Silicon Laboratories' CEO Hosts Definitive Agreement to Acquire Energy Micro Conference (Transcript)

Jun. 7.13 | About: Silicon Laboratories, (SLAB)

Silicon Laboratories, Inc. (NASDAQ:SLAB)

Definitive Agreement to Acquire Energy Micro Conference

June 07, 2013 8:30 am ET

Executives

G. Tyson Tuttle - Chief Executive Officer, President, Director and Member of Equity Award Committee

John Hollister - Chief Information Officer and Vice President of Business Development

Geir Førre - Co-Founder, Chief Executive Officer, President and Director

William G. Bock - Interim Chief Financial Officer, Senior Vice President and Director

Analysts

Vernon P. Essi - Needham & Company, LLC, Research Division

Auguste P. Richard - Piper Jaffray Companies, Research Division

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Brian Nugent

Craig A. Ellis - B. Riley Caris, Research Division

Operator

Good morning, my name is Akitria, and I will be your conference operator today. At this time, I would like welcome everyone to the Silicon Labs conference call. [Operator Instructions] I would now like to turn the call over to Mr. Tyson Tuttle, CEO of Silicon Labs. You may begin.

G. Tyson Tuttle

Good morning, and thank you for joining us. As a reminder, this conference call is being recorded and there will be a replay on our website shortly after we conclude today. To listen to the webcast replay, please visit Silicon Labs' Investor Relations web page where you'll find complete instructions. The telephone replay numbers are listed in our press release.

Safe Harbor Statement. During today's conference call, we'll be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I would like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear on our SEC filings, including risk factors relating to acquisitions. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainty, and that future events may differ from statements made. For additional information, please refer to the company's SEC filings, which are posted on our website or available from the company without charge.

With me today in the call is John Hollister, Vice President, Business Development; and Geir Førre, Energy Micro's President and CEO. Because we are all in Norway today, and we'll shortly attend an Energy Micro company meeting, we request that you ask any questions you have on this call, as follow-up questions will be difficult to accommodate afterwards. Bill Bock, CFO of Silicon Labs, is also standing by in the U.S. and will be happy to answer questions during this time as well.

We're excited to announce our agreement to acquire Energy Micro and believe the combination will greatly benefit our 2 companies. As some of you may already know, Energy Micro offers the industry's most power-efficient portfolio of 32-bit MCUs. Silicon Labs has its own strong MCU business and is a lead -- industry leader in wireless RF solutions. This strategic acquisition will expand and enhance Silicon Labs' portfolio of 32-bit microcontrollers, allow us to launch unique multifrequency, multiprotocol wireless RF solutions based on the industry-leading ARM Cortex architecture, and it will accelerate our position in ultra-low-power-embedded processing for the Internet of Things and smart energy markets.

I'm sure many of you have heard me talk about our focus on these green markets, which we believe will be important growth drivers for Silicon Labs going into the future. Industry experts predict that the number of connected devices for the Internet of Things will top 15 billion nodes by 2015 and reach 50 billion nodes by 2020. In addition, Energy Micro's ultra-low-power portfolio is highly complementary to our existing 32-bit Precision32 mixed-signal MCUs and sub-gigahertz and ZigBee wireless ARC [ph] products. It targets a rapidly growing embedded market and greatly expands Silicon Labs' MCU portfolio, adding new low-power products and protocols such as Bluetooth LE.

Finally, we view this acquisition as a good fit, not only in terms of technology, but culturally as well. We both share a vision of a greener, smarter, wirelessly connected world and a foundation for the shared combined vision is ultra-low-power technology enabled by each company's innovative mixed-signal design. The combination of Energy Micro and Silicon Labs' industry-leading development environments and reference designs enable a faster time-to-market and a reduction in development costs, benefiting our customers, our companies and our shareholders.

I will now hand it over to John Hollister to give you some specifics on the acquisition. John?

