Silicon Laboratories Inc.
Q3 2009 Earnings Call Transcript

Published: 28 Oct 2009

[Operator:]

Welcome everyone to the Silicon Laboratories third quarter earnings conference call. All participants have been placed in a listen-only mode until the question-and-answer session. (Operator instructions) This conference is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Ms. Shannon Pleasant. Thank you Ma'am, 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 financial results. The financial press release, reconciliation of GAAP to non-GAAP financial measures, and other financial measurement 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 866-513-1237. 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 review 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 10-Q that we anticipate will be filed today but 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 to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Silicon Laboratories' Chief Financial Officer, Bill Bock.

[Bill Bock:]

I'm very pleased to report revenue of $125.9 million for the quarter that’s a high end of our revised guidance range. This represents an increase of over 10% compared to our peak revenue performance in the same period last year. This record breaking quarter exceeded expectations on all fronts delivering exceptional margin and earnings performance as well as very strong cash flow. Let me first cover the GAAP results which include approximately $11 million in non-cash stock compensation charges. Third quarter GAAP gross margin increased considerably to 64.4% of revenue. R&D investment for the period was $25.9 million. SG&A increased to $28.6 million. Other income principally interest income on invested cash was under $1 million. GAAP operating income was a record 21.1% and fully diluted earnings per share was $0.47 more than doubling from the second quarter. For investors focused solely on GAAP measures, these results demonstrate that our business model drives considerable leverage to the bottom line inclusive of stock compensation. And these non-cash stock charges are declining as a percent of revenue a trend we expect to continue over the next several years. Turning now to our non-GAAP results, revenue of $125.9 million was up more than 20% sequentially and 50% above where we started the year in Q1. The better than peak revenue performance was driven by strength at tier one customers and our broadcast business and an excellent recovery in our MCU business. Non-GAAP gross margin was 64.7%, a 220 basis point improvement over the prior quarter. This quarter’s result include some one time favorable variances that was principally derived from continued cost reductions, improved test yields and outstanding performance from our operations team. We expect gross margins will continue to be excellent and will hold at or above 63% for the foreseeable future. We are particularly proud of this accomplishment given this year’s economic environment. Operating expenses as a percent of revenue decreased significantly, sequentially to 35% of revenue an improvement of more than five percentage points. On an absolute basis, operating expenses increased to our resumption of selective hiring and higher variable compensation. Specifically, R&D investment increased by $1 million to $23 million or 18.3% of revenue and SG&A expense increased by a similar amount to $20.6 million or 16.4% of revenue. Operating expenses are expected to increase again modestly in the fourth quarter, primarily in R&D. The very strong performance resulted in 30% operating income, a truly outstanding result. Other income in the period was under $1 million and is expected to remain at this level. Relative to our revised guidance, net income and EPS were further enhanced by our lower tax rate of 16.5%. This was due to a one-time release of a tax reserve position established in 2005 as the Statute of Limitations has expired on that tax year. We expect our fourth quarter average effective tax rate to be slightly below 20%. Net income, therefore, increased to $31.9 million or 25.4% of revenue for the quarter, resulting Q3 diluted earnings per share was $0.67. Moving on to the balance sheet, accounts receivables were actually down slightly and ended at $61.5 million or 44 days outstanding. We have no known collection or bad debt problems. Inventory levels increased sequentially to $33.5 million as we supported the increased level of demand from our customers. Returns for the quarter were 5.3, within our target range. Channel inventory was also up in anticipation of strong fourth quarter demand. We continue to believe the supply chain is lean and in good balance. We expect year-end inventories will be approximately flat with Q3 ending balances. The quarter also exhibited tremendous cash generation with cash flows from operations totaling $52 million. When combined with the quarter of minimal share repurchase activity, the result is a climb in out cash balance to over $400 million. As we entered this extremely uncertain year, we embarked on a conservative cash management strategy and have built our balance sheet to enviable levels. Given our increased confidence in the business, we have received from our Board of Directors, a new stock repurchase authorization designed to allow us to offset stock compensation dilution and to return cash to share holders, we have a new $150 million authorization in place through the end of 2010. We expect to be in the market as selective purchasers during the course of this period. Our business is poised to achieve record performance in 2009 on a number of levels giving us a very solid foundation for 2010 and the ability to continue to invest for growth in 2011 and beyond. I will now turn the call over to Necip to discuss the business in more detail. Necip?

