Silicon Laboratories Inc.
Q1 2010 Earnings Call Transcript
Published:
- Arnab Chanda:
- Craig Berger - FBR Capital Markets Auguste Richard - Piper Jaffray
- Sandy Harrison:
- Brendan Furlong - Miller Tabak & Co. Ian Ing - Broadpoint Srini Pajjuri - CLSA Suji De Silva - Kaufman Bros
- Operator:
- Welcome, and thank you for calling the Silicon Lab’s first quarter earnings call. I would like to inform all parties that you are in a listen only mode until the question-and-answer portion of today’s call. (Operator Instructions) I would now like to turn today’s call over to Shannon Pleasant; you may begin.
- Shannon Pleasant:
- Thank you Anne. 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 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 888-562-2923. 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 conference call. This information will likely change overtime. 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 this week, and identify important factor 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 operations. I would now like to turn the call over to Silicon Laboratories Chief Financial Officer, Bill Bock.
- Bill Bock:
- Silicon Labs delivered yet another excellent quarter. Revenue was better than expected at $126.7 million, a $0.51 increase over the same period last year. The significantly better than seasonal result in the first quarter was due to strong growth in our broad based product lines. This performance is particularly impressive considering revenue is essentially equal to a corporate record in Q4 that was driven by consumer-oriented products. We are clearly demonstrating the benefits of diversification and multiple growth drivers across various end markets and customer categories. Let me start with the current quarter GAAP results, which include approximately $10.3 million in non-cash stock compensation charges. First quarter GAAP gross margin increased 50 basis points sequentially to 66%. R&D investment for the first quarter was $29.9 million. SG&A decreased to $28 million. Other income, principally interest income on invested cash was under $1 million. GAAP operating income was over 20% again in the quarter, representing the third consecutive period at this performance level. Fully diluted earnings per share was $0.44 for the first quarter, up from $0.001 the same period last year. Turning to our non-GAAP results, revenue of $126.7 million reflects strong performance from MCU and timing products, offsetting the seasonal decline in broadcast products. This mix shift contributed to outstanding gross margin results, reaching a post divestiture record of 66.2%. We also benefited from better than anticipated average selling prices, inventory reserve reductions, and continued improved manufacturing yields. We expect to be able to maintain the 65% to 66% margin performance in the second quarter. Operating expenses were up sequentially as anticipated, to about 38% of revenue. Specifically, R&D increased to $25.8 million or 20% of revenue, while SG&A was about flat at $22.3 million or 18% of revenue. The drivers behind the increase included our annual raise cycle, a record quarter of new product takeouts, and an excellent recruiting effort, starting a strong pace for bringing in new talent. We expect operating expenses to increase in Q2, primarily in R&D, which will be up about $2 million sequentially. Part of the increase is attributable to the strong hiring trend. We anticipate by quarter end that head count will be up by nearly 100 people from a year ago, most of these in technical positions. There are just more opportunities to gain share and develop new products than we have been able to adequately address. The ability to secure high caliber talent at this juncture is very strategic for us, as it enables us to lever the incremental investment in marketing, sales and design, to capture more of this potential revenue. The other element of increasing R&D investment in the second quarter is the acquisition of Silicon clocks for $22 million that we announce today. Necip will provide more details on the strategic rational in his commentary. SG&A is expected to remain flat or decline slightly as a percent of revenue. Operating income for the first quarter was a solid 28%. Other income in the first quarter was under $1 million and was expected to remain at this level. The tax rate was at our new lower level at 17.7%, without the benefit of the anticipated R&D tax credit. Net income increased to $29.8 for the quarter, or 23.6% of revenue. Resulting Q1 diluted earnings per share was $0.62, well above our expectations and nearly tripled to $0.22 earned in the comparable period last year. Moving onto the balance sheet, accounts receivable were flat, ending at $56.9 million or 40 days outstanding. We have no known collection or bad debt problems. Inventory levels decrease began sequentially to $27.7 million, down $3.9 million from year-end. Terms for the quarter were 6.2, the highest level since 2007. Channel inventories remain flat sequentially. With the industry recovering and our vendors operating closer to capacity, we will endeavor to increase inventories in Q2, in anticipation of continued revenue momentum in the second half. We ended the quarter with $447 million in cash due to continued healthy cash flow from operations. Share repurchases totaled about $25 million in the quarter. This is the highest level of share repurchases since 2008. There is over $100 million of authorization remaining under our current program. We expect to remain selective purchasers of shares throughout 2010. I will now turn the call over to Neicp.
