Silicon Laboratories Inc.
Q1 2009 Earnings Call Transcript
Published:
- Operator:
- Welcome and thank you for standing by and for joining the Silicon Laboratories First Quarter Conference Call. At this time all participants are in a listen-only mode. Today's conference is being recorded. (Operator instructions) I will now turn the meeting over to your first speaker, Ms. Shannon Pleasant. Thank you, ma'am. You may begin.
- Shannon Pleasant:
- Thank you. Good morning. This is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the Company's financial results. The financial press release, reconciliation of GAAP and non-GAAP financial measures and other financial measurements, tables are now available on the investor page of our Web site at www.silabs.com. This call is being simulcast and will be archived on our Web site. There will also be a telephone replay available approximately one hour after the completion of the call at 866-415-2341. I am 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 conference call. This information will likely change over time. By discussing our current perception of our market and the future performance of Silicon Laboratories and our products 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 and 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 10-Q we anticipate will be filed this week 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 Laboratories GAAP financial results. We are providing this information because it may enable investors for meaningful comparisons of operating results and will clearly highlight the results core ongoing operation. I would now like to turn the call over to Silicon Laboratories, Chief Financial Officer, Bill Bock.
- Bill Bock:
- I am very pleased to report stronger than anticipated performance for the quarter. With revenue of 83.7 million, we posted only a 16% sequential decline versus our original expectation of down 20% to 25%. This was due to steadily improving order patterns throughout the quarter. In our previous earnings call, we predicted that Q1 would be a revenue trough for Silicon Labs. Our confidence in that guidance has increased considerably as we now expect a solid sequential revenue improvement in the second quarter. Let me first cover the Q1 GAAP results. These results include approximately $10 million in non-cash stock compensation charges and $800,000 of severance and other related costs. We are very pleased to have remained profitable on a GAAP basis in the period. First quarter GAAP gross margin was flat to the fourth quarter at 60.5% of revenue. R&D investment for the period declined to 26.1 million. SG&A also declined to 23.4 million. Other income principally interest income on invested cash was under $1 million. GAAP diluted earnings per share therefore was $0.01 significantly better than anticipated. Cash flow from operations was nearly $12 million. Turning to our non-GAAP results, as expected, we were able to sustain gross margin within our target range, even with the sequentially lower volumes. On revenue of 83.7 million, non-GAAP gross margin was a solid 61%. We expect to maintain gross margin performance within our 60% to 62% range in the second quarter. Operating expenses were down meaningfully to 38.9 million, a 6% sequential decline. The cost containment actions we initiated last year all contributed, including the closure of a design center, the suspension of salary increases, and the elimination of discretionary spending. We will maintain this cost structure going forward managing to relatively flat headcount and with aggressive controls. However, second quarter operating expenses will increase due to variable compensation elements that will rise with the higher revenue we are forecasting as well as a high number of anticipated new product tape outs in the quarter. Operating income for the first quarter was nearly 15% at $12.1 million; an outstanding result for what we believe will prove to be our trough quarter. Other income in the period was under $1 million and is expected to remain relatively flat going forward. The non-GAAP income tax rate was 22% and we expect the tax rate to remain approximately 20% through the balance of 2009. Net income therefore was $10 million or 12% of revenue for the quarter. Resulting Q1 diluted earnings per share was $0.22, well above our earlier expectations. Moving on to the balance sheet, accounts receivable increased to more normal levels as demand improved throughout the quarter. Receivables ended at 44.6 million or 48 days outstanding. Our customers and distributors have been paying promptly and we have not had any bad debt or collection issues to-date. We think receivables are in very good shape. Our operations team did another exceptional job in managing the supply chain during the quarter. Our inventory levels contracted meaningfully for the second quarter in a row. Inventory decreased by $5 million to $23.5 million or 5.5 turns. Channel inventory was down slightly in absolute dollars. Thus, we enter the second quarter without excess inventory in the system and are supply constrained in some cases. Inventory will grow in the second quarter as we react to the increasing demand, but will remain tightly managed. We ended the quarter with cash and equivalents actually up sequentially from yearend at 326 million. As we entered the period, we had $75 million available for share repurchase under our current authorization. We purchased about 220,000 shares or approximately $5 million during first quarter. We intend to remain selective purchasers of shares as we anticipate continued strong positive cash flow. We have obviously slowed our rate of activity until we see a more predictable macroeconomic environment. When we talked last, we were very cautious about that macro environment and we continue to have limited visibility into the second half of the year. However, we are gaining increasing confidence in the strong product cycles and market share gains we anticipated as we entered 2009. I will now turn call over to Necip to discuss his positive business trends in more detail. Necip?
