思佳訊 (SWKS) 2008 Q1 法說會逐字稿

Welcome to the Skyworks Solution first quarter 2008 earnings conference call.

Now at this time I would like to turn the conference over to Tom Schiller, Investor Relations for Skyworks.

Mr.

Schiller, please go ahead

Thank you, Dwayne.

Good afternoon everyone, and welcome to Skyworks' fiscal first quarter 2008 conference call.

With me today are Dave Aldrich, our President and Chief Executive Officer, Don Palette, our Chief Financial Officer, and Liam Griffin, our Senior Vice President of Sales and Marketing.

Dave will begin today's call with a business overview, followed by Don's financial review and outlook.

We will then open the lines for your questions.

Please note that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially and adversely from those projected, as a result of certain risks and uncertainties, including but not limited to those noted in our earnings release, and those detailed from time to time in our SEC filings.

I would also like to remind everyone that the results and guidance we will discuss today are from our pro forma income statement consistent with the format we have used in the past.

Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP.

I will now turn the call over to Dave for his comments on the quarter.

Thank you, Tom, and welcome everyone.

Today we announced our first fiscal quarter 2008 results, and I am pleased to report that we delivered solid performance in the December quarter, with our times focus on operational execution translating into improvements in profitability.

Our increasing diversification into new markets, coupled with content gains in handset front-end modules fueled double-digit top line growth and expanding margins, as well as both record earnings per share and cash flow generation.

Specifically during the quarter, we grew our top line 11% sequentially to over $210 million.

We expanded our gross margins to nearly 40%.

We posted $29 million of operating income, this is up 26% sequentially, and represents nearly now a 14% operating margin.

We delivered EPS of $0.17, and we generated $55 million of cash flow from operations.

At the highest level, our performance continues to reflect the fundamental shift taking place in our business.

Quite frankly based on many of your recent investor comments, I don't believe we have adequately communicated to investors just how significantly Skyworks has evolved over the past couple of years.

So as a result, I would like to spend just a few minutes today out lining the transformation that is occurring within our Company.

Now for many of you, if you followed us at the time of the launch of Skyworks, or at the time of the merger in 2002, Skyworks was at that time was a digital baseband and primarily a 2G, CDMA, and GSM power amplifier company.

Since that time, we have aggressively focused on four initiatives.

First, we are continuing to diversify Skyworks.

While leveraging our catalog business our worldwide distribution network, and we are expanding into a broader set of end markets including broadband, industrial, medical, computing, wireless networking, cellular infrastructure.

And to give you just a sense of the scale of our business today, we are now supporting around 1,000 customers.

We have a little over 2,500 SKUs.

And in fact in 2007 we introduced well over 100 new analog solutions.

Now at the same time we are expanding our customer footprint in existing key accounts via forward analog integration, in applications like satellite set-top boxes, notebook computers, cellular base stations, wireless routers, and this is just to name a few.

And even within our handset business we are also aggressively diversifying.

Now back in 2005 we were supporting three of the top five cellular OEMs with custom products, whereas today we are shipping higher value EDGE, WEDGE, FEMs, to each and every one of the top five handset suppliers.

So in other words, we have been diversifying our business within both our linear products and handsets.

Secondly, second initiative is that we have been delivering and developing higher margin products.

With the introduction of a host of new innovative solutions we have created a portfolio that is now characterized, by not only product life cycles, and in some cases annuity-like revenue streams, but also higher contribution margin.

This transition is occurring on multiple fronts.

First, standard catalog products, high margin diverse standard catalog products.

Second, custom analog and RF solutions in multiple new markets.

And obviously multi-mode front end modules and handsets.

Just as a marker in fact, our linear product application specific products typically carry contributions above 70%.

Now across the board, both our handset and newer linear product customers place a high value on architectures that help them reduce size, that help them resolve noise problems in many applications.

In all cases, they are looking to reduce the bill of material complexity, and otherwise enable their competitive differentiation.

So just put another way, we are delivering higher margins in both our linear products business and in our handset business.

Now our third initiative, we have been capitalizing on the increase in handset front end module content.

The migration to 3G multimode whether it is EDGE, WEDGE, wideband CDMA, wireless phones and platforms, from voice-centric phones just a couple of years ago is accelerating.

With this trend, the complexity in the front end significantly increased, and this expands our addressable content by as much as three times, or three-fold.

And the reason for this front-end content growth in front-end modules, I think is relatively straightforward.

A couple of examples, multiple bands are typically required to facilitate backward compatibility to multiple standards.

Data services are simply not available in all areas within every given geography, as an example, in London, if you drive just a few miles outside of the city, you will lose 3G signal.

These phones therefore hand-off from an EDGE to a GSM Signal, multiple-bands.

The simultaneous transmission of voice and data may not sound like a big deal, and it is a new requirement in more and more handsets, the issue is even while in data mode, the phone is required to negotiate with a base station on an ongoing basis for potential incoming calls.

