Silicon Laboratories Inc.
Q4 2007 Earnings Call Transcript
Published:
- Operator:
- Thank you for standing by and welcome to the Silicon Laboratories fourth quarter earnings conference call. At this time all participants are in a listen only mode. During today’s question and answer session you may press star one on your touchtone phone. Today’s conference is being recorded. If you have any objections you may disconnect at this time and now I’ll turn today’s meeting over to Shannon Pleasant, thank you, you may begin.
- Shannon Pleasant:
- Good morning, this is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the company’s quarterly financial results. The financial press release reconciliation of GAAP to non GAAP financial measures, details on discontinued operations and other financial measurement tables are now available on the investor page of our website at www.silabs.com. This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 800-839-2341. I’m joined today by Necip Sayiner, President and Chief Executive Officer, Bill Bock, Chief Financial Officer and Paul Walsh, Chief Accounting Officer. We will discuss our financial results and review our business activities for the quarter. We will have a question and answer session following the presentation. Before we begin, let me comment regarding the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments and presentation today will include forward looking statements or projections that involve substantial risks and uncertainties. We base these forward looking statements on information available to us as of the date of this call. This information will likely change over time. By discussing our perception of our market and the future performance of Silicon Laboratories and our products with you today, we are not undertaking an obligation to provide updates in the future. There are a variety of factors that we may not be able to accurately predict or control that could have a material adverse effect on our business, operating results and financial condition. We encourage you to review our SEC filings, including the form 10K that we anticipate will be filed in early February that identify important factors that could cause actual results to differ materially from those contained in any forward looking statements. Also, the non GAAP financial measurements which are discussed today are not intended to replace the presentation of Silicon Lab’s GAAP financial results. We’re providing this information because it may enable investors in performing meaningful comparisons of operating results and more clearly highlights the results of core ongoing operations. I would now like to turn the call over to Silicon Laboratories Chief Executive Officer, Necip Sayiner.
- Necip Sayiner:
- Good morning everyone. In February of last year, we stated that we believed the divestiture of our cellular business would allow us to deliver on our target financial model more quickly and I set a goal to hit 25% operating income by the end of 2007. We achieved 26% in the fourth quarter. We set year over year growth targets for our major product lines and met or exceeded those targets for our MCU, broadcast, timing and embedded modem products. It has resulted in a 17% increased in 2007 revenue, far in excess of the industry’s growth rate. We plan to further diversity our product and customer base. We increased the number of MCU customers by 15% in 2007 to 11,000. We increased broadcast revenue from non handset applications to 50% in Q4, with 20% coming from new products. We also committed to control operating expenses. We reduced op ex from over 50% in 2006 to 43% of revenue in 2007. And we promised pro forma earnings expansion. In Q4, earnings per share increased by over 140% compared to the same period last year and earnings for the full year increased by 65% over 2006. I believe our 20007 results demonstrate that we do indeed have a powerful business model. Bill is now going to cover more detail on the financial performance. Bill.
- Bill Bock:
- Thanks Necip. We again exceeded expectations on virtually every measure. The company delivered record revenue of $100 million in the fourth quarter, a 34% increase from the same period last year and revenue of $337 million for the full year of 2007, representing a 17% year over year increase. Earnings for the fourth quarter also exceeded expectations and pro forma earnings represented a record for the business. I will begin with the GAAP results for the quarter. Gross margin was 63.5% of revenue. Research and Development investment was $21.5 million and SG&A expense was $27.6 million. Other income, principally interest income on invested cash, was $6.3 million. The tax rate was 23.5%. The resulting total GAAP earnings per share from continuing operations on a fully diluted basis was $0.28. For the full year, earnings per share from continuing operations was $0.70. Including the gain from the sale of our cellular business, 2007 fully diluted GAAP earnings per share totaled $3.64. Our non GAAP adjusted financials that follow exclude approximately $800,000, the onetime charge related to the consolidation of our facilities and $11 million of stock compensation expense. This is a slightly higher number than historical quarters and we expect stock based compensation to average around $10.5 million quarterly in 2008. Non GAAP gross margin increased to 63.9%, exceeding the high end of our range. This was due in part to better than expected margins for our broadcast products and favorable product mix. All of our major product categories delivered quality margins in the period. While we’re pleased to see this type of margin expansion in a single quarter, we continue to believe that the business will more typically operate