Apr 30, 2008
Executives
Shannon Pleasant – Director,Corporate Communications Necip Sayiner – President,Chief Executive Officer Bill Bock – Chief FinancialOfficer Paul Walsh - Chief AccountingOfficer
Analysts
Romit Shah - Lehman Brothers Srini Pajjuri - Merrill Lynch Craig Berger - Friedman,Billings, Ramsey & Co. Adam Benjamin - Jefferies& Co.
Craig Ellis - Citigroup Tayyib Shah - LongbowResearch Arnab Chanda – Deutsche Bank Sandy Harrison - Signal HillGroup LLC Cody Acree - Stifel Nicolaus& Company, Inc. Suji De Silva - Kaufman Bros.
Operator
Welcome to today's Silicon Laboratories first quarter earningscall. (Operator Instructions) I would now like to turn thecall over to Shannon Pleasant.
Thank you, ma'am, you may begin.
Shannon Pleasant
Thank you, [Hope]. Goodmorning.
This is Shannon Pleasant, Director of Corporation Communications forSilicon Laboratories. Thank you for joining us today to discuss the company'squarterly financial results.
The financial press release,reconciliation of GAAP to non-GAAP financial measures, details on discontinuedoperations and other financial measurement tables are now available on theInvestor page of our website at www.silabs.com. This call is being simulcastand will be archived on our website.
There will also be a telephone replayavailable approximately one hour after the completion of the call at866-446-5477. I'm joined today by NecipSayiner, President and Chief Executive Officer, Bill Bock, Chief FinancialOfficer, and Paul Walsh, Chief Accounting Officer.
We will discuss ourfinancial results and review our business activities for the quarter. We willhave a question-and-answer session following the presentation.
Before we begin let mecomment regarding the safe harbor statement under the Private SecuritiesLitigation Reform Act of 1995. Our comments and presentationtoday will include forward-looking statements or projections that involvesubstantial risks and uncertainties.
We base these forward-looking statementson information available to us as of the date of this conference call. Thisinformation will likely change over time.
By discussing our current perception ofour market and the future performance of Silicon Laboratories and our productswith you today, we are not undertaking an obligation to provide updates in thefuture. There are a variety of factors that we may not be able to accuratelypredict or control that could have a material adverse effect on our business,operating results and financial condition.
We encourage you to reviewour SEC filings, including the Form 10Q that we anticipate will be filed today,and identify important factors that could actual results to differ materiallyfrom those contained in the forward-looking statements. Also the non-GAAP financialmeasurements which are discussed today are not intended to replace thepresentation of Silicon Laboratories' GAAP financial results.
We are providingthis information because it may enable investors to perform meaningfulcomparisons of operating results and more clearly highlight the results of coreongoing operations. I would now like to turn thecall over to Silicon Laboratories' Chief Financial Officer, Bill Bock.
Bill Bock
Thanks, Shannon. It is satisfying in light ofthe economic uncertainty in the larger marketplace to be able to share with youanother quarter of excellent results for Silicon Labs.
We again exceededexpectations on virtually every measure. The company delivered revenueof $98.2 million in the first quarter, representing a 33% increase from thesame period last year.
Operating income and earnings also exceeded expectationfor the quarter. I will first cover the GAAPresults.
Gross margin was 61.5% ofrevenue. Research and development investment was $24.7 million, andSG&A expense was $24.6 million.
Other income, principally interest incomeon invested cash, was $4.5 million. The tax rate was 30.6%.
Fully diluted GAAPearnings per share was $0.21. Our non-GAAP adjustedfinancials that follow exclude $10.2 million of stock compensation expense.
Non-GAAP gross margin of61.8% was consistent with our guidance and at the high end of our target rangeof 60% to 62%. We expect margins to remain at this level in the second quarter.
Operating expenses were lowerthan expected at 40% of revenue. R&D increasedsequentially as expected to $20.7 million as we added headcount in engineering.We anticipate further R&D headcount expansion in the second quarter.
SG&A came in favorable toour guidance at $18.7 million. The improvement in SG&A was due to lowerthan anticipated legal expenses, which we believe will continue to be favorableto our previous expectations due to the formal resolution of our legal disputewith Analog Devices.
The strong revenue, stronggross margin and lower expenses resulted in operating income of $21.3 millionor 21.7% of revenue. We believe this is an outstanding operating achievementfor the first quarter of the year.
Operating income, which we view as a primarymeasure of our financial performance, nearly tripled over the year earlierperiod. Wrapping up the incomestatement for the first quarter, other income in the period was $4.5 million,down significantly from the fourth quarter.
Our non-GAAP income tax rate was23.3%, which was slightly higher than our forecast. Net income, therefore, was$19.8 million or 20.2% of revenue, driving earnings per share above ourguidance to $0.38.