[Necip Sayiner:]

Hello everyone. As you’ve just heard we had a tremendous quarter. We made progress on a number of key fronts, customer diversification, market share growth and new products. I will [point] on each of these as we cover the different businesses. Starting with the access business, Q3 was down sequentially by about 8% due primarily to an expected slowdown in set-top boxes and Voice over DSL gateway demand. Shipments into point of sale and infrastructure equipment offset this to some degree. Our performance in this business compared to the large double-digit year-over-year declines of our two primary competitors supports our internal view that we have gained about 300 basis points of share in the last 12 to 18 months. These share gains on the modem side are coming from set top box and points of sale wins in Europe. On the voice side, our recently introduced ProSLIC product, are successfully winning designs among top tier customers and helping to establish beachheads in new accounts including leading OEMs and ODMs in China. We are also benefiting from the trend towards integration of Voice over IP into data and content delivery equipment for the digital home, ideal for our highly integrated small footprint solutions. Our RF business which represented about 40% of revenue in Q3 had a very strong quarter growing nearly 40% year-over-year. Strong tier one customer demand for the audio products was the highlight of the quarter as our largest customer moved aggressively to gain share and we added new major customers that began to [ramp]. Some investors have been concerned that the audio business will begin to decline in 2010. To the contrary, we expect our business to grow again next year. In handsets, we have held off integration threats and have grown our volume and revenue by gaining share in a growing market fueled by higher tax rate. We now have nearly 30% share owing to the value and performance of our solution. We expect share gains will moderate over time, especially the large customer like Samsung which has awarded us an unusually high percentage of their business. And we recognize the competitive dynamics as the long-term challenge. However, we continue to secure design wins at a rate consistent with our dominant share of this customer and do not yet see any basis for share decline. Samsung significantly increased demand for FM tuners for handsets in Q3 contributing to a 50% plus sequential increase in tuner revenue. Outside of Samsung, we added two marquee names to our FM tuner customer list in Q3. One is the leader in portable media players and the other is a leader in mobile handsets. [Ramps] that these new customers will partially offset the sequential decline we will see in Q4 as Samsung manages their year-end inventories. But more importantly, we’ll provide a sound basis for growth in to next year. And then there is the AM/FM piece of the business, which now exceeds 10% of audio revenue. I projected earlier in the year that our AM/FM revenue would double in 2009. In terms of that forecast what’s conservative and we will do better as we are seeing a significant revenue increase in the second half. The trajectory looks good for 2010 as well with many more design wins slated to ramp in the coming quarter. I’m also very pleased with the prospects for the video business. The customer evaluations of our TV tuner are going well. And we have a number of design ends with top TV OEMs and module makers in Japan and Korea. It is worth noting that we are not aware of a single design loss to date to another silicon tuner in a hybrid TV. These designs are expected to generate modest revenue throughout 2010 and we are continuing to compete for fall 2010 models. This is the beginning of what we believe will be the proliferation of our silicon tuner technology into a broad set of customers. We are positioned well as large customers begin to deploy our tuner in a few select models, gain experience develop shipping history and then ramp the technology more universally in 2011. The short range wireless product revenue continued its steady growth in this third quarter. We have identified a significant competitive advantage with the combination of our low power MCUs and world class easy radio receiver. We have been working on a roadmap to integrate the devices offering an even more compelling solution for security, home automation and smart metering customers. We believe this new integrated device will accelerate adoption of our solution at a critical inflection point in the market when government globally are subsidizing large scale upgrades to the energy infrastructure. Moving to the broad-based business it was up nearly 30% sequentially and 15% year over year resulting in record revenue levels. Power, timing and MCU all grew sequentially. Beginning with the power products, we are successful displacing incumbent optocoupler technology with our digital isolator. We are nearing 100 design wins for our new ISOpro Isolators this year and are having particular success in industrial and system measurement