SLAB

Silicon Laboratories, Inc. (SLAB)

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Silicon Laboratories (SLAB)

Q3 2012 Earnings Call

October 24, 2012 8:30 am ET

Executives

Shannon Pleasant

G. Tyson Tuttle - Chief Executive Officer, President and Director

Paul V. Walsh - Chief Financial Officer and Senior Vice President

Analysts

Steven Eliscu - UBS Investment Bank, Research Division

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

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

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

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

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

Cody G. Acree - Williams Financial Group, Inc., Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Blayne Curtis - Barclays Capital, Research Division

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

Arnab K. Chanda - Avian Securities, LLC, Research Division

Presentation

Operator

Good morning. My name is Diane, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs Third Quarter Earnings Call. [Operator Instructions] Thank you. Ms. Pleasant, you may begin your call.

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 webcasted 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 Tyson Tuttle, 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 our prepared remarks. Our comments 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 Labs 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 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 Lab's Chief Executive Officer, Tyson Tuttle.

G. Tyson Tuttle

Thank you, Shannon, and good morning, everyone. I'm pleased to report another record quarter, reflecting strength across the business. Revenue was up 10% sequentially, and we delivered solid operating performance, resulting in earnings growth of 20%. I think it's fair to say that the market share expansion story we've been talking about for the last several years is intact, and we're seeing our consistent investment in the R&D pipeline pay off. While macro uncertainty is a current business reality, we continue to be optimistic about our prospects despite the weak demand environment. I'll talk more about the various product lines at our Q4 outlook after Paul reviews the specifics for the quarter. Paul?

Paul V. Walsh

Thank you, Tyson, and good morning, everyone. Third quarter revenue of $149.5 million was up 25% compared to third quarter of 2011. The large sequential increase encompass our recent acquisition and organic growth, demonstrating the quality of this quarter's results. I'll start with the GAAP results first. Third quarter GAAP gross margin was 57.9%, which included $4.5 million of one-time charges associated with the Ember acquisition. R&D investment increased to $34.8 million, and SG&A expense decreased to $24.5 million, resulting in an increase in GAAP operating income to 18.2% or $27.2 million. GAAP earnings of $0.24 was slightly below our expectations and included charges related to the executive separation agreement, other costs associated with the Ember acquisition, the net gain from the acquisition of our headquarters buildings and $7.9 million in noncash stock compensation. Turning to our non-GAAP results. Gross margin was flat at 61% and consistent with our guidance. This is a good result, and we expect this margin stability to continue into Q4.

Operating expenses increased, as expected, to $58.5 million due to the addition of Ember as well as strong performance of the organic business, which drove higher variable compensation. Organically operating expenses declined on a sequential basis, demonstrating continued disciplined around spending to improve leverage. R&D increased to $31.7 million but declined to 21.2% of sales. SG&A increased to $26.7 million due largely to variable compensation, but also declined as a percent of revenue to 17.9%. I anticipate operating expenses will be flat to up $1 million in Q4 to accommodate additional R&D activity. Operating income in Q3 continued to improve, ending at 21.9% of revenue. Other expenses were minimal and represent the debt service on our new credit facility. Net income in Q3 increased to $26.1 million or 17.5% of revenue. The Q3 tax rate was 20%. We expect our tax rate to be in the 20% to 21% range in Q4. Strong growth and stable gross margin provided significant earnings leverage resulting in a $0.10 increase to earnings per share at $0.61, up nearly 40% from a year ago. Turning to the balance sheet. Accounts receivable increased to $75.7 million or 46 days sales outstanding, consistent with the revenue growth. We continue to have no known collection of bad debt problems. Inventory levels remain healthy. We've been watching inventory very closely as one of the indicators of our customer's confidence and we believe we are generally shipping to end demand.

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