Jul 25, 2012
Executives
Shannon Pleasant G. Tyson Tuttle - Chief Executive Officer, President and Director Paul V.
Walsh - Chief Financial Officer and Senior Vice President
Analysts
Craig A. Ellis - Caris & Company, Inc., Research Division William S.
Harrison - Wunderlich Securities Inc., Research Division Anil K. Doradla - William Blair & Company L.L.C., Research Division Vernon P.
Essi - Needham & Company, LLC, Research Division Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division Blayne Curtis - Barclays Capital, Research Division Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division Craig Berger - FBR Capital Markets & Co., Research Division Ian Ing - Lazard Capital Markets LLC, Research Division Steven Eliscu - UBS Investment Bank, Research Division Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division Sujeeva De Silva - ThinkEquity LLC, Research Division Terence R. Whalen - Citigroup Inc, Research Division Cody G.
Acree - Williams Financial Group, Inc., Research Division
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 Labs Second Quarter Earnings Conference Call. [Operator Instructions] Thank you.
I will now turn the conference over to Shannon Pleasant.
Shannon Pleasant
Thank you. 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-ed 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 am 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 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 Executive Officer, Tyson Tuttle.
G. Tyson Tuttle
Good morning, everyone. We had another great quarter with all 3 of our major product line categories posting growth.
We delivered upside to revenue, operating income and earnings and we see product cycle momentum continuing into Q3. We announced this strategic acquisition, which will also begin contributing to the top line in Q3.
I'm going to turn the call over to Paul to review the specifics of the quarter and then I will provide some further commentary on the business and our Q3 outlook. Paul?
Paul V. Walsh
Thank you, Tyson, and good morning, everyone. Second quarter revenue of $135.7 million was a new company record.
The 8% sequential growth was a $10 million increase over Q1, representing the largest sequential gains in nearly 3 years. This is impressive and that it comprehends the decline in our touch control in revenue from 8% in Q1 to just 5% in Q2.
The strength was across all of our major product lines with several reaching all-time highs. The Ember acquisition closed on July 3, thus, our Q2 results do not reflect anything related to that deal other than transaction cost.
I'll start with the GAAP results, which include charges related to the executive separation agreement, transaction costs associated with the Ember acquisition, $9.2 million noncash stock compensation charges and an $8.4 million credit from a one-time release of tax reserves. Second quarter GAAP gross margin improved to 61%.
R&D investment increased to $34.2 million and SG&A expense increased to $32.2 million, resulting in GAAP operating income of 12.1%. Because of a tax reserve release, there was a tax benefit in Q2, thus, our tax rate was a negative 15.3%, resulting in diluted GAAP earnings of $0.47.
Turning to our non-GAAP results. Gross margin increased meaningfully to 61.3%, a 7% sequential increase in broad-based products and an 8% sequential increase in access products contributed to the gross margin improvement.
Our Broadcast products also increased 8% sequentially in Q2, driven by our audio business, which was favorable to the margin mix within Broadcast. Mix continues to be the primary determinant in the quarter-to-quarter margin fluctuations and I expect that trend to persist in the second half of 2012.
We project our Q3 gross margin will be at or near 61% depending on mix. This comprehends an expectation of the higher margin Access business will represent a smaller percentage of revenue in Q3 and the product mix within access will be less favorable than in Q2.
Moving down to P&L. Operating expenses increased to $55.7 million as we anticipated.
R&D increased $2 million to $31.3 million or 23% of sales. Q2 was a record quarter for tape-outs and that was the primary driver behind the growth in spending.
This year is proving to be very strong in this regard as we execute on our product roadmaps. This pace of new product development is very encouraging as it's a meaningful indicator of the health of our pipeline.
SG&A increased slightly to $24.4 million but declined to 18% of sales. The strong performance in the business drove higher variable compensation, which was the main factor behind the increase.
I anticipate operating expenses inclusive of the Ember acquisition will increase $3 million to $4 million in Q3. We expect this new run rate to remain relatively stable through the end of the year.