Turning to the balance sheet,this was a very significant quarter in terms of structural change relating to our cash position and investments. First of all, we continuedexecution of our share repurchase plan in a very aggressive fashion.
Repurchasesin the period totaled $137 million or 4.5 million shares. In less than twoyears, our share repurchase programs have cumulatively repurchased 10.5 millionshares utilizing $350 million of cash.
We have approximately $120 millionremaining under our current authorization. Secondly, during the quarterthe traditional market for auction rate securities faltered and the FederalReserve enacted multiple significant interest rate cuts.
During the quarter wereduced our exposure to auction rate securities to approximately $70 millionand reclassified the majority of these remaining holdings to long-terminvestments. The net effect of the rate cuts and reduced holdings in auctionrate securities is a significant reduction in our tax‑free investments and inthe interest rate we are earning on all of our investments.
Quarter-ending cash andinvestments, therefore, totaled $467 million and continued to reflect the verystrong balance sheet position and more than sufficient corporate liquidity. Howeverthe combination of a lower cash balance and dramatically lower short-terminterest rates implies that interest income in the second quarter will beapproximately half that of the first quarter.
We also anticipate that thetax rate will remain at the higher Q1 level due to the loss of tax-free incomeand the temporary lack of a Congressional approved R&D tax credit. Moving on, receivables andinventory remain in very good shape.
Accounts receivable declined to$46.4 million. Days sales outstanding dropped to 42 days.
Inventory alsodeclined, to $26.9 million. Turns were at 5.6, within our target range.
Inventoryin the distribution channel was also in our desired range at 45 days. Necip, I'll now turn thediscussion over to you.
Necip Sayiner
Thanks, Bill. In addition to the strongoperational results we delivered in the quarter we made significant progress onthe new product introduction front.
Our R&D pipeline is delivering newproducts at a record pace. We aggressively added to our Broadcast, MCU and Timingportfolios this quarter, consistent with our strategy to further diversify,expand our served market, and strengthen our competitive advantage.
I'll talkmore about these new product introductions in the business discussions. Beginning with Broadcast, I'mvery pleased with the execution of our strategy in this business.
This isclearly not a single product or a single market story. Some have questioned ourconfidence in the strong potential of our Broadcast business.
We have achieveda number of milestones that demonstrate the sustainability of growth in thisbusiness and should put those questions to rest. First, we've proven we have astrong competitive position in handsets, enabled by an innovative road map.
Whileintegration trends in handsets will persist when the economics are favorable,our design momentum and revenue growth confirm that our innovative road mapwill continue to thrive in both the [audio] segment in emerging markets as wellas in new, higher-value handsets. Second, we have aggressivelydiversified the product line and customer base in a very short amount of time,putting us on course to double the product portfolio.
This is complemented byan increasingly varied base of customers and applications served. And third, audio is only partof the Broadcast story.
We've invested in video products that leverage ourexisting technology and IP. These investments will allow us to develop andgrowing and further diversified revenue stream for the Broadcast business.
In the first quarter,Broadcast was up 85% over the same quarter last year and down sequentially, asexpected, due primarily to seasonal softness in the consumer segment. Handsetrevenue grew sequentially in spite of what is typically a seasonally weakquarter for the end market.
We enjoyed continued strength from Korean customersand expect to see additional Tier 1 customer ramps into the second quarter.Specifically in Q2, we'll begin shipping our FM transmitter into Nokia handsetsand both the FM transmitter and the AM/FM receiver into Sony Ericsson handsets. We have not seen any slowdownin design activity related to either competitive pressures or economic weakness.We added a record 125 new broadcast design during the quarter, evenly splitbetween new handset models and non‑handset applications.
As I noted earlier, Q1 wasalso a strong quarter for new product announcements. We introduced three newaudio families in Q1: The first FMreceivers to support an embedded antenna, enabling FM to be added to anyportable device without the need for an external headphone cable, we introducedan even smaller footprint FM receiver family that reduces board space by morethan 40% compared to competing solutions, and we announced the smallest footprintdata receivers to combine RDS and traffic message channel with static GPSnavigation maps to dynamically route drivers around traffic.
Our competitiveposition and new products in our pipeline give us confidence that we will beable to preserve our edge in our audio products well into the future. And as I mentioned, audio isonly part of the Broadcast story.
We're also expanding into broadcast video. Weintroduced a video demodulator product line in Q1 that is the first in a familyof demodulators, tuners and receivers for video broadcast.
The new videodemodulators are the smallest, lowest power and highest performing solutionscapable of supporting multiple video standards in a single chip, supportingDVB-T, C and H. The new demodulators are ideal for integrated digital TVs, set-topbox receivers, PC-TV add-on cards, and personal video recorders.
