Silicon Laboratories (SLAB)

Q2 2011 Earnings Call

July 25, 2011 8:30 am ET


Necip Sayiner - Chief Executive Officer, President and Director

Shannon Pleasant - Director Corporate Communications

Paul Walsh - Chief Financial Officer, Chief Accounting Officer and Vice President of Finance


Vernon Essi - Needham & Company, LLC

Craig Berger - FBR Capital Markets & Co.

Ian Ing - Gleacher & Company, Inc.

Anil Doradla - William Blair & Company L.L.C.

Blayne Curtis - Barclays Capital

Sujeeva De Silva - ThinkEquity LLC

Steven Eliscu - UBS Investment Bank

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

Blake Harper - Signal Hill

Alex Gauna - JMP Securities LLC

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Craig Ellis - Caris & Company

Arnab Chanda - Roth Capital Partners, LLC

Brendan Furlong - Miller Tabak + Co., LLC



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Good morning. My name is Roshira, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Silicon Labs Earnings Conference Call. [Operator Instructions] Thank you. Ms. Pleasant, you may begin your conference.

Shannon Pleasant

Thank you, and 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. This call is being simulcast and will be archived on our website. 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

I'm joined today by Necip Sayiner, President and Chief Executive Officer; and Paul Walsh, Chief Financial 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.

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 Labs and our products with you today, we're 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 conditions. We encourage you to review our SEC filings, including the Form 10-Q that we anticipate will be filed next week, that identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

Also, the non-GAAP financial measurements, which are discussed today, are not intended to replace the presentation of Silicon Laboratory's 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, Paul Walsh.

Paul Walsh

Good morning, everyone. Second quarter revenue grew sequentially by a healthy 5% to $126.2 million. Strong operational performance yielded excellent earnings leverage in return to the 20s in non-GAAP operating margin.

First, I'd like to cover the GAAP results, which include approximately $8.6 million in noncash stock compensation charges. GAAP gross margin was up slightly at 60.4% for the second quarter, which included the final SpectraLinear acquisition costs and the nonrecurring charge from a negotiated cancellation agreement with the supplier. R&D investment was down in the second quarter to $34.2 million. SG&A decreased significantly to $26.1 million and includes a credit related to the final purchase accounting for SpectraLinear, also a non-recurring item. The GAAP tax rate was 19.5%. All this resulted in fully diluted GAAP earnings of $0.29.

I'd also like to highlight our continued progress in managing stock compensation expense down to our goal of 6%. It was not long ago that stock comp was about 10% of revenue. We're now in the range of 7% to 8% and well on our way to achieving our long-term target.

Turning to our non-GAAP results. The revenue increase was due to sequential growth in all 3 of our main businesses, led by a record quarter for our Broad-based products and the recovery in Access. Gross margin is back in our target range of 62.1%. Now prior projections on cost improvements for TV tuner contributed to the sequential increase, but mix shifts between video and timing resulted in some unfavorability relative to our forecast. We are forecasting sequential growth in gross margin again for the third quarter.

We've demonstrated good operating expense control while navigating through an increasingly uncertain demand environment. On a sequential basis, second quarter operating expenses were essentially flat and declined to 42% of revenue. R&D increased by less than $1 million to $30.5 million, and SG&A declined by a similar amount to $22.5 million. SG&A expense control has resulted in roughly flat spending levels for the last 6 quarters creating solid leverage as we work to improve the top line.

While contending with market uncertainty, we will need to remain focused on profitability. We plan to tightly manage discretionary spending and limit headcount growth to critical hires. Thus in total, we now expect Q3 operating expenses to be approximately $54 million. In the second quarter, operating income improved considerably to 20.1% of revenue, ahead of our projections. Other income was about $600,000 and our non-GAAP tax rate was 15.8%. Therefore, net income increased to $21.9 million or 17.3% of revenue. Resulting Q2 diluted earnings per share was $0.48.

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