- Necip Sayiner:
- Good morning, everyone. With the first quarter behind us, we are feeling good about our business even in light of what we recognize is a very weak global economy. As Bill mentioned, we see Q1 as the cyclical bottom. We believe that the 26% peak-to-trough decline we experienced compares favorably to almost all of our peers. This combined with our ability throughout the period to hold margins sustain our profitability, and generate cash puts us in a select group of companies well equipped to outperform this year. The quarter was better than expected as the inventory contraction that began in Q4 came to an end and order patterns steadily improved. We also benefited from increasing penetration at large customers who are gaining share in their respective markets. Two examples include Samsung which represented greater than 10% of our revenue during the quarter and Huawei which entered our top five lists during the quarter. We have a strong relationship with Samsung and we are supplying product for a growing number of their product lines including handset, portable audio, home stereo, boxes, set up box and most recently television. Our video demodulator ramp aggressively had pass on in Q1 for their European TV models. We also benefited from Samsung's increase market share intense. At Huawei, we have established grow reduction across their communications platforms with our ProSLIC's timing product, FM receivers, and MCUs and we expect to add isolators to the list in Q2. These market share gains across a variety of products and customers in good health have been a strong contributor to our better than industry performance. In Q1 our broad-based products grew to almost 30% of revenue. RF and Access represented about a third of the business respectively and mature products about 5%. Starting with RF, which includes our broadcast audio, video and short range wireless product the business was down less than 15% sequentially in Q1. As expected, demand in the audio business declined as our customers pulled back to adjust to weakening consumer demand. We were able to slightly grow our AM/FM revenue and we see good growth potential as our backlog of design wins go into production. We added well over 100 new design wins during the quarter with a noticeable pick up in consumer audio wins. Handsets represented the dominant share of the audio revenue. Our competitive position remains strong and we believe our share in the quarter increased slightly and is approaching 30%. In addition to having the smallest and most proven CMOS based FM radio in the industry; we also continue to have marketable advantages in both performance and flexibility. For example, we provide excellent FM sensitivity in a weak signal environment and can consistently block out strong signals while we receiving weak ones. This translates to a better user experience, clearer sound, more stations and non-static. We can customize the receivers to see an audio out behavior to match the customers’ specific preferences and feature also on match by the competition. And using a standalone radio versus a combo solution allows our customers to tailor the bill of materials and features to their respective end markets, optimizing for value and margin while maintaining a single mode design. This differentiation and a substantial backlog of design wins give us confidence in the potential of the audio products. As you know though, we also have two other high potential RF businesses video and short-range wireless. An aggressive ramp with our video demodulators in the flat panel TVs partially offset audio revenue declines and we expect the ramp to continue into the second quarter. Our lead customer, Samsung, introduced their new TV model that are only about an inch thick, a great example of the disruptive change going on in televisions in terms of form factor and power consumption. We are now competing for 2010 models with our demodulator and our new TV tuner. Early competitive comparisons with our TV tuner indicate that in addition to the excellent performance, we also have a significant footprint and component count advantage versus existing solutions. While there was a notable sequential change in revenue for our short-range wireless products in the quarter design win activity is accelerating across a variety of end applications. We launched the next generation wireless transceivers, the easy radio profamily and have been very pleased with the number of new opportunities that just since the launch. With more than half in Home Automation, Security and Smart Energy initiative. Smart Energy is one of the most interesting opportunities for semiconductors as analog meters are replaced infrastructures upgraded and usage displays are added to the home. This enables remote monitoring and management and increased customer awareness of energy use. In Q2, we expect growth across the board in our RF business as order patterns begin to more closely reflect end user demand and short-range wireless and video revenue ramps. Our Access business which includes our voice and embedded modem product was