- Neicp Sayiner:
- Good morning. Slicks had a strong start for 2010. We are benefiting from the general improvement in the health of the industry, and very good momentum behind our broad based products, which were largely behind the better than seasonal performance. I will begin with the Access business, which continues to be steady performer for us. About 30% of revenue, Access was essentially flat for the quarter, was more than down slightly, and flicks up. We expect this trend to continue driving modest sequential growth in Q2. Slicks benefited from strength in Voice-over-DSL in Q1. Our momentum winning new sockets continues, with new design wins at about 50 in the third quarter, a very good number, and this near term strength appears to be sustainable. Our Broadcast business was down about 10% sequentially in Q1, better than our expectations. In our Audio business, AM/FM nearly doubled sequentially, as the stronger ramp we have been anticipating this year began for our radio receivers in boom boxes, table radios and lower end automotive radios. This strength partially offset the significant seasonal decline in portable media players, and the better than seasonal decline in handsets. During the quarter we secured another 100 design wins for our radios, about a third of which were for new handsets. The rest addressed a range of consumer electronics applications, from portable radios to docking stations. We expect the Consumer Audio business to grow sequentially in Q2, with handsets down slightly, resulting in modest sequential growth for the Audio business overall. We expect this trend to continue for the reminder of the year. In media, with recent design wins coming to mass production, our tuners or demods are now being used in five of the top six brands worldwide, a very important accomplishment for our emerging media product line. Mitsubishi America has also selected our silicon tuners for their Unison line of LED TVs for 2010. Mitsubishi is the first TV maker in production, to mount our silicon tuner directly on to main system board, bypassing the Ken module. The validation of the strong performance of our silicon tuner is resulting in a real pull from TV OEMs and ODMs, to adopt silicon tuners rapidly over the course of the next two years. We are looking at deploying the technology in two ways; primary and secondary tuners. Primary tuners exist in every terrestrial television, and they have to support both analog and digital broadcast; we call this a hybrid tuner. Analog and digital broadcasts require demodulators. These can be integrated with the tuner, remain outside of the tuner as separate chips, or be part of the larger system SOC. We are agnostic to the partitioning and our solution can support any variation cost effectively, unlike non-CMOS based tuners. The 170 [ph] also remains the only solution to support analog and digital broadcast in a single CMOT IC, without performance compromises versus discreet solution. The other opportunity in terrestrial TVs is the secondary tuner. This tuner is used for functions like PVR and picture-in-picture. These sockets have already begun to convert the silicon tuners prior to our entry into the market, due to the relaxed performance requirements versus the primary tuner. We are winning these sockets as well, and are equally well positioned against competitors targeting this opportunity. We are on track to grow our Video Business nicely in 2010, and more importantly, we are positioning it to ramp aggressively in 2011. We expect the overall broadcast business to be up modestly sequentially in Q2. Our broad based business was up again in Q1, growing sequentially by more than 10%, and representing more than 30% of our total revenue. We are very bullish about the continued strength in this strategic growth area. The timing business had another record quarter, growing by about 30% sequentially and hence surpassing the $10 million per quarter margin. Growth was driven by strength in networking customers, and the ramp of new programs. Defining customer base expanded at a record pace with over 90 new customers added, and strong design in momentum continued with nearly 200 wins secured in the first quarter. With increasing diversity of customers and application, and a growing pipeline of ramping design wins, we have very good visibility into the growth trajectory of this business for Q2 and beyond. The acquisition of silicon clocks that we announced today adds the strategic capability in advanced technology to our portfolio that will immediately impact our timing road map, and allow us to further expand our served market. Silicon cost pioneers the development of immense process technology that allows the manufacture resonators and sensors, directly on standard CMOS wafers. Our cost in oscillators, this approach enables excellent stability at a lower cost than traditional crystal based technology, and significantly reduces footprint and power consumption. This technology will allow us to effectively target lower end, higher volume segments of the timing market. It will also be a strategic addition across our portfolio as we expand our horizons into new areas. Our Embedded-Mixed Signal business had a record quarter as well. Our MCU’s lead the group with particular strength coming from optical transceiver customers, addressing demand created by the increase in capital spending