The receiver is always on.

The receiver is always drawing current, this isn't the case with a 2G platform.

These newer phones by their very nature require true broadband access for applications like music, data, video.

Signal integrity therefore is essential, and it is essential in all forms of data communication, signal integrity.

And this is no small feat in a mobile environment.

So the integration of these various bands for reliable high-speed access requires very complex modules, which must remain at the same time physically small, handsets aren't growing.

They must remain very power efficient, as more features are crammed into the sale volume, and they need to be obviously cost-effective, there needs to be value, they need to deliver value to our customers, and this complexity is creating an incremental RF market opportunity measured in the billions of dollars, billions of dollars.

And at the same time because of the complexity, the competitive landscape is narrowing with fewer and fewer suppliers able to support both the technical requirements, and the manufacturing scale required by the leading handset OEMs.

Now this dynamic is in stark contrast to 2G, and has the very real side benefit of stabilizing the industry's pricing environment.

Now our fourth and final initiative is we are executing, and we are extremely focused on operational fundamentals.

Our manufacturing team is intensely focused on continuous improvements in our product yields, in the utilization of our equipment, our equipment efficiency, in all our cycle times, and then in return on all invested capital.

Towards this end, our established hybrid manufacturing model, and that is with multiple external foundries, allows to us maintain very high internal capacity utilization, by creating second sources for high fixed cost services like foundry, like assembly.

Now this approach provides us supply chain flexibility.

It provides us with lower overall capital investment, and the ability to meet our customers upside demand.

I think most importantly this model gives us a gross margin advantage, and is enabling us further improvements in helping our financial returns.

Okay.

To recap, the four initiatives that are transforming our business, is that we are driving to further diversify across both handsets and linear products, we are delivering more and more high margin products.

We are capitalizing on the increase in front-end module content, and we are focusing on operational fundamentals to improve higher margins.

Just to switch gears for a moment and looking a bit further into the future, you are going to begin to see Skyworks expand into additional new markets, adjacent markets, new opportunities, while leveraging the very same core technologies.

As an example, we have intensified our focus on the emerging energy management space.

Considering that there are 2.5 billion household and businesses worldwide that employ manual gas, water, power meter readings, there is pent-up demand by many service providers, for an economic RF solution that can provide realtime usage reporting.

And just recently we have developed product, and we have been award a strategic win, with a custom solution with one of the largest energy service providers in the United States.

Next is another example that we have now introduced 4G WiMax and FEMTO.

Femto cell solutions with Samsung as our lead customer.

Now Femto cells are small cellular base stations, designed for residential and small businesses.

These small base stations provide better coverage, and solve very real near term signal coverage and capacity issues.

Now this is an interesting and I think an exciting opportunity for us, given that there are some estimates that worldwide Femto cell subscriptions are expected to surpass 100 million end users over the next several years.

This represents a market opportunity for Femto cell devices measured in the billions of dollars.

Another example is we are especially excited by our growth prospects within the highly diverse automotive sector.

Here we are seeing a dramatic rise in addressable opportunities as cars increasingly come equipped with keyless entry systems, with global positioning, climate control, engine and tire sensors, Bluetooth digital receivers, as well as after market toll tags, and this content increases in hybrid vehicles.

Given our very recent TS 16949 quality Certification, we have begun to capture several wins with customers, and some of those customers include today, Delphi, Siemens, Johnson Controls, Garmin.

Now each of these three examples represent the intersection, and hopefully quite simple, the intersection of high growth, high margin market opportunities, with what we do well in the analog and RF domain.

In summary, the Skyworks team is intensifying focus on our areas of strength, namely linear products and handset RF end markets, with our innovative product portfolio, with our strong customer engagements, and with our dedication to operational fundamentals, we believe we can continue to outgrow our addressable markets, we believe we will continue to further expand both our gross and our operating margins.

Okay.

I would like to now turn this over to Don for his financial review.

Thank you, Dave.

Revenue for the first fiscal quarter was $210.5 million, up 11% sequentially, and $3.5 million better than our guidance.

Gross profit for the quarter was $83.8 million, or 39.8% of revenue, a 40 basis point sequential expansion, and a 130 basis point improvement year-over-year.

Our continuous improvement over the last four quarters reflects the following.

Enhanced product mix as multi-mode FEMs and linear products become an increasing part of our business, higher equipment efficiency and factory utilization, progress on yield improvement initiatives, and double-digit year-over-year material cost reductions.

You may not realize this, but at Skyworks each and every function, department, and operating location has monthly, weakly and in some cases, daily improvement initiatives, with very specific metrics that aggregate to our profit growth targets.

We have structured these metrics to clearly tie to incentive plans, and align with shareholder value creation.

We believe this attention to detail is helping to drive our margin improvements.