within our target range of 60-62%. Operating expenses were slightly lower than anticipated at 37.6% of revenue, with R&D totaling $18 million and SG&A totaling $19.6 million. Higher variable compensation expense and an increase in legal fees were offset by savings realized on [mask] costs and fewer new hires than forecast in R&D. The increased revenue and margin improvements we’ve discussed resulted in operating income of $26.3 million or 26.3% of revenue. This is a major accomplishment, early demonstrating the leverage of our high gross margin business and allowing us to actually exceed our target model in operating performance. Wrapping up the income statement for the fourth quarter, other income in the period was $6.3 million down slightly due to reduced cash balances as a result of our share repurchases which I will comment on in a moment. Our non GAAP income tax rate was 22%, representing yearend tax reconciliations that resulted in a full year tax rate of 16%. However, going forward, we continue to anticipate that our basic tax rate for the company will remain about 20% as we have guided previously. Income from continuing operations therefore was $25.5 million or 25% of revenue. Earnings per share from continuing operations came in at $0.46 for the quarter and $1.30 for all of 2007. As Necip mentioned, this kind of improvement in a matter of quarters is a significant accomplishment for any company in our sector. Turning to the balance sheet, accounts receivable decreased to $51.2 million, primarily driven by better linearity in the quarter versus that achieved in the prior period. Days sales outstanding dropped to 46. We ended the quarter with inventory up slightly but within our target range at $28.6 million or about 5.1 turns. Inventory in the distribution channel was stable, increasing slightly to 48 days. Capital expenditures for the year were approximately $12 million. Our capital expenditure requirements are relatively low now that we have completed the move of all manufacturing activities offshore. We expect 2008 capital expenditures to be in the range of only $10-$15 million. Cash and equivalents declined to $573 million at year end, a decrease of $65 million from the end of the prior quarter. During the fourth quarter, we completed share repurchases totaling $112 million or 2.9 million shares. We’ve now completed over one-third of our $400 million authorization in only five months. I believe this clearly demonstrates our commitment to fully executing on the program. The fourth quarter also demonstrates strong positive cash flows from operations, a performance characteristic that Silicon Labs has long enjoyed. Necip, I’ll now turn the discussion back to you.
- Necip Sayimer:
- Thank you Bill, 2007 was a critical year for us. We achieved a number of key milestones as we executed to our strategy of building strong vertical businesses, complemented by high margin horizontal broad based businesses. This hybrid strategy offers an attractive combination of growth and profitability. Our broad based businesses which have become a meaningful piece of the portfolio over the last few years, continued to grow far in excess of the market. The micro controller business ended 2007 up 40%. Q4 was another record quarter for the product line with double digit sequential revenue growth exceeding our expectations due to strong seasonality for consumer devices. Our small footprint devices which lead the industry in what we call functional [dentitiy] are still the biggest success story in our MCU portfolio. We added more products in this category during the quarter and we believe we have the leading portfolio of small high performance mixed signal MCUs for space constrained applications. We shipped more than 7,000 development tools during the fourth quarter and had solid design win activity, both of which are strong indicators of future growth. This product line is benefitting from differentiation, a large TAM and cross selling opportunities with the rest of our portfolio. We plan to accelerate the expansion of the product line in 2008. In order to reach our goal of addressing 50% of the $5 billion plus 8-bit MCU TAM. At this point, we believe the MCU business could continue to grow at 35-40% as it has over the last several years. Our timing business grew at a similar rate for the year. The product line had a large step up in revenue in Q4 driven by robust demand for our clocking product and a strong ramp of our oscillators. We added a number of new revolutionary products in 2007 that will be the foundation for growth in 2008. A strong pipeline of design wins, continued cap ex spending by carriers and penetration of broadcast video, testing measurement and other infrastructure markets are expected to drive strong double digit growth of 40-50% this year. The broadcast business overall grew far in excess of our 50% target, essentially doubling in 2007. Growth was driven in part by the adoption of our FM tuner into hundreds of handset models. More significantly, our non handset business grew even faster through the successful penetration of a number or portable applications with our FM tuner and FM transmit products and in the fourth quarter, strong demand in portable navigation devices and MP3 accessories were largely behind the revenue upside. By continuing to pack more features into an industry leading footprint, our broadcast audio family is the leader in both performance and size. We ended the year by our own estimates at about 25% market share enhancement and greater than 50% market share in portable navigation devices. We continue to see strong momentum behind existing and new products. In Q4, we secured 115 new design wins for the broadcast family, about half in handset and