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Silicon Laboratories, Inc. (NASDAQ:SLAB)

December 07, 2011 7:30 pm ET

Executives

Necip Sayiner - Chief Executive Officer, President and Director

Analysts

Unknown Analyst

Blayne Curtis - Barclays Capital, Research Division

Blayne Curtis - Barclays Capital, Research Division

Let's go ahead and get started here. From Silicon Labs, we have Necip Sayiner, CEO; we also have Paul Walsh, CFO. We're going to do a shorter position and leave some time for Q&A and then the breakout immediately following. Thanks. Necip?

Necip Sayiner

Thanks, Blayne. Good afternoon. I know there is quite a bit of interest in the current business trend given the macro environment. So I'll start by stating briefly what we're seeing in our business today.

Quarter to date, I'm happy to report that demand has held up quite well for us. We are seeing solid turns business with steady bookings across all our businesses. I would attribute this primarily to the new product cycles driving growth for us. We're of course enjoying a robust demand for our touch controllers at Samsung. We've seen solid demand recovery for our silicon tuners, TVs. And some of the market share gains that we were able to get in our Embedded Mixed-Signal business earlier in the year is coming to fruition, to improve overall demand for us in the quarter.

So as you may recall, at least those of you who follow us would recall, in our October earnings call when we provided guidance for the fourth quarter, we stated that at that time our backlog to date looked better than the same time in prior quarter. But we had chosen to inject some extra conservatism into our guidance and essentially guided around flat revenues to third quarter. This was based on what our peers were saying and were based on some concerns that we might see bookings rate drop later in the quarter. Well those worries have not materialized and we feel at this juncture that extra conservatism in the guidance may not have been necessary.

We are seeing, however, in conjunction with the solid Turns business, shorter than usual lead times in our business. So that does reduce the visibility that we would normally have into the following quarter. Also, obviously, there are unknowns around the holiday season, sell-through both in North America, as well as in Asia. So all of this makes it, for us, difficult to call how Q1 will shape up, whether it will be seasonally down quarter, soft seasonal, better than seasonal, we don't really -- can't call that definitely at this stage. But nevertheless, I think the current business trends have been better than what we've expected.

In addition to the favorable current business trends, we also believe that there are a number of key trends, long-term in our industry, that favor our core capabilities and competencies. So to start with, the requirements for low-power everything is on the rise across an increasing number of applications. Whether we're talking about longer battery life or energy being harvested from green sources, the trend is clear and I think this plays strongly into our low-power mixed-signal design capability.

Insatiable demand for more bandwidth will continue to extend opportunity for networking infrastructure. Not only the needed capacity is growing significantly, but also as the data rates are going up, demand for high-performance components such as our low-jitter clocks is disproportionately increasing. We are also believers in internet of things. What I believe will enable this, among other things, is highly integrated, low-power or power harvested smart sensors with wireless connectivity. And this is exactly what we're doing in our Embedded Mixed-Signal business. Bringing sensors, micro controllers and wireless transceivers in highly integrated solutions.

Human interface, of course, is a large growing exciting opportunity. One which we approached differently than many of our competitors. We approach touch sensing as a mixed-signal problem that called for better interference, immunity and higher signal-to-noise ratio, and with lowest cost of implementation. Something we happen to be very good at, as a high-performance mixed-signal provider. And indeed, smaller higher performance, lower power, always win across an increasing number of solutions. So that is how we are investing, this is how we are channeling our capabilities into a variety of areas.

So one of the, I think, critical measures of how effective we've been, with those investments, is to look at the growth of the investment businesses. We've talked about some of the headwinds during the last 4, 5, 6 quarters affecting our business, as FM tuners for handsets and modems have declined, while these are products that have been invested in 5, 10 years ago and haven't really seen any recent investments. So a fair picture to look at is the trajectory of our investment businesses. And this picture actually excludes the benefit we've seen with the handsets in the '08, '09 -- 2008, 2009 timeframe. So I think it's a fair way to look at it.

And as you see, we've been able to achieve a very high CAGR across 5, 6 years. Even in 2011, which proved to be a mediocre year for our industry, those product areas has grown in mid- to high-single teens. And I believe this trend will continue into 2012, I see absolutely no reason why we can't have a similar rate of growth in those businesses into '12, given the share gains that we are enjoying in our video, HI product lines, Broad-based businesses like timing MCU, emerging businesses like Wireless and Isolation. And I feel confident in that growth potential, not just for the next couple of years but for the long term, because I believe we possess a highly differentiated capability in mixed-signal design that is becoming more and more prevalent and more and more critical across a broad set of applications that we target.