for network buildups. Communications represented about a third of the MCU business in the quarter, with growth driven by new customers ramps, as well as continued strength from existing customers. Our USB products were also behind the strong quarter, with revenue from customers in Asia growing 25% sequentially. We also benefited from a general lift across a broad group of industrial customers, which represented the largest percentage of our Embedded-Mixed Signal revenue in Q1. MCU development kit shipment seen a record high at nearly 10,000 kits shipped, which we believe is a strong indication of broadening interest in our products. Wireless applications represented as significant component of this new run rate. For example, applications in home automation, security and metering, are driving the designing activity in this category. We also shipped nearly 2000 development kits, for our new human interface products, where we see considerable opportunity. In addition to the handset makers we are sampling, our quick sense, touch sense controllers, and proximity senses are being evaluated for products ranging from touch screens, to dispensers and industrial equipments. This product category has one of the most diverse opportunity pipelines of our new products. In combination, we expect strength in the broad based products to accelerate into the second quarter. We project revenue to be up double digit sequentially, making broad base the largest business group as a percent of revenue for the first time. Supporting this growing business is an expanding sale channel. We expect a new franchise agreement that we announced last week with Arrows, the world’s largest electronics distributor to significantly increase our sales footprint. The ability of this new sales partner to augment our existing demand creation efforts, and accelerated adoption of our broad based products, is expected to have a meaningful impact on our business. Now for the guidance; to reiterate, for the second quarter we expect to be up slightly in broadcast and access, and we expect the broad based business to be up significantly. We therefore expect revenue to be $131 million to $135 million. We expect growth margin to remain strong at 65% to 66%. We anticipate R&D investment to be up by $2 million sequentially, and SG&A to remain flat or decline slightly as a percent of revenue. On a GAAP basis, we are projecting $0.43 to $0.46, and on a non-GAAP basis excluding stock compensation expense, and we expect second quarter earnings of $0.62 to $0.65. We’d now like to take your questions. Shannon.
- 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. Operator, please review the question-and-answer instructions for our call participants.
- Operator:
- (Operator Instructions) Our first question comes from Adam Benjamin from Jefferies. You may begin.
- Adam Benjamin:
- Just a follow up on the timing and video businesses. Obviously they are ramping pretty nicely for you guys. You previously talked about the race to $100 million for the five new businesses. I am curious if you can update us now, given the ramps in those businesses as to what do you think -- who will win that race among those two.
- Necip Sayiner:
- It’s a pretty close race still Adams. Timing had a very good start for this year. We expect this momentum to continue for the rest of the year into 2011. Clearly at this juncture, from a revenue prospective, timing as well as of video. On the other hand, the design win momentum with our TV-tuner is very encouraging. We’ve made quite a bit of progress in the last 90 days with the top TV OEM’s, so we are looking at a pretty good year in 2011 for our video business as well. As I mentioned, we are engaged with and doing business with five all the top six brands. That’s what speaks to the presence we have been able to develop with these customers over a short period of time. I am not going to be able to give you a direct answer on who is going to win the race, but both are making very good progress towards that goal.
- Adam Benjamin:
- Great, and then just as a follow-up; I think I ask this every quarter on gross margin. You guys just out performed and continue to out perform. I know you benefited a lit bit on the mix in the quarter, but your guidance implies that this is sustainable going forward. Should we be thinking now that the gross margin can stay at these levels into the rest of this year and beyond, given the fact that some of these new businesses, do carry higher gross margin than the corporate average, and the business that’s probably going to see the most decline over the next year or two is the handset FM business, which carries probably the lowest gross margin. Is that fair to say?
- Bill Bock:
- Well Adam, it was a very good quarter and once again exceeded even our internal expectations. There are some one-time elements in the first quarter result that are not going to be carry forward, but we are encouraged that we can guide 65% to 66% for 2Q, and we feel pretty comfortable about that. Looking into the second half of the year and into next year, I would probably point you back to our target model range, as I don’t know if these margins are sustainable over an 18 month period of time, but you correctly pointed out, we have been over performing in this area for quite some time, and our encouraged at our position with where we are right now.