half in non handset applications. The AM/FM receiver ramped into production as expected in a variety of applications in Q4, a high end cable radio, a portable radio and an iPod entertainment system. And recently, the first handsets offering AM radio were announced, validating the demand for this functionality in cell phones. These examples illustrate the broad applicability of the AM/FM product line to a number of large markets. In addition to the success we’re having with the current portfolio, we’ve also announced several new additions, including support for weather band emergency service broadcasts and short wave and long wave frequencies, popular in Europe and Asia. The [expend] portfolio increases our available market and will allow us to grow the business in higher margin applications. This year, we’re anticipating that the growth in the non handset business will more than offset ASP declines and competitive pressures we expect in handsets, enabling the business to grow another 20-30%. Our embedded modem business was relatively flat quarter to quarter in Q4, but was a solid contributor in 2007, growing by 5%. We estimate that we have moderately increased our market share in set top boxes in 2007, offsetting ASP declines. We continue to see healthy demand among set top box makers along with growth in fax modem revenue. As a result, we remain confident that this product line will be a stable, highly profitable business in 2008. Our voice business was about flat sequentially in the fourth quarter. Improved demand was offset by ASP declines, putting some pressure on this business. However, an expanding footprint of voice enabled broadband modems indicate that the long term trends are still intact for the residential market. We also expect to see our central office revenue begin to develop in 2008. Net of these trends, our voice business is expected to return to growth in 2008, increasing modestly from 2007. Mature products, which have gradually become a very small piece of our business, representing around 10% of revenue in Q4, are expected to decline steadily this year. The growth of our investment business has far overshadowed the declines in these products and we’re expecting that will continue to be the case. So, in summary, Silicon Labs is and will continue to be a growth story. As we’ve stated before, we believe our organic portfolio can drive 15% annual revenue growth. We’re focused and we know how to win. Our products continue to outgrow their end markets, increasing share. We’re executing and our performance reflects that. We expect our operating income to remain strong throughout the year. We have a solid pipeline of new products that we plan to launch in 2008 that will further fill out our portfolio and set a strong foundation for the future. And lastly, we make our decisions based on our long term strategic goals and will continue to drive our business to optimize shareholder value. We have a number of promising areas targeted for additional R&D investments this year and will make these investments mindful of maintaining the profitability measures that we have worked hard to achieve. We realize that there is significant uncertainty in the economic environment, so we will be closely monitoring the health of end user demand as we commit these incremental R&D investments. At this point in time, we believe our customers and distributor’s inventory levels are relatively lean and remain well managed. Near term, demand trends are consistent with seasonal order patterns that are similar to what we’ve seen in the past, with a typical seasonal decline in our consumer oriented businesses, we’re expecting Q1 revenue to be in the range of $93-$97 million. We’re expecting gross margin to be near the high end of our target range of 60-62%. We anticipate operating expenses in the first quarter will be impacted by salary increases, resumption of social security related payroll taxes and new hires in R&D. As a result, R&D spending the first quarter is expected to increase and SG&A expense on the other hand is expected to be relatively flat. First quarter net income per fully diluted share on a GAAP basis is expect to be $0.17-$0.19. Non GAAP EPS, excluding a noncash charge for stock compensation is expected to be in the range of $0.34-$0.36. We’d now like to take your questions.
- Shannon Pleasant:
- Thank you Necip, we will now open the call for the question and answer session. So that we can accommodate questions from as many people as possible before the market opens, please limit your questions to one with one follow up question. Operator, please review their question and answer instructions for our call participants.
- Operator:
- Your first question comes from Craig Ellis, Citi, your line is open.
- Craig Ellis:
- Thanks and congratulations on the strength in the results. Bill can you just quantify the rate at which the gross margin upside in the fourth quarter was driven by broadcast versus mix, how did that shake out?
- Bill Bock:
- The principle drivers for the broadcast margins were better than we had originally forecast, this had a couple of components, one is that ASPs held up in the quarter, better than our relatively conservative forecast that we had entering the period. Perhaps more importantly, the initial shipments of new products, transmitters and the AM/FM radio helped to prop up the margins for the overall product line. In addition, we had some onetime cost savings that were related to the increase in volume in the period. It really led to an exceptional gross margin result in the fourth quarter.
- Craig Ellis:
- And so are you saying that the broadcast benefit and the onetime cost benefit were about equal or was one significantly greater than the other?
