused on execution. It's my belief that executing on this strategy is the best way to deliver value to the shareholders. We've got our head down and are in the process of doing that with the product developments and market activities and tremendous engagement in our, into the eco-system.

With that being said, we continue to be active in looking at potential M&A targets. We just do not see -- there are not that many out there that really fit with our strategy and fit in to what we consider to be a high-quality accretive type of situation. So we continue to be looking. But overall, we've got our heads focused on execution and delivering value the best way we know how.

That's helpful. The follow up is on the IOT segment. The Company had another quarter of very strong design-win activity. Can you give us any qualitative color on the end-market profile that you're seeing as design wins continue to build? Whether it's portable, consumer electronics, in-home or around home as you describe today. With the automated meter example, or other end-markets like industrial and others. Thank you.

Right. I would say that the majority of the design-win activity in IOT is more bias towards the industrial segments. Home automation and home security both are quite strong. Metering has been quite strong. We're finally starting to see some of the ramps -- some visibility into the ramps for some of the smart meter deployments in Europe and the UK.

We see quite good traction on the wearables side, and other types of consumer applications, but, if you really sit down and look at where these design wins are coming, we've seen quite a spike, or quite a ramp in the number and breadth of these design wins. It is quite broad.

It's a surprising, sometimes the application that you see people adding -- connectivity, and cloud connectivity, and apps, and how that can influence things. There are some consumer applications and a lot of industrial applications. Everything from retail, supply chain, monitoring of goods and agriculture. It's really exciting to see some of the vision of IOT and, the benefits that can have to the economy. And see those products getting designed and starting to sell. So it's quite broad, but I would say mostly bias towards the industrial segment.

Thank you.

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

Hey guys, thanks for taking my question. Well first of all I want to congratulate Bill. Clearly Bill, you're proving out to be a man of multiple talents. Congratulations on this new role. And perhaps you're one of the only executives who have come out of retirement and taken more roles than before retirement.

So that said, I wanted to double check on my calculations. So you said, Tyson about 8% Broadcast audio revenue. Does that mean that it declines 20% plus sequentially year-over-year? And does that mean Broadcast video sequentially grew?

Yes, so the 8% was the amount of automotive revenue for the company in Q3.

Oh. Okay.

So in Broadcast total was 23% of revenue in Q3. So no, we are not seeing declines, we are actually guiding Broadcast up in Q4.

So what was the contribution of Broadcast video in the quarter?

Yes, we don't specify that. Specifically Broadcast overall was 23%, as Tyson indicated. Automotive was 8% and most of the automotive business is related to the Broadcast product line, but not 100% of it. And that's the level of granularity we provide.

Okay, great. Finally Tyson, congrats on getting back Samsung, the Koreans. Looks like Cresta is out of the mind set for some of these guys, but, as you were gaining shares back, was there any irrational pricing from incumbents? I know some of your competitors got some design wins were not involved in this litigation. Did they resort to any kind of aggressive pricing as you won back these designs?

Anil, this is Bill. The design wins were really, strictly a function of eliminating the overhang of the lawsuit. So, this did not produce any unusual pricing behavior. Our customers were anxious to quickly switch back once that overhang dissipated.

Great. And congratulates on the results. Bill, congrats to you again.

Thanks.

Your next question comes from the line of John Vinh with Pacific Crest Securities. Your line is open.

Hi. Thanks for taking my question. Just a question on Infrastructure. Looks like you're on a pace to grow double digits in 2015 given your guidance for Q4. Tyson, what's the right way to think about Infrastructure growth going into 2016? Do you think you could sustain this double digit growth rate next year?

Yes, this is Tyson. We've got two primary growth drivers within Infrastructure. We've got our clock and also our timing products. Clock and oscillator products, where we continue to gain share in new applications like data centers, and wireless, and also continue to gain share in core network applications. We have a strong product portfolio, a strong product pipeline with very nice performance and integration features there. So, that has been one of the growth drivers for the year.