down sequentially by more than 20% as expected. Our voice products did relatively better than initially forecasted while seasonal weakness, set up box inventory and soft demand were behind the embedded modem decline. In the quarter we added two new major platform wins in Europe. One was a set up box provider serving BSkyB and another was the large point of sale customer. Both representing net share gains for our embedded modem business. Similarly, on the voice side, our latest generation prospect is enjoying their strong design activity in DSL gateway, IAD platforms and fixed wireless terminals. With the worst of the customers inventory issues behind us and continued share gains we are expecting the Access business to grow in the second quarter, reinforcing our expectation that the long-term trends point to a sustainable and steady business. Our growth-based business which includes our MCU, timing and power products was about flat sequentially and grew almost 15% year-over-year. The MCU business faired better than expected, declining by less than 10% while both timing and power products grew sequentially. The SCU business has been our closest proxy for the broader end market and we view the better than expected results for the quarter as a good indicator that the demand environment is stabilizing. We had a stronger than typical quarter for developmental tool shipments primarily due to promotion around trade shows in Europe and China and new product launches. During Q1, we launched the first in a family of products with capacity of excess capability. The solutions are based on a proprietary technology that enables us to implement high performance touch sense with excellent accuracy. The new F700 MCU has already seen strong interest from numerous customers building front panels for consumer appliances and industrial applications. Timing product revenue growth is being driven by new product traction; ramps of existing design win and the 3G build out in China, where we have a number of design wins in line cards destined for the backbone network being built. In terms of market share gains, we saw a 15% increase in new timing customers in the quarter. Our new low end clock family delivered first revenue in Q1 to 20 unique customers. This new product family is broadening our content within communications and diversifying our timing businesses expected into areas like storage, video and servers. If our business is steadily ramping as we penetrate customers with new products and see existing design wins going to production. The big story for the product line near-term is the gains we're making with digital isolation and the ramp of our POE solution at a major customer. Progress here continues to be good and we feel this product line is on track to our expectations. Our confidence remains high that the broad-based business will be a highlight this year posting good growth year-over-year. Over the last six months, we made a very conscious effort to avoid compromising hard earned market share momentum and the continuity of our development programs. I feel strongly, we made the right decision to preserve all of our key projects. Tone within the Company is positive, programs are moving forward and our team is executing well. Looking to the second quarter, visibility has improved considerably, and bookings and shipping linearity are consistent with healthy historical norms. You observed some inventory replenishment occurring at contract manufacturers, but generally believe we're tracking to end user consumption. While some inventory replenishment is required across the industry given the significant contraction late last year and early this year, we believe our anticipated growth throughout 2009 is really a result of new product cycles and market share gains. In Q2, we are expecting all three of our major businesses to grow sequentially and therefore, we are anticipating revenue will increase sequentially by 10% to 16% to $92 million to $97 million. We are currently expecting to maintain our gross margin within our target range of 60% to 62%. We anticipate our operating expenses will be up 6% to 8% sequentially. On a GAAP basis, we are projecting $0.07 to $0.11 and on a non-GAAP basis, excluding stock compensation expense, we expect earnings of $0.28 to $0.32. We'd now like to take your questions. Shannon. Shannon Thank you, Necip. We will now open the call for 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. Operator, please review the question-and-answer instructions for our call participants.
- Operator:
- (Operator instructions) We have a question from Craig Berger with FBR. Your line is open.
- Craig Berger:
- Hey, guys, phenomenal job. Wow! I guess as we look to the second quarter obviously you guys are ramping a lot. Is that – obviously you've got a lot of product cycle drivers, but apart from that I mean are we still in an industry burn in inventory burn situation as you look out there? Are you shipping in line with what you think end consumption trends are as of the second quarter guidance or is there more catch up to be had going forward?
