Silicon Laboratories Management Discusses Q2 2012 Results - Earnings Call Transcript

Silicon Laboratories (SLAB)

Q2 2012 Earnings Call

July 25, 2012 8:30 am ET

Executives

Shannon Pleasant

G. Tyson Tuttle - Chief Executive Officer, President and Director

Paul V. Walsh - Chief Financial Officer and Senior Vice President

Analysts

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

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

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

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

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

Blayne Curtis - Barclays Capital, Research Division

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

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

Ian Ing - Lazard Capital Markets LLC, Research Division

Steven Eliscu - UBS Investment Bank, Research Division

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

Sujeeva De Silva - ThinkEquity LLC, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

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

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs Second Quarter Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the conference over to Shannon Pleasant.

Shannon Pleasant

Thank you. Good morning. This is Shannon Pleasant, Vice President of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the company's financial results. This call is being webcast-ed and will be archived for 2 weeks. 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.

I am joined today by Tyson Tuttle, 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 our prepared remarks.

Our comments 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 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 conditions. We encourage you to review our SEC filings 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 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 ongoing operations.

I would now like to turn the call over to Silicon Laboratories' Chief Executive Officer, Tyson Tuttle.

G. Tyson Tuttle

Good morning, everyone. We had another great quarter with all 3 of our major product line categories posting growth. We delivered upside to revenue, operating income and earnings and we see product cycle momentum continuing into Q3. We announced this strategic acquisition, which will also begin contributing to the top line in Q3.

I'm going to turn the call over to Paul to review the specifics of the quarter and then I will provide some further commentary on the business and our Q3 outlook. Paul?

Paul V. Walsh

Thank you, Tyson, and good morning, everyone. Second quarter revenue of $135.7 million was a new company record. The 8% sequential growth was a $10 million increase over Q1, representing the largest sequential gains in nearly 3 years. This is impressive and that it comprehends the decline in our touch control in revenue from 8% in Q1 to just 5% in Q2. The strength was across all of our major product lines with several reaching all-time highs. The Ember acquisition closed on July 3, thus, our Q2 results do not reflect anything related to that deal other than transaction cost. I'll start with the GAAP results, which include charges related to the executive separation agreement, transaction costs associated with the Ember acquisition, $9.2 million noncash stock compensation charges and an $8.4 million credit from a one-time release of tax reserves. Second quarter GAAP gross margin improved to 61%. R&D investment increased to $34.2 million and SG&A expense increased to $32.2 million, resulting in GAAP operating income of 12.1%. Because of a tax reserve release, there was a tax benefit in Q2, thus, our tax rate was a negative 15.3%, resulting in diluted GAAP earnings of $0.47.

Turning to our non-GAAP results. Gross margin increased meaningfully to 61.3%, a 7% sequential increase in broad-based products and an 8% sequential increase in access products contributed to the gross margin improvement. Our Broadcast products also increased 8% sequentially in Q2, driven by our audio business, which was favorable to the margin mix within Broadcast. Mix continues to be the primary determinant in the quarter-to-quarter margin fluctuations and I expect that trend to persist in the second half of 2012. We project our Q3 gross margin will be at or near 61% depending on mix. This comprehends an expectation of the higher margin Access business will represent a smaller percentage of revenue in Q3 and the product mix within access will be less favorable than in Q2.

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