SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Laboratories Inc. (SLAB)

Q3 2009 Earnings Call

October 28, 2009 8:30 a.m. ET

Executives

Shannon Pleasant - Director of Corporate Communications

Necip Sayiner - President and CEO

Bill Bock - CFO

Analyst

Craig Ellis - Caris & Company

Alex Gauna - JMP Securities

Tore Svanberg - Thomas Weisel Partners

Adam Benjamin – Jefferies

Terence Whalen - Citi Investment Research & Analysis

Craig Berger - FBR

Arnab Chanda - Roth Capital

Suji De Silva - Kaufman Brothers

Brendan Furlong - Miller Tabak

Ian Ing - Broadpoint AmTech

Romit Shah - Barclays Capital

Presentation

Operator

Welcome everyone to the Silicon Laboratories third quarter earnings conference call. All participants have been placed 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 introduce Ms. Shannon Pleasant. Thank you Ma'am, you may begin.

Shannon Pleasant

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 866-513-1237.

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 but 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 $125.9 million for the quarter that’s a high end of our revised guidance range. This represents an increase of over 10% compared to our peak revenue performance in the same period last year. This record breaking quarter exceeded expectations on all fronts delivering exceptional margin and earnings performance as well as very strong cash flow.

Let me first cover the GAAP results which include approximately $11 million in non-cash stock compensation charges. Third quarter GAAP gross margin increased considerably to 64.4% of revenue. R&D investment for the period was $25.9 million. SG&A increased to $28.6 million. Other income principally interest income on invested cash was under $1 million. GAAP operating income was a record 21.1% and fully diluted earnings per share was $0.47 more than doubling from the second quarter.

For investors focused solely on GAAP measures, these results demonstrate that our business model drives considerable leverage to the bottom line inclusive of stock compensation. And these non-cash stock charges are declining as a percent of revenue a trend we expect to continue over the next several years.

Turning now to our non-GAAP results, revenue of $125.9 million was up more than 20% sequentially and 50% above where we started the year in Q1. The better than peak revenue performance was driven by strength at tier one customers and our broadcast business and an excellent recovery in our MCU business. Non-GAAP gross margin was 64.7%, a 220 basis point improvement over the prior quarter.

This quarter’s result include some one time favorable variances that was principally derived from continued cost reductions, improved test yields and outstanding performance from our operations team. We expect gross margins will continue to be excellent and will hold at or above 63% for the foreseeable future. We are particularly proud of this accomplishment given this year’s economic environment. Operating expenses as a percent of revenue decreased significantly, sequentially to 35% of revenue an improvement of more than five percentage points.

On an absolute basis, operating expenses increased to our resumption of selective hiring and higher variable compensation. Specifically, R&D investment increased by $1 million to $23 million or 18.3% of revenue and SG&A expense increased by a similar amount to $20.6 million or 16.4% of revenue. Operating expenses are expected to increase again modestly in the fourth quarter, primarily in R&D. The very strong performance resulted in 30% operating income, a truly outstanding result. Other income in the period was under $1 million and is expected to remain at this level.

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