Turning back to the income statement, operating expenses were $55.2 million, of which R&D expenses totaled $32.9 million, and SG&A costs were $22.3 million.

As a result, our operating income for the quarter was $28.6 million, up 26% sequentially, and representing a 13.6% operating margin.

Our net interest and other expense for the quarter was $158,000 while taxes were $568,000, reflecting a 2% cash tax rate.

Net income was $27.9 million, yielding a record $0.17 of Earnings per share, $0.01 ahead of Consensus estimates.

Now turning to the balance sheet.

We exited the quarter with cash and cash equivalents as well as short term investments of $207 million.

During the quarter we recorded $11 million of depreciation, generated a record $55 million in cash flow from operations, invested $19.9 million in demand-driven capital expenditures, primarily for fab and assembly and test capacity, acquired free scales PA/FEM portfolio, related IP and inventory, as well as 16 fundamental HBT and RF MEMs patents developed by the Rockwell Science Center, for roughly $30 million, retired 49 million of convertible debt, and in the process reduced our share base.

Now to our business outlook for the second fiscal quarter.

As Dave outlined earlier, by executing on our diversification strategy, we expect to largely offset the seasonally low March quarter, with growth from our linear products portfolio, and handset multi-mode content gains.

Assuming revenue of $200 million, we anticipate maintaining gross margins at 39.8%, with operating expenses at Q1 levels, just above $55 million.

Below the line, we suggest modeling $100,000 for interest expense and $500,000 for taxes.

In turn, we plan to deliver $0.15 of diluted earnings per share, off a base of 163 million diluted shares.

To put our improved performance and outlook in better context, in fiscal 2006 we recorded $0.21 of diluted earnings per share.

In fiscal 2007 we posted $0.48 of diluted earnings per share.

Based on today's guidance we are on-track to deliver $0.32 for the first six months of fiscal 2008.

Or a $0.64 annualized run rate.

And given the trends we have outlined today we anticipate an even stronger second half of fiscal 2008.

By every measure our year is off to an excellent start, and we look forward to updating you on our progress.

That completes our prepared comments.

Operator, please open the lines for the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question will come from Amit Kapur with Piper Jaffray.

Thanks a lot, guys, and congratulations on the strong quarter!

Thank you, Amit.

Maybe we could just start off, obviously there is a lot of debate out there, in terms of the nature of the macro environment.

Maybe if you could give your view on what you see in terms of levels of handset inventory out there, what your order lead times were doing exiting 2007?

Well, there are areas of weakness.

We have seen some areas in China, for example, on the low end, some pockets of infrastructure, a couple of customers are soft.

Fortunately we have been ramping, Huawei and a couple of others that are very strong, even in the infrastructure environment.

Although I must say there has been nothing significant enough to move the dial overall at Skyworks.

In our case we are seeing strength from our linear products.

We are seeing this average blended ASP content increase begin to become a reality, such that our ASPs are increasing in handsets, and as you know, we are ramping some new customers we have acquired over the last six, nine months.

So while we do see pockets of weakness and some choppiness, I think overall the handset industry is relatively strong, and we are picking up share.

Great.

Maybe could you give us a sense of what linearity was during the December quarter, was it pretty normal?

Yes, this is Liam.

Linearity was actually pretty normal for us as Dave outlined.

We have very good position now across the Top 5 OEMs that we had good visibility exiting the quarter, and visibility looks decent now as we move into March.

And as a reminder, (OPERATOR INSTRUCTIONS) We are asking callers to limit themselves to one initial question with a follow up.

We will next go to Edward Snyder with Charter Equity Research.

Thanks a lot.

Good quarter, obviously a lot of chatter as Amit had said about the macro environment.

You mentioned China was an area of weakness, we had [Vahmi] and managed to speak to Ralph from TriQuint on an investor call yesterday, and both seemed kind of upbeat about the end markets strength to share gains, but clearly not everybody is gaining share, or could be gaining share on the quarter, and we are hearing about some relatively large share shifts, especially in CDMA.

You mentioned you were picking up share.

Could you give us some kind of indication of where you think you are gaining share, what technology, what OEMs and then who you are gaining it from?

And then also you have done really well the largest handset OEM, have you leveraged your position there out of 3G, actually from 3G into their EDGE and GSM businesses, or are you almost exclusively just 3G there?

Thanks guys.

Thank you, Ed.

That's a lot of questions.

Let me make comments on a couple.

First as we mentioned in the prepared comments we are shipping EDGE and wideband CDMA to all of our top tier customers.

So we don't have customers that are buying just EDGE or just wideband CDMA, at least not among the top tier.

And the reason for that is pretty simple.

There is a real advantage to coupling the complicated filtering, the multi-throw switch, the logic and control that drives in most cases multiple bands of EDGE, and then enables bands one, two, three, or four bands of wideband CDMA.

So there is a real current consumption size, overall bill of material cost advantage, so most of these solutions are highly proprietary and custom.

