SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Laboratories, Inc. (SLAB)

Q2 2010 Earnings Call

July 28, 2010 8:30 AM ET

Executives

Shannon Pleasant – Director, Corporate Communications

Necip Sayiner –President and CEO

Bill Bock – Chief Financial Officer

Paul Walsh – Chief Accounting Officer

Analysts

Adam Benjamin – Jefferies

Craig Ellis – Carris & Company

Anil Doradla – William Blair

Eric – Stifel Nicolaus

Sandy Harrison – Signal Hill

Alex Gauna – JMP Securities

Srini Pajjuri – CLSA

Arnab Chanda – Roth Capital

Craig Berger – FBR

Presentation

Operator

Welcome to the Silicon Laboratories' second earnings – I’m sorry. Welcome to the Silicon Laboratories' Second Quarter Earnings Call. Thank you so much. At this time, participants are in a listen-only mode. (Operator Instructions) Today's conference is being recorded. If you have objections you may disconnect.

And now, I'll turn the meeting over to Ms. Shannon Pleasant. You may begin when ready.

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 website at www.silabs.com. This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 888-484-8258.

I'm 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 this conference call. This information will likely change overtime.

By discussing our current perception of our market and the future performance of Silicon Labs and our product review today, we're 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 including the Form 10-Q that will be filed this week 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 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 Laboratories’ Chief Financial Officer, Bill Bock.

Bill Bock

Good morning, everyone. An all time high in revenue of $134.6 million was the catalyst for a number of records in Q2 resulting in an outstanding quarter for the company. We also crossed the $500 million revenue milestone on a trailing 12-month basis, another first for the company.

Earnings per share far exceeded expectations, due to a very strong operating performance, which I will outline in detail. We also had a tremendous quarter in terms of share repurchase activity as we took advantage of what we believe is a depressed stock price.

Let me start with the current quarter GAAP results, which include approximately $10.7 million in non-cash stock compensation charges. Second quarter GAAP gross margins increased 150 basis points substantially to 67.5%.

R&D investment for the second quarter was up slightly to $30.5 million. SG&A increased to $29.7 million. GAAP operating income was nearly 23% in the quarter. Other income was negligible. The GAAP tax rate was 31% as it included a one-time charge related to the acquisition of Silicon Clocks, which we announced in April.

Fully diluted earnings per share, therefore was $0.44, more than double the result in the same period last year. It's worth noting that our stock compensation expense was just below 8% of revenue, representing solid progress toward our goal of 6%, on all fronts, an outstanding quarter.

Turning to our non-GAAP results, revenue of $134.6 million represented 6% sequential growth and was driven primarily by strong performance from our broad-based products, including the fourth consecutive record quarter for MCU. This mixed shift and increasing concentration of distribution versus direct customers contributed to an increase in our average selling price for the quarter.

This led to an outstanding gross margin result, a post divestiture record of 67.8%. We expect gross margin to decline sequentially as we enter the second half of the year due to seasonal strength in our consumer-oriented products, but we anticipate we will continue to achieve better than model margin performance in the third quarter.

Operating expenses declined as a percent of revenue to 37%. Specifically, R&D increased only slightly to $26 million or 19.4% of revenue, below our forecast. This was due in part to first revision successes that allowed us to eliminate some scheduled takeouts and related costs.

In the coming quarter, we expect R&D to increase and be more aligned with our typical range of 20% to 21% of revenue. SG&A increased $23.8 million or 17.7% of revenue. The drivers behind the increase included higher than anticipated variable compensation, as well as success in hiring applications engineers.

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