- Bill Bock:
- From what we see our customers the inventory burn has come to an end. And by and large we believe we are now tracking to end user consumption. There are a couple of exceptions to that, one of them being the PND market. That still has some inventory and we don't expect that segment to recover fully until Q3, but in general I would say the inventory contraction is largely behind us.
- Craig Berger:
- And just as a follow-up on the audio business, can you help us understand how big handset is versus how big some of the other components are, maybe what the contribution is from your new AM/FM tuner, how you see that playing out. I guess I am trying to understand the sustainability of that given the various moving pieces in that business. Thank you.
- Bill Bock:
- So the handsets represented roughly two-thirds of the audio revenue in the quarter. As I indicated we believe we have gained some market share in the quarter. Our products higher value products continue to see good adoption cross the customer base. We benefited from Samsung's success in the quarter as they shipped more low-end phones to regions like India, South America and China. We're seeing recovery in handsets in latter part of the quarter, particularly in March. I think all of the advantages that I've given you the examples of during the prepared remarks, continue to support us hanging on to our share. And in some instances as we have done in Q1, expand our share. The really positive new side we've seen in the quarter in terms of design win have come from the consumer audio segment. While we have grown our AM/FM revenue modestly in the quarter we are seeing a significant increase in design wins for our AM/FM products particularly in the Chinese consumer audio market, our product has simply become the solution of choice.
- Craig Berger:
- Thank you.
- Operator:
- The next question is from Romit Shah from Barclays. Your line is open.
- Romit Shah:
- Thanks for taking my question. Bill, did you guys see any impact from – in just in terms of wafer pricing, any impact on your margins from better wafer pricing?
- Bill Bock:
- Romit, not particularly. I think that we have seen relatively stable pricing dynamics, both in terms of ASPs with our customers, and in terms of the costs that we are obtaining from our vendors. So the gross margin was not impacted by anything unusual in that regard.
- Romit Shah:
- Okay. And then just back to broadcast either historically you have said that handsets would account for a smaller percentage of that business, can you just talk about what – why combo solutions haven't had a bigger impact on that piece of your business to-date? And is it still your expectation that over time handsets will comprise a smaller piece of the total broadcast business?
- Necip Sayiner:
- Clearly, the handset business flow is holding up very well. We continue to gain share with our customers and tax rate for FM continues to inch up. I think the story in terms of the fraction of revenues we drive from handsets versus non-handset applications at this juncture is simply due to the really weak consumer demand for portable media players, navigation devices and so on. So it's not an indication of any lack of momentum in the consumer audio business quite to the contrary. It's just the depiction of the current demand environment and increasing same for FM solution in handsets.
- Romit Shah:
- Got you. And then just last question from me. Are you comfortable at this point giving a forecast for each of the major product categories in 2009?
- Necip Sayiner:
- I think we're going to defer that to the media call, Romit. As Bill indicated earlier, the visibility for the second half is still limited and we are not at the point provide full year targets for product line.
- Romit Shah:
- Sure. Understand. Thank you.
- Operator:
- The next question is from Terence Whalen with Citigroup. Your line is open.
- Terence Whalen:
- Great. Thanks for taking my question. This question is with regard to the strength that you expect for the second quarter, I think at the midpoint you are guiding roughly up 13% sequentially. Is that sequential growth evenly divided between OEMs and distribution or would you expect one type of customer to grow more than the other in that guidance? Thanks.
- Necip Sayiner:
- Just as a reminder, we recognize revenue as the product sales through the distribution channel. So the large customers that we serve direct have seen a relative strength in the first quarter. I expect some of that strength from the large customers to continue into the second quarter. However, the – I think given how low the revenue was from our distribution channel in 1Q, I would expect that percentage to go slightly up in the second quarter on a relative basis.
- Terence Whalen:
- Great. And then as a very quick follow-up it sounds like you've kept headcount flat and expect to keep it flat in the out quarter. If this growth kind of continues to maintain momentum, at what point do you really have to start adding to either your design groups or your sales force? Thank you. That's it.