- Adam Benjamin:
- All right guys, thanks. That’s all I have.
- Operator:
- Thank you. Our next question comes from Craig Ellis at Caris & Company. You may begin.
- Craig Ellis:
- Thank you and congratulations. Necip, on the error distribution agreement, when do you think that will help contribute to revenues in the business and are they more of a fulfillment distributor, or do you think they help more with lead generation or a little of both?
- Necip Sayiner:
- We certainly expect them to augment our demand creation efforts in all three geographies, and we’ve been working with them even ahead of this announcement to gear up, to train their resources out in the field. They are quite excited about the portfolio that they’ll be able to ask with their line card. So most of them expect quite a bit of effort from them on demand creation. They will of course augment demand fulfillment as appropriate, and we’ll see design wins, a good backlog of design wins from them this year, that will contribute to revenue for us in 2011.
- Craig Ellis:
- Okay, that’s helpful. Then Bill, you mentioned R&D investments, are those more on the product design side or is that more on the field sales side. Can you give us some color on how you are investing in the business?
- Bill Bock:
- There are investments in both areas, but generally speaking, the concentration of our hiring activity has been around engineers to support design activities, and certainly the acquisition that Necip discussed in his formal remarks is effectively a design team that will come into the organization and contribute directly to the R&D line. So we are making concerted and conscious effort to build our resources in the design area, and we are engaged in more profit opportunities than we ever have before.
- Craig Ellis:
- Thanks guys.
- Operator:
- Our next question comes from Terence Whalen from Citi. Your line is open.
- Terence Whalen:
- Thanks for taking my questions. This one is on the broadcast side of the business. Can we get an update on expectations for handset FM tuners this year, what you see going on there, and also maybe an update between handset and consumer at this point. Thanks.
- Necip Sayiner:
- I think what we guided to for the second quarter, that is consumer audio going up and handset revenues declining slightly, will continue for the remainder of the year. Now, I think we have been successful in diversifying the business into our consumer audio dimension. The AMS nearly doubled sequentially in the quarter, so that’s of course a very good start to a year, while we expected AM/FM to double year-over-year, probably we are going to be in a position even to exceed that expectation. Handset revenues will see a slight order decline throughout the year, and I expect that we will see a 50/50 split between handset and the consumer, albeit before this year is out.
- Terence Whalen:
- Okay great. Then as my follow-up, I think you had said that this was the first quarter that timing surpassed $10 million per quarter. Necip, what would be your best estimate for when the video business will surpass that $10 million milestone. Thanks.
- Necip Sayiner:
- Yes, that is essentially the same question Adam asked earlier. I think what we’ll see in timing is a steady ramp of revenues over the next couple of years. What we will see in video is much more of an exponential ramp that we expect to start in the second half of the year, and will be very significant into 2011. So you were essentially asking, what the revenue will be in late 2011 between those two product lines. I know both will be very strong, I am just not in a position to say which.
- Terence Whalen:
- That’s helpful. Thank you.
- Operator:
- Our next question comes from Anil Doradla from William Blair. Your line is opened.
- Anil Doradla:
- Yes, thanks a lot for taking my questions; a couple of questions. In the past if you look at the timing focus, you focused on kind of higher end applications, kind of on the routers and switches, and with the acquisition of this company today you seem to be getting into kind of the more consumer oriented applications. How will that play out and impact the gross margin lines of your guys going forward?
- Bill Bock:
- Good question Anil. We have been to-date engaged with primarily the major Telecom and Datacomm customers, and have been developing some new product to be able to address segments that are just below the performance requirements of networking for sometime. The Silicon cost exhibition I think will very effectively augment that move in terms of product enrollment for us. The strategy that we’ve always had in timing and in broad based businesses in general is to provide products to the customer that has a smaller footprint and smaller bond, and that [Inaudible] will allow us to do that, essentially including that content in our clocks and oscillators. So, in moving further down there is not necessarily a result in lower gross margin targets for the new products we are developing. Just to name it, a couple of applications that those products will be targeting, we will be looking at Wifi point printers, equipment, servers and so on.
