Silicon Laboratories (SLAB)

Q3 2011 Earnings Call

October 26, 2011 8:30 am ET


Necip Sayiner - Chief Executive Officer, President and Director

Shannon Pleasant - Director Corporate Communications

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


Cody G. Acree - Williams Financial Group, Inc., Research Division

William S. Harrison - Wunderlich Securities Inc., Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

Anil K. Doradla - William Blair & Company L.L.C., Research Division

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

Craig A. Ellis - Caris & Company, Inc., Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Steven Eliscu - UBS Investment Bank, Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

Blayne Curtis - Barclays Capital, Research Division



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Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs Third Quarter Earnings Call. [Operator Instructions] Thank you. I will now turn the call over to Ms. Shannon Pleasant. You may begin, ma'am.

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 to 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 condition. 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 Labs' GAAP financial results. We're 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 V. Walsh

Good morning, everyone. While third quarter revenue was down by 5.6% sequentially, we finished near at the top end of our guidance at $119.1 million. We are able to counter top line softness with strong operational performance, yielding excellent earnings leverage. First, I'd like to cover the GAAP results, which include approximately $9.1 million in noncash stock compensation charges. GAAP gross margin was up slightly at 61.2% for the third quarter. R&D investment declined in the quarter to $31.7 million, and SG&A was $27.3 million. The GAAP tax rate was 20.9% resulting in fully diluted GAAP earnings of $0.26, well ahead of our guidance.

Turning to our non-GAAP results, the revenue mix differed somewhat from what our initial expectations were entering the quarter. The Broadcast business came in relatively flat, and our Broad-based and Access products experienced larger macro-related declines. Given the mix shift, gross margins was down 60 basis points to 61.5%. We expect that margins remain in this range in Q4.

Anticipating an uncertain demand environment, we again exhibited very good restraint in controlling operating expenses. On a sequential basis, we reduced spending approximately 5% through lower variable compensation and further reductions in discretionary spending. R&D decreased to $28.1 million, and SG&A declined to $22.4 million. SG&A expenses at its lowest level since the first quarter of 2010. Operating income improved versus our initial expectations given the expense restraint I just described and was 19% of revenue. Other income was $300,000, and our non-GAAP tax rate was 16.8%. Therefore, net income was $19.1 million or 16% of revenue. Resulting Q3 diluted earnings per share was $0.44, well above our guidance.

Some of the impressive earnings result was also attributable to our aggressive buyback activity. Spending $86 million in Q3, we repurchased 2.5 million shares. We ended Q3 with a diluted weighted average share count of 43.9 million, down sequentially by 2 million, reducing the float by 4.4%. Share count is expected to decline further this quarter as a result of Q3 substantial repurchases. Since the repurchase program's inception in 2006, we have now spent more than $750 million, totaling 22.4 million shares, and reducing our float by 35%.

On the balance sheet, accounts receivable decreased to $58.4 million or 44 days sales outstanding. We continue to have no known collection or bad debt problems. Inventory was particularly well managed given the revenue decline and the simultaneous need to build inventory for new product rims.

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