application. We also added new design wins in Power over Ethernet during the quarter as our top customer. As the chief editor of the newly ratified PoE plus standard, Silicon Labs has made a significant technical contribution to the next generation of Power over Ethernet technology, which is expected to expand PoE into higher power systems such as 802.11n wireless access points, WiMAX equipment and security and surveillance systems. We expect to have new products supporting this standard in the very near future. The timing business had another record quarter. We introduced new oscillator and clock families optimized for a video broadcast application that should allow us to more quickly build up on our early success in that market. Design wins are accelerating as large customers gain experience with the technology and proliferate our products throughout their systems. With an active R&D pipeline and more new products to choose up, we are probably expanding them faster in this area than any of our broad based product lines. We see no hurdles to continuous growth based on current design win momentum. The MCU business rebounded in a big way in Q3 achieving record revenue with greater than 30% sequential growth and 9% year-over-year growth. Several of our competitors are talking about share gains while posting year-over-year quarterly revenue declines. We feel good about backing our claims with actual results. Customer demands improved across the board with a significant part of the recovery coming from customers shipping into consumer and industrial applications like digital cameras, battery chargers, portable medical devices and touch screens. With five out of our eight product lines posting record revenue in Q3, 2009 is shaping up to be a very good year for us. We are enjoying record revenue and profitability, ramps at new strategic customers and a record number of new product introductions. For the fourth quarter, we expect our broad-based business to be up again led by continuous trends in MCUs and we expect our assets business to be flat but slightly up. After the aggressive ramp in Q3, we expect the RF business to be down due to the pause in Samsung demand, which will not be entirely offset by the ramps of new customers. We therefore expect revenue to be $124 to $129 million, a 25% to 30% increase over the same period last year. In aggregate, our second half revenue is projected to be up by nearly 20% versus the second half of 2008 a clear indicator of the share gains we are achieving across the board. We are accomplishing those share gains without a compromise to our margins. And as Bill mentioned, we are currently expecting gross margin to remain strong at 63% to 64%. We anticipate fourth quarter operating expenses will be up slightly sequentially. On a GAAP basis, we are projecting $0.40 to $0.43 and on a non-GAAP basis excluding stock compensation expense, we expect fourth quarter earnings of $0.60 to $0.63. Before I turn the call over to you for questions, I want to highlight the strategic product announcement we made today. In addition to the strength of our established product lines, we have talked about four brand new growth sectors this year, video, timing, wireless and power. I want to add another to that group. Today’s announcement of a suite of Samsung products targeted at human interface applications is the next high potential product line in our mix. Our QuickSense portfolio enables interaction with electronics through touch and intuitive gestures. We are the first in the industry to offer both infrared sensing technology and high performance MCU based touch sense capability in the same portfolio all with industry leading accuracy and response. Ideal for portable, consumer and industrial products, the new IPs are supported by a common development environment making it straightforward for customers to add human interface technology to their products. The first phase of this new infrared and touch sense product lines includes the F700 touch sense MCU family announced earlier this year. The new infrared proximity and ambient light sensors and F800 touch sense MCU family introduced today, and a family of touch screen controllers that we will be sampling in the first quarter. These products address more than a billion unit market opportunity and are differentiated by the type of innovative IP you would expect from Silicon Labs. A combination of a decade of infrared experience, we gained through the acquisition of Integration Associates and our own unique patent pending approach to touch sense we have developed a compelling value proposition and a roadmap difficult for our competitors to duplicate. We are very excited about the potential of these new products which are poised to follow the successful formula we have consistently delivered, leverage our analog mixed signal know how to deliver a destructive solution in established markets and rapidly gain share. We expect the new products will begin contributing to revenue late in 2010. I would now like to take your questions. Shannon?

