SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Laboratories Inc. (SLAB)

Q2 2009 Earnings Call Transcript

July 29, 2009 8:30 am ET

Executives

Shannon Pleasant - Director of Corporate Communications

Bill Bock - SVP, Finance and Administration and CFO

Necip Sayiner - President and CEO

Paul Walsh - VP and Chief Accounting Officer

Analysts

Craig Ellis - Caris & Company

Adam Benjamin - Jefferies & Company

Romit Shah - Barclays Capital

Tore Svanberg - Thomas Weisel Partners

Alex Gauna - JMP Securities

Suji De Silva - Kaufman Brothers

Gus Richard - Piper Jaffray

Arnab Chanda - Roth Capital

Sandy Harrison - Signal Hill

Craig Berger - FBR

Srini Pajjuri - CLSA

Presentation

Operator

Good morning. Welcome to the Silicon Laboratories second quarter earnings call. All participants will be in a listen-only mode until the question-and-answer session. (Operator instructions) This conference is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the meeting over to Shannon Pleasant. Ma'am, you may begin.

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. 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 Web site at www.silabs.com. This call is being simulcast and will be archived on our Web site. There will also be a telephone replay available approximately one hour after the completion of the call at 0x01 graphic
800-873-2051.

I am joined today by Necip Sayiner, President and Chief Executive Officer; Bill Bock, Chief Financial Officer; and, Paul Walsh, Chief Accounting 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.

Before we begin, let me comment regarding the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. 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 Laboratories and our products review 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 condition.

We encourage you to review our SEC filings, including the Form 10-Q that we anticipate will be filed today 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 Financial Officer, Bill Bock.

Bill Bock

I'm very pleased to report revenue of $104.2 million for the quarter in line with our revised guidance, and nearly a 25% sequential increase versus last quarter. Earnings were substantially above our updated guidance due to improved gross margin and lower operating expenses. We will discuss the details in the comments that follow.

Let me first cover GAAP results. These results include approximately $11 million in non-cash stock compensation charges. Second quarter GAAP gross margin increased considerably to 62.2% revenue. R&D investment for the period was $25.9 million.

SG&A increased to $26.2 million. Other income, principally interest income on invested cash, was just under $1 million. GAAP diluted earnings per share, therefore, was $0.21, significantly better than forecast.

Turning now to our non-GAAP results, revenue of $104.2 million was up 24.5% sequentially. Ramps in new products and excellent recovery in our access and broadcast audio businesses fuel the revenue growth. Even more impressive, non-GAAP gross margin of 62.5%, a 150 basis points sequential improvement, exceeded the high end of our target range.

The strong margin performance was seen across nearly all of our product lines, and reflects cost reductions we have implemented and outstanding performance by our operation's team in response to the increasing levels of demand. We do expect these margin improvements to be sustainable. And therefore, gross margin should remain at these levels exceeding our 60% to 62% target range throughout the remainder of 2009.

Operating expenses, as a percent of revenue, decreased significantly sequentially to under 40% of revenue, an improvement of more than 650 basis points. This encompasses an expected APEX increase in absolute dollar terms to $41.6 million in Q2. We executed well to our aggressive tape out schedule for the quarter, but we're able to keep R&D nearly flat at $22.1 million due to benefits and tape out related costs, and continued expense control.

SG&A expenses increased to $19.5 million due to higher variable compensation and some headcount additions for application support.

Operating expenses will continue to increase in the second half of the year due primarily to two factors. Variable compensation will increase with the higher levels of revenue we are anticipating. And we are preparing to resume selective hiring in critical design areas to take advantage of what we believe is a unique opportunity to attract exceptional talent.

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