Potentially, a stronger overall growth driver but at a lower base is our isolation products. So, these are power products going into power supplies and motors. But the predominant amount of that revenue is going in to data center type application. There are some motor control applications as well. It helps to make power supplies more efficient.

That has been growing even stronger than the timing products, but both growing double digits this year. And we do expect that growth to continue on both of those vectors as we move in to 2016.

So, these are high quality long-life products as well as high-margin products. So, we are quite bullish about our prospects in these markets and continue to invest in new product development and channel activities as well.

Great. Thanks. My follow up is, if you look at all your segments, you've got IOT growing 20%, continued growth in Infrastructure, looks like Broadcast is stabilized. Do you think you can get back to your 10% to 15% growth model next year?

Hey John. This is John. You know that certainly is our goal. We will have some tough first half compares heading in to 2016. Clearly, the Broadcast revenue levels were at a higher point in the first half. We've seen an adjustment down, and as we've indicated on the call today -- see this is more of the new normal. Moving in to the second half of next year, we should be better positioned. For the first half we'll have tough compares out there.

I'd also want to add that our Access products, they also had quite a strong first half. With those being legacy products, we will continue to see some level of declines in the Access category as well. So if you do year-on-year compares I would say Access and Broadcast are going to decline. Especially due to the first half compares with what the growth in the IOT and the Infrastructure segments as we just talked about.

Great. Thank you.

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

Thanks for taking my question. Tyson, I want to follow back up on the IOT segment. If you could talk about the road map. I think you introduced a ZigBee SOC, but you have a grander plan there. Just timeline to get more of these SOC products out. Any indications that you're going to be successful with your Bluetooth Smart effort? Thanks.

Yes, Blayne, this is Tyson. We acquired Bluegiga back in January of this year. And that brought on a full BlueTooth stack, and that comes on top of the ZigBee activity that we've had that came through Ember as well all of the developments that we've been doing with Google, Nest, and ARM around Thread, which is a low-power wireless mesh networking technology that we've been working on with them on for several years as the leading partner. And with, driving the standard there. We've got tremendous interest from the market.

We've launched the 1.0 version of that out in to the market, together with our NextGen SOCs. Our NextGen SOCs are multi-mode, they will provide BlueTooth Smart, they will provide ZigBee, Thread and a lot of the sub gigahertz proprietary standards. And those are out in the hands of about 40 alpha customers right now. We've been working through all that design-win activity as we've marched through the year.

We anticipate to be doing a more broad based launch of that platform, here towards the end of the year and early into next year. That will take that to the next level. But currently, we're working through all the alpha customer engagements and working on a number of large opportunities in the ZigBee space, and in the sub-gig space and in the Thread and Bluetooth Smart. It's quite exciting. We also announced our modules.

So the Bluegiga acquisition heralded our entry in to the module market. They had a leading position in Bluetooth Smart modules. Then we have put our SOC in to that module and that one is now out in the market. We continue to expand our module portfolio, drive cost, drive size on that. I believe that is critical to serving a lot of the smaller customers. Then we can move to serve a broad market, and to streamline our support activities and then as higher volumes come up, we can move those customers into SOC applications.

So there is a lot of activity on the wireless connectivity side. Quite excited about the road map that we have. The low power platform and the road map that we have been delivering on. I'd also like to say our microcontroller, our 32-bit microcontroller portfolio has been doing extremely well.

We have a leading low-power micro controller set of products and are working on the next generation of those. So that would be rolled out as part of the overall platform in low power. Then, earlier this year we also introduced our [BEE] the 8-bit micro-controller and are getting a lot of traction from lower-end applications on the 8-bit. We actually believe that the 8-bit segment is a rich opportunity pipeline as well.

And then, we have sensor solutions in optical sensors, environmental sensors, and some new sensor developments underway. That piece of revenue has also been growing this year. So let's look across 8-bit, 32-bit, wireless connectivity, modules, sensors we believe we've got well positioned in all of those to continue growth as we come in to the new year.