And they are a real win/win for our OEM customers.

So that is the answer there.

Where we are seeing share gains is, because we are now a pretty broad proxy as I mentioned in the prepared comments, a couple of years ago we were shipping to three of the five top customers, we are now shipping to all five, and we are shipping most, all modulations to all five virtually, that now we are beginning to see real growth, as the industry increases, and as the average content is there's more EDGE and 3G, the average content moves from $1 or $2 a phone, to several dollars a phone.

So the blended, that dovetailing in of higher dollar content is causing us to increase.

So we are taking share by virtue of the fact that there are fewer discrete solutions that we have swept into more functions, we are taking share by shipping to all five, and of course, linear products is an area of growth for us.

Our next question is from Suji De Silva with Kaufman Brothers.

Hi guys.

Congratulations on the quarter!

You talked about the share gains, can you talk among the Top 5, which ones you have the best share gain opportunities as you look at '08?

It is tough for us to get into that kind of granularity.

I think the phenomena of there being more content is not specific to any one customer.

So I believe that we will see a blended ASP increase as all of the top tiers are moving from a mix of emerging market low end, as well as EDGE and wideband CDMA to varying degrees.

So that phenomena exists across all customers.

Clearly we have, the OEMs are some gaining share from others.

So as we see that overall market dynamic, as I said we are a pretty broad proxy for the overall industry, I think you can look to see those OEMs who are gaining share, and as those OEMs gain share, that shifts some of our volume from OEM A to OEM B.

Great.

That helps.

Then just one quick follow up, you have done well with Apple recently with some of their new products, the iPhone.

Do you have any update on the opportunity there, as they refresh their product lines, or perhaps some of the computing products they have coming?

Yes, absolutely.

With respect to Apple as you may know, we really can't speak in detail about that company.

But we certainly pursue opportunities with all the major players both in notebook computing and also handsets, and we encourage you guys to do your tear downs, and gain your insights from there.

Great.

Thanks.

Our next question is from Aaron Husock with Morgan Stanley.

Thanks for taking my questions.

I am happy to hear you guiding OpEx dollars flat in the March quarter.

Is that something you think you can hold it to flat, or just slight growth beyond that, even as you continue to grow the business in the second half of fiscal '08, or how much growth should we look for in OpEx dollars?

Hi, Aaron, this is Don.

I would expect there would be some slight growth.

If you look at our expense base, most of those costs are fixed.

We have a great model in place that allows us certainly to leverage very effectively operating expenses, but there are some minor variable costs associated with some commissions, and some volume related expenses.

But I would say would you not want to model any significant increases in our Op expenses on a go forward basis.

As you look at the factors that are driving better than normal seasonality in the March quarter, the share gains and media tack, the ramp of your new tier one customer, and some of the transitions to front end modules, and the Motorola low end, what would you say is the biggest factor helping you offset seasonality?

Let me give the top two or three.

One is in these newer applications, or these adjacent markets nonhandsets, it is less seasonality.

So what we are seeing in a quarter where we typically think of handsets as being seasonal, the markets we are addressing in the nonhandset space are either, if they are seasonal it maybe a different season, or they are not seasonal at all, so that is an area where we tend not to see that seasonality, and as that business has grown that has become a bigger impact for us.

The second is that we are beginning to see displacement of our business on the 2G side, with more and more EDGE, and more and more wideband CDMA, where we sweep into filters and switches.

So I think you are starting to see that creep from relatively simple dual-band power amplifier, to a relatively complex multimode FDM.

I would say that is number two.

Our next question then is from Todd Koffman with Raymond James.

Yes, just with regard to the weakness you have seen in Asia, can you give any more quantification on that, since a number of other vendors have talked about that as well?

Let me try to clarify that.

I mean it is obviously I will use the word choppy, for lack of a better word.

I would say that, what we are seeing today in China, frankly is we have a large customer called MediaTek in China, they have lots of customers, the indigenous of the local-branded OEMs within China.

And one of the things that we are seeing is that there has been some supply chain constraints.

We have been looking to fill I think an underserved customer there by filling that void.

We have been scaling up for that customer, and working very hard to gain design wins.

The challenge for us is to make sure that is a permanent share gain, so that has been our goal, and those are the discussions we have been having with that customer.

So while I look at China I think the end handset sales across the industry are strong.

Again, there is some choppiness and that is one area where it is difficult to handicap it, or take a beat on it, because you are seeing some constraints and some share shift, which makes it difficult to quantify, again, I don't believe it is a major issue, I don't believe there are major pockets of inventory, and our business in China for '08 looks frankly quite strong.

Thank you.

Thanks.

Our next question, you will have to help me on the first name, the last name is Kidron and Oppenheimer.

Yes, Ittai Kidron from Oppenheimer.

Hi guys, congratulations on the quarter!