- Necip Sayiner:
- I think we are going to make incremental investments to the business when we gain some confidence that the growth trajectory is sustainable. So I think we are going to continue to get data points as we go through this year. And if we start seeing that type of growth continuing to the second quarter then we will be in a position to add some headcount.
- Operator:
- The next question is from Randy Abrams with Credit Suisse. Your line is open.
- Randy Abrams:
- Yes. Hi, good morning. Want to ask a bit more on the gross margins, with the revenue coming back, is there any potential to absorb some of the fixed cost just a little bit and get gross margins back to the high end? And you talked a bit about supply constraints, just wanted to understand where that's coming from and what products and just how meaningful the supply constraints are?
- Bill Bock:
- So Randy, there certainly our benefits with increasing volume to our gross margin profile. We do however have a number of new product ramps with start up costs underway that we suspect will not allow us to exceed our target range as we did a couple of quarters last year. So our guidance for 2Q is that we will be in the 60% to 62% range and we feel pretty comfortable with that. I think that opportunity going forward is going to be a function of, how does second half revenue play out. And as Necip commented, we are still lacking visibility into the second half. And we do expect the second half will be stronger than the first half of the year, but we really just don't see yet how that will play out quarter by quarter.
- Randy Abrams:
- I guess the supply constraints. Then my follow-up was on the OpEx looking to second quarter maybe the split between R&D and SG&A with the higher tape outs and is that higher tape out level an expectation that continues or could R&D actually take a little bit of a step down once you get through the tape outs?
- Bill Bock:
- So let me hit the supply constraint question. I think that this is a function of the increased demand we saw during the quarter and is not unusual. We simply had planned for a lower level of demand and as it picked up inevidently [ph] we ran into some constraints on unique product lines and we expect to work through all of those during the course of 2Q. On the operating expenses going into the second quarter, yes, I think you should expect to see the R&D line will increase more than the SG&A line because that is where all of the tape out activity occurs. This is typically a lumpy expense for us. And so while we should see more of that cost in 2Q it's not necessarily the case if that would continue on a run rate basis.
- Randy Abrams:
- Thank you.
- Operator:
- Next question is from Suji De Silva with Kaufman Brothers. Your line is open.
- Suji De Silva:
- Good morning, guys. Nice job on the quarter. You talked about a little bit about the micro control business and visibility broadly. I think you talked about China consumer being strong but can you talk about end market wise what you saw from the recovery there?
- Necip Sayiner:
- I think geographically, Asia is the best among our regions while we do see continued caution among our greater China customers. We also are making a lot of progress with large customers in China and rest of Asia. I think Europe is also doing well, and in the second quarter, we are going to see broad participation geographically to the sequential revenue increase. In terms of segments we do expect to see increased revenue in Access business from set top box customers and customer premises – equipment segment. We expect to see improvement in handsets. We are going to see a notable increase in our video revenues as well as the consumer audio segment and I expect the revenue increase in our broad based business is power, timing and MCU to be broad across existing large customers and driven to some extent with newer design wins.
- Suji De Silva:
- Okay. And then on the growth areas, I know you talked about second half visibility being little weak, still challenging, but across video, say, power and timing maybe very good growth areas which one do you think has the best potential to contribute to the second half? Thanks.
- Necip Sayiner:
- Well, I mean first provide the following perspective to you. When we look at some of these growth engines, take video, take short-range wireless, take power, take timing, all of these product lines are now running at the higher run rate than they did just six months ago. So the revenues from each of these product lines in the first half of '09 is going to exceed that of second half of '08. So, you can see even in a depressed economic environment we are able to grow these product lines. So we are highly confident that second half for those products are going to be better than first half, notably. All of these are really being driven by new product cycles and new design wins. I can't point to any one of those product lines as the driver. I think our message is that the growth that we are going to see throughout 2009 is going to be supported by multiple product lines.
- Suji De Silva:
- Okay. Thank you.