Thanks. I just wanted to ask within Broadcast, I want to understand the moving pieces, and particularly auto, the [method] has been in ramp mode for several years. Was that business down in September? And is that now getting to the size or timing of the ramp that you're now seeing seasonality? And as you look to December, is video the only segment up or is auto growing still? Thanks.

Yes if you look in to the fourth quarter, the automotive, and the consumer are both going to continue to grow. Automotive is going to continue to grow, and consumer is going to resume some growth as well. Both of those are strong, and we expect going in to next year that automotive will have a steady growth path as we move through the year.

Thank you.

Your next question comes from the line of Ryan Goodman with CLSA. Your line is open.

Thanks for taking the question. Congratulations on the strong quarter.

Question one is in IOT. I mean, we're talking about this 20% plus growth rate. I'm looking at the implied year-over-year growth. For Q4 is kind of in that 10% to 15% range and then if comps get a little bit tougher in the first half of next year when, just because you have Bluegiga, in first half 2015 numbers. The question is, should we be thinking about that 20% plus target for IOT as a 2016 target? Is it further out? And just basically how quickly you think you can get back there? I know you've talked about some of the drivers already.

Yes, this is Tyson. That may vary a little bit quarter to quarter, but that's overall, we're thinking a 2016 growth over 2015. So that was -- that comment relative to 20% is the growth we think we can see next year over this year.

Okay. And then just for a follow up on the OpEx. You mentioned the litigation. I was looking to see if you could quantify that a bit? Like what the litigation costs were in Q2 to Q3? And then, are all the savings from that going down in to the numbers now in the Q4 outlook? Or is there more room to go in that? Thanks.

Yes, Ryan. You know, the large amounts in there was in 2014. We had some of that lingering in to the first half of 2015. By Q3 of 2015, you're seeing it materially down from where we were in 2014 in particular. So, at this point, we would view those as fairly normalized in terms of the effects of legal spending on our overall OpEx profile. So, you can consider that the beneficial effect of this roll in OpEx is already in our numbers.

Okay, great. Thank you.

Your next question comes from the line of Ian Ing with MKM Partners. Your line is open.

Yes, thank you. My question is more on this consumer Broadcast recovery. Where do you think the Korean OEMs are seeing demand? Is it in some of the recently weaker areas, like Latin America, Europe, Russia? Where you sell some of the higher-end hybrid parts?

This is Tyson. We have basically an inventory correction in Q3. So they built too many units in the first half. They didn't sell through. They had to sell those through, they stopped ordering parts towards the later half of Q2 and into to Q3 and now they've resumed orders.

I don't believe that there is any particular region that is driving that other than the fact that they've worked through inventory I don't have any information beyond that.

I do know that we will be getting back the US models for Samsung. But, we do have a little bit higher concentration of content within the European models and the South American models. And that looks like that also is returning to somewhat of a normal level. I don't have any view on that being driven by any sort of macro return or anything other than the fact that they have been working through inventory.

Thanks. For my follow up, can you just talk more about the state of channel sales in greater China? It looks like EDOM in Taiwan that's about, distributed by about 20% of sales for you. I mean, you had a record revenue month in September. So, for EDOM are you seeing some of that strength? And is the framework here that product cycles are offsetting the overall China macro environments?

So EDOM has been a distribution partner of our Company in over a decade. And has always been one of our leading channels into Asia. We don't see that there is a unique spike or improvement in China at this point in time. Business results that EDOM itself reports, are not necessarily direct correlated to our own. So presently, we see China as relatively soft. We expect that dynamic is going to continue through the fourth quarter and in to the first part of next year.

Thanks. So navigating a tough environment. That's all I had. Thank you.

Your next question comes from the line of Atif Malik, with Citi. Your line is open.