[Shannon Pleasant:]

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. Operator please review the question and answer instructions for our call participants.

[Operator:]

(Operator instructions). Our first question today is from Craig Ellis. You may ask your question and please state your company name.

[Craig Ellis:]

Caris & Company. Bill can you clarify the one-time benefits that you mentioned in the gross margin line in the quarter?

[Bill Bock:]

Sure Craig. We had some accounting adjustments in the quarter that helped boost margins above the 64% level. That is why my guidance for the fourth quarter and looking forward is in the 63% to 64% range.

[Craig Ellis:]

Okay, great. And then as we think about the target margin model of the company Bill, how would you guide us to think about that, given the margins that you are currently achieving on the growth and the operating line.

[Bill Bock:]

I think that we are at the moment just very pleased and proud of the performance of the business, you know we are above our model on gross margin by 2 to 3 percentage points. We are also above our target on operating income by a full 5 percentage points in this quarter. I think we will continue to enjoy above model performance in the fourth quarter and we are in the process of developing our plan for 2010 which also looks quite strong to us right now. I think that we will retain our business model as a multi-year target for the company as we move into 2010. So we have no plans to make a formal change but we are certainly pleased with the fact that we are out performing today.

[Craig Ellis:]

Excellent and then if I could follow up with Necip on the product question. Necip, it did sound like you are getting increased customer diversity on the FM tuner side of the business, can you talk a little bit about the way the OEM balance could shake out as you look at design wins now for and what that could mean in 2010.

[Necip Sayiner:]

Certainly, we continue to get design wins with large handset customers and consumer audio customers but we are also winning designs across the board particularly with ODMs in greater china with our AM/FM products. We have become the product of choice in that region for a variety of end products including AM/FM as well as some home theater system wins with household names, large OEMs in Japan and Korea. So I don’t have a specific breakout of how large OEM versus smaller customer revenue will shape up for 2010. But I am very pleased to see the number of design wins in our broader base business within audio.

[Operator:]

Thank you. Alex Gauna, you may ask your question and please state your company name.

[Alex Gauna:]

JMP Securities. You mentioned good comfort that your audio business is going to be up next year in that kind of low visibility environment can you give a little more color on why you have that confidence and what’s going to drive either customers or new platforms of that growth.

[Bill Bock:]

We are ramping in second half of 2009 two large customers with our FM tuners we expect that business will continue to support growth for the audio business in 2010 but perhaps more importantly to Craig’s earlier question we continue to diversify our customer base significantly in this business, AM/FM business in particular and that will be more than doubling in 2009, will continue its growth trajectory into 2010 based on the design and momentum we see and enjoy today. So based on all of these and even taking into account the uncertainties that we allude to especially in the short product cycle segments like handsets we feel confident that we can grow the audio revenue year-over-year in 2010.

[Alex Gauna:]

And you mentioned that you had strong timing results here. Is there anyway you can differentiate between what might be the rising pride of the networking market versus your new design wins contributing? And may be how far are we into bringing to market all the design wins you are getting in timing?

[Bill Bock:]

I would argue that we are still in the early innings of our growth story and timing. The revenue that we drive from oscillators and clocks, both grew approximately 30% year-over-year. We continue to bring to market new products. We are adding tens of new customers every quarter, we are getting hundreds of new design wins every quarter and as importantly we also continue to proliferate inside large customers. One anecdotal example I can provide for you is a recent business review we had with one of our large infrastructure customers where we now have 35 distinct products that they are utilizing compared to only 18, 12 months earlier. So not only we are continuing to get new design wins and adding new customers but also expanding our business with the existing customers.

[Alex Gauna:]

All right. Thank you. Congratulations on a strong quarter.

[Bill Bock:]

Thank you.

[Operator:]

Tore Svanberg, you may ask your question and please state your company name.

[Tore Svanberg:]

Thomas Weisel Partners. The first question is if you look at RF you expect to pause there in Q4 and you talked about some inventory adjustment with Samsung, is that just a seasonal adjustment, do you expect it to be over in Q4 or is there anything beyond that?

[Bill Bock:]

Well this sort of ordering pattern is not unique to this year for Samsung. In prior years we have seen similar trends were their business with us in 3Q is higher than in 4Q. This year it’s amplified further for two reasons, one the volumes are significantly higher now due to our continued success with this customer and higher tax rate of FM tuner functionality in to handsets. And secondly, our customer had some specific needs and goals this year that we supported them with. So, on a sequential basis you see a reduction in 4Q but overall the volume of business for us at this customer for the second half is significantly higher than what I would have projected only 90 day ago.

[Tore Svanberg:]

My second question is on your new human interface product line. How should we view this sort of from a competitive landscape I mean you mentioned some strong IP mixed signal architecture and so on but I mean if this is where you actually have very high integration using a vanilla CMOS process to potentially gain significant share in this market.