Had a couple of questions, Don, first to you, with all this cash that you are now starting to generate, how should we think about your net interest income current quarter going forward, and Dave, can you comment on what would be seasonality for the handset market, in your opinion, as you hear it from your customers on an aggregate basis of course, December to March, that would be interesting to hear.

Ittai, where we have been running right now, and the cash balance at this point hasn't had a material impact on that, is that we have a net interest expense and interest income of about 100K a quarter, it is running, you can start ramping that up a little bit as we move out through the year, but it is not a real material number for us at this point in time.

It shouldn't have much of an impact on your model.

And we don't expect that is going to change dramatically.

But this quarter though, I am missing $50 million off you balance sheet, if you generated $55 million, your cash balance went down almost 50, that is offset by the 49 million convert that you paid.

Where is the other 55 that you generated?

We had the Freescale acquisition, as well as some selected patents, and that was around $30 million, that is the biggest piece of that.

Okay, and Dave with regards to the markets?

I think a couple of OEMs have reported at this point, as you know, there is a lot of information that will be coming in shortly for December quarter end sales.

From where we sit, the hub polls for us were strong, the visibility is quite good.

The order linearity was about what we expected.

So I would think you are looking at a 10% or so sequential unit decline, and there are some pockets, our cream customers look very strong, our Tier 1s are kind of, the larger customers tend to be more typically seasonal.

In our case, in China, we are filling a need.

And there are some new entrants, some new customers for us, RIM being one, and we are starting to see some of those customers actually look quite strong going into March, so it is a bit of a mixed bag, I can't do any better than say it is roughly seasonality in the 10% range.

Our next question is from Jeff Kvaal with Lehman Brothers.

Yes, thanks very much guys.

I was wondering if you would refresh us a little bit on how your long-term marketing structure is developing?

You guys have previously said mid-40s margins in the 250 million a quarter range.

Jeff, you are referring to the business model that we talked about last quarter?

Yes.

Sure, I think first of all, if you take a look at where we have been over the last three or four quarters we are making consistent progress on the margin front end.

We are very positive about that.

And it is really from the product cost side, it is really being able to execute and focus on the blocking and tackling of margin improvement.

It is the material cost out, we have been delivering the double digit material cost out year-over-year, we are continuing to improve product yields, and we are continuing to improve the efficiencies and productivity in the factory.

Those things coupled with the volume, we feel very very comfortable that we are going to be able to deliver margins in the low 40s, and that is what the business model is based on.

And to remind everybody, the model is about 240 to 250 million in revenue, about 42% margin , 23% Op expenses, which gets us to about an 18% return, that is our internal

Our goal is how to we drive that to 20 points of operating income.

Right.

We can see 18, doing the things that we are doing today, and our goal is through more linear products to continue to focus, can we get that number to 20%.

And that is what we targeted ourselves with internally.

Fantastic.

Then can I ask what the mix of linear was in this quarter?

Both of our segments grew from the prior quarter, and our linear mix is roughly consistent with what is was in the prior quarter, and is roughly 25% linear/75% handset.

Okay, and are you guys talking about the margin structure inside of the linear business?

No, we don't disclose that.

The margin structure is accretive to the overall results, but we don't get into the specific margins on that segment.

Okay.

Would you consider doing so at some point in the future?

You know, it is difficult for us Jeff, because it is a, we said in the prepared comments that the contribution margins are over 70%, but remember these products are using the same core technologies as our handset business, so we operate them in our same assembly facilities, our same external foundries, and internal foundries, so for us, it is really a blend on the supply chain side, the pricing tends to be higher, so the contribution margin is 10 or 15 points higher, but we really don't segment our business in terms of the full absorbed gross margin all of the way through.

Okay that makes sense, thanks very much Dave.

Thanks Don.

Thank you.

Our next question comes from Jeroen Bos with UBS.

Yes.

Thank you.

Hi, congratulations on a good quarter!

Two quick questions.

Can you maybe talk about linear in the March quarter, what you feel there, what it represents in terms of total revenues.

And as a follow-up, any 10% customers for the next quarter?

Yes, with respect to linear coming into March about flat, it won't be subject to the seasonality that we see in handsets.

We are seeing some dynamics within LP moving around, there are some infrastructure share shifts, Ericsson has been a little bit light, but Huawei has picked up, we have also diversified into a number of new markets as Dave outlined, energy management, satellite settop boxes, and others.

But linear at this point looks pretty strong going into March, it should be roughly flat sequentially.

Okay, great.

Any 10% customers to name?

For the quarter, yes, we had Sony Ericsson and Samsung were both above 10%, and Motorola was just slightly below 10% for the quarter.

Okay, and a very quick follow-up, amortization in the quarter came to 1.9 because of the Freescale acquisition?

Correct.

Do you run rate [inaudible] model?

2 million a quarter, that is directionally correct for the balance of the year, yes.

Okay, great, thank you very much.

Our next question is from James Faucette with Pacific Crest.