Hi this is Amanda Scarnati for Atif. A question on the decision tree, if any are exiting the Access business or the non-automotive Broadcast business, and focusing on IOT and auto, and any other growth areas.

Amanda, this is Tyson. You look at the Access business has been a 15-year business for us. And it continues to generate strong profitability for the Company. We believe that it is, relatively stable over the long haul.

And as a good cash generation business, and one not likely to go away, we believe that is an important part of our portfolio. We actually parked some of the Access parts in the [SLICS] in voice-over IP and some of the power over ethernet actually fits somewhat into our IOT strategy and we sell those to common customers and into common applications. So we do see some level of synergy there, even though these are older parts.

On the Broadcast consumer side, we see a similar thing, that we do that business generates a nice profit stream. While it has been somewhat more volatile, we do believe that tuner business is going to persist over a long period of time, it's not going to be integrated into other SOCs. That being said, if we did see -- the termination of the legal activity, and if there was interested, certainly something that we would consider. But also we're comfortable with holding on to that business long term if we need to ride it down.

And another question on IOT, I know we talked a lot about it today. But as IOT continues to grow in the semi market, does Silicon Labs have the scale to compete as this business continues to grow across (inaudible). Or do we need more scale?

If I look at where we are trying to achieve, if we're going after low-power connectivity in micro controllers and IOT, we do have a substantial investment in the platform, but with the resources that we've been able to apply, both transferring internally, some, a limited amount of organic hiring as well as the three acquisitions that we've done. We believe that we have critical mass in the scale to execute those on the product developments, on the software, the stacks, the tools and within the channel.

So, we believe that this business can thrive and can continue to grow. And we're extremely well-positioned in a market that is, really what I consider it to be one of the sweet spots of the semi-conductor market in terms of growth over the next decade. And so, while sometimes scale helps but given our size, and given our focus, and energy we believe we've got the chance to significantly outgrow the market if we can execute on the product developments and design wins we've got going on right now.

Perfect. Thank you.

Your next question comes from the line of Ruben Roy with Piper Jaffray. Your line is open.

Thank you. Just a quick question, Tyson. A lot of discussion, obviously around IOT. My question, and you addressed some of this in some of the previous answers. But it's nice to see industrial growing as a percentage of your total revenue and the design activity around IOT. I'm wondering, you think about the layering different technologies within your IOT portfolio, connectivity sensors et cetera. Are the design wins that you've been seeing over the last six months being done from a platform approach already? Are you selling a number of technologies into these industrial design wins or that something that's still [to come]?

A lot of these applications are where we either have both micro controller and wireless connectivity content, or where that is now getting integrated in to a single SOC. Those developments are being driven off of a Silicon platform and a software platform. In general, our customers are then connecting that into the cloud eco-system. So, we are not providing the cloud platform that they are using, although that's an interesting topic of discussion.

So, I believe that our platform approach -- I mean this is a way to get leverage across a broad range. The IOT market is broad. I mean, you have applications with lots of different requirements. It requires a portfolio of products. To do that efficiently, you'd have to build it on a platform of both Silicon and software. And, so all of the developments that we have going forward, I mean today on our 32-bit micros going forward on our connectivity and our 32-bit micros, those are all going to be on the same platform. And, that is what is driving the majority of our engagements today.

Okay. Thanks, Tyson. Just a very quick follow up to your point on cloud. There have been some partnerships recently around data analytics and IOT. Is that something you'll need to, continue to progress in the industrial and cloud-related areas of IOT? Or is it something that you're working on already today?

Yes, I mean, I think you look at -- what Amazon is doing, and what Microsoft is doing, what ARM is doing. We are working with all of those companies and more to integrate our solutions into those clouds platforms. And certainly, when you're in IOT, you're dealing with data and cloud and apps and you have to have strong partnerships and decide what you need to offer and what's cost effective for us to offer? Where we can make money? And where we can able partners to be successful. So, we are working throughout that entire eco-system to plan the best path forward.

