SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Laboratories, Inc (SLAB)

Q3 2010 Earnings Call

October 27, 2010 08:30 am ET

Executives

Shannon Pleasant - Director, Corporate Communications

Bill Bock - SVP of Finance and Administration and CFO

Necip Sayiner - President & CEO

Analysts

Anil Doradla - William Blair

Craig Ellis - Caris & Company

Adam Benjamin - Jefferies

Craig Berger - FBR Capital

Terence Whalen - Citi

Arnab Chanda - Roth

Sandy Harrison - Signal Hill

Sanjay Devgan - Morgan Stanley

Srini Pajjuri - CLSA

Brendan Furlong - Miller Tabak

Ian Ing - Gleacher & Company

Presentation

Operator

Good morning. My name is Valerie and I will be your conference operator today. At this time I would like to welcome everyone to the Silicon Labs third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Miss Shannon Pleasant, ma'am you may begin your conference.

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 800-642-1687.

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 of this conference call. This information will likely change overtime.

By discussing our current perception of our market and the future performance of Silicon Laboratories and our product with your 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 we anticipate 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 at 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

Good morning everyone. Revenue of $120.2 million was within our revised guidance range. Operating results continue to be strong and share repurchase activity remained high. Earnings came in at the high end of our revised expectations. While revenue performance in the second half of this year is below our previous estimates, we are positioning the company for the recovery and demand and new product ramps we are anticipating in 2011.

Necip will discuss the business environments in detail during his comments. Let me start with the current quarter GAAP results which include approximately $10.3 million in non-cash stock compensation charges. Third quarter GAAP gross margin was 65.5%. R&D investment for the third quarter was about flat at $30.8 million. SG&A decreased to $28.6 million. GAAP operating income was 16.1% in the quarter. Other income was negligible, the tax rate was 6%, fully diluted GAAP earnings per share therefore was $0.40.

Turning to our non-GAAP results, revenue of $120.2 million represented an 11% sequential decline driven primarily by weakness in consumer Audio and Access products, as well as softening in our broad base business due to general economic headwinds. We expect these conditions will continue into the fourth quarter. Despite the revenue decline, gross margin remained robust at 65.8% in the period. We expect gross margin to be at the high end of our target range in the fourth quarter.

Operating expenses represented 41.1% of revenue declining to $49.4 million. Specifically, R&D was about flat at 26.4 million and SG&A decreased to 23 million. The reason for the decrease versus our July expectations was largely related to lower variable compensation expense and also fewer then anticipated hires. We expect operating expenses to increase in the fourth quarter particularly in R&D. We have a large number of tape-out schedule as well as the addition of the Chipsensors team we acquired this month. In aggregate, this will add about 1.5 million in the quarter.

Operating income for the third quarter remained strong at 25%. Other income was immaterial. The tax rate was 18%. Net income declined to $24.5 million for the quarter or 20.4% of revenue. Resulting Q3 diluted earnings per share was at the high end of our revised guidance at $0.53, a very solid operational result given the unanticipated decline on the top line.

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