- Operator:
- Next question is from Brendan Furlong with Miller Tabak. Your line is open.
- Brendan Furlong:
- Good morning. Thank you very much. The last questioner got most of my questions, but couple of quick ones. GAAP taxes for the rest of the year I don't know if you addressed that if you could quickly tell me what you think there.
- Necip Sayiner:
- So we would expect that the GAAP tax rate through the remainder of the year will be in the mid-30s. On a pro forma basis we expect around 20%.
- Brendan Furlong:
- Perfect. Thank you. And then I guess the only follow-up to the previous questioner was on the consumer audio business which you reference in your model out design wins, when you are you expecting the, I guess a more significant revenue contribution from that sub segment of the RF business? Thanks.
- Bill Bock:
- I think the portion of revenues we drive from consumer audio is going to increase steadily throughout the year. I alluded to a small increase in our AM/FM revenue in the quarter, for example. These are design wins that we won back months ago and that has been a significant increase in the design win in terms of numbers and revenue contributions in the last nine months to twelve months and the driver for that has been particularly performance in that space. Couple of large notable customers, for example, have decided to split their business a while back between us and other suppliers and now have come back to using us 100% primarily driven by the higher level of performance that we are providing to their products.
- Brendan Furlong:
- Great. Thank you very much.
- Operator:
- Next question is from Sandy Harrison with Signal Hill. Your line is open.
- Sandy Harrison:
- Thanks. Good morning, everyone. So the question I had, Necip is you were talking quite a bit about market share gains and it sounds like relatively all of your products you're expecting market share gains in, if you could maybe spend a second and talk about the competitive environment within the segments and what it is that sort of gives you the comfort that you should be in confidence that you guys should be able to accomplish this, when many of the other conversations and conference calls folks are talking about the same activity.
- Bill Bock:
- Okay. In Access business I think we are positioned very well against some of our competitors who are not in great financial health. And I think some customers are taking note of that fact and looking at our offerings more closely than they may have in the past. And that resulted in some net share gains in our embedded modem business and we see a lot of opportunity with our voice product especially with more recent product introductions. I think audio I covered in about handsets and consumer audio, many good trends there. With video we are ramping very aggressively, this is just driven by a new product cycle. In addition to our lead customer, we are also engaged with a number of other customers that we had design in with that I expect to see some revenue contribution from in coming periods. Short-range wireless, we are enjoying very good reception in a couple of segments. One is the metering sector where we are engaged with some tier one gas and water meter customers. And most of those wins are also bundled with our micro controllers. Another good area for our short-range wireless products is security, and we see bundling opportunities there with our microcontrollers and modems, so an excellent fit for our products for that customer base. So it's just a sheer amount of design wins that I'm seeing across the Board with all the product lines what gives us confidence that we will continue to see share gain throughout the year.
- Sandy Harrison:
- And just my follow up, per your prior comments on audio, is it safe to conclude that I think in the past you guys have maybe taken some criticism for not making as integrated a part for the handset in the beginning and in fact with your strength this quarter coming from the lower enhanced set. Is that an acknowledgment of your strategy versus some of the other competitors out there who are trying to do everything for everyone?
- Necip Sayiner:
- Well, I think we always recognize that there will be segmentation in the handset market, and the low end will always favor standalone solutions. So we have – our strategy was based on providing a low cost, good performance solution in that space rather than making investments in areas that are not close to our core competencies.
- Sandy Harrison:
- Great. Thanks for taking my question.
- Operator:
- Next question is from Cody Acree from Stifel Nicolaus. Your line is open.
- Cody Acree:
- Thanks guys and Congrats. Can I just follow up there on Sandy's question? As you talked about that low end of standalone tuning part, how – is there a window, is there a time frame where before combo parts start to move down into those lower end, the cost start to become more attractive and it decreases the window of your opportunity there and then you have to move more into the consumer products?