- Bill Bock:
- They’re similar.
- Craig Ellis:
- Okay, alright and then Necip, as we look at the business on a go forward basis it would seem that given the dramatic increase that we saw in the fourth quarter and with the shift towards consumer in the first quarter, or the shift away from consumer, I would think that would be more positive than negative for gross margin, so how do we reconcile some of the tailwinds you have going into the first quarter with the gross margin guidance?
- Necip Sayiner:
- Yes, we operated the business consistently through 2007 up until the fourth quarter in our target range of gross margin. As Bill mentioned, we’re certainly benefitting from the increased volumes in the business as well as the shift to newer products and we’re likely to enjoy the position we have with our customers with those new products. Much of the upside in the second half in particularly in the broadcast business was driven by a strong ramp of the new products that brought strong margins with it. And these obviously address the consumer market non handset markets in particular. And that is precisely the segment we think is going to be seasonally lower in 1Q over 4Q and [has] seen [tacked] on the gross margins.
- Craig Ellis:
- Okay and then a follow up would be as you think about your desire to grow R&D as you support new product programs, can you provide a little bit more color quantitatively on the pace at which you’d like to grow either staffing or dollars or both?
- Necip Sayiner:
- Sure, I think at a very high level when you start looking at things on an annual basis, our targets from this point on would be to grow R&D investment commensurate with revenue increase. So you know first [order] guidance we can provide to you is to look at our revenues for 2007 and based on what you’re projecting the revenues to be for 2008, take a similar view of R&D investment increase. And SG&A increase will be modest compared to the R&D investment increase.
- Craig Ellis:
- Got it, thanks guys.
- Operator:
- Alright, thank you, next Arnab Chanda, Deutsche Bank, your line is open.
- Arnab Chanda:
- Hi, couple of questions. First of all, Bill, your operating margin, 26% is actually higher than I think your longer term goal, is that something that we expect to be holding in 2008 or is it likely to come down because Q4 was seasonally stronger and we expect that to taper off in the first part of the year?
- Bill Bock:
- That’s a good question Arnab and I think that this quarter really represents what we have been talking about all year and that’s that we think this business has the potential to operate at model performance levels and we are going to have quarters like the one we just reported where we’re above model, and we are certainly going to have quarters where we’re below 25% and I do think that’s the case as we look into the first half of next year as we see the seasonal dip in volume associated with the consumer markets, combined with seasonal increases in spending related to our annual wage increases and the resumption of social security taxes and other related costs. So, I don’t think we’ll see this level of profitability in Q1, but we’re certainly trying to manage the business such that our ability to attain this level of profitability in the second half of year is intact.
- Arnab Chanda:
- Thanks Bill and then a question about your new products. It seems like as you’re kind of going away from your legacy businesses, you know some of the growth rates are accelerating, however we are also in kind of a more uncertain economic environment. If you look at your products today, what do you think are going to be the primary growth drivers for 2008 as you see today for you know the next 12-18 months.
- Necip Sayiner:
- Arnab, I think the product lines that will drive growth for our business in 2008 are the same product lines that provided the growth for us in the second half of ’07, namely the broadcast business, the micro controller business and timing business. All of which took a very sizable step up in Q4 sequentially over Q3 and we expect that relative strength to continue into 2008.
- Arnab Chanda:
- Thank you and then last question maybe for Bill about the buyback program. You [exhausted] the buyback [unintelligible] somewhat, there’s still obviously quite a bit left, what criteria are you using to sort of us it, is it driven by stock price movement or is there a certain amount you want to spend every quarter, if you could talk a little bit about that? Thank you.
- Bill Bock:
- Arnab you could observe in the fourth quarter that we stepped up the program significantly and this reflects the softness that occurred in the market in what we thought was an excellent buying opportunity. I think as you look into the first half of the year, we will manage our program in a similar fashion and be more aggressive buyers at what we think are attractive prices and perhaps less aggressive on spikes. But the commitment to execute the program I think has been demonstrated now over the last two quarters and we expect to continue to be in the market and executing against the $400 million authorization as we go through the year.
- Arnab Chanda:
- Thanks Bill, thanks Necip.
- Operator:
- Thank you, next, Srini Pajjuri, Merrill Lynch, your line is open.