John Hollister

Thank you, Tyson, and hello, everyone. We have signed a definitive agreement to acquire Energy Micro for an upfront payment of $115 million in cash, plus approximately $55 million in deferred and earn-out consideration. The acquisition is funded from balance sheet cash resources and will require no borrowing. As we said in the press release, Energy Micro is expected to contribute approximately $7 million in revenue in the second half of 2013. Anticipated growth will allow the transaction to be accretive on a non-GAAP basis by the end of 2014, excluding amortization of acquired intangibles and other non-GAAP adjustments. Of course, we will be in a better position to give more details in our second quarter conference call, which we expect to hold on July 25. The boards of both companies has -- have approved the acquisition and we expect to finalize the transaction sometime next month, subject to customary closing conditions.

I would now like to introduce you to Geir Førre, President and Chief Executive Officer of Energy Micro.

Geir Førre

Thank you, John, and hello to all of you. We, at Energy Micro, are very excited about being a part of Silicon Laboratories. When we started the company in 2007, our goal was to develop the most energy-friendly microcontrollers and radio in the industry. And we have, all based on the industry-standard on course. Our product has been designed into many high-volume applications, and revenue has been growing steadily and strong since we started the company. Now, becoming a part of Silicon Labs is, for us, the beginning of a second phase. With access to more R&D resources, more marketing, most hedged resources, in addition to a lot of experience in all areas, we will accelerate our pace to -- and to gain market share. We will be able to open more ready-to-go systems with firmware stacks and tools on top of the chips to our customers.

We know that Silicon Laboratories has a very healthy culture, its innovation and its vision for the future is in line with ours. Our combined unique expertise in MCUs, radios and mixed-signal design will give our customers access to a wide variety of differentiated products. We have extremely passionate innovators in both companies and I cannot wait to see what we can do with all of them.

I will now hand the word back to Tyson.

G. Tyson Tuttle

Thank you, Geir. Over the course of our due diligence, we've gotten to know the Energy Micro team well, and we believe we have a good fit in all the ways that matter in an acquisition of this kind. Both teams are excited about today's announcement, and we believe it will be beneficial to all shareholders involved.

Now, we will go to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Vernon Essi with Needham.

Vernon P. Essi - Needham & Company, LLC, Research Division

Tyson, congratulations on this acquisition. Tyson, I was wondering if you could give us an idea, and I know the Internet of Things is a much-used moniker and in some ways, some will say, an ambiguous thing to try to discern in MCU and wireless, what defines that. But if you were to look at the products that you've rolled out in this space and including Ember, and now, this new acquisition, do you have any idea of what your market share in this space might be even though it's still small and emerging?

G. Tyson Tuttle

We gave some guidance at the end of last year, that last year, about 10% of our revenue came from, let's say, Internet of Things applications that are wirelessly connected, microcontrollers, some sensors in there. And so we're adding, layering on, we're saying $7 million in the second half, so that would be incremental on top of whatever share we would have. I would think most of the applications that these are going into would be there. I don't know exactly what fraction, but you can call it 50/50. So it's going to move the needle a little bit this year. And I think that given the ramp of the products going into next year and the new wireless products that we will introduce and the synergy that we'll have in selling our wireless products together with their MCUs in a lot of these low-power applications, it will definitely accelerate revenue in that category going forward.

Vernon P. Essi - Needham & Company, LLC, Research Division

Well -- and I guess, my -- the reasoning for my question is more or less -- I mean, I see the leverage there, obviously, that it can lever your channel. What, I guess, I'm trying to understand is, the thought process behind the scenes, just to try to gain as much share as you can in these newly emerging areas, and I'm trying to understand sort of how much share you have relative to all the competitive offerings that are out there in this new emerging space?

