SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Labs (SLAB)

Q4 2010 Earnings Call

January 26, 2011 8:30 a.m. ET

Executives

Shannon Pleasant - Director, Corporate Communications

Bill Bock - SVP of Finance and Administration and CFO

Necip Sayiner - President & CEO

Analysts

Adam Benjamin - Jefferies

Anil Doradla - William Blair

Craig Ellis - Caris & Company

Alex Gauna - JMP Securities

Arnab Chanda - Roth Capital

Sandy Harrison - Signal Hill

Terence Whalen - Citigroup

Sandy Harrison - Signal Hill

Craig Berger - FBR Capital Markets

Tore Svanberg - Stifel Nicolaus

Brendan Furlong - Miller Tabak

Presentation

Operator

At this time I would like to welcome everyone to the Silicon Labs fourth 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.] I would now like to today's conference over to 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 call is being simulcast and will be archived on our website. 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 now 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 products with your 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 conditions.

We encourage you to review our SEC filings, including the form 10-K that we anticipate will be filed this weeks, 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. Fourth quarter results of $112 million in revenue, GAAP EPS of $0.28, and non-GAAP EPS of $0.46 were all improvements relative to our guidance. For the full year, the company delivered revenue of $493 million, a 12% increase over record revenue in 2009.

Non-GAAP operating income was an impressive 26% of revenue. Non-GAAP EPS was $2.34 and we completed over $140 million in share repurchases.

Additionally, we are announcing this morning the strategic acquisition of SpectraLinear, a pure play manufacturer of clock solutions. This acquisition will expand the breadth of our timing portfolio and significantly enhance one of our most promising businesses. Necip will discuss the acquisition and the rest of our product lines in detail after I cover the financials.

Let me start with the current quarter and year-end GAAP results, which include approximately $9 million and $40 million, respectively in non-cash stock compensation charges. GAAP gross margin was 63.5% for the fourth quarter and 65.7% for the full year. R&D investment was up in the fourth quarter to $32.6 million and was $123.8 million for all of 2010.

SG&A decreased again to $27.5 million in Q4, and was $113.8 million for the full year. GAAP operating income declined for the quarter to 9.8% of revenue, but was up for the full year at 17.6%. Other income was negligible.

The GAAP tax rate was a credit for the quarter, reflecting a $3.7 million R&D tax credit, retroactive to the first of the year. The credit resulted in an $0.08 improvement to the fourth quarter earnings result. Fully diluted GAAP earnings per share, therefore, was $0.28 for the quarter and $1.57 for the full year.

Turning to our non-GAAP results, revenue of $111.9 million represented about a 7% sequential decline, driven by the expected weakness in our audio tuners and modem products. Gross margin was within our target range at 64% for the quarter and exceeded our range at 66% for the full year.

2010's outperformance relative to our model was due in part to price concessions gained from our suppliers in early 2009, when capacity usage was at record lows and a better than normal price environment last year as customers focused heavily on continuity of supply.

In 2011 we will not be benefitting from the same cost and customer dynamics. Therefore, we're expecting our margins to return to our corporate model of 62-65%. Our gross margin will also become more mix-dependent as we ramp our video business.

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