- Necip Sayiner:
- Well, I think the long-term integration path for FM tuners in that space is going to be into single tip solutions rather than involving a blue tooth combo, for example. I don't think those low end phones need or can afford that type of connectivity function. So I don't see however low the price may get, I don't see blue tooth really seeping into the low end phones that we are talking about. The bill of materials for those phones is below $15, getting to be below $10. So cost is everything-and we have seen that over the last several quarters in terms of the price pressure that we are seeing for our product and the things that we have to do to remain competitive in that space. So to answer your question directly I continue to see a good opportunity for us in the low end segment. As a matter of fact, I think the TAM for standalone products in the near-term is going to increase.
- Cody Acree:
- You mentioned penetration rate, attach rates, do you have an estimate for about where those stand today and then what those might look like through the remainder of the year?
- Necip Sayiner:
- Our best guess today is that tax rate is just north of 40% and has been inching up.
- Cody Acree:
- Any reason why that accelerates or does it that, that path just continues at a more steady rate?
- Necip Sayiner:
- I don't expect it to accelerate. I expect it to inch up at a steady rate. When we talk to our large customers, they continue to tell us that they are putting that functionality into a majority of their models. And more often than not that corresponds to an even higher percentage of phones that they ship.
- Cody Acree:
- Great. And then lastly, Bill, you had talked a little bit about maybe the lumpiness of your operating expenses. Can you give a little color maybe beyond the second quarter if the recovery continues as we are looking into the second half with revenue, what is a more normal spending trend? When do you start to let your foot off that brake?
- Bill Bock:
- So I will follow up with Necip's earlier comments. For the present, we are going to continue to manage the operating expense category as we did in Q1 effectively, a flat headcount assumption and very tight expense controls. The variance that you see between first quarter and second quarter really amounts to variable comp on higher revenues and this tape out expense. Going into the second half of year, I think we will continue with this posture and as our confidence grows we see growth returning to the business and the industry in general we will relax our constraints on hiring and perhaps add some engineering resources late in the year. But for the time being, we are going to stay very close to the best with the operating expenses.
- Cody Acree:
- Very good. Congrats, guys.
- Operator:
- The next question is from Gus Richard with Piper Jaffray. Your line is open.
- Gus Richard:
- Yes. Thanks for taking my question. Just a number of questions on the video side of the business. Can you talk a little bit about the tuner opportunity, when you see that cutting in and how much that will increase your TAM in that market?
- Bill Bock:
- Well, TV tuner opportunity is very exciting for us. This is a market that is growing and is an inflection point in terms of being open to adopting a silicon-based solution. I think the hurdles in the past have been about being able to combine performance and cost and I think with our product offering we have been able to get over that hurdle. So far the feedback from the customers is healthy and the characterization effort for our product continues in our lab. Everything is looking good, we are engaged in developing the firmware with our customers for their application, addressing all of their application issues and competing with – competing for 2010 models at this point. What I see from a design cycle perspective with TV customers is somewhat long 12 months to 18 month is what we are seeing particularly in this case where they're adopting a new technology in terms of silicon tuner. So I would not expect to see any meaningful revenue before mid-2010.
- Gus Richard:
- Okay. And TAM for that would that be hundreds of millions of dollar, how big is that market just in total opportunity?
- Bill Bock:
- I think hundreds of millions of dollars is right. Basically, we are talking about digital TVs that are shipping hybrid TVs along with the analog TV functionality shipping in the hundreds of millions. The TV tuner that we have developed will address all over the world. So it is not a region specific. We can go after the entire TAM. And we are talking about multi-dollar ASPs for the solution. So several hundred million dollar opportunity is right.
- Gus Richard:
- Okay. And then just based on your commentary on the ramp, on the demodulator, is it reasonable to assume that the revenue on that product could get in $10 million or so for the year?
- Bill Bock:
- That's not an unreasonable expectation.
- Gus Richard:
- Perfect. Thanks.
- Bill Bock:
- Thank you.
- Operator:
- Thank you for your questions. I will now turn the call back over to Shannon Pleasant for closing remarks.
- Shannon Pleasant:
- Alright. Thank you, Amy. Thank you all for joining us today. This now concludes our call.
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