The newdevices are sampling now and are expected to start contributing to Broadcastrevenue in 2009. Given the range of videobroadcast standards adopted in various geographies, it is clear to us that theoptimal system partitioning for digital and hybrid fixed television equipmentis to use one [inaudible] processor across platforms while optimizing thereceiver for specific regional standards or unique feature requirements.
Thisallows customers to reduce the solution footprint and eliminate redundantcircuit blocks. Our road map in the video market addresses this trend andincludes front-end receivers that integrate all circuitry from RF input todemodulated output for both digital and hybrid modulation standards.
The R&D investments inthis area leverage key technology and IP in our Broadcast group and theinvestment needed to bring this road map to market is already comprehended inour current income statement. Our MCU business was upalmost 40% over the same quarter last year and down sequentially due toseasonal weakness, primarily in the portable navigation market.
All businessindicators remain healthy, with development kit shipments increasing andcontinued design activity. We began an aggressive lead-generation campaign inthe first quarter and continue to add new customers at record levels.
Weintroduced a new product family of low-power, low-voltage MCUs during thequarter that are the industry's first MCUs capable of operating down to 0.9volts. Based on a very novelarchitecture, these new MCUs enable portable devices to be powered from asingle cell battery for the first time without external components.
Forproducts powered by user-replaceable batteries such as wireless sensornetworks, smoke alarms, hand-held medical devices, remote controls, computerperipherals and portable audio devices, the F900 family enables smaller formfactors, longer battery life and lower overall system costs. We estimate the market forlow-voltage MCUs is about $1 billion.
This segment today is served by outdated,mediocre solutions, so we have seen a very enthusiastic response from customersfor this product. We expect the low voltage product family to be a significantgrowth engine for the MCU business beginning in 2009.
We also further expanded ourSmall Form Factor MCU product line, which continues to be among our strongestsellers. We have been adding to this portfolio of MCUs to addresscost-sensitive applications, further solidifying our position inspace-constrained applications.
And finally, we recently announced TS-16949 quality registration, animportant achievement that validates our ability to serve the automotivemarket, a strategic area of investment. We are expecting the MCUbusiness to return to sequential growth in Q2, with some recovery anticipatedamong consumer-oriented customers, growth in revenue from industrialapplications, and addition of new customers.
The Timing business grew double-digitssequentially in Q1 due to strong momentum behind our new products. We securedmajor wins in key networking OEM accounts, particularly in Europe and NorthAmerica.
We are benefiting from the trend towards multi-protocol systems thatcreate a strong need for the flexibility of our products. Our success is not limited tothe networking space, however, as we continue to expand the customer base at avery high rate.
About 20% of our oscillator revenue came from video broadcastin Q1, contributing to our diversification and to new applications and newcustomers. We have been investing in ourchannel for these broad-based businesses in order to expand our presence andoutreach into new customers.
We nearly doubled channel wins in Q1 compared tothis time last year, and Timing was a strong contributor behind theacceleration. Our foundation businesses arealso executing well in their markets.
Our Voice business was up sequentially inthe first quarter due to strength in broadband service rollouts. We're makingfurther progress in the cable market and secured new design wins in the quarterwith a major supplier.
Our existing engagements with customers in Europe areexpanding to include additional operators, creating port growth and increasedvoice attach rates in residential gateways. The Embedded Modem businessremained healthy in Q1, particularly in the set-top box market, driven by thetransition to high definition equipment.
We are anticipating increased demandrelated to high-profile sporting events specific to the upcoming 2008 Olympics.As a result, we are expecting sequential growth in this business in Q2. We realize that there continues to be significantuncertainty in the economic environment and we are closely monitoring thehealth of end user demand.
The global nature of our business, the positiveimpact of new product cycles, and the addition of new customers should have acounterbalancing effect to the slowing U.S. economy.
Therefore, we are expecting Q2 revenue to be flat toup sequentially at $98 to $101 million. We are expecting gross margin to remainrelatively flat to Q1 levels, at the high end of our target range of 60% to 62%.We anticipate operating expenses will be relatively flat.
We expect operatingincome dollars to increase sequentially while interest income will decline forthe reasons Bill described. Therefore we are anticipating second quarter netincome per fully diluted share on a GAAP basis will be $0.20 to $0.22, andnon-GAAP EPS excluding a non‑cash charge for stock compensation is expected tobe in the range of $0.37 to $0.39.
We'd now like to take your questions. Shannon?
Shannon Pleasant
Thank you, Necip. We'll nowopen the call for the question-and-answer session.
