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Silicon Labs Spins Off Cell-Phone Unit

The mixed-signal circuit maker sells it business to NXP to focus on more-profitable products.

Silicon Laboratories

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hung up on cell phones Thursday, spinning off its radio transceiver business for $285 million.

With competition in the wireless-handset market heating up, Silicon Labs decided it was a good time to cash out by selling the business to


, and to focus its resources on other, more profitable products.

But Silicon Labs management's statements about maintaining current R&D spending, despite dumping the capital-intensive cell-phone business, along with the seemingly contradictory promise to substantially increase the operating margin by year's end, caused some confusion on the Street.

Shares of Silicon Labs recently slipped 2.8%, or 94 cents, at $32.30 in late-day trading.

The deal gives NXP, formerly Philips Semiconductor, the bulk of Silicon Labs cell-phone business, which includes transceivers, power amplifiers and its single-chip AeroFone product, which integrates all the major cell-phone capabilities, such as the radio and baseband processor.

Silicon Labs also could net an additional $65 million from the deal, based on the cell-phone business achieving certain milestones with its new owners during the next three years.

The cell-phone business accounted for roughly one-third of its $111 million revenue in the fourth quarter.

According to Silicon Labs, the other two-thirds of its business, which includes microcontrollers, FM tuners and VoIP chips, are a much more profitable lot. Revenue from these mixed-signal product lines grew by 20% in 2006 while maintaining a gross-margin profile above 60%, said CEO Necip Sayiner.

Sayiner said the proceeds from the sale, along with its existing $386 million in cash, will allow Silicon Labs to go on the hunt for acquisitions to beef up its core mixed-signal business.

"Over the last 12 to 18 months our acquisitions have been targeted to close gaps we perceived in our intellectual property or skill set," said Sayiner in a conference call with analysts.

"Going forward, we have more appetite for a meaningful acquisition, where we can either add another product line altogether to our portfolio or bring a synergistic business to strengthen our product line," the CEO said.

By selling its cell-phone business, Silicon Labs is the latest small-chip company to change course in the face of in increasing competition from semiconductor giants.

In October,


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put the

kibosh on its business of selling baseband processors for cell phones (although it continues to sell radio chips for handsets), acknowledging that it could not sustain the level of investment necessary to play at the cutting edge.

As cell phones adopt new technology standards that allow for more bandwidth and faster data transmission, such as Edge, 3G and WCDMA, chipmakers need to develop chips for each flavor.

That's an expensive proposition, especially with deep-pocketed rivals such as

Texas Instruments

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developing their own versions.

For Silicon Labs, the drain on resources became even more significant, as the company responded to market trends by developing its AeroFone chip, which integrates the functions of various separate chips -- such as baseband processing and transceivers -- onto a single chip.

"They knowingly or unknowingly got onto a treadmill of developing a single-chip cell phone for low-end markets," says Pacific Growth Equities analyst Satya Chillara.

On Wednesday,



announced that it had

won a contract to supply its single-chip product to


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, the world's No.1 cell-phone maker. Texas Instruments says that 12 handsets already use its single-chip LoCosto and that the company has deals for many more in the coming months.

Silicon Labs' Sayiner says he's confident the company's single-chip will win a major handset customer. But he says the goal will be better achieved at NXP, which has more resources available.

The fact that Silicon Labs was able to sell the business for more than twice its annual revenue suggests the technology was making headway, says Chillara. By contrast, Skyworks had to write off the entire baseband business because nobody wanted to buy it.

"At least they

Silicon Labs got it out while it is hot," said Chillara, whose firm makes a market in Silicon Labs shares.

Meanwhile, Silicon Labs believes it will be able to achieve a 25% operating margin by the end of 2007, now that it has freed itself of the cell phone business, which Sayiner said accounted for 20% of the company's operating expenses.

But the math didn't add up for many analysts.

Wedbush Morgan Securities analyst Craig Berger, for one, said that the costs and revenue that management ascribed to the cell-phone unit suggest operating margins for the rest of the business of only 18% to 21% -- not 25%.

"Perhaps management is being cautious with respect to the cellular costs savings associated with this transaction, or alternatively perhaps management is being too aggressive in its operating margin guidance," Berger wrote in a note to investors. Wedbush Morgan makes a market in Silicon Labs shares.

Adding to the confusion, Sayiner said the R&D budget would not decrease as a part of the deal, and he was tight-lipped about changes to SG&A following the deal.

Sayiner reaffirmed the guidance he provided a few weeks ago of $106 million to $111 million in first-quarter sales. That guidance assumes a full quarter of shipments from the cell phone business, Sayiner said, adding that the deal with NXP could close earlier in the quarter.