[Bill Bock:]

I think the differentiation comes not only from the mixed signal capability you alluded to but also our ability to offer a comprehensive portfolio to our customers. Not just MCU-based capacitive sensing which has become an arguably crowded space but also to couple that with infrared and ambient light sensing products. We believe that we have a significantly better solution in terms of power efficiency and I don’t mean just 2X or 3X whether I am talking about orders of magnitude better due to the approach that they have taken and with our infrared sensing products, we offer a much longer range as well as some very unique features such as proximity sensing that I think our competitors will be hard pressed to duplicate.

[Operator:]

Thank you. Adam Benjamin you may ask your question and please state your company name.

[Adam Benjamin:]

Jefferies. Thanks guys. Necip I know again we are at the end of the year here and typically you’ve in the past kind of talked about growth potential on a year-over-year basis, you talked about some of the businesses, I wonder if you can give us some better view into 2010 as we are kind of getting near the end of the year and what you are thinking about each one of the main three businesses and how should we be thinking about year over year growth given the incremental opportunities you have and you talked about. Thanks.

[Necip Sayiner:]

I think in terms of providing a full year growth targets I am going to wait until January to get a little bit more visibility into our design win traction with various product lines. I have already talked about the audio but I can’t give you a sense for 2010 in this regard that I think a significant portion of our growth into 2010 will come from our broad-based products, that’s all I can tell you at this point.

[Adam Benjamin:]

Okay, got you. And then just a follow up as you look at Samsung and you talked about having an inventory adjustment typically in Q4 and then you have a big audio, portable audio customer ramping in Q4 offsetting some of that decline. As you look out into Q1 how should we be thinking about those two meshing together. Should we be thinking about better than normal seasonality on the handset side obviously being offset by a bigger decline on the portable audio side which is typical of their production. You can give some better color there as to what you are thinking about that would be helpful.

[Necip Sayiner:]

Okay, that’s a great question. I think compared to a couple of years ago and I am going to refrain from comparing it to last year for obvious reasons, compared to two years ago I think we have a higher exposure to consumer and high end consumer in our business as those businesses about serving the consumer segment have grown above and beyond the corporate average. So from that perspective I would expect the seasonality in Q1 to be stronger than prior year. However, you have pointed out that we are ramping some major customers as we speak so that will provide a balance to that stronger seasonality. We will have to wait a little longer and see how the holiday season goes before being able to provide a more precise color on the trends in Q1, Adam.

[Adam Benjamin:]

Got you. Thanks a lot guys.

[Operator:]

Terence Whalen you may ask your question and please state your company name.

[Terence Whalen:]

Hi, with Citi Investment Research & Analysis. Thanks for taking my question. The first one relates to inventory levels and distributor inventory levels. We saw the increase there I think you said this before the growth into 4Q. Do you expect inventories heading into 1Q in the distribution channel to then decline after moving a level in the fourth quarter and I guess related to that do you expect OEMs to grow less than distributors in fourth quarter or more, thanks.

[Bill Bock:]

No, the general story on inventories is that the growth that you have seen from the midpoint of the year to today is to support this early dramatic increase in overall demand that we are seeing across the board. We have guided fourth quarter revenues and we think the current level of inventory is appropriate to support that. Consequently, we think inventory both within our own company and in distribution will be relatively flat as we exit the year. Typical seasonality patterns and this is certainly supported by our distribution business and consumer I would suggest that there is some fall off in demand in first quarter. So it is not unreasonable to think that inventories would actually decline in March.

[Terence Whalen:]

And then in the fourth quarter do you expect distributors or OEMs to grow more or is it a pretty balanced outlook?

[Bill Bock:]

I think it’s pretty balanced. The expectations we have for our distribution business in fourth quarter is quite good.

[Terence Whalen:]

Okay and then my follow-up would be to Necip’s point. Necip I think in your prior response you said regarding first quarter revenue outlook and the degree to which that might be seasonally down you would have to wait to see how the holiday season went. What are some may be if you could name two or three specific indicators that we should be watching for to gain an assessment of the degree to which 1Q might be seasonally down? Thanks.

[Necip Sayiner:]

I think the biggest variance we’ll see will come from handsets and portable media players.