So that we can accommodatequestions from as many people as possible before the market opens, please limityour questions to one with one follow‑up question. Operator, please review thequestion-and-answer instructions for our call participants.
Operator
(Operator Instructions) Yourfirst question comes from Romit Shah - Lehman Brothers.
Romit Shah - Lehman Brothers
Nice quarter, guys. Aquestion on Broadcast.
Does the addition of Nokia in Q1 change your full year target of 20% to 30% growth inBroadcast?
Necip Sayiner
No, we have alreadycomprehended the addition of Nokia and other customers with new products intoour full year forecast, Romit.
Romit Shah - Lehman Brothers
It seems like some of yourcompetitors like TI and Broadcom are being more vocal about their design winsin the FM tuner space with the combo chips. Can you talk a little bit aboutyour market share in FM tuners this year and how you'd expect it to trend?
Necip Sayiner
Our position with ourcustomers remains very strong at this point. There continues to be an increasein the [inaudible] rates for FM tuners.
We continue to hold the market sharethat we've obtained with our customers. You've seen that in the first quarteras our handset-driven revenues in Broadcast audio increased sequentially, buckingthe trend of the industry.
The design win momentum is strong, as I mentioned. We'vehad a record 125 design wins in the quarter, so that sets up very well forthe remaining part of the year.
We're also encouraged by theadoption of our new products by the handset vendors, particularly the transmitand AM/FM functionality. So we feel good about our competitive position in thehandset market.
Romit Shah - Lehman Brothers
Bill, how will the changes with the cash balance and this current stock priceinfluence the pace of the buybacks going forward?
Bill Bock
We've executed a substantialportion of our current authorization in a very short period of time, and Ithink that we took advantage in the last quarter of depressed share price to beaggressive buyers. We will continue to executeagainst our share repurchase program in the remainder of the year, and I thinkthe pace at which we execute will be a function of share purchase price as wego through the period.
Operator
Your next question comes fromSrini Pajjuri - Merrill Lynch.
Srini Pajjuri - Merrill Lynch
Bill,just a clarification on the tax rate. You said it's going to be flat in Q2.
I'mjust wondering, should we model 20% for the full year or is it going to be atthat level?
Bill Bock
I thinkfor the moment the prudent thing to do is to take the first quarter tax rateand use it for the remainder of the year. Wehave a substantial decrease in tax-free interest income as a result of therebalancing of our investment portfolio, and until Congress re-enacts theR&D tax credit we'll be unable to take advantage of that in quarterlyresults.
SoI think for the time being, the first quarter rate is the right one to use forthe full year.
Srini Pajjuri - Merrill Lynch
Andthen Necip, you said you're not going to change your 20% to 30% guidancefor the FM business. If I just take what you just reported, the flatsequential, and assume that it's going to remain flat for the next fourquarters, I think that in itself accounts for a pretty solid 25% growth or sobased on my own estimates.
I'm wondering, I mean, are you being conservativehere? I mean, wouldn't you normally see a seasonality strong second half inthis business?
Necip Sayiner
Wewould normally. Our conservative positioning in that regard does not stem fromour competitive position with the customers but more from uncertainty aroundthe end user demand.
We'rebeing cautious about handset unit growth this year. Clearly, if the seasonalpatterns hold strongly into the second half we're positioned to benefit fromthat.
Ithink in the next 90 days we'll get better visibility into the second halfdemand as well as finalize the design wins we are competing for at the momentfor the first quarter business. So I'll be able to give you a much better viewfor the full year for that business in 90 days.
Srini Pajjuri - Merrill Lynch
Andthen finally on the AM/FM, now thatyou're shipping can you talk about what kind of reception you're receiving inthe market and what your expectations for that product are? Thank you.
Necip Sayiner
Sure.It was satisfying to see that functionality being adopted by a top-tier OEM. Weare seeing interest from other top handset OEMs also for that functionality.
Ithink the reception of that function in the regions that it's being targetedfor remains to be seen. We're obviously supporting our customers with the rampstrongly.
We expect these models to be available by midyear.
Operator
Yournext question comes from Craig Berger - Friedman, Billings, Ramsey & Co.
Craig Berger - Friedman,Billings, Ramsey & Co.
Canwe talk about the Broadcast business alittle bit? Can you help us understand what your average selling price trendswere in tuners, either sequentially or year-on-year?
Necip Sayiner
Theblended ASP in the quarter for all our Broadcastproducts went down sequentially, and that's a reflection of a product mix change as well as a mix change between handset and non-handset applications. As I mentioned, overallBroadcast revenue was down sequentially, and that's due to reduction in demandfrom portable media players and personal navigation devices compared to thestrong 4Q.
So that product mix change resulted in a blended ASP decline for us in thequarter.