G. Tyson Tuttle

Right. Well, if you -- really, there is -- the new emerging spaces, like the Internet of Things and all of the new wireless applications, you've also got the broad 32-bit MCU market. And as you know, last year, we introduced our first 3 families of Cortex-M-based devices. The Energy Micro portfolio will layer on to that immediately and will be added to our portfolio. And as we go up against some of the big players in the market like TI and Freescale, Atmel and ST, you have to have a complete portfolio. So this helps us compete more effectively with the large players and also accelerates the roadmap going forward into that 32-bit market. And I think will dramatically accelerate our revenue in that fast-growing area. So that's one important area of synergy that we have going forward. And then, certainly these technologies, low-power is going to be an essential element going forward in the market for a lot of these Internet of Things applications that have to run on batteries, are going to be energy harvested. And this technology that Energy Micro has developed and the portfolio they developed and what we can do together going forward, I believe, will dramatically also accelerate our ability to gain share in that area. Specifically what that share is a tough thing to calculate at this point.

Vernon P. Essi - Needham & Company, LLC, Research Division

Okay. And then just a quick financial question here, Bill, and I don't know if you're prepared to give us any color as to what the intangible amortization charges may look like from this on a quarterly basis?

William G. Bock

Well, we're not going to provide that detail this morning. Our plan will be to give you a much more comprehensive view of the impact of this acquisition on our financials when we do our second quarter earnings call on the 25th of July. So we'll provide detailed guidance on the third quarter and a good view of all of the relative statistics of this transaction at that point.

Operator

The next question comes from the line of Gus Richard.

Auguste P. Richard - Piper Jaffray Companies, Research Division

Tyson, can you talk a little bit about -- or I just want to make sure I understand which pieces you got in the RF and in the ARM cores, did you get an M0+ and a ZigBee -- I'm sorry, low-energy Bluetooth radio in the acquisition?

G. Tyson Tuttle

Yes, the -- so the ARM Core, the Energy Micro portfolio has Cortex-M0+, Cortex-M3 and Cortex-M4, so from -- both from the low-end side with the M0+. M3, which is a similar core to what we've -- the same core that we were using our products and then the M4F, which is a higher functionality core with additional capabilities. So they have the full portfolio of Cortex-M-class MCUs, and with various memory sizes. So on the ARM side, we believe that we've got a quite complete set of products to go compete in the market. On the RF side, those products have not been introduced into the market yet. In other words, they are not sampling to customers yet, but the development is ongoing, and brings a number of different standards, including ZigBee, where our software can run on top of their chip, but also significantly expanding our stand with Bluetooth low energy, Bluetooth Smart type of devices. So that's the single-mode devices going to all of the accessories that connect the handsets and tablets. And that's a very exciting addition to our product portfolio and a very great application for our mixed-signal technology.

Auguste P. Richard - Piper Jaffray Companies, Research Division

And then in terms of the $7 million in revenue you expect in the second half, can you talk a little bit about the applications that [ph] you're signed into?

G. Tyson Tuttle

Maybe I can pass that one to Geir.

Geir Førre

Yes, I can answer that question. We have -- Energy Micro has 5 areas where we have focus: One is the smart energy; the second is home/building automation; the third is alarm security systems. The fourth is health and fitness applications; and the last one is what we call smart accessories, anything that you connect to your smartphone or your tablet. And our revenue has been quite equally split between these 5 segments. And also design win wise. So we have, in total now, over the last couple of years, we won 725 customers and quite spread amongst those. And that is what Silicon Laboratories is also getting here is a very broad-based business with numbers of customers, and many of those customers are just in the early days of production and sampling. So there's a lot of revenues to come over the next few years, just by what we have created and won in the market over the last couple of years.

Auguste P. Richard - Piper Jaffray Companies, Research Division

And then last one for me. Can you talk a little bit about the overlap or -- in your software capability, you're going to run [indiscernible] software on top of the Energy Micro controllers? Or how do those teams come together?