Thank you, I just wanted to follow-up on a couple of questions that have already been posed.

First of all, as far as the linear products business, how are you thinking about the economic sensitivity of that business?

Especially related, or relative to handsets, and how they traditionally shrug off, any economics slowdown, or they have in the past?

Well James, this business, maybe for a point of clarification, is as I mentioned, we have got between 2,000 and 3,000, about 2,500 parts, part numbers, SKUs, and over now 1,000 customers, and it is growing pretty rapidly.

Think of it as a catalog standard business, and we have got a catalog as thick as a phone book, not because we want to lug it around, but because it is a market where you take fundamental building blocks, and you characterize them across as many parameters as you can possible think of so that they can be adopted in as many applications as possible, and that is where we are seeing the business, a distribution-based broad catalog business.

Then within that business, we have begun to identify vertical applications, where the size and the margin warrants a custom development, or application-specific development, Liam and I have talked about a few of those, and those businesses are quite different.

Energy management I do not see as a seasonal business, for example, automotive is seasonal.

Infrastructure is cyclical albeit not necessarily seasonal, but when you aggregate them all, this business has very, very low customer concentration, very low product concentration.

I hope that helps.

Well, actually what I am asking is I am wondering how much more sensitive to just economic cycles you think that business generally is, I understand that it is way more diversified across customer bases, but I am just wondering if you feel like it is more economically sensitive than the handset business?

I don't think it is more economically sensitive than the handset business, intuitively I would say that it is not, but again I would have to really frankly step back and analyze the various pieces to try to understand that, which is more utility oriented, or more discretionary, frankly I would be giving you a weak answer if I tried to quantify it.

Thank you for your forthrightness.

And just a quick follow-up on the Freescale product acquisition, how much of a contribution was that in the December quarter firstly, and secondly, are you producing those products internally as of yet?

And if not, when do you plan to?

As far as the materiality, it was immaterial for both our fourth quarter and our first quarter, I am sorry, for the first quarter and the second quarter, there is no material impact on the revenue.

We expect that to change in the second half of the year.

It will be a contributor as both RIM and Motorola transition to our products and burn off some of their inventory.

So on the balance, the second half of the year we are expecting to be more of a contributor.

So when we bought this business, in addition to all of the design rights and the IP, and the exclusive rights to work within their transceiver, where it is sold, and those accounts, we did not buy finished goods, so that is really the issue.

Some of that inventory and late stage finished goods is bleeding through the supply chain.

Great, but are you already producing that internally yet, or should we expect that to ramp in the second half?

It is transitioning as we speak, and we didn't buy any fab assets, so it is transitioning to our foundry being qualified as we speak, as it will be on our production facility in the second half.

Our next question is from Aalok Shah with Credit Suisse.

Hi guys.

Most of my questions have been answered.

I wanted to follow-up a little bit on the linear products group a little bit more, it seems like you guys are guiding to revenues being down about 5% next quarter, and I am trying to figure out if the margins are so much higher in the linear products group, could we see gross margins going up even above the 39.8% range.

Is that something that you guys are being conservative about right now, or should we start to see a little bit of increase in the margins?

I would look at that business, it does have higher contribution margin as we have discussed, substantially higher.

I think the shift in relative share or percentage of the revenue in Q2 is not overly significant.

I think handsets will be down less than seasonality.

I think linear products will be more flat than seasonal, with a lot of embedded dynamics within this broad portfolio.

We are trying to be prudently conservative, and so we are kind of, we are pushing 40% at this point on a revenue base of a couple hundred million, and we feel very, very good about that.

There is upside opportunity as we move into Q3, and into Q4, and 2009 for sure.

And then, David, can I follow up real quick on capacity right now.

What do you think your utilization rates are right now?

Our utilization and our internal factories is running well into the 80s, the upper 80s and low 90s.

We have bought some equipment on line that is being qualified as we speak.

We are transitioning to 6 inches.

And a lot of that equipment is in, it is no bricks and mortar, so it is a relatively inexpensive proposition, but it doubles our throughput in our existing foundries.

We are dovetailing that in as demand comes on line.

But what is different about us, is that we do have fully qualified suppliers for all of our major, where we are vertically integrated we have copy exact fully-qualified suppliers on the outside, who are ramping to varying degrees.

So we have an ability to address a lot of upside demand.

Without having to get out in front of the high-end of all of our customers curve by being totally vertically integrated.

We like that hybrid model a lot, and I think it is going to serve us very well, and our investors well in the next two to three to four to five years.

Our next question is from Craig Ellis with Citi.

Thanks, guys, I wanted to do drill down into gross margins a little bit more.

It looks like the business is developing a profile where margins are a little bit flattish in the first part of the calendar year, and then you get some uplift in the back half of the year.

In December we are up 130 basis points versus December of last year.