- Anil Doradla:
- So, bottom line is that you are not worried about the gross margin impact by the positioning, I think would you fair to say?
- Necip Sayiner:
- Certainly, not, with this position not.
- Anil Doradla:
- Now on the broadcast video, it seems like there seems to be a much more greater bullish tone, especially for 2011, can that reach $100 million in 2011?
- Necip Sayiner:
- I’m going to stay away from giving that target for next year on our products, but I do ascertain to see that level of revenue potential for the video business, but as far as I’m concerned, its just the matter of time.
- Anil Doradla:
- Finally, from your advantage point of view, I mean there’s always been concerns about inventory build-up, double order bookings and all that stuff. If you look at what you guys did, a nice kind of inventory management, inventories came down for you guys, but looking out across the whole landscape, how do you feel in terms of inventory levels, kind of supply chain, component shortages, any thoughts?
- Bill Bock:
- So, inventory for us is in very good shape. I think the new investors have been asking us about build in the inventory positions throughout the supply chain for the last couple of quarters, and certainly we are not seeing that in our supply chain. Our inventories are very lean, distribution inventories have remained flat, and looking through to our end users, we do not see any pockets of inventory there either. Generally speaker, therefore we would declare the supply chain in good balance and going toward the second half of the year, we see capacity filling-up within our vendors and are anxious to secure our positions, so that we can support the growth that we expect in the second half, so our efforts over the next couple of quarters will actually be to increase our inventory position as we move forward, a strong seasonal back half.
- Anil Doradla:
- Okay. Thank you very much and congratulations once again.
- Necip Sayiner:
- Thank you.
- Operator:
- Our next question comes from Tore Svanberg from Thomas Weisel Partners. Your line is open.
- Tore Svanberg:
- Yes, thank you, another great quarter. First of all, can you talk a little bit about silicon clocks, and if they are going to be lowering any revenues at this point?
- Bill Bock:
- No. They are a per revenue company. We are essentially accruing them for the technology that they will be bringing us. The technology that silicon clocks has developed would allow us to put multiple sensors on a single side on top of a extended CMOS wafer. So, initially we will be applying this technology to our timing road map as I indicated, and we feel that this technology will also allow us to expand our horizons at address other application in the not so distant future.
- Tore Svanberg:
- Great, thanks. On the video business you mentioned these alignments that five of the top six OEMs. It looks like the bulk of those ramps are going to be 2011, but will you actually get revenue contribution from those five already this year?
- Bill Bock:
- Yes, I mean when I talked about five, just to be clear this is a business that we will have this year, either with our tuners or demods. Some of those brand names are engaged with FM tuners, and will generate revenue this year, and some are on demod and are starting to generate revenue again this year. So all of these five will have some contribution to revenue for the video product line this year.
- Tore Svanberg:
- Excellent. Thank you very much.
- Operator:
- Our next question comes from Arnab Chanda from Roth Capital. Your line is open.
- Arnab Chanda:
- Thank you. Two questions; one, maybe for Bill. You are obviously doing very well in your gross margin and basically your mix of your lowest margin business continues to decline. So should we assume that in kind of qualitatively, longer term you are likely to continues to see gross margins keep going up. I mean you actually grew gross margins in Q1, given both of your revenues didn’t grow and that is all thank you.
- Bill Bock:
- So Arnab, I think that margins are very strong at the moment, and the mix transition that you described will help us and should continue to help us as we move into the future. I am expecting however that as we get into the second half and into next year, we will have incremental issues with cost as the supply chain begins to tilt towards capacity. So as I commented earlier, my suggestion looking out 12 to 18 months is to remember our target model and we will be endeavoring to operate as close to the high end of that margin range as possible.
- Arnab Chanda:
- Great and then a question on the product side. Necip if you can talk about your sort of strategic focus, it seems like your broad based business is becoming your largest growth driver, and you are starting to make acquisitions even beyond your traditional area. Is that going to be a primary focus in terms of acquisition, or are there sort of internal developments that you are focusing on there also, primarily. Thank you.