[Operator:]

Craig Berger you may ask your question and please state your company name.

[Craig Berger:]

I guess my question is you guys have been pretty conservative over the last few quarters and you’ve ended up tracking ahead both on revenues and gross margins. I guess my question is kind of what kind of backlog coverage are you assuming for Q4, how is guidance versus your orders this quarter versus say in the last couple of quarters. Thank you.

[Bill Bock:]

Well, in our guidance, we have continued to take a conservative view of demand this quarter. We certainly did not lean forward in terms of what the demand might be in the uncertain month of December. I think there is an overall level of caution with our customers while trying to capture share in their end markets. I have had an opportunity to visit with a number of our customers over the last several weeks and I would characterize their move as having one foot on the gas pedal and one foot on the brakes and they all want to continue to capture the share of the holiday season but are wary of the inventory situation that caught them off guard last year. So we are monitoring this very closely and I think offering the best guidance, we can give with the information we have today.

[Craig Berger:]

And just a separate question your microcontroller business ramping quite nicely. I know you guys have various products families that you have rolled out in recent years, kind of how far into the ramp are we in some of those families, how much growth is still left ahead of us. Thank you.

[Necip Sayiner:]

Okay. So to give you some color on the MCU business, if I compare the revenue in third quarter to the same period last year, we would see an increase in our broad-based small phone factor MCUs. We’ve seen an increase in one-time programmable devices. We’ve seen an increase in revenue in our USB products that are targeted towards consumer. The only area that hasn’t yet caught up with the peak revenue is precision mixing of MCUs, which have a heavier exposure to industrial markets. I think all the products that we have brought to market in the last 18 months low power MCUs have been somewhat slower to ramp than we had projected at the time but its starting to ramp nicely especially with the metering applications today. I think the growth trajectory for MCU looks good for the near future.

[Craig Berger:]

And then last one for Bill. Thanks for the color Necip. I may have missed it but tax rate going forward?

[Bill Bock:]

We had a 16.5% tax rate which is below our standard in the third quarter due to the conclusion of the Statute of Limitations on 2005. I think looking forward our general guidance is approximately 20% and we should be slightly below that in 4Q.

[Craig Berger:]

Thanks so much.

[Operator:]

Thank you. Arnab Chanda you may ask your question and please state your company name.

[Arnab Chanda:]

Roth Capital. Couple of questions, one, Necip if you want to talk about a little bit more about the video product line, what are your expectations. I know you have a couple of products there TV as well as outside of TV, what are you seeing with the demand product those are video product and tuner product sorry and then what sort of expectations should we have for sort of next year. Thank you.

[Necip Sayiner:]

I think in the last 90 days we made reasonably good progress with our customers in securing some design wins. And those are primarily with module makers where we want the design and they are going through the qualification process with the TV OEM before we can start ramping it. I expect there are three or four models that we have won to date and those will start ramping throughout 2010, a couple of them in the first half of the year. What the customers are doing is to allocate a few select models to silicon tuners given this is a new technology they want to take it slow, they want to gain some experience with this new technology and some shipping history and then turn on the technology to a much larger portion of their volumes in subsequent years. Several customers I have spoken to suggest that they have an internal mandate to start using tuners on their products to be able to continue to drive cost down and now that we are able to offer a solution, that means a performance expectations that has become much more valuable.

[Arnab Chanda:]

Great. One other question of the audio product lines. What is your rough mix today with handsets versus non-handset and I know you talked about the potential of integration of, what type of timeframe do you think that something that we should look out for? And do you think by that time the rest of your business will catch up? The other thing about audios is whether AM/FM somewhat offsets that even within handsets? Thank you.

[Bill Bock:]

In the third quarter the mix between handset and non-handset was two thirds, one thirds roughly speaking favored in handsets. I think we had projected earlier that this mix will get closer to 50-50 over time but we continue to have much success with our customers in the handset space. So in spite of very good growth in the consumer audio and AM/FM particular, the mix that stays 65% or higher. I feel confident that we are going to be able to grow our audio business into next year regardless of what happens in the handset market from a unit growth perspective or a tax rate perspective or ASP erosion perspective.