I'll give you a couple of examples of where we're channeling that investment. I'll start with 32-bit MCUs. We've had a lot of success in our 8-bit MCU offerings, not just because of the high-performance core in it but primarily due to the higher level of integration of mixed-signal peripherals. So we essentially have a mixed-signal MCU that we offer to target applications, while we wanted to take that same value proposition into the 32-bit domain and essentially offer a similar set of products that can target those applications that require the higher level of computational power.

Another example is what we're doing in the sensors area which we believe is a long-term strategic growth vector for us. We are in the late stages of commercializing the 2 exciting technologies we acquired in 2010. MEMS technology for our Timing business and humidity and temperature sensing technology that we acquired, that will allow us to enter the environmental sensor market.

These types of technology acquisitions is just one way of how we leverage the strong balance sheet that we have and the strong cash flow that our business consistently generated. Another important way we utilize excess capital is share repurchase. And since we initiated this program back in 2006, we purchased over $0.75 billion worth of our shares, reducing our float by 35% in the process. And we'll continue to be opportunistic in the way we utilize our capital in terms of share repurchase. So our board authorized another $50 million for the 6-month period, so we always have something in place to be able to deploy that cash.

So with that, I'll turn it to Blayne for questions.

Question-and-Answer Session

Blayne Curtis - Barclays Capital, Research Division

Just going back to the first slide. What areas were you being conservative on? And now, where have you seen it? Is it just then that those areas that you're conservative on have gotten -- you haven't seen the fall-off, or some other areas benefit better than you were looking for?

Necip Sayiner

I think, across all product lines, we've seen a little better than expected demand. Certainly demand for our verticals in touch and silicon tuners have been robust. We have also seen continued strong turns business in our embedded mixed signal. This includes MCUs. I think we're also getting some modest help from the very early stages of the PON equipment in China. This has providing a bit of a lift into our ProSLIC Business, as well as the MCU business through our optical transceiver presence.

Blayne Curtis - Barclays Capital, Research Division

Maybe moving to touch, obviously you announced one win there. Can you talk about the -- obviously that component now in the market, how has it been received and the traction that you're getting in, obviously, a crowded space? How are you differentiating?

Necip Sayiner

I think we approach this differently than those competitors who has looked at us as an MCU-centric problem. For us it's a mixed-signal problem. You're trying to detect touch in all kinds of interference, you're trying to achieve high signal-to-noise ratio. So for us, this is really a mixed-signal problem creating an analogue platform to touch, the sense, the capacitive touch with high degree of fidelity. And we are able to do that with a significantly smaller die size than I believe our competition can achieve. Certainly, we do utilize the MCU as part of that solution, much like we do in our silicon tuners and FM tuners. But for us, this is not an MCU-centric problem, this is a mixed-signal problem, that lends itself well to what we do. And I think our lead customer has seen it in our offering and has chosen to put us on a highly visible platform in their offering, in a very short period of time.

Blayne Curtis - Barclays Capital, Research Division

Maybe moving to video. You saw a correction or a pause in that business. Maybe talk about -- there's obviously a concern that your products aren't going to sell in that economy. But maybe talk about what you're seeing to minimize, in the video unit product, in the near term and then maybe frame the opportunity next year, as far as what the opportunity for silicon tuners is.

Necip Sayiner

I think the recovery in the fourth quarter, over the depressed levels of third quarter, has been very solid. And our customers also started ramping 2012 models with our new generation device. So that's been underway. We feel very good about the expansion of our footprint in 2012. We believe that we'll be able to increase our share by at least 50% year-on-year. And obviously, in the near term, seasonality and the sell-through through the holidays will determine how we start the year off in that business. But on a year-on-year basis, we feel very bullish. We also feel very good about where we stand with our roadmap compared to competition. I think we're able to successfully maintain a very significant competitive lead.

Blayne Curtis - Barclays Capital, Research Division

Maybe following up on -- I mean, you obviously blaze the trail for silicon tuners adopted in TVs. It did cost you a bit on the gross margin side as you had a step down in the margin of the initial volumes. Can you talk about the progression of improving those, the margins in the Video business, and then maybe as it compares to your target range for the overall company? As video becomes -- you're doubling your market share, a larger portion of the mix, how's the different factors...

