SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Laboratories (SLAB)

Q4 2011 Earnings Call

January 25, 2012 8:30 am ET

Executives

Necip Sayiner - Chief Executive Officer, President and Director

Paul V. Walsh - Chief Financial Officer, Chief Accounting Officer and Vice President of Finance

Shannon Pleasant -

Analysts

William S. Harrison - Wunderlich Securities Inc., Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

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

Alex Gauna - JMP Securities LLC, Research Division

Bin Jiang

Vernon P. Essi - Needham & Company, LLC, Research Division

Craig A. Ellis - Caris & Company, Inc., Research Division

Sujeeva De Silva - ThinkEquity LLC, Research Division

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

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Laboratories Fourth Quarter Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Shannon Pleasant.

Shannon Pleasant

Thank you, and good morning. This is Shannon Pleasant, Vice President of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the company's financial results. 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 Necip Sayiner, President and Chief Executive Officer; and Paul Walsh, Chief Financial 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.

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 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, operating results and financial conditions. We encourage you to review our SEC filings, including the form 10-K that we anticipate will be filed in the next 2 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 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, Paul Walsh.

Paul V. Walsh

Good morning, everyone. Fourth quarter revenue proved to be a peak for 2011 and a strong ending for the year. Revenue of $126.7 million represented a 6.4% sequential increase and a 13.2% year-over-year increase. Business trends were robust throughout the quarter, with new product cycles driving the upside to our guidance. The top line outperformance fell through to the bottom line, resulting in impressive non-GAAP earnings per share of $0.49, well ahead of our guidance.

First, I'd like to talk about GAAP results, which included approximately $8.9 million in non-cash stock compensation charges and $1.3 million in one-time charges for acquisition-related intangibles and a repurposing of a design center into an applications and sales office.

A brief side note on stock compensation. It represented just 7% of revenue in 2011, down from a peak of 10% just a few years ago. Total stock dilution, which has been offset by our share repurchase program, was well within our target of 1% to 2%. We've made good on our promise to reduce stock comp as a percent of sales and anticipate further progress in 2012.

For the fourth quarter, GAAP gross margin was 60.9%. R&D investment increased to $34.7 million, and SG&A was flat at $27.3 million. GAAP operating income of 12% was a 220 basis point improvement over the same period a year ago. The GAAP tax rate was 18.8%, resulting in fully diluted GAAP earnings of $0.29, a 12% sequential increase and a 4% increase year-on-year.

Turning to our non-GAAP results. All of our 3 businesses performed better than anticipated, with Access flat, Broadcast up slightly and Broad-based up double-digits. Gross margin met our expectations at 61.2%. Mix will continue to be the primary driver behind gross margin fluctuations around our target model of 62% or better, with video causing downward pressure and Broad-based, notably timing, providing upward pressure.

Operating expenses came in as expected at $52 million. R&D increased to $29.6 million due primarily to increased tape-out activity, including 2 at 55 nanometers. SG&A remained flat at $22.5 million. SG&A continues to remain at levels not seen since the first quarter of 2010. In Q1, we're expecting the typical seasonal increases in payroll, taxes and salaries, which will result in about a 4% sequential increase in operating expenses. Operating income improved to 20.1% of revenue, and net income improved to 16.9% of revenue. The Q4 tax rate was 17.8%.

On the topic of taxes, the federal R&D tax credit expired on December 31. Until this credit is reinstated, we expect our tax rate to increase. The non-GAAP tax rate will be about 18% beginning in Q1, which translates to a $0.02 EPS impact for the quarter. Solid operational results afforded us significant leverage on the bottom line. The resulting earnings per share of $0.49 represented an 11.4% sequential increase, well above our guidance. Diluted share count ended the year at 43.4 million shares, a decrease of more than 2 million shares from a year ago.

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