[Arnab Chanda:]

Great. And then one question on the microcontroller business. If you look at your microcontroller business obviously there are a lot of touch products out there. What’s your strategy in terms of design wins? Are you going for places where you already have some penetration with FM or are you going to be doing a more distribution oriented approach? Can you talk a little bit of what kind of metrics we should be looking for? Thank you.

[Bill Bock:]

Sure. If I look at the target markets for the portfolio we announced today, it covers a broad base of applications ranging from handhelds, consumer gadgets, interactive toys to industrial applications, kiosks, security panels and so on. Clearly with many of the consumer names, we have existing relationships through our existing portfolio of products. So they have already shown some interest in what we have to offer in that space both from a capacity of sensing perspective as well as proximity sensing perspective. But also there product plan themselves very well to the distribution channel where we have a long list of growth in products particularly with the MCUs. So we are going to be pushing this product line in both sectors.

[Arnab Chanda:]

A last question for Bill. If you can talk a little bit of why your gross margins and operating margins. I think the operating margin; this might be an all-time high for you even since IPO et cetera. And gross margin seems like your revenues are increasing in areas where the gross margin is actually higher. Can you talk a little bit about; there are analog companies sort of the mid-60s or even high-60s. Even if you’ll leave out linear, what are the things that we have to look for, is it a mixture in or is it more about cost reduction? Where can it go from here? Thank you.

[Bill Bock:]

Thanks Arnab. I appreciate the comment on the operating income statistic. 30%, we do believe is a record and it is really a stunning accomplishment given the year that we have been in. I think the dynamic on gross margins for us going forward is less about mix and its more about the simple, normal course of the business in terms of competition and pricing and cost. So we will enter 2010, need to go through new rounds of negotiations with both our customers and our vendors. And margins will be impacted by that next year. In general, what you have seen over the last six or eight quarters is that we have had relatively significant mix shifts into the business that are not driving dramatic changes in gross margin.

[Necip Sayiner:]

I just also want to comment that I think our gross margin model allows us to compete effectively and various kinds of environment, pricing environment with our suppliers as well as the end markets that we serve. Over the last couple of years, we have made steady improvement in our gross margin profile. In 2008, we’ve had about 50 basis points improvement on an annual basis over 2007. And in 2009 we’ll have a similar improvement again on an annual basis to bring that to about 63% for the full-year. I think its safe to say that our [aggressivity] in winning new business is only matched by our focus on design for cost and continue to receive those cost reductions. So our gross margin model certainly does not prevent us from aggressively continuing those efforts. However, we don’t want to change the model primarily because we want to continue to focus on growth and don’t want to artificially repeat that.

[Operator:]

Suji De Silva, you may ask your question and please state your company name.

[Suji De Silva:]

Kaufman Brothers. Good morning guys. Nice job on the quarter. Just a quick housekeeping question, what do you refer to this being more consumer and being more seasonal. What’s the historic seasonal level you are referencing for 1Q there?

[Bill Bock:]

Suji, the first quarter of 2009 notwithstanding, previously, we have suggested roughly a 7% sequential decline as being a typical seasonal period.

[Suji De Silva:]

And then just to understand the diversification on the handset FM part, you have I think two tier ones that are seemed to be ramping, is that, correct me, are there other three potential to ramp in the 2010 time frame or is there a different assessment on where you are in the Q1? Thanks.

[Bill Bock:]

At this point with handset customers, we are shipping FM receive solutions to all part.

[Suji De Silva:]

Okay.

[Bill Bock:]

They have added the only one this quarter that we weren’t shipping before.

[Suji De Silva:]

Okay. So you completed the (Inaudible) now there.

[Bill Bock:]

Right.

[Suji De Silva:]

And then last question really with the buyback being announced here, what your thoughts are on comfortable level of cash for you guys and also, any updates on your thoughts on acquisitions prejudicially given the environment and some of the changes that have been happening here in terms of the market.

[Bill Bock:]

Sure. With the conservative cash management approach we took during the course of this year, which we thought was entirely appropriate given the uncertainties surrounding the macroeconomic environment. We’ve had a significant build in cash during 2009 to now over $400 million. That is clearly more cash than we need for operating purposes. And frankly more cash than we believe we need also for strategic M&A. So the authorization that the Board granted last week of a new $150 million program is designed for a continued return of cash to shareholders but leads us comfortably in a position to operate the business and to take advantage of opportunistic M&A candidates, which we continue to review on a regular basis and while we don’t have any eminent transaction, we are actively in the market and looking at opportunities that could augment this business.