- Srini Pajjuri:
- Thank you, good morning guys. Bill I guess on the gross margin, you know going back to 60-62% in one quarter seems a bit aggressive to me, I’m just wondering are you seeing any more price pressure in recent weeks in some of your product lines or are you just being conservative here?
- Bill Bock:
- Well I think that it’s both. You know we have been dealing with anticipated price pressure from competition, typically other companies offering combo chips into the handset market, those competitors continue to address the marketplace and we expect that that pace will only increase in 2008. I also think that it is prudent to be conservative going into the new year given all of the talk about the economic environment and the fact that this spike in gross margin is a onetime event that we’ve seen only in the most current quarter. So we’re looking into next year and trying to take a prudent course and I think that the guidance that Necip indicated is to feel comfortable forecasting the high end of our target range, but I think for now that is the most appropriate place to be.
- Srini Pajjuri:
- Okay and then on the inventory front you said the [unintelligible] inventory went up slightly, I’m just wondering going into a seasonally weak period, why the [unintelligible] taking the inventories up?
- Necip Sayiner:
- Well the inventories, some are of ’07 for us, were very low from historical measures but also to our comfort levels so in 3Q you know we wanted to increase the inventory levels and it went up and increase in spite of the strength in the fourth quarter, went up only slightly in the [unintelligible] channel. As I mentioned in my prepared remarks, Srini, what we see at this point in time with our customers and distributor’s inventory levels is that those are well managed and on a relative basis lean certainly we don’t see the same situation that we’ve seen you know 12-15 months ago when the industry went through an inventory correction.
- Srini Pajjuri:
- Okay and Necip you said you still expect the FM business to grow north of 25% but you also said that maybe you were seeing ASP pressures, can you lay out in terms of where the growth will come from, both in the handsets with the penetration share gain or any new applications also in the non handset markets you talked about portable navigation devices and MP3 players and if you can expand on that and maybe give us a little bit more idea where you’re seeing growth coming from in 2008, thank you.
- Necip Sayiner:
- Okay, so in the near term, just in the first quarter, if you look at the broadcast business, we expect the revenues that we drive from handsets to remain about flat to fourth quarter levels. But we are going to see a decline in the consumer segment, particularly in personal navigation devices and MP3 accessories. Particularly the P&Ds were very strong as I’m sure you’re aware from other reports for the industry in Q4 and we’ve benefitted from that having gained a sizable market share through design wins earlier in the year. And going into 2008 I feel that we are well positioned with our customers both on the handset side as well as the non handset applications. I think that we are looking at a healthy pipeline of design wins from both sides. We expect that we’re going to continue to maintain our share. The AM/FM is just starting to contribute to revenues so that will become a larger contributor as 2008 unfolds. We’re getting more and more design wins with our products for a variety of applications, and it’s also encouraging to see that we’re seeing signs of interest and use of our AM/FM technology of the AM/FM functionality in handsets going forward. So these are going to be the growth drivers for the business in ’08.
- Srini Pajjuri:
- Thanks Necip.
- Operator:
- Alright, thank you, next Adam Benjamin, Jefferies, your lines is open.
- Adam Benjamin:
- Yeah, thanks, just to further drill down on the broadcast segment, you talked about 100 design wins on the handset side. Can you give us some better view into the customer base there, if there are a couple customers representing a significant portion of the handset piece of the broadcast segment and then you previously talked about the percentage breakouts of broadcast versus portable audio side, can you talk about, you were 50/50 exiting the year, can you talk about where you think that could be as you exit ’08?
- Necip Sayiner:
- Okay Adam, just a clarification first, I mentioned 115 design wins for the product line, that is about halfway split between handsets and non handsets. And really that represents an increase in the number of design wins over the prior couple quarters. So we continue to be positioned very well with handset OEMs. And our customer base has been and continues to be pretty broad. I think you know in 2008 we’ll be able to say that all the top handset OEMs are our customers for our broadcast products. On the non handset side, obviously we are gaining design wins with a set of new customers that we haven’t served before, particularly with AM/FM solutions. That will continue at a high level, drive the portion of revenues that we get from non handset up. You know I don’t have a number to give you as an exit rate for 2008 but I would imagine that it will be at the 50% fractional higher for the non handset.
- Adam Benjamin:
- Okay, well maybe asked a different way, I mean if you look at where your handset percentage of broadcast exits the year and you’re saying it’s going to be roughly flat in Q1, you know on a year over year basis, that’s up a decent chunk, almost 50%, are you based on the 20-30% growth for the total broadcast business for the year, are you looking at that number to be kind of flat as you go throughout the rest of the year?