Operating income in Q2 continued to improve ending at 20.2% of revenue, an increase of 210 basis points. Other income was $1.4 million.
Net income in Q2 increased to 16.4% of revenue. The Q2 tax rate was 22.6%.
We expect our tax rate to be in the 21% to 22% range in the second half. Strong growth and improved gross margin provided significant earnings leverage, resulting in earnings per share above our guidance at $0.51, a 19% sequential increase.
Turning to the balance sheet. I remain very satisfied with our inventory levels in the help of our financial position.
In Q2, accounts receivable increased to $72.7 million or 48 day sales outstanding, consistent with the growth in revenue. We continue to have no known selection or bad debt problems.
Inventory was up slightly to $36 million or 5.8 turns, consistent with last quarter. The channel inventory balance declined 7% and ended at 40 days.
Based on the last 2 quarters of channel inventory trends, we believe that our distributors are shipping to end demand. Cash flow continues to be strong with cash, cash equivalents and we end investments at $323 million.
We repurchased $1.1 million shares during the quarter for $38.8 million and plan to continue to execute on our open authorization. Wrapping up the financial discussion, we continue to make progress towards our growth and profitability goals.
The Ember acquisition, which is already contributing to our revenue growth in Q3, will be slightly dilutive over the next 4 quarters but will support our gross margin model and ultimately contribute to continued improvement in our operating performance. At this point, I will turn the call over back to Tyson.
G. Tyson Tuttle
Thanks, Paul. This quarter's results demonstrate what we've been talking about in terms of the uniqueness of the Silicon Labs business model.
In a lack luster demand environment and despite some headwinds from the Touch business we've exited, we've been able to achieve strong growth. Because of our diversification, our performance is not dependent on the help of anyone in market.
And our strong product differentiation enables meaningful market share gain, adding up this year to better-than-industry growth. I'd like to start with our Broad-based business, which delivered across the board in Q2, representing about 45% of total revenue.
The Broad-based products are on track to grow by as much as 25% to 30% this year. Strong growth in Q2 was driven by new revenue highs in our MCU timing and wireless products.
The timing products posted a record quarter, with revenue up 20% sequentially. If you remember, this high-growth business slowed in Q4 and Q1, as carrier spending came to a virtual standstill.
We continue to rack up record new design wins during that time with existing and with new products in both our established customer base and in new markets. In Q2, we believe the return to significant growth was driven by 2 factors: First, we saw some of the pent up demand materialize as our customers replenished inventories to satisfy some resumption in carrier demand; second, we began shipping into new business of customer supplying storage and security devices for cloud computing and other midrange application.
While communication infrastructure remains the lions share of the timing revenue and design wins, industrial design wins accounted for 25% of the total in Q2. This is resulting from our expanded portfolio and compelling value proposition, allowing us to capture share at the high end and push it into adjacent markets.
In Q3, we expect end up [ph] market uncertainty will continue to drive caution for customers in telecom. But we're forecasting continued growth in timing that reflects share gains, the adoption of our new products and increasing contribution from new application.
Our MCU products were up more than 10% sequentially, nearing 20% of total revenue in Q2. We benefited from growth in communications applications as well as the ramp of new wins and consumer in portable devices.
Overall, the MCU products achieved a new record in design wins during the quarter with 1/3 of those coming from brand new customers. The 8 bit MCU family is continuing to demonstrate strong customer attraction with new wins and industrial automation security and test in measure.
The 32-bit MCU family we launched earlier this year continues to generate a lot of excitement. And we're now pursuing more than 250 new opportunities.
We're preparing to launch additional 32-bit products that are highly differentiated and will leverage our competitive advantage in power, precision analog and size. Our wireless products increased by nearly 50% in Q2.
These products include transmitters, receivers and transceivers that support point-to-point sub gigahertz connectivity and meters, home automation, electronic shelf label, garage door openers and remote control. These are our systems typically reliant in MCU as the primary system controller, making our integrated radio in MCU a powerful combination.