So the question is, is that the profile that you think is starting to manifest in the business, and secondly, as we look out to where we will be existing 2008, do you think you can get the same type of gross margin improvement over the next four quarters, as you did within the last four?

Maybe Don and I can answer this together.

It is very revenue dependent, and overall our yields are improving across the product portfolio to varying degrees.

We are shipping more linear products, we are more diversified, more dollar content and front-end modules, so there is a trend towards higher margin as we work those products into a fixed cost structure.

And in the second half, that's one half of the answer, it is volume dependent.

The second half of the year with the growth comments that we have made, and where we see our business moving, higher revenue will translate into higher margin.

And as Don just mentioned, we will be in the low to mid, the 42% range is what we have stated publicly, 18% operating income, and 240 to 250.

We are now at a 210 run rate, or we just exited the quarter at a 210 run rate.

We have got a lot of upside and capacity room.

We haven't talked specifically about when we will intersect with that margin point, but you should think of it that way, 240 to 250, we are at 18% operating income, with a couple hundred basis point higher gross margin.

And also I think it makes more sense too when you are looking at margins, is you sort of have to take it off of where we are, and our most recent run rates, because year-over-year comparisons can get muddy like Dave said, depending on the mix and where you run the volume, so I think it is a much easier model we are trying to work off recent quarters, and project where you think that benefit is going to be on a go forward basis from there, I just think that makes a lot more sense.

That is reasonable.

A follow-up on the linear business, and really more of a detail.

Typically when we think about a linear business, we think of one that is about 50% through distribution, 50% direct sales.

How should we think about the direct versus distribution mix in your business?

Yes, we have a similar dynamic here.

We have worldwide distributors and even third party sales reps, so that does pick up for us it might be about 60% of the business, where we actually have lots of smaller customers with a very diverse product portfolio.

And then we have more or less global account opportunities with larger companies, like Ericsson, Nokia, Siemens, and Huawei, where we go with a direct sales team.

And Liam, I know you guys had talked about a number of new products that were hitting the portfolio in the middle of '07.

Is that what we are seeing now, the growth in the linear business being fueled in part by what you are doing on the customer diversification side, but in part based on the success of the new products that were brought out mid last year?

Yes, absolutely and as Dave outlined, we have a couple of thousand SKUs, and we developed a fresh set of analog and mixed signals devices in the last calendar year, about 100 devices or so.

So we are moving into new segments like energy management, where we have very custom VCL synthesizers, PLLs, front end modules, integrated together to form a very unique RF solution.

We are starting to move forward into automotive.

We talked about cable TV and set top.

So it is a culmination of new products and also expansion into some of these interesting vertical markets.

Our next question is from Pierre Maccagno with Needham.

Congratulations on the quarter.

Thank you, Pierre.

Could you give an approximate breakdown of your 2G versus 3G, and how each of those grew?

And also if you can give us an update on Helios, where the customers are growing?

Yes if you look at the mix, the 2G business, it's margin right now, obviously our GPRS and CDMA business was about 60%, with WCDMA and EDGE being the balance.

How did those particularly grow?

Well, obviously there are dynamics in both, the 2G market is being fueled by new subscribers in China and India, and we have had some strength there, with accounts like Mediatek, but the real growth is growing in WCDMA, and WCDMA for us, as Dave outlined, really means a WCDMA product coupled with an EDGE device, that is really the architecture that we are pursuing and getting design traction on.

So as we move into March, and we move into each quarter in 2008, we should see sequential growth in WCDMA and EDGE devices.

And Pierre your comment on Helios, Helios today is a little bit under 5% of our total revenue.

And just keep in mind, just to remind you, we have talked about this in the past few quarters, we have a small very focused team, that are dedicated to serving RF needs for both our linear products business, infrastructure, new broader catalog, and some application specific devices, as well as handsets, because there is a subset, there are a subset of handset OEMs, that are looking for a multimode power amplifier switch filter solution with a standalone transceiver, to mate with their chosen baseband support.

So in our business it is always 100% of the time the case, that our front end module is made it mated to our standalone transceiver.

Our next question is from Vijay Rakesh of Deutsche Bank.

Actually it is Brian Modoff with Deutsche Bank.

A question on Nokia, did you see the gains you had in the quarter coming from perhaps some yield issues, or some issues with competitors in that company, or do you see these as design wins and share gains that you see as sustainable over say the next year or two?

Thanks.

Thanks, Brian.

Well again, we are a little bit handicapped here, because we can't speak specifically about our customers.

I think you understand that.

But, Brian, I would say that at a higher level, it isn't so much the case that we are taking share from a specific company.

It is more the transition of the market and the need, the underserved need in the market, to have a company that can field a pretty complex set of technologies, in a front end solution that provides the harmonics, the current consumption size, and overall bill of material costs.

In the case of a large OEM with a sophisticated architecture, the design window to enter a platform is measured in years, Brian, it is two to three years.