Craig Berger - Friedman, Billings, Ramsey & Co.
Someof your other products in there include set-top box receivers, satellite set-top box receivers and tuners. Are thoseproducts more legacy products or are you pursuing new investment there?
Howmeaningful is that business?
Necip Sayiner
Thesatellite receiver revenues are very modest at the moment compared to the audiorevenue. Clearly, we would like to see the video revenue grow into next yearwith the new products, but a large, very large, percentage of revenues in Broadcast today are driven from audio, Craig.
Craig Berger - Friedman, Billings, Ramsey & Co.
Andwhen we think about the video demods that you guys just put out, how long doesit take for that stuff to become a meaningful contributor?
Necip Sayiner
Demodswill be our first product in that space, and we expect, based on the designcycles in that space, we expect the revenues to start contributing in 2009. Obviously,we have plans to come out with additional products in that space, so thatshould be a growing portion of Broadcastrevenues into '09 and '10.
But at this point, I'm not going to be able to giveyou a number for [inaudible] years.
Craig Berger - Friedman, Billings, Ramsey & Co.
Andcan you tell us how meaningful the Timing and Clock business is for you at thispoint? Is it, you know, 3% of revs, 5%, 10%?
Necip Sayiner
It'sstill in single digits, a growing single digit number but not quite 10% yet.
Operator
Your next question comesfrom Adam Benjamin - Jefferies & Co..
Adam Benjamin - Jefferies & Co.
Bill, on OPEX last quarteryou guys stepped it up and now you're guiding for it to be flat. Can you justtalk a little bit about the dynamics there and kind of how you expect the restof the year to play out there?
Bill Bock
Yes, I think that, as Iindicated, we're adding headcount in the engineering organizations. We did soin Q1 and that will continue this year, so we would expect the R&D line tomove up slightly in 2Q and will continue to grow in the second half of theyear, generally tracking our growth in revenue.
Operating SG&A expensewill be flat to slightly down in the second quarter, and we are going to holdthe line very tightly on SG&A all year, so I would expect that line to berelatively constant as we go through 2008.
Adam Benjamin - Jefferies & Co.
And Necip, on the Timingbusiness you seem very encouraged about your prospects there. You've talkedabout 40% to 50% year-over-year growth before.
You care to up that estimate ordo you think you can do better than that?
Necip Sayiner
Certainly the traction we'regetting with the customer base today increased our confidence that we can hitthat 40% to 50% target for the full year.
Adam Benjamin - Jefferies & Co.
And then just two questionson Broadcast. First, you usually providethe breakout between [inaudible] audio and handset.
What was that in thequarter?
Necip Sayiner
You know, we were at 50/50in 4Q. That filtered towards handsets in 1Q for the reasons I described.
Itbecame more like 60/40.
Adam Benjamin - Jefferies & Co.
And then just to follow upon the conservatism you've talked about on Broadcast,do you care to quantify, if you break out between just your own competitivedynamics and share gains, share losses, within the handset market verse justyour concerns regarding the end market growth in the second half, can you justbreak those two out and quantify how you're getting to your conservative fullyear guidance?
Necip Sayiner
The conservatism solelycomes from caution on the end user demand. As I indicated earlier, ourcompetitive position with the top handset OEMs remain as strong as they've everbeen.
I think our design win numbers reflect that. The additional features thatwe're providing in our FM tuners such as the embedded antennae are beingembraced by many.
So we have a concern orcaution about end user demand, how that might shape up, but from a competitiveposition, we feel pretty good at this point.
Operator
Your next question comesfrom Craig Ellis - Citigroup.
Craig Ellis - Citigroup
First, congratulations onthe revenue and Necip, just the general productivity you're getting out of theengineering team on your products. It sounds like you'recomfortable with the full year targets for Timing and Broadcast.
Can you just comment on MCU versus the 35%to 40% number you put out last quarter?
Necip Sayiner
We're also sticking withthat number. Obviously, a slow start for the MCU business due to weaknessprimarily in P&D market, but we look for sequential growth in 2Q.
If you look at the MCUrevenues for the first quarter, just to add a little color, the decline in theconsumer space such as personal navigation devices or toys and such, thedecline in revenues from those set of customers was actually larger than theoverall decline in MCU business, so that's another way to say that the rest ofthe business actually grew sequentially. So in 2Q, while we expectthe overall P&D market to remain soft, overall we expect the MCU revenuesto grow.
Craig Ellis - Citigroup
And then Bill, the grossmargins remain high overall. Given some of the mix dynamics, in my model Iwould have thought they would have shaken out a little bit higher in the firstquarter since Timing was up.