- Necip Sayiner:
- I think on the broad based business side we have a very strong pipeline of new projects that we have been investing in. As you recall, last year unlike many of our peers in the broad based businesses we have maintained or slightly increased our R&D investment, and I think those efforts will show favorably later this year and next year as we continue the momentum in this business. Just to give you a data point to show the amount of progress that we’ve made in this business, if you go back to the prior peak before the downturn, I think which is a good measurement point to gage how well we’ve merged from, how strong that’s been able to merge from the downturn, our broad based revenues in Q1 of this year compared to the third quarter of 2008 is up 50%. So that’s a lot of progress that we have made over 18 months, and I am pretty confident when we talk again in 18 months, our results will be at least as good.
- Arnab Chanda:
- Thank you very much Necip.
- Operator:
- Our next question comes from Craig Berger from FBR Capital Markets. Your line is open.
- Craig Berger:
- Hi guys, thanks for taking the questions and nice job on the results. Can you help me understand the Access business a little bit. I know you talked about some strong design wins. How much sustainability is there to the process and to the embedded modems as we look out a year, two years, three years, to the extent that you can provide any color. Thank you.
- Necip Sayiner:
- I think again the trend that we’re guiding to for 2Q with modems being down slightly and slicks up, I think is a trend that we like to continue in the near to medium term beyond Q2. We are continuing to win new circuits with our slicks. The market dynamics is generally favorable as the Voice-over-IP ports continue to increase, and we feel that we are getting the better part of the share in this market. In the embedded modems, that has not been a significant market share shift and we wanted to see wins or losses, and the market dynamics there is about stable. So with ongoing ASP reductions we would expect the embedded modem business overtime to decline at a slower rate. We probably started this year in the Access business, and a slight improvement we are expecting into 2Q. I think we are very well positioned to deliver on the annual expectations for that business to grow in the high single digits.
- Craig Berger:
- Great, that’s helpful. As a follow-up if we could go back to the Audio Business, as transmitters and AM/FM Mix and how do we think enhanced that mix, how do we think about ASPs and also gross margins within that segment?
- Necip Sayiner:
- Well I think the consumer orders obviously has carries better gross margin than handsets, so in the near term any product mix shift will be favorable to margins, but over the longer term, we also expect a higher level of competition to emerge, and that is one reason I think Bill has eluded to our target margin range, for the medium term as an expectation. It’s just the right set of expectations on the FM. We’ll certainly benefit from the mix change, at least as far as the audio business is concerned.
- Craig Berger:
- And can you just remind us what your expectations are for the audio business in total for 2010, if you’ve given any annual growth or any color or metrics?
- Necip Sayiner:
- We have provided guidance for the overall broadcast business to grow in the mid-teens for the year, and of course audio is a very large part of that at the moment. So we will see 10% or more growth year-on-the-year in audio this year compared to last year.
- Craig Berger:
- Perfect, thank you so much.
- Operator:
- Our next question comes from Auguste Richard with Piper Jaffray. Your line is open.
- Auguste Richard:
- Yes, thanks for taking my question. Necip, can you talk a little bit about the 2010 landscape and the video broadcast side of things. What are seeing comparatively on your CMOS tuners, and their increasing number of folks and how do they compare against you products?
- Necip Sayiner:
- Well, there is an increasing number of vendors coming into this space of TV tuners. So far we believe and the customers validate that, we do have a performance advantage over those Silicon tuners. So when we don’t win a socket, that socket always goes to a discrete based Ken tuner, primarily because we didn’t have or the customer doesn’t have enough time to develop their applications with us to get ready for production. What I’m trying to say is, that the primary competition that we have today, as far as our tuners go, is the incumbent discreet based Ken tuners.
- Auguste Richard:
- Okay and then just speaking about the transition from Ken tuners to CMOS tuners, is this a five-year process from zero to 80% or is it a three years process. How quickly do you think the conversion will happen going forward?
- Necip Sayiner:
- My expectation on that timeline has actually gotten shorter over the last three to six months. We are seeing a measurable increase in interest and adopting Silicon tuners. Even customers who have looked at it as a long-term possibility, are now working with our solutions in the lab evaluating much more closer than they did last year. So I do expect that in say two years time, there is the good chance a majority of these sockets will likely become Silicon based tuners.
- Auguste Richard:
- Okay, I’ll stop there, thanks so much.