[Operator:]

Brendan Furlong, you may ask your question and please state your company name.

[Brendan Furlong:]

Thank you and good morning. I just want to circle back on a couple of things if I can. On the Samsung, typical Q4 inventory drain that maybe from audio increases this quarter. But normally Samsungs re-bills in Q1 would you expect that sort of seasonality continue for Samsung?

[Bill Bock:]

There is nothing we know at this point that would suggest other loss.

[Brendan Furlong:]

And then on the general seasonality question you just said normal excluding last year is down 7%, was that comment directed at the consumer end of it or for the whole company?

[Bill Bock:]

It reflects the whole company. So we’ve got a meaningful portion of the corporations businesses in the consumer marketplace that we obviously are addressing a lot of other end markets as well. That 7% statistic has been typical for us at a corporate level.

[Brendan Furlong:]

And to that point, in previous years, you haven’t had the exposure to (Inaudible) like the MCU timing and power which tend to be better seasonally in Q1 than the consumer. Should we think of that as an offset to previous seasonal declines?

[Bill Bock:]

I think the contraction of our overall business has tilted more towards consumer in the last several years in spite of the growth that you are alluding in broad-based businesses. So I acknowledge the seasonality being whether in those businesses in the first half. But I think overall accepting for any significant customer and seasonality wise, we would expect something more stronger in Q1 than prior year.

[Brendan Furlong:]

I guess my last question then is on. Somebody kind of alluded to this question. But I don’t know if you entered directly, inventory, what is your sense of inventory at your major OEM customers and major distributors at the current time?

[Bill Bock:]

We think that they are appropriate, we have seen some growth in distribution inventory but in support of what is a strong demand profile for the fourth quarter, we really don’t believe that there is excess inventory at any position in the channel.

[Operator:]

Ian Ing, you may ask your question and please state your company name.

[Ian Ing:]

Broadpoint AmTech, thanks for fitting me in. As you go through the annual foundry negotiations, could you give us a sense of what products are up for negotiation and what is in tact in (Inaudible) perhaps new products versus old products. And how much of a help is volume-based question as you enter fiscal year ’10 in ramps?

[Bill Bock:]

I prefer not to talk about product level negotiations with our suppliers. All I can tell you is that specially given our increased volumes all our suppliers has supported us with our cost reduction needs today.

[Ian Ing:]

All right. I understood. There has been a lot of questions on new design wins but as a relatively smaller company could you talk more about the scaling about your field resources to cover all the geographies and end markets. Is it just a matter of staffing up or are there some other leverage opportunities perhaps using your distributors and [FAE] distributors et cetera.

[Bill Bock:]

As our revenue base increased, we have continuously add direct sales resources out in the field as well as expanding our distributor channel partners appropriately in regions that we needed some additional focus on with the new product.

[Operator:]

Our final question is from Romit Shah. You may ask your question and please state your company name.

[Romit Shah:]

Barclays Capital. Bill we typically see OpEx bump up in Q1 for a salary and bonus accruals. Given how you have managed employee compensation this year. Should we expect a similar or greater than normal bump up in Q1 of 2010. Thank you.

[Bill Bock:]

Romit I think that you will see op expense go up in the fourth quarter and probably trend up again in 1Q for some of the reasons that you mentioned. I do think that what we’d like to do here is preserve our opportunity to really offer quality guidance on Q1 to the next call. We’ll have a much better idea of what consumer seasonality will be, what the overall corporate revenue picture will look like and we will have completed our planning exercise. So we’ll give you a much better understanding of the Q1 dynamics when we reach this meeting next quarter.

[Romit Shah:]

Makes sense. Thank you.

[Operator:]

Thank you. I’d now like to turn the call back over to the speakers for any closing comments.

[Shannon Pleasant:]

Great. Thank you very much for your time today. This now concludes our call.

[Operator:]

Thank you. This concludes today’s conference. Thank you for participating. You may disconnect at this time.