The Ember products, which we just acquired, dovetail nicely into our wireless strategy, adding mesh networking and 2.4 gigahertz radios into our toolbox and enabling us to provide a complete portfolio of embedded wireless solutions. The combined portfolio has already inspired exciting ideas for the technology roadmap.
Our goal is to become the leading supplier for the devices that form the internet of things and I believe we are well positioned to accomplish that goal. Given the strong attach of our MCUs with our wireless devices, we're not going to be able to continue to break out wireless products separately from MCU.
We'll, therefore, be reporting wireless and MCU together in one category. This is reflected in our Q3 guidance which anticipates the combined group will be up sequentially, both on a organic basis and as a result of the Ember product revenue.
Moving to Broadcast, the business was about 1/3 of total revenue in Q2. Growth was driven by the strong seasonal demand for the audio products which were up nearly 20% sequentially.
We continue to maintain dominant share in the consumer audio market and we are expanding our footprint with new products. We just announced our latest high-end radio optimized for high fidelity audio equipment.
As I've described before, our ability to take a single IC development and then use firmware to create different device personalities has allowed us to offer a portfolio of products optimized for different applications and price points. This is very efficient from an R&D standpoint and because our products are optimized for the distinct requirements of each market segment, we have been able to gain share quickly and hold onto it.
You'll see us pursuing a similar strategy across the company. Looking forward, we believe audio is back on track to be a growth business.
We continue to maintain dominant share on the consumer market and we are layering on high-quality automotive revenue in a steady fashion. There are products in the pipeline that will expand our footprint and provide additional growth factors.
Video revenue was about flat sequentially, off the strong growth in Q1 and expect it to be about flat again in Q3. We've seen notable strength from Korean customers, offset by softness in Japanese customers.
Caution about the health of in demand is likely to persist among the TV makers this year. But the penetration of Silicon tuners continues to rise, leaving us confident in our ability to hit 30% of our greater share in 2012.
Q3 will represent the first of the ramps of Tier 2 TV makers in China, adopting the products we announced last year specific to that market. We also recently launched our fourth generation TV tuners and next-generation demodulator.
These devices further expand our differentiation. And given the strong customer pool for these new devices, we are expecting to ramp earlier than we initially anticipated with meaningful revenue in Q4.
Design win traction from model year 2013 is significantly ahead of our goals. Our competitive position remains very strong, validating that the barriers to entry are high.
I continue to feel very good about the growth story in this product line. The Access business had a great quarter, with voiceover IP, modems and power over ethernet all posting growth.
It is declining as a percentage of our overall revenue, though, coming in at just under 20% for Q2. For the rest of the year, we expect some puts and takes as the modem business trims downward in set-top boxes, offset by growth in voice over IP and power over ethernet.
But in our view, the overall profile remains relatively stable on a run-rate basis. Now for Q3 guidance.
We're currently expecting continued growth with revenue of $140 million to $145 million. We're anticipating that Broad-based will be up, Broadcast will be flat to down and Access will be down.
This comprehends a relatively weak macro backdrop offset by the market share momentum we've discussed. As Paul mentioned, we expect growth margin to be about 61%.
We anticipate operating expenses will be up by $3 million to $4 million reflecting the addition of Ember, which has a modesty diluted impact on EPS. On a GAAP basis, we are projecting earnings of $0.28 to $0.33.
And on a non-GAAP basis, we are expecting earnings to be $0.50 to $0.55. We'd like to now take your questions.
Shannon?
Shannon Pleasant
Thank you, Tyson. We will now open the call for the question-and-answer session.
So that we can accommodate questions from as many people as possible before the market opens, please limit your questions to 1 with 1 follow up. Operator, please review the question-and-answer instructions for our participants.
Operator
[Operator Instructions] Your first question comes from the line of Craig Ellis of Caris & Company.
Craig A. Ellis - Caris & Company, Inc., Research Division
Paul, can you just quantify how much of a contribution you're getting from the Ember business in your revenue outlook and how much is the $3 million to $4 million in OpEx increases due to Ember?