So it is not sort of an opportunistic play.

It is a custom.

These customers tend to by custom solutions, that are highly proprietary, that are platform based, and that are sole sourced for that platform.

So it could be the shift to WCDMA at Nokia is good news for you?

I think the shift to anybody, the EDGE, WEDGE and WCDMA is great news for us, that is right.

Our last question is a follow-up from Edward Snyder with Charter Equity Research.

Thanks.

You mentioned you got a lot of external qualified vendors to help you address upside demand, without having to add a lot of additional costs, like some of your competitors did.

That doesn't come for free, though.

Obviously your margins there will not be as good as if you produced it internally.

Any feeling at all if we see uptick in demand?

You should see a pinch to margins somewhat.

What would you suffer by doing that?

And secondly you say the Freescale product line will start contributing in the second half of '08.

This is obviously going to be a much faster ramp than if it was just a new product, you have Motorola and RIM out there burning off finished goods inventory, and when they are done they are going to come to you for product.

Should we expect some sort of maybe not a hockey stick, but a step-up in revenue in the second half of the year, as you start producing that to customers that are already built in?

Okay.

Okay.

Let me compartmentalize that a bit.

With respect to the foundry part, it is a little bit different than thinking about it in a pure, for example, in a CMOS environment, where you go out in the merchant market, you obtain the best possible price you can, and then you look to drive yields in further material cost reductions over time through a negotiation process.

In this case, what we have done on the gallium arsenide side is quite a bit different.

We have taken our process, our IP, our quality people, our designers, our device people, and we have done an absolute copy exact on the very stringent contractual requirements, to actually bring up a partner into volume production with MRP links, and also so that it looks and feels and smells to our people, just like what we produce internally.

And because we have that kind of a relationship, and we are dealing with suppliers who have a different cost structure, operate in lower cost parts of the world, have much different cost of capital, we are able to get pricing, because of this arrangement, that is remarkably close to our internal cost.

So we don't suffer a gross margin reduction, if that's your point.

In this case it's very different.

You are right if we were to go outside, and say well let's start buying a lot of packages outside, and having to fund their gross margin requirements and their cost of capital, then there is obviously a flexibility advantage offset by gross margin.

But in the case of the foundries, it is quite different.

Would you repeat the second half of the question?

Again if I can have you press star one again.

Star one go ahead, Mr.

Snyder.

Thank you.

Yes, Freescale you mentioned it is going to contribute in the second half of this year, as your two big customers, Motorola and RIM burn off their finished goods inventory, shouldn't we be modeling maybe not a hockey stick increase, but some significant step-up in revenue, it's not like you are going to ramping up a new product and you have to go out and sell it, you have got a full installed base and incumbent customers that will start ordering from you again.

The absence of specific guidance from us in the second half, I think your intuition is right, it is a faster transition, and we do expect it to be a contributor in the second half.

So I think your point that it would ramp faster than your normal design win is true.

Thanks, Dave.

Thank you.

We have one final question, Mike Burton with ThinkEquity Partners.

Hey guys, thanks, great quarter!

can you talk a little bit about your contribution margins in WCDMA and EDGE, or WEDGE compared to GSM?

Well, it is, GSM is much more mature, so we are producing enormous volumes there.

The yields have been coming up very quickly, our wideband CDMA, and remarkably they are quite close.

The wideband CDMA gross margins are very good once you get them into the north of 85% yield, and that is where we have begun to drive them.

We are not there across the portfolio, but they are raising, they are increasing in a semi-conductor learning curve, that we understand I think quite well.

The test times are coming down, so utilization, we are able to get much more volume through any given step in the process.

And so the contribution margins today are quite similar.

Overall over time, the gross margin in our entire business, the blended gross margin increases, because we simply have more dollar content driving not only higher utilization, but there is a fixed cost element to our cost of sales.

So on a product by product base, it depends upon where we are in the yield learning curve, and fortunately, products that are launching, are launching the way we would expect them to.

Okay.

Great.

And both of the OEMs that have reported have spoken optimistically about 3G in '08.

Can you provide us an insight on your own estimates for 3G next year, or perhaps what percent of sales you see that becoming?

Yes, absolutely.

Sony Ericsson and Samsung both reported pretty much in-line, and you are correct, it did report favorably on 3G or WCDMA.

We see that clearly as the fastest growing segment of the market.

And as we have outlined before, for us it is very rare, in fact I don't think we have a case where we have a WCDMA part without an EDGE, and largely an EDGE FDM made it to that 3G band, or multiple band.

If you look at the numbers '07 we think it is about 180 million 3G phones worldwide, and the 1.1 billion, and that number is going to go well into the high 2s, maybe as high as 300 million next year.

With that, this does concludes today's question and answer session.

I would like to turn the conference back to David Aldrich for closing comments.

Thank you very much.

This concludes our conference call today.

On behalf of the entire team, thank you for your participation.