Can you just talk about the gives and takessequentially and how we should think about gross margins as we look out throughthe year as the Broadcast businessprobably increases as a percent of mix as we think about the second half?
Bill Bock
Yeah, I think that therewere a lot of mix movements in the quarter, as Necip has commented on. Theconsumer business was soft.
It caused the handset portion of Broadcast to be a higher portion of our overall mix. We'vealso indicated that the MCU business was also down in the first quarter, whichis historically a good margin product line for us.
But I was really pleased with how the overall marginsheld in the quarter, at the high end of our target range. I think if you'llrecall, that's almost exactly what we told you to expect 90 days ago.
Looking into 2Q, we think some consumer demand willcome back. We think MCU will recover.
And on balance, we think that the mixshifts going into 2Q will allow us to remain at the high end of our guidancerange, someplace very close to 62%.
Operator
Your next question comesfrom Tayyib Shah - Longbow Research.
Tayyib Shah - Longbow Research
Necip, can you talk aboutwhat's happening to your revenue content within the Broadcast arena per unit? Obviously, you had some mixshift change there, but if you disregard that, with the FMtransmit and AM capability, what's happening to your overall revenue contentbecause of that?
Necip Sayiner
So, to recap, the overall Broadcast revenue was down sequentially. The handsetrevenue was up, driven by strength in Korea, in particular.
On the non-handsetside, our AM/FM revenues continue to ramp. We've obviously seen a reduction intuner and transmit revenue from non-handset applications in the quarter.
Andlooking into the second quarter, I expect to see the handset revenue grow alittle further sequentially over 1Q, and we expect the P&D market willremain soft, so those revenues we expect to be lower in the quarter. TotalBroadcast revenue will likely be around flat sequentially in the secondquarter.
Tayyib Shah - Longbow Research
And if you look at yourrevenue content per device, how is that tracking?
Necip Sayiner
Well, are you asking aboutthe ASP trends?
Tayyib Shah - Longbow Research
ASP versus getting more FMtransmit content within the devices as well as AM capability.
Necip Sayiner
Yeah. So, as I mentionedearlier, the overall blended ASP was down in the quarter, and that's drivensolely by the mix between handset and non-handset applications.
We continue toenjoy a premium in our higher-value products, such as transmitter and AM/FM.
Tayyib Shah - Longbow Research
And Bill, when would youexpect to be out of auction rate securities, and what's the average maturity ofthese securities?
Bill Bock
So at the time thesesecurities were purchased, the maximum time period that we anticipated was35 days. With the failure of a number of auction rate security auctionsduring the month of February in particular, a number of these assets have muchlonger maturities but are extremely high quality, either municipal backed orU.S.
federal government backed securities that we think are very high valueassets. So we will probably remain in auction rate securities and not attemptto liquidate early.
We may have some long-term investments, therefore, for aconsiderable period of time, but we think the value of those assets is veryhigh.
Tayyib Shah - Longbow Research
And with your demod product,would you expect to get some wind with the top tier OEMs, especially in the TVspace this year?
Necip Sayiner
We've been sampling ourdemod device for a few months now, and we're competing for design wins for 2009models.
Tayyib Shah - Longbow Research
And finally, Necip, what'sthe outlook for the voice business this year? How much do you think you cangrow that business this year?
Necip Sayiner
Well, we're pleased to seethat there is a renewed interest in voice attachments in residential gateways,particularly in Europe. We benefited from that trend in the first quarter.
Wealso won a design win with one of the major suppliers in the cable space, sothat should start being reflected in our revenues in the second half. So, as Isaid, our confidence in some of the targets we've established for the productlines for the full year increased over the last 90 days, and voice overbroadband is no exception.
Operator
Your next question comes fromArnab Chanda - Deutsche Bank Securities.
Arnab Chanda - Deutsche Bank Securities
First of all, Bill, I thinkthere was a question on gross margins, but I just wanted to maybe drill down alittle bit. If you look at your businesses today, is it fair to say that,excluding the handset portion of your Broadcast,gross margins within the company are relatively - the new products have thesame or maybe a little higher than where you are today?
Bill Bock
Arnab, I think one of theattractive parts of our business today is that all of our product lines enjoyattractive gross margins and the spread between the highest gross marginproducts and the lowest is relatively narrow. So while we are certainly seeingsignificant mix shifts from quarter to quarter, it's not driving dramatic changes in the overall corporatemargin profile.
And I think we had a very strong Q1, and with what we seelooking into the remainder of the year, we're expecting margins to continue toperform very well.
Arnab Chanda - Deutsche Bank Securities
One other question on theexpense side. It sounds like you're going to be relatively conservative on theSG&A and you're going to continue to invest in R&D.