G. Tyson Tuttle
Craig, this is Tyson. We've talked about second half revenues in the $10 million to $12 million range and we're not going to break that out further than that but that's a reasonable assumption.
And in terms of the OpEx, the bulk of the OpEx increase is due to Ember. I'd say that we hit the ground running with Ember acquisition, they--it closed early this quarter and we're able to start shipping right away, we've completely integrated the teams and integrated that business with our own wireless business.
So we really feel good about the momentum, both in the Ember product and our own existing wireless products that are going to helped by a lot of the expertise that came in.
Craig A. Ellis - Caris & Company, Inc., Research Division
And then as a follow up, looking at the microcontrollers business, you did a nice job growing it despite capacitive touch phasing out. How should we think about the growth dynamics in the core MCU business in the back half of the year and does capacitive touch get fully mixed out in 3Q or is that [indiscernible]?
G. Tyson Tuttle
You broke up a little bit there but in terms of the growth of the MCU business, it was up 10%, sequentially. We've had a lot of growth in communication, consumer portable area, we had record number of design wins that's mostly still on our 8-bit product line and industrial automation security test and measurement.
And the record design wins, we got our 32-bit stuff coming along. So the growth profile of that business is solid.
And going into the second half, we think that we're going to continue to able to gain share. We've also -- the 32-bit products are getting a lot of interest, so we think that going to 2013, that's going to be another good growth driver for us.
Craig A. Ellis - Caris & Company, Inc., Research Division
And the capacity of touch mix out, Tyson?
G. Tyson Tuttle
I'm sorry you just broke up.
Craig A. Ellis - Caris & Company, Inc., Research Division
The capacity of touch, when does mix out of 3Q or 4Q?
G. Tyson Tuttle
Well, the 5% of business in Q2 and we anticipate that will tail off over the next 3 quarters.
Operator
Your next question comes from the line of Sandy Harrison of Wunderlich.
William S. Harrison - Wunderlich Securities Inc., Research Division
Just a quick question on the tape out. You said that you had a lot of activity this quarter.
How much of that is new product, how much of that is, perhaps, new processes to help cost controls and what do you think the tape-out activity looks like for the rest of the year from here? Was Q2 sort of the big number and now we harvest or are you going to continue to keep your foot to the pedal on that?
Paul V. Walsh
Sandy, this is Paul. I would say we really don't characterize it.
We don't break it out between new product development and process improvement necessarily. There's certainly an element of both in there.
But I would characterize it as largely new product development. I mean, that's really going to -- it's what we're focus on when it comes to fueling the growth for the next few years.
And we don't try to manage our operating expenses by managing the timing of tape-outs. We encourage the engineering teams to hit market windows, so we're keeping the pedal to the metal on tape-outs.
And we anticipate that will pay off in the coming years.
William S. Harrison - Wunderlich Securities Inc., Research Division
Got you. And then my quick follow-up.
You talked a little bit, Tyson, about Gen 4. You might see some of early rouse in Q4 this year, is that the fact that some of the manufacturers might be skipping some of the 2012 going to 2013 early?
Or is that new customers or new markets that are ramping ahead of that you weren't in before?
G. Tyson Tuttle
Those 2 questions are actually related. I wanted to comment once more on the tape-out that we've got -- the majority of our tape-out activity is driving into new product development and we also have quite a good execution.
So these are mostly brand-new tape-outs that the coming out. In fact, our Gen 4 TV tuner is going to be on the first rev and production in Q4 and that's part of the reason the execution on that product is part of the reason for ability to pull it in.
But that's mostly on new customers that we are able to sample the part out and get going. But the customers that are on our third-generation device, those were won last year and are going, for the most part, be shipping throughout the year.
But I think that the indication of revenue out of that fourth Gen product is testing out to the execution. And also just one more point is that the pace of product introduction that we've had, we are keeping the pedal to the metal in terms of new product tape-outs throughout the year.