- Necip Sayiner:
- Well, you know part of the guidance that we are providing you here is for the broadcast business where the design win cycles are short. You know half the discounts of uncertainty about the second half of the year. You know we’ve talked about you know the economic environment earlier. There are some uncertainties in the environment. In the near term we’re not seeing that in our order book but are mindful of that, especially in North America. So there is some lack of visibility for that business for the second half, therefore we’re providing, what I would call a conservative guidance in terms of the growth rate for the broadcast business. But just qualitatively, we are positioned with our customers, both existing and new as well as we’ve ever been.
- Adam Benjamin:
- Okay so just to be clear, the conservatism is based on the economic backdrop and not on the competitive dynamics?
- Necip Sayiner:
- The competitive dynamics will only enter I think at this point from an ASP point of view as Bill articulated earlier. We continue to see significant ASP pressures, particularly for the FM tuner business in handset. I think we’ve dealt with that relatively well in 2007 but those pressures I believe are going to continue to be with us in ’08.
- Adam Benjamin:
- Okay, great, thanks a lot.
- Operator:
- Thank you, next Romit Shah, Lehman Brothers, your line is open.
- Romit Shah:
- Yeah, thanks for taking my question. Just back on the handset business, could you just describe the order activity at your Korean accounts versus some of the other top five OEMs?
- Necip Sayiner:
- I can tell you that the attach rates particularly for the received FM tuner function and especially in low cost platforms has seen a measurable increase in the second half of ’07. And the attach rate particularly is going up with the OEMs in Korea and we have had good market share and good design momentum at these accounts so we certainly benefitted from that trend in the second half. And that trend still is intact and I think we’re positioned well with those customers going forward.
- Romit Shah:
- And Necip you mentioned earlier that you expect to be shipping to all five OEMs this year, could you give us a little bit of a better timeline as to when you think that’ll take place?
- Necip Sayiner:
- I’m not really at liberty to provide more details at this point because that ramp will be driven by the customer’s announcements of those models and platforms. So, stay tuned.
- Romit Shah:
- Okay, fair enough, just lastly Bill on the cash balance, you know [atheros] took an impairment charge on some longer term marketable securities that were impacted by the credit mess. Have you guys reassessed the fair value and liquidity of your cash and marketable securities?
- Bill Bock:
- We have and I’m pleased to say I don’t think we have any exposure to mortgage backed securities that would cause us any difficulty.
- Romit Shah:
- Great, thanks a lot.
- Operator:
- Thank you, next Auguste Richard, Piper Jaffray, your line is open.
- Auguste Richard:
- Yes, thanks for taking my question. Could you talk a little bit about again the broadcast division and potentially new products for the TV market and when those might come out?
- Necip Sayiner:
- Well we haven’t made any announcements in that regard. Clearly we had made an acquisition in ’06 that brought us the demodulation expertise. So, I can tell you that we have the fruits of that investment in the building but we have not yet made any announcements, so again I have to say stay tuned.
- Auguste Richard:
- Okay, thank you.
- Operator:
- Thank you, next Sandy Harrison, Signal Hill, your line is open.
- Sandy Harrison:
- Thanks, appreciate you taking my call. Just a couple questions relating to the timing opportunity. What are some of the applications, you provided some color on some of the other product segments, what are some of the applications where you’re having the strongest success with your timing products? And then from that the clocks versus the oscillators, is there a similar dichotomy in some of the markets with those products?
- Necip Sayiner:
- Sure Sandy, previous portfolio products in the timing business primarily address the networking segment. So some of the robust demand that we’ve enjoyed in the second half of this year came from those set of products, from networking customers. Also, one of the newer products that we announced in the year anyrate clock, the demand for that product is really exceeding our expectations even though it’s really in the very early stages of its life cycle. On the oscillator front, the customer base is diversifying very fast. You know this is data point for you, in Q4, we had 145 unique customers with our timing products and that represented a 20% increase just over the prior quarter. So you know significant momentum, again a lot of networking customers but especially as we start bringing to market products that address a bigger portion of the TAM, a broader set of customers outside of networking as well.
- Sandy Harrison:
- And just a question on that, is this more Silicon timing devices replacing traditional [cans] and others or is this a combination of that as well as you guys getting market share?