Very good. Thank you, Tyson.

Thank you.

Your next question comes from the line of Harsh Kumar, with Stevens. Your line is open.

Hey guys. Thanks for the opportunity to ask a question. The semi markets are all over the place. I know you provide the guidance for the December quarter, but I'm curious as you guys look out a little bit ahead, perhaps in the first half, maybe even March. How do you see your, some of your end markets playing out? You don't have to give me numbers. I know you can, but if you can just give us some color, that would be really appreciated.

I think we are cautious at this point in time looking in to the first half of next year. We've watched our peers report throughout last week, and in to this week. And there were a number of surprising guides for substantial reductions in revenue performance in fourth quarter. That concerns us. We feel fortunate and confident to deliver a guide that is slightly up for 4Q. But the industry, in general is not reflecting that. So I think we would look in to next year right at the moment, viewing the macro environment as not particularly encouraging. So, we'll track this very carefully and try to bake our view of the macro world into what we provide for you in the January call about 2016.

Got it. And as my follow up, there's a variety of parts you saw within your IOT portfolio. Is there one that is perhaps coveted by your customers? One that is sort of the hook for the rest of the sale? Than some of the others, or is it more of a system sell?

Well, I would say that our integrated wireless connectivity with microcontroller set of products is in general, in extremely high demand and is highly differentiated versus everything else in the market. If I would have to put one on top is when you integrate microcontrollers and wireless connectivity, it is hard, it is especially hard to do it with robust software stacks, with multi-mode, where you're dealing with multiple wireless protocols at the same time. Getting that integration to work in high performance and robustly in a network and that is where we think we have the highest differentiation from a silicon and system perspective. Being able to deliver that in and in an easy-to-use way. And for instance, into modules [over] tools. That also, creates an additional level of stickiness and differentiation.

Thank you for your time.

(Operator Instructions)

Your next question comes from the line Rajivindra Gill with Needham and Company. Your line is open.

Hey this is Josh on behalf of Raji. Thanks for squeezing me in. Just piggybacking on a previous question. How is the recent consolidation in semi-conductor universe -- how has that changed or affected or not affected your competitive position verses your peers? Thank you.

Yes, Josh. I view consolidation actually as an opportunity for us. For instance, if we look at Broadcom going into Avago, they are going to find, let's say $1 billion worth of synergies, which means a lot to your engineers. They went from being a company that I was somewhat concerned about. They're a high-quality company executing -- they could have come after IOT. I believe that's not going to be the case now. That's favorable to us.

If you look at companies like Atmel, and NXP and Freescale that are going through significant mergers and have, had challenges themselves in some ways. I think that they will be distracted over the next couple of years as they merge road maps and merge cultures. I also view that as an opportunity for us.

That being said, I view our main competitors as TI, ST and Nordic and we -- in the IOT states. And all three of those states have stayed out the M&A [fray]. I believe that they will all remain focused. I think it's all overall a net positive for us.

But long term, I do believe that some of those companies may come out strong, if they can achieve the benefits of the scale. But you just look at the overall reduction in the R&D expenses. TI's now below 10%, I think they are now 9% R&D. And I think that the level of innovation in the industry is going to decline. And that's an opportunity for us to go and take share.

That's very interesting. Thank you. I guess similar to that, how should we think OpEx now that the legal expenses are sort of winding down heading in to 2016? Maybe how will they grow in relationships to revenue or any direction you could help us with the model, thank you.

Yes, Josh, we kind of touched on this earlier, but the OpEx was [living] at a 5% increase in 2015. The key points right now, are to view the first half of 2016 as seasonally high, as our fringe factors reset. We'll be able to provide more color on the January call for the overall annual overall profile for OpEx next year.

Thank you and congratulations on the results.

Thanks, Josh, thank you.

There are no further questions at this time. I would now like to turn the call back over to Jalene Hoover.

Thank you, Heather. And thanks to everyone for joining us this morning. This concludes today's call.