Operator
Your next question comes from the line of Anil Doradla of William Blair.
Anil K. Doradla - William Blair & Company L.L.C., Research Division
A couple of questions. The comeback in the timing business, was that largely driven by kind of growth in adjacent markets or do you folks believe that telecom infrastructure is coming back?
Any color on that would be great. And the follow-up was on the outlook, how much of macro uncertainty have you baked in your guidance?
What is your degree of confidence and level of conservativeness?
G. Tyson Tuttle
Anil, this is Tyson. In terms of timing in Q2, it was really -- I think that there was some pent-up demand with the -- in the telecommunications customers and that was really one of the biggest factors.
There was some new business that we started shipping into and storage cloud-computing-type stuff, some other midrange applications. We've been expanding our timing product line to have a complete portfolio at the high end, pushing that down into the midrange and then down into even some of the consumer level things.
We've also got a solid frequency control business in terms of the oscillator and we've been pushing down that as well. So it was an across-the-board kind of -- I wouldn't call it a recovery on the telecommunication customers but certainly some strength there that was the main driver behind Q2.
I'll let Paul comment on the macro.
Paul V. Walsh
Yes, I'll comment on the macro in a second. Let me just add about timing, though.
We believe there is a recovery in telco but not a complete recovery certainly, but this was a record quarter for timing. And to achieve that, you're not just relying on the macro conditions to achieve a record quarter, you're getting that through share gains.
So what we've been getting for design wins that we also believe is beginning to pay off. On the macro uncertainty, now what we've got baked into the guidance, Anil, is that uncertainty that's factored into the guidance.
We don't anticipate any strong or strength in demand coming in the second half of the year but we're largely a product cycle company. And we're relying on a lot of different product cycles' momentum stories to carry us through this year and -- but it's given the some confidence though as what we've been seeing in our booking trends.
Our booking trends in the past month and in the past few weeks have been very positive and that gives us a lot of confidence in our guidance range.
Operator
Your next question comes from the line of Vernon Essi of Needham & Company.
Vernon P. Essi - Needham & Company, LLC, Research Division
I'm wondering if you could just dive in a little bit more into the strength in your Access business and what specifically drove that? I understand, obviously, what you're selling into, but, I mean, you're guiding that to be down and I'm wondering if there was any unique reasons for why the business was stronger this time of year versus the prior 4 quarters or so?
Paul V. Walsh
Yes, we just had strength across all the major segments in Access in terms of modems, voiceover IP, the power of ethernet were all growing. Those are the modems going to fax-type applications, point-of-sale, a lot of industrial-type application.
We did see some strength in power of our ethernet. That's mostly going Cisco.
So some strength there. I think that was mostly in share gain.
And in voiceover IP, those are slicks that go into cable, DSL, voice terminal adapters. And again, softened strength in China on that one.
So it was kind of an across-the-board just good quarter for the Access business. We have seen the modems coming out of the set-top boxes at a measured pace and we think that that's going to continue into the second half, although, it's a modest pace but we still see strength in the other 2 pieces of that business.
So the Access business is looking good. I think if you look it on a long-term basis, we think it's relatively stable.
Vernon P. Essi - Needham & Company, LLC, Research Division
And then with my follow-on question, I suppose. Do you anticipate hitting revenue thresholds up in this range, maybe even in the 2013 or would you anticipate this to be sort of a flattish to down business longer term?
Paul V. Walsh
I think that on a run-rate basis, given the share gains that we have been able to achieve on the voiceover IP side, and I think that most of the wind down in the set-top box modem is moving to lower speed modems and pulling out some of the modems in some of the emerging markets where they're using SMS messages to order pay-per-view content on the satellite, set-top boxes. I think that that's mostly behind us but we think that on a run-rate basis, that's going to be stable moving into 2013.
Operator
Your next question comes from the line of Tore Svanberg of Stifel Nicolaus.
Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division
First question for Paul. Paul, could you just give us the cash flow numbers for the quarter, please?