- Necip Sayiner:
- I think we are going to be driving the replacement of quartz based oscillators with silicon based oscillators. Our products provide the same level of performance in CMOS as quartz based solutions do. So I think we’re going to drive this trend and we’re seeing pretty strong adoption from our customers at this point.
- Sandy Harrison:
- Okay and then a quick question on the MCU biz. Obviously without sort of pre-releasing what you’re working on, what are some of your thoughts that you are looking towards to market that you want to expand that product in, in other words, what could we be looking forward to see some announcements from new devices in there?
- Necip Sayiner:
- Yeah, I don’t want to take the thunder away from that product line but I can tell you that since we are now at addressing [bay] about 20-25% of that market and we’ve publically stated that goal of hitting 50% of the market by the end of ’09, this will generally come from large volume, large revenue, large TAM product lines. So, especially the couple products that we will be launching later in 2008 is going to significantly open this up. We are also building on the existing portfolio Sandy, you know I mentioned that we’re having a lot of success with small footprint products and we’re just bringing more and more flavors of those products into the market. Getting into different setup applications, just customizing the MCU for additional opportunities.
- Sandy Harrison:
- Gotcha and then Bill a couple of quick housekeeping on [M’s], as far as expenses this quarter, you talked about less mass costs and others. As you introduce some of these new products Necip that you were talking about, are the mass costs going to increase a little bit or is that already figured into your outlook as far as same spending on R&D as sort of growth in revenue?
- Bill Bock:
- It’s factored into those comments. We do anticipate that with increased headcount and increased momentum in all of the business units, we will continue to see new tape outs and mass costs occurring as we go through 2008. But they are definitely built into the guidance that Necip provided earlier.
- Sandy Harrison:
- So the real leverage you would say to your model going forward in ’08 after we go through the seasonal [prodebations] would be with R&D spending increasing at the same rate of your revenue growth, SG&A spending increases would be what, half of revenue growth which is where your leverage would come from?
- Bill Bock:
- We’re certainly going to stay very tight on SG&A Sandy, I think that our goal there is to continue to drive that category of our income statement to lower percentages of revenue over time. So you’ll see us maintaining very tight control in terms of headcount additions in SG&A and we’ll get leverage from that line item in this coming year end next.
- Sandy Harrison:
- Great, thanks for answering my questions guys.
- Operator:
- Thank you, next Cody Acree, Stifel Nicolaus, your line is open.
- Cody Acree:
- Thank you, maybe back on the broadcast segment, talked about the competitive pricing pressures, specifically competition and pricing pressure coming in, more so in the handset rather than the non handset side, what is it right now that gives you confidence that as we push through ’08 we don’t see more of the similar competition pricing pressure into the non handset market as well?
- Necip Sayiner:
- You know, different business models. When we’re talking about handsets, we’re talking about a handful of customers, maybe tens of customers that are buying in very large quantities. With the non handset, particularly when you start talking about the portable radio, table top radio kind of applications with AM/FM, now you’re talking about 100’s or 1,000’s of different customers that are buying at much lower quantities. So the business model changes, the sales channel obviously has adopted to that change. But it’s a more favorable pricing scenario than you’d see with very high volume handsets.
- Cody Acree:
- Necip, today as you’re non handset revenue, especially with personal navigation and MP3, is that a little more concentrated today than you’d expect it to be over time?
- Necip Sayiner:
- Yes, definitely because I think with the introduction of AM and FM, we have opened a whole set of new customers for the company that we have engaged over the last six, nine months and as the design wins that we are getting with this set of customers comes to fruition, the revenue base will certainly be diversified further on that side.
- Cody Acree:
- And that should ramp throughout ’08?
- Necip Sayiner:
- Yes.
- Cody Acree:
- Okay, great and then lastly, you’ve given us some general breakdowns of revenue in the past with the growth of broadcast and micro controllers and timing, how does the revenue mix look today, could you maybe just give us a level set on how this breaks out?
- Necip Sayiner:
- I’m not prepared to give quarterly updates on the revenue breakup. I think we have provided a starting point earlier in the year and have given sequential changes from that. You know obviously broadcast and MCU, because of the growth that they’ve experienced, have become a larger portion of the revenue base. So, the one thing I can tell you is between those growth businesses, it’s probably now north of 50% and these are high growth businesses, MCU, broadcast and timing. Anywhere from 20-40% rate and the rest is comprised of embedded modems which have shown some growth in 2007 and the voice business that we expect to grow modestly in ’08.