Necip Sayiner

Sure. I think they've made a lot of improvements in the margin profile of the product they shipped in 2011, throughout the year. As I stated previously, the margin -- product margin, for our next-generation device is more favorable. So we'll see an improvement in the product line margin. However, that product line will continue to have a margin below our corporate average. So we get asked this question quite a bit in terms of the margin profile of the business, as video ramps and some of the margin-rich products in broad-based also ramped throughout the year. I think this is going to be a question of timing and what ramps quickly and what time frame. I would like to think that, over the long term, the broad-based businesses that carry better margin profiles will have substantially bigger growth potential, because in those areas we are addressing a significantly larger TAM. And those businesses are also growing very nicely for us. But in the near term, it will be a matter of the mix between video and some of the margin-rich businesses.

Blayne Curtis - Barclays Capital, Research Division

Maybe one last question. On the broad-based business, timing has been a huge success. Touch is still small. Obviously, percentage-wise, it will be a big grower. But when you look next year out of that portfolio, if you're talking about 32-bit MCUs, kind of maybe rank your -- the opportunities you're most hopeful of next year.

Necip Sayiner

I think I would put them in 3 categories. I think 2 of them we touched on. Significant gains in our verticals in touch for smartphone and silicon tuner for TVs. We are equally, if not more excited, about the progress in broad-based. We have seen a measurable uptick in our design win rate early in 2011 in those businesses. And I think we're starting to see fruition of some of these share gains today in those businesses. I think you would agree that our broad-based business held up much better compared to peers in the industry. And I think that trend will continue. We'll continue to get good growth from MCUs, and timing along the lines that I represented in some of those major trends. And the emerging businesses are small today, but they are providing us with a significant growth rate. And at this rate, soon enough, they will be large enough to start moving the needle for us.

Blayne Curtis - Barclays Capital, Research Division

Anybody else have a...

Unknown Analyst

Just a follow-up on the Touch business. Given the capabilities that you're talking about there, the focus on the mixed-signal side of it. What applications is your solution best suited for? And the profile of those products, is it going to be those more interface or mixed-signal related capabilities that are going to cause you to win? Is it going to be your ability to drive a lower price on that? Is it going to be the intersection of the 2? If you could just profile that, that would be helpful.

Necip Sayiner

Sure. The very first offering that we've had in that space actually targeted a broader set of applications. And we've started generating some revenue from those applications even before we've announced a smartphone win. The smartphone win comes at the heels of a more optimized solution for handsets. And we are targeting the entire smartphone market, so we are not particular about the low-end or high-end. In that, I think the performance value trade-off that we are able to offer our customers is attractive. Having said that, this is just the first step for us, both in terms of getting traction but also expansion of the roadmap. So we are obviously invested in a cost reduction roadmap, to be able to serve the lower end smartphones that are increasingly -- or lower end phones in general, that are increasingly getting the touch functionality. As well as continuing to improve performance to get a more meaningful share of the up -- higher end. I do believe that the analog platform has the capability to do both. And some of our competitors have the first mover advantage and may have had more time with end application in terms of maturing their firmware. But I do believe that we do have a fundamental advantage in the way we approach this problem, in the way we have an analog platform over which we can build that solution. So I'd just say, stay tuned for more design wins. We'll try to report our progress as we look to proliferate our position, but also as we expand the roadmap.

Blayne Curtis - Barclays Capital, Research Division

Maybe just going back. The video -- the competition has only been, maybe one other player. Has anything changed? Is there any guys you see on the periphery that may be there? I mean, it is a big market, any update there?

Necip Sayiner

No. I think we continue to enjoy a significant lead. There are players who have perhaps been able to secure some sockets at the lower end, away from the can tuners. So just to put things in perspective, I believe the silicon tuner penetration has been about 30% in 2011, and we would account for 20% of that. Going into 2012, we do expect that penetration to be approximately 50%, and we would be more than 30% of that. So we are gaining lion's share of the incremental unit. And I don't see that competitive landscape changing anytime soon. As a matter of fact, some of the major customers, our relationship has evolved to become more strategic, and we're able to now add additional features that they require to our solution to create a more compelling, long-lasting relationship with them.

Blayne Curtis - Barclays Capital, Research Division

If there is not one more, we'll wrap it up there. Thank's Necip.

Necip Sayiner

Okay. Thank you.

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Source: Silicon Laboratories Inc. Presents at Barclays Capital 2011 Global Technology Conference, Dec-07-2011 04:30 PM

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