Is there a certainexpectation that at current rates of growth we should assume R&D as apercent of sales remains about the same or goes down? How should we think aboutthat line item versus revenue growth?
Bill Bock
I think that we spent atremendous amount of energy in 2007 getting the income statement in balance. Andwe indicated last quarter that we thought that the R&D line was essentiallyconsistent with our expectation, and therefore, on a percentage basis, willprobably stay similar going forward.
There's still plenty ofopportunity to improve in SG&A, and we'll continue to strive forimprovement in that line item throughout the remainder of this year andcertainly into 2009 as well.
Arnab Chanda - Deutsche Bank Securities
And if I can ask a couple ofquestions on products, Necip, if you look at your Timing business, under whattimeframe do you think that business can be sort of breaking out of that sortof emerging segment into its own segment, like Microcontrollers did? Is it morein late '08 or is it more in 2009?
Necip Sayiner
In terms of the annualgrowth rates, the Timing business at this stage is certainly tracking to atleast what MCU business has done for us. We certainly think that the Timingbusiness can achieve the level of revenue that the MCU business has.
It'sprobably behind a couple, three years compared to the MCU business. But thenumber of new customers we're adding every quarter and the proliferation of ourproducts inside those customers are both very encouraging to us.
So I don't see it getting toa 10% product line this year because of the strong growth in other parts of thebusiness, but we would see that happen in 2009 or 2010.
Arnab Chanda - Deutsche Bank Securities
And then a quick question onMCUs. You said that your, you know, you were talking about your growth rates inthe MCU business.
It seems, though, that your [inaudible] is expanding quitedramatically, so should we assume the growth rate that you've seen historicallycould continue for a couple of years here or is there a reason that it shouldslow down?
Necip Sayiner
You know, we set a target acouple of earnings calls ago that we would get to about half the [inaudible]available by the end of 2009. We're certainly on track to achieve that.
As youobserved, we're expanding our served market quite significantly, especiallywith the introduction of the low voltage MCU family. So this is really what weneed in order to maintain our high growth rate.
Clearly, the revenue base isgetting larger, so the revenue growth in dollars is going to be bigger. And tobe able to achieve that kind of growth rate we need to expand [inaudible]aggressively, as we have done.
So our target for theproduct line remains intact in that for the next couple of years we'd like tocontinue to see that business grow at that high rate.
Operator
Your next question comesfrom Sandy Harrison - Signal Hill Group LLC.
Sandy Harrison - Signal Hill Group LLC
Just a quick question on theMCUs. You had highlighted, Necip, the $1 billion market for the low voltagedesigns.
Is there a particular segment in that $1 billion that you guysparticularly see as one or is it sort of the opportunity by a lot of differentsegments?
Necip Sayiner
There are variedapplications, everything that you can imagine that requires a double A batteryor two to operate from. An area that we have not participated in the past andour new products would fit nicely are the hand-held medical devices.
Thatrepresents a large and growing market because of the demographics also, and ourproducts are very well suited for that particular application. But it also addressesportable audio devices, computer peripherals, wireless sensors, so the marketis really large and fragmented.
Sandy Harrison - Signal Hill Group LLC
Is there a particularcompetitor in there? Is this done - maybe with the volume by ASIX - what's kindof the competitive position by which you guys enter in?
Necip Sayiner
There are a number ofexisting competitors out there. One of the larger ones is Texas Instrumentswith their MSP430 series of MCUs, and the 0.9 volt series that we've announcedcompetes very favorably in terms of power dissipation spec and the level ofintegration compared to that device.
Sandy Harrison - Signal Hill Group LLC
And as far as lead times -and with these markets, the consumer markets, they can be pretty quick tosample or from design to production, the medical obviously sometimes a littlebit longer - but what do you see as when you could potentially start togenerate revenues from this particular product?
Necip Sayiner
Well, we said to target this2009. We have an enormous amount of leads after the launch of the product.
We'recompeting to turn those to design wins this year, and certainly have revenueexpectations from those products for '09.
Sandy Harrison - Signal Hill Group LLC
And Bill, one for you as faras the hiring of R&D. How is that going?
Is there a steady stream ofpotential candidates out there? Are you having to raise the bar a little bit toget the quality?
Just kind of what's the environment about hiring engineers?
Bill Bock
The standards we have inthis employee category are very high, but we are executing on our plans. Sowe're aggressively recruiting on a national level and adding, but only when wecan meet our internal standards.
Sandy Harrison - Signal Hill Group LLC
And is there a particularthat you're looking to hire or are you just looking to hire athletes that youcan then put into spots where you can use them?
Bill Bock
No, I think in each caseit's specific. So each of our business units have got specific requisitionsopen for needs in defined programs.
So the skill sets are very distinctlydefined.
