SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Laboratories (SLAB)

Q2 2013 Earnings Call

July 25, 2013 8:30 am ET

Executives

Deborah Stapleton

G. Tyson Tuttle - Chief Executive Officer, Director and Member of Equity Award Committee

John Hollister - Chief Financial Officer and Senior Vice President

William G. Bock - President and Director

Analysts

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

Srini Pajjuri - CLSA Limited, Research Division

Craig A. Ellis - B. Riley Caris, Research Division

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

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

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

John Vinh - Pacific Crest Securities, Inc., Research Division

Blayne Curtis - Barclays Capital, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Presentation

Operator

Good morning. My name is Wendy, and I will be your conference operator. At this time, I would like to welcome everyone to the Silicon Labs Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Stapleton, you may begin your conference.

Deborah Stapleton

Thank you, Wendy. Good morning, everyone. As a reminder, this call is being webcast 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'm joined today by Tyson Tuttle, Chief Executive Officer; Bill Bock, President; and John Hollister, Chief Financial Officer. We will discuss our financial results and review our business activities for the quarter. Then 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, our operating results and our financial condition. 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 statement.

Also the non-GAAP financial measurements which are discussed today are not intended to replace the presentation of Silicon Labs 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 Labs' Chief Executive Officer, Tyson Tuttle.

G. Tyson Tuttle

Thanks, Deb, and good morning, everyone. We are reporting $141.5 million in second quarter revenue, up 4% year-on-year and with a significant improvement in overall gross margins to 63%. Our broadcast video and timing product lines had record revenue in the quarter, partially offsetting declines in legacy products. We announced the strategic acquisition of Energy Micro and launched our new CMEMS technology platform and oscillator product line. We will talk more about these 2 important growth drivers later in the call.

For now, I'd like to turn the call over to John, who will review our financial results in detail. John?

John Hollister

Thank you, Tyson. Second quarter revenue of $141.5 million was within our guidance range, reflecting a 2.6% decline sequentially and growth of 4.3% year-on-year. As anticipated, during the second quarter, we experienced a revenue decline of over $10 million in mature products, including FM tuners and handsets, touch controllers and handsets and modems and set-top boxes. Partially offsetting that decline was a 6% sequential increase in our growth products with particular strength in our timing and video products, which achieved record-revenue levels.

On a GAAP basis, second quarter gross margin increased to 62.7%. R&D investment was stable at $37.4 million, and SG&A expense increased to $32.4 million, resulting in GAAP operating income of $19 million or 13.4%. GAAP EPS was $0.29, which was $0.01 below our guidance range. However, I would note that GAAP results were impacted by charges totaling $1.6 million or $0.04 per share that are related to the acquisition of Energy Micro and which were not included in the Q2 guidance.

On a non-GAAP basis, gross margin improved significantly to 62.9%, primarily driven by an overall mix shift in favor of higher-margin timing products. We expect margin to be in the 61% to 62% range in Q3 on a slightly lower timing mix.

We maintained effective expense control in the second quarter with only a slight increase in overall non-GAAP OpEx to $60.9 million. Non-GAAP R&D investment increased to $33.6 million, related to additional hiring as a result of the success of our new college graduate recruiting program. Non-GAAP SG&A expenses were down to $27.3 million based on reduced fringe costs. The combination of strong gross margin results with only a modest increase in operating expenses allowed us to leverage our operating income higher for the quarter to $28.2 million or 19.9% of revenue. This represents an increase of $1.1 million or 130 basis points from the prior quarter.

Other expenses were stable at $600,000. Our effective tax rate increased to 22% in Q2, driven by a shift in the mix of production test sites in the United States, resulting in around a $0.03 drag on non-GAAP earnings. For comparison, our Q1 results included a significant tax benefit due to the implementation of the U.S. federal R&D credit. Due to the effect of the increase in the income tax provision, net income declined to $21.5 million, or $0.50 per share, which is above the midpoint of our Q2 guidance range. This result is comparable to our earnings of $0.51 from Q2 of 2012.

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