- Cody Acree:
- Thank you.
- Operator:
- Thank you, next Tore Svanberg – Thomas Weisel Partners, your line is open.
- Tore Svanberg:
- Yes, good morning and great quarter. A couple questions, maybe a follow up on what Sandy asked about micro controller business, as you get to that goal of 50% of your TAM, do you really need to work on a completely new architecture or would this just be some tweaks to the functional density aspect you have to your solution?
- Necip Sayiner:
- I think with the MCU, if I understand your question correctly, we feel that we have a lot more runway with the 8-bit MCU before we take a big step and address 32-bit applications. Our next natural step at some point in time would be to address that space also. But given where we are with the 8-bit and opportunity that we see ahead of us, at this point in time we continue to put the incremental investments in just further developing this 8-bit portfolio.
- Tore Svanberg:
- Great and you mentioned the broadcast business could grow 20-30% in ’08, how much of that would come from new products and new programs versus the current run rate of existing programs?
- Necip Sayiner:
- I think qualitatively I can say a very large majority of that growth is going to come from new products. You know the products that we ramped in the second half of the year, transmitter, AM/FM and various flavors of the original FM receiver you know have to support additional functions, will drive much of the growth in ’08.
- Tore Svanberg:
- And finally, do you have any updates on your power over Ethernet business?
- Necip Sayiner:
- We don’t talk about it a great deal because it’s still in its infancy. But you know the design momentum with these devices look pretty promising at this point, both on the powered device side as well as the PSE side. It will provide some modest contribution to revenue in 2008 I expect, but it’s still pretty small that we don’t separate it out at this point.
- Tore Svanberg:
- Great, thank you and great results.
- Operator:
- Alright, thank you, our last question comes from Suji De Silva from Kaufman Brothers, your line is open.
- Suji De Silva:
- Yes, good morning Necip, Bill, congratulations on the quarter. In terms of Bill talked about R&D growing in line with revenue, should we think of ’07 as a typical year for your product pipeline development or is it a little more aggressive in terms of trying to get products out?
- Bill Bock:
- So I’m not sure I understood that question.
- Suji De Silva:
- Well I guess would R&D grow in line with revenues in typical years or is this year one that has more products you’re trying to get out in the pipeline? Relative to others.
- Bill Bock:
- Yeah I think this year would perhaps be more aggressive than in the past year but our intention is to continue to invest in these business units and product lines, so you’ll see a steady drum beat of new product introductions from Silicon Labs in 2008 and the years following.
- Suji De Silva:
- Okay, that helps and then can you remind us of what a typical June looks like to you guys from a seasonality perspective and whether we’re somewhat set up for that given the visibility in the second half is weaker still?
- Bill Bock:
- I think what we’ll do is reserve comments about 2Q to this time. The next earnings call, you know we clearly have significant seasonal effect in the first quarter but we won’t have great visibility into 2Q until we’re a little bit further into the year.
- Suji De Silva:
- Okay and Bill, you talked about a gross margin onetime impact, from volume I believe, can you help quantify what that was this quarter?
- Bill Bock:
- Modest but it certainly contributed to the high level of gross margin in fourth quarter as you might expect, you’ve got a certain level of fixed costs in any manufacturing activity and when you get an upside in revenue you benefit from that and we certainly saw that effect in the fourth quarter. With guidance to slightly lower revenue in Q1, that will be muted.
- Suji De Silva:
- Was it sort of less than 100 basis points? 50 basis points? Kind of that magnitude? Is that…
- Bill Bock:
- Yeah, I don’t think I’ll comment to that degree of specificity.
- Suji De Silva:
- Last question guys, handset share, you guys are in position here, what do you think your share can go to in the ’08 timeframe? For FM tuners specifically, sorry.
- Necip Sayiner:
- Well I think our experience with the handset internal indicates that it’s pretty tough to go beyond the 25% kind of market from what we’ve seen from various elements. So I think it’s a first degree, I can tell you that we’re going to maintain that share, this 25% is our own estimate of course of the share that we have. But compared to several quarters ago, that has not been any negative change in our position you know with the customers and obviously the increase in the tax rate of this functionality is helping us with the volumes.
- Suji De Silva:
- Okay, thanks, good luck in the quarter guys.
- Shannon Pleasant:
- Alright, thank you for joining us today, this now concludes our conference call.
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