- Operator:
- Our next question comes from Sandy Harrison from Signal Hill; your line is open.
- Sandy Harrison:
- Great. Thanks for sneaking me in here. A quick question on sort of the geographic landscape and what’s happening in a number of the different areas. If you can maybe spend a second talking about sort of your view of what’s happening in North America versus EMEA versus Asia, and sort of how you expect that to play out this year? Do we see Europe come back finally after its nap and just kind of what your expectations are you’re that perspective?
- Necip Sayiner:
- If I were to rank the three geographies for our business, I would have to put Asia at the top, driven by very strong demand from Greater China, followed by North America, which we expect will grow in all groups for us in the second quarter, followed by Europe, where the growth is still subpart.
- Sandy Harrison:
- And I thin you talked about the silicon in your prepared remarks. If you look at the four product groups or five product groups that you guys are highlighting, would you rank if you could, sort of what you expect them in 2010 to be, as far as the drivers for overall revenues for 2010?
- Necip Sayiner:
- Well I think the biggest impact will come from our broad based product volume and we’ve already had a better than expected start through the year, and that was probably the highest growth segment for us. So in both timing and embedded mixing of products that are going to show very good year-on-year revenue growth for us, and will like to be together responsible for a majority of the dollar growth into 2010. I do expect as I mentioned earlier audio and video to grow as well, and there is a very good chance that Access will also achieve record revenues this year. So there is a high likelihood that all five product lines will hit the rest for us in 2010.
- Sandy Harrison:
- Great. Thanks for taking the call.
- Operator:
- Our next question comes from Brendan Furlong from Miller Tabak. Your line is open.
- Brendan Furlong:
- Good morning. Thank you very much. Back on to video tuner question again, you are engaged in five of the top six brands. I’m just curious if in your discussion of primary tuners versus secondary tuners, if you could kind of give us a run down of those five, what’s your main engagement, is it on the primary side or in the secondary tuner side? Thank you.
- Necip Sayiner:
- Yes, so although it’s five, although it’s six when I talked about engagement with five, two of those are with tuners. These are design wins that we’ve alluded to at the last earnings call. The other three are engagements with our demod today. It’s fair to say all five are evaluating our tuners, but we only have design wins with two at the moment. One of these design wins is a primary tuner, and the second one as a secondary tuner.
- Brendan Furlong:
- So, all together three, two are not currently using tuners. Are you more interested doing evaluations on the secondary side or the primary side?
- Necip Sayiner:
- Both. Actually, one of those customers is looking at using us for both functions, but we are at equally well positions for both primary and secondary, but we have a larger competitive advantage in the primary tuner due to our performance for analog TV.
- Brendan Furlong:
- My second question is on the handset side you said probably slight decline, I just want to clarify something there; even in your September quarter, which usually gets a seasonal bumping in handsets, are you still expecting the handsets to be down slightly in the September quarter?
- Necip Sayiner:
- I mean that’s the trend that we are seeing in terms of units remaining relatively flat, and blended AFPs being lower. Part of the reason and there is some of our customer, who have adopted our lower price solutions, but on a revenue basis that’s a trend we see to be that specific about September quarter over June quarter I think. We are on our way to another 90 days.
- Brendan Furlong:
- Perfect, thanks a lot.
- Necip Sayiner:
- You’re welcome.
- Operator:
- Our next question comes from Ian Ing from Broadpoint. Your line is open.
- Ian Ing:
- Thanks for fitting me in. First question on R&D, the $2 million you’re guiding up higher; how much of that is Silicon clocks acquisition and how much is organic. Also as we look to the second half, any thoughts on the R&D organization would be helpful. Do you have like a target headcount in mind or are you going to continue to hire and acquire opportunistically?
- Necip Sayiner:
- So to answer the first quarter, it’s about evenly split. The silicon clocks acquisition, we had about $1 million of quarterly run rate to R&D which will continue through the remainder of the year. On the second question, we will continue to add headcount all throughout the year. I think my best guidance for you there would be the index of revenue that we expect to achieve in 10-Q, will probably stay constant in the second half of the year. So to the degree we can expand revenues in the second half, R&D will probably expand commensurately.