G. Tyson Tuttle

Right. So the -- as you know, we acquired Ember about a year ago, and they brought in ZigBee technology and the ZigBee software stack, and a very strong software team. So that is a set of software that will run on our existing hardware platforms, on the new Energy Micro EFR platform, and then -- and certainly on a number of roadmap items that are under discussion. So that software was something that Energy Micro did not have and we will bring to the table. Energy Micro was developing the Bluetooth low-energy stacks and software, and so that will come together. Certainly, in terms of our silicon roadmap and in terms of our portfolio and our organization and teams working together, we will be using that to dramatically accelerate the roadmap. Let's say on the other aspect, software-wise, is all the tools and software libraries, and our goal is then to unify the efforts that we were making in that area with what they're doing. And I think, again, dramatically accelerate our ability to develop best-in-class support tools to be able to scale the business into the channel as well and to support the customer. So we see a lot of advantages in the markets, and in this acquisition, in terms of being -- as combining forces and really accelerating our path going forward for both companies.

Operator

Your next question comes from the line of Tore Svanberg with Stifel.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

I had a few questions. First of all, Tyson, I'm sure you looked at other potential companies in this area. So could you talk a little bit more about why you chose Energy? I mean, was there something about their power consumption or anything else you can talk about the architecture on why you chose this particular asset?

G. Tyson Tuttle

Yes, there's a lot of reasons there. So I think, foremost, is the fact that they have, I think, best-in-class technology and they had established a leadership position in the market, in particular in the low-power area and were one of the early adopters of the ARM core and introduced their first products with a dramatic time-to-market advantage. And so -- and were very successful in winning in the market against much larger incumbents. So that speaks very highly to the quality of the technology and the execution and the strategy that they were able to pursue. I think, probably an equally important aspect is the cultural fit between the 2 companies. I think we really share both a strategic vision and a common heritage in terms of our appreciation of technology and innovation and the spirit with which we've had in our engagement has been very important. I think that just that -- that cultural fit and the fact that we have a lot of common background and a lot of common shared values is going to make for a successful acquisition. I think that one is equally important to the quality of the work. And I also think that it's a very clean acquisition in terms of the size, in terms of the stage, as being late stage, and that it's really a perfect intersection point with our own internal developments and their developments to put the 2 companies together at this point. And so it was really a great fit. There were a number of other avenues. I mean, it really -- it was this -- it really came down to this or the organic path. And when I compared -- when we compared going together and how much faster we could get into the market with what we could do alone and what they could do alone, it was really a win-win situation. So this was the logical path and the best fit with our existing strategy.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good then. Maybe a question for Geir. I was hoping you can talk a little bit about manufacturing, who the company -- company's foundry partner is? And maybe talk a bit about the company's gross margins in relation to Silicon Labs. Just wondering if there's some synergies there as well.

G. Tyson Tuttle

Yes. I think in terms of the of the financials, beyond the guidance that we've provided, I would prefer to wait until we get to the call in July. In terms of the company's supply chains and methodologies and tools, we're actually quite compatible. We use the same foundry partners, the same assembly partners. We actually, on the operations side, believe in -- and on the supply chain side, believe that this will be quite a straightforward acquisition and integration.

Operator

Your next question comes from the line of Anil Doradla with William Blair.

Brian Nugent

I guess, it's Brian Nugent for Anil. So this is this second sizable acquisition in the space in the last 2 years. We know it's a fragmented market. I'm just wondering, should we be expecting more M&A activity from SLAB and MCUs or were these really just more opportunistic?

G. Tyson Tuttle

I would, as we have said in the past, our primary strategy is to grow organically and to remain within the areas that we're currently in and that if we look for acquisitions, it will be ones of high quality, and it will be to fill a product or a technology gap. And I think that here it would be -- it really -- both a product and a technology gap. That it was looking at the organic path versus joining together forces with Energy Micro and the acceleration of the time-to-market and the increased scale that we were able to achieve made sense. So it really fit the criteria that we've been talking about for certainly the whole time I've been here. And so whether we -- whether to expect anymore -- I mean, certainly we're busy right now, but you can't predict the future. But I think we would continue to be consistent in our application of that technology into our, primarily into our broad-based business, which includes our MCUs, wireless, sensors, power and our timing business. But that's really all I can say at this point.