Paul V. Walsh
The cash flow went -- declined by about $28 million for Q2. We were $351 million in Q1, we're down to $323 million, but we've repurchased nearly $39 million of our stock.
So that was really the primarily use of cash. And so if you take that out and you factor in some of the working capital growth just tied to the growth in the business, we've had a pretty strong cash flow quarter.
Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division
Okay, very good. And as a follow-up, could you comment a little bit on your visibility and backlog trends?
You mentioned bookings have been fairly robust the last couple of weeks. That's quite contrary to some other people.
So help me just understand how your relative visibility going into this quarter?
G. Tyson Tuttle
Well, if we look at our -- just like everyone, we look at our bookings trends every week, those have been trending very positively and very consistently. Our lead times that we typically see are 6 to 8 weeks, and we're near the lower end of that.
So I think when you combine all that together and when we compare where we're targeting for revenue guidance where we're -- against where we've been historically, we're in place where we feel very confident about that range.
Operator
Your next question comes from the line of Blayne Curtis of Barclays.
Blayne Curtis - Barclays Capital, Research Division
On the guidance for the Broadcast business, I mean, typically the seasonally strong period in Q3, obviously, not a typical year, but if you could talk about kind of what's going on with consumer products in Q3. And then I know you don't want to guide for Q4, but typically that is a down quarter as things are built in Q2, Q3.
How do you see the year playing out?
G. Tyson Tuttle
This is Tyson. In Q3, we think that Broadcast team and was up 8%, audio was really strong in Q2.
And that's typically quite strong seasonally. I think there maybe a little bit of macro going on in audio, it's not up in Q3 like we would normally expect it to be.
But it's probably flat to down. We got a lot in new product momentum and a lot of design wins going on in that area.
So we feel comfortable about our ability to continue to dominate the consumer segments there. But I think that's probably a little bit of an indication of what's going on in the general economy, but I think Q4 is typically down in audio.
I think on the video side, I think that will be about flat this quarter to last. So Q3 will be flat to Q2.
That has -- it may again be a reflection. I think there's some conservatism on the part of the TV makers in terms of the build up to the holiday season.
But we've got the ramp in China, we've got strong design win momentum going into 2013 and I believe that, that will be a strong growth. So I think in terms of share gain in both of those businesses, we're positioned very well.
Also on the automotive, we're starting to see the ramp on the -- I'm sorry, in the audio business, we're starting to see a ramp on the automotive side, which is high-quality revenue and that's going to continue into 2013. So while the macro may be impacting the Broadcast somewhat [indiscernible] strong, the bookings are strong and we feel confident in the level of guidance of that we share the guidance that we applied to Broadcast and feel good about where we're going in 2013.
Blayne Curtis - Barclays Capital, Research Division
Excellent. And if you could just touch on the setup in wireless, obviously, pre-Ember was quite strong.
What drove that?
G. Tyson Tuttle
In terms of the wireless business in the growth, 50%. I mean, it was a number of industrial, metering, some strong consumer applications in with wireless.
It was -- at this point, it's about $5 million a quarter, the wireless business going in. We're not going to break that out in the future but that's -- as we're combining that in with MCU and then with Ember, that's kind of the level that we're going in.
And if you look at the synergy there between our sub-gigahertz wireless business, our microcontroller business and then the Ember technology and products that are coming in, there's a strong synergy, strong customer interest around all of those. So we think that, that is a very positive area for us to focus on, both near term, in terms of leveraging our sales force and all that with Ember product but also long term, in terms of integration in all of that.
So we feel like the wireless piece of that and the combination with the MCUs is going to be a big growth driver for us.
Operator
Your next question comes from the line of Srini Pajjuri of CLSA Securities.
Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division
Tyson, you gave some guidance for the full year, I've got parts of it and I missed, especially, the Broadcast. Could you please go over what you expect for different businesses for the rest of the year or the calendar year?
G. Tyson Tuttle
Yes, we've talked a little bit about some trends, but we're not providing guidance for the full year. We're just -- we really are focused on Q3.