- Ian Ing:
- Okay, and as a follow-up, I’m just wanting to drill down into the TV tuner content. So for the secondary tuners I guess the number of might be more than one given that this is more than one picture-in-picture or more than one person doing a DDR. Is there a range of suite spots in terms of number of secondary tuners, and will that always been an SOC.
- Necip Sayiner:
- Well, the tuners always to my knowledge are outside of the SOC. You could have a higher number of tuners in the application, but you will see them more in setup box applications, which is a secondary target for us at the moment. So I would say that in ID TV’s, 99% of the case are tuners.
- Ian Ing:
- Okay, thank you.
- Operator:
- Our next question comes from Srini Pajjuri from CLSA; your line is open.
- Srini Pajjuri:
- Thank you and good morning guys. Bill and Necip, in talking about the second half seasonality, given the expectation that on the handset FM business Necip should we expect to see normal seasonality like the previous years. I guess in previous year’s you had the consumer part growing pretty strongly in the third quarter or because of the handset issues we should expect something different this year?
- Necip Sayiner:
- I’m going to refrain from giving a quantitative answer to it, but I’ll point to two dynamics that have some trade offs. One, obviously for the industry overall, we are seeing a seasonably strong first half. So you might expect from that macro point of view, that second half gross rates might be less than what we’ve typically seen for the industry. As it pertains to our business, we have a number of products that will stop ramping over the next six to nine months. We have four new products in particular that will generate meaningful quarterly revenue starting this quarter and into the third quarter and beyond. In particular these are the power over Ethernet product, the easy radio product is the first product we have designed together with the integration team. The human interface family of products and finally is the TV tuner. So these are all going to be starting to ramp over the next six month, so that will provide some additional strength in our business, and we talked about the handset dynamics already. So the trade off of those three will result in a sequential growth and 3Q I think too early to pin point.
- Srini Pajjuri:
- Okay, and then just looking at the Q1 and Q2 guidance Necip, obviously micro controllers and the timing are fairly strong here, and some of their peers are also reporting pretty solid industrial and networking demand out there. My question is, how much of your strength you think is driven by new products versus the demand itself coming back a bit here?
- Necip Sayiner:
- We are certainly advancing from the healthier demand environment. I’d say in the timing business for example to use it as a proxy, we talked about a 30% sequentially improvement in the business, and when I look at existing customers, they’ve also grown strongly from 4Q to 1Q as their on demands include. But we’ve also added 40 new customers with our clock solutions, 50 plus new customer oscillateive. So we also gaining new customers and ramping new programs, but we are benefiting from the improved demand environment for sure.
- Srini Pajjuri:
- Thank you.
- Operator:
- Your last question comes from Suji De Silva from Kaufman Bros. Your line is open.
- Suji De Silva:
- Hi guys, nice job on the quarter. So on video first Necip, it sounds like you were a little more bullish a few months ago. Is part of what’s driving this that best you are seeing maybe moving from a few mile with each customer, to wining designs that are a broader footprint of these customers and that’s still on the common terms of that vector expanding.
- Necip Sayiner:
- I think that we made progress on multiple fronts in the last 90 days. We are starting to ship for revenue this quarter, and the customer who have been early adaptors are looking to proliferate our solution into their fall models and 2011 models. We have been able to work with our customers to address a number of improvements that they have sought from us, and we are delivering on those improvements to our customers. That will set the stage for winning more designs for 2011. Finally, as I alluded to earlier, we are seeing stronger interest from the customers in adopting silicon tuners sooner rather than later, so that level of increased enthusiasm that we see in the customer base is giving us more encouragement.
- Suji De Silva:
- And then real quick on the acquisition video it looked like immense technology. I’m curious if you already had some of that in-house with your first on trade there, and so is it extensible across products outside timing?
- Necip Sayiner:
- No we have not had that technology in-house, so that’s a strategic addition for and yes, we certainly intend to use this technology outside of timing, although timing will be the initial focus for the team.
- Suji De Silva:
- Very good. Nice job in the quarter guys.
- Necip Sayiner:
- Thank you.
- Shannon Pleasant:
- Alright, thank you very much. This now concludes today’s call.
- Operator:
- This now concludes today’s conference call. We thank you for your participation and you may discount at this time.
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