Operator
Your next question comes from Cody Acree - StifelNicolaus & Company, Inc.
Cody Acree -Stifel Nicolaus & Company, Inc.
Maybe we can go back to the Microcontrollers. I thinkthis is the first time that the MCUs have been impacted by some degree ofseasonality.
Is that more the norm going forward or has Microcontrollers grownlarge enough now that seasonality tends to be more of an issue and, if so, whatare we to expect from normal seasonality there?
Necip Sayiner
We've had good success last year, the second half oflast year, in bundling our MCUs with some of our Broadcast products, so theportion of MCU revenues coming from consumer in the second half of '07 went updramatically. So we're seeing the seasonal impact of this in 1Q.
But there's an underlying revenue growth in all oursegments underneath that overlay of seasonal changes. It's I think too premature for me to say this isgoing to be the rule going forward.
Cody Acree - Stifel Nicolaus & Company, Inc.
And Bill, you gave a littlebit of color or you gave more color on gross margin mix expectations for thesecond quarter given that you've got a pretty tight range on gross margin delta.Still, as you look at the mix through the remainder of the year, would youexpect that mix to be a positive impact or kind of a flattish impact throughthe rest of the year?
Bill Bock
Yeah, I think as we gothrough the second half of the year we should see the consumer segmentsrebound, particularly if the macro economic environment is good or improves. I think that the challengewe have looking out into the second half of the year is really ASP pressure andcompetitive pressures, and it's the combination of these two effects thatcauses me to suggest that the range that we have indicated to you isappropriate going forward.
Cody Acree - Stifel Nicolaus & Company, Inc.
And then lastly, youmentioned the ASP pressures. What are you expecting?
It sounds like your designactivity, your design wins in the Broadcastsegment are solid, but what do you expect outside of just mix, just purepricing sensitivity, in that segment, maybe not just in Q2 but throughout theremainder of the year?
Necip Sayiner
The price declines,particularly in the handset, is consistent with what we've seen in prior years.Clearly, we're going to benefit to some degree from the introduction of newerdevices, higher value add devices. But on existing plain vanilla FM tuners, theASP reduction that we're planning is consistent with the prior years.
Cody Acree - Stifel Nicolaus & Company, Inc.
You're not seeing anyindications of any increased ASPs? I know lots of new competitors coming in orare at least talking about coming in, is that having an impact on the ASPvisibility?
Necip Sayiner
Not any more than what we'veseen in the last 18 months.
Operator
Your last question comesfrom Suji De Silva - Kaufman Bros.
Suji De Silva - Kaufman Bros.
So FM tuner, can you repeat,Necip, what the mix was this quarter, handset versus non-handset, and where youexpect that to trend as you exit '08?
Necip Sayiner
In the neighborhood of 60 to40 in 1Q favoring handsets. Wewould expect this to tilt a little further in the second quarter because we areexpecting the handset revenues to go up sequentially slightly and non-handset,P&D in particular, to go down slightly.
Suji De Silva - Kaufman Bros.
And then exiting '08, wheredo you think that trends?
Necip Sayiner
I think the best guess I canshare with you at the moment would be closer to 50/50, as we achieved in 4Q oflast year.
Suji De Silva - Kaufman Bros.
And the Microcontrollerbusiness, the seasonal patterns we're seeing in '08, is that indicative of howthis business should track seasonally going forward?
Necip Sayiner
Yeah, there was a questionjust a few minutes ago on this. I think it's too premature for me to state thatthis is going to be the seasonal pattern going forward for MCU.
We're clearlycoming up over a very strong 4Q for the P&D space in particular, so thesequential comparison is a little unfair in that regard.
Suji De Silva - Kaufman Bros.
And then on the cash levels,can you update us on the end of the [buybacks], how aggressive you are? Can youupdate us on the strategic processes you guys are going through?
I know you'relooking at targets out there. What's kind of an update on that process?
Bill Bock
Yes. We continue to be veryactive in reviewing M&A opportunities, as we've indicated previously, muchmore so in the private segment of the market as opposed to public companies.
We'vehad an active program going on now for a year and that continues. We areanticipating that we could be in the market during 2008 or 2009.
Suji De Silva - Kaufman Bros.
And lastly, one lastquestion. Have you seen, Necip, anything tangible from your customerconversations or order patterns that would give you the kind of caution you'reguiding toward or is it just sort of macro uncertainty?
Necip Sayiner
It is the macro uncertainty.We haven't gotten any signals from our customer base to verify that.
Operator
Thank you. I will now turnthe call back over to Shannon Pleasant at this time.
Shannon Pleasant
Thank you very much forjoining us. This now concludes today's call.
Operator
You may now disconnect.Thank you.