Brian Nugent

Fair enough. Are there any other specific areas, I mean, you have a big bet on Internet of Things right now, but are there other specific product gaps where you feel like that you need to fill in order to be the leader in that space?

G. Tyson Tuttle

I think that certainly the 32-bit MCU area was one where we were certainly later than others to the market. And I believe that success in this area is a huge opportunity for us and enables our ability to control the embedded systems and to provide a mixed signal integration platform. So this was one that I felt like we really need to move as fast as we can. The other areas, I feel certainly quite good about our prospects in all of the other broad-based businesses. I think the company has never been better positioned in terms of the profile of the revenue. We just -- this quarter, the PC -- or I'm sorry -- the handset revenue is now essentially done with. And so really looking at the broad-based business and the way we're positioned in those markets, and we can take them 1 by 1. But I think we're very well-positioned in all of our product lines going forward, from Broadcast to Access and all of the broad-based businesses. So I feel quite good for where we are, and I feel very good about what we're able to announce today in accelerating the momentum that we've got in the MCU and wireless space.

Operator

[Operator Instructions] And there are no further questions at this time. Presenters, are there any closing remarks?

G. Tyson Tuttle

Yes. Well, everyone, thank you very much for joining on the call today, and we look forward to speaking with you again on our Q2 conference call in late July.

Operator

Excuse me, presenters. Presenters?

G. Tyson Tuttle

Hello, yes?

Operator

Yes, we have one question.

G. Tyson Tuttle

Okay.

Operator

Okay. The question comes from the line of Craig Ellis with Needham (sic) [Caris & Company].

Craig A. Ellis - B. Riley Caris, Research Division

Tyson, I missed first part of the call, so you might have to addressed this. Related to the deal being accretive in the second half of 2014, what's assumed on the earn-out dynamic in that accretion guidance and what's the dilution impact, their termination [ph] take on incremental expenses and the team that you look for providing better, longer term growth opportunities for the business?

G. Tyson Tuttle

Craig, this is Tyson. We really, other than what we've said in the remarks so far in terms of $7 million of revenue in the second half and being accretive by the end of '14, we'll be prepared to offer more details in the call in July, but we're not sharing any additional information financially beyond that at this point.

Craig A. Ellis - B. Riley Caris, Research Division

Okay. And then with respect to the application leverage that these low-power 32-bit MCUs provide Silicon Labs, what are the 2 -- 2 or 3 applications that this positions you better for versus the organic 32-bit growth that you have been targeting?

G. Tyson Tuttle

Yes. So you've got -- a number of areas where we've been focusing, we talked about the 5 areas. One of the big areas for us has been home automation security, and I think that's got a lot of momentum out in the market right now. Also the smart metering space, certainly we've got a nice presence there and this provides additional products to be able to sell. The health and fitness area, both for the ZigBee application, but especially the Bluetooth low-energy technology that we have coming in, I think, is going to accelerate that. And we already -- that's an area that values the low-power technology very much. And then all of the smart accessories that connect to iPhones and tablets to be able to have Bluetooth smart. We've got -- they've already -- Energy Micro already has a number of design wins in that area, and adding the RF capability and the software for Bluetooth low-energy is a tremendous market opportunity for us and an expansion of our SAM [ph]. So I think it spans a fair number of applications and brings in some new ones that will be exciting for us to pursue.

Craig A. Ellis - B. Riley Caris, Research Division

Okay, that's helpful. And then lastly for me. How many folks are you bringing on board with Energy Micro?

G. Tyson Tuttle

Energy Micro has approximately 85 employees today.

Operator

And there are no further questions.

G. Tyson Tuttle

All right. Thank you for joining us today. And we look forward to speaking with you again on our Q2 conference call in late July. Thank you, everyone.

Operator

This concludes today's conference call. You may now disconnect.

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