You look at the visibility we have there is solid but we're not providing guidance for Q4.
Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division
Okay, fair enough. And then on the timing business, you mentioned that telecom came back because of some pent-up demand.
Could you remind us whether this is coming from any particular regions. And also, if you could remind us what kind of applications within infrastructure that you are timing products go in to.
G. Tyson Tuttle
Okay. I did -- there was one -- we did talk about Broad-based for the year being up 25% to 30%.
So the Broad-based category -- so we did talk about that in terms of the full year. So I just wanted to get that straight.
In terms of telecom, it was really across the board. I mean, these are -- this is mostly high-end telecommunications equipment, it's optical networking, wireless base station, infrastructure equipment, high-speed data communications, equipment we shipped into the top -- all of the top vendors in terms of our cloth and most of them in terms of our off layers.
So it was -- those high-end segments that drove the recovery and also some -- even within those customers, some of the lower priced products and some of the portfolio that we've been doing here over the last year or 2 has started to pay off. And so that was behind some share gain, some portfolio expansion at the high end that was really driving and the resumption of some level of demand from them.
I mean, Q1 and Q4 were quite tough in terms of those customers. So that has returned and overall, the businesses had a record level.
Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division
And then, Paul, on the tax rate. I'm just curious, should we think about 20% to 21% as kind of the normal rate as we head into 2013 as well?
Paul V. Walsh
No. If you'll recall at the beginning of the year, we mentioned that the federal R&D tax credit, which expired at the end of 2011, was not reinstated.
And this applies to many companies, I would assume. And we're waiting on that.
So I think our rate is impacted materially by that. And so assuming that gets reinstated at some point in the year, probably near the end of the year, that it will come back down to mid- to high-teens.
Operator
Your next question comes from the line of Craig Berger of FBR Capital Markets.
Craig Berger - FBR Capital Markets & Co., Research Division
First, on the modem business, one of your -- another supplier in the set-top box was noted continuing strength into the third quarter, I think that's different than what you guys are saying. Can you just give us a little more detail on what your seeing in set-top box and is that a still an ongoing and sustainable business for you guys?
G. Tyson Tuttle
Yes. In terms of the modem, we don't believe that we're losing share in the modem to on the set-top box side for -- this is -- let me just be clear, the set-top boxes that we shipped into our satellite set-top boxes mostly into the U.S.
And so the modem is used for billing of movies and this is where you don't have an Internet connection. And a lot of suppliers that are talking about set-top boxes are talking about cable.
So Broadcom, for instance, ships their chips into cable set-top boxes and that's a totally different application. So that's maybe what you're talking about but I don't believe that we're losing any share in the set-top boxes.
I think that the trends that we've seen there have really been the shift of customers from higher speed modem and the modem that we're talking about is a telephone line voice band modem, it's not a cable modem, it's not that -- it's a telephone modem chip and they've moved in, moving to lower speed versions and in some of the emerging market economies, they pulled out the modems and gone to SMS cell-phone-type of communication. So I don't believe -- I think that what you're hearing in terms of the market is other types of set-top boxes.
Craig Berger - FBR Capital Markets & Co., Research Division
Okay. And then just as a follow-up in the FM tuner or tuner piece of the business or audio, can you help us understand the relative magnitude of exposure between tuners going into handsets, consumer audio and automotive?
G. Tyson Tuttle
Right. So over the last few years, we've seen the FM tuner handsets wind down.
That's now less than 5% of revenue and the remaining piece of that is stable, relatively stable. Shipping into the high-end.
But the consumers, the lion share of that the revenue now, the AM/FM consumer applications like navigation devices, looking at boomboxes, home theater systems, iPod docks and we are shipping and beginning to shop more and more into the automotive, the automotive is still a small piece but it's going to be on a continual growth trend over the next number of years. So it's -- we're gaining share in the consumer space.
We just announced a radio at the high-end of that, which sells at a higher ASP, delivers a higher value. So we feel good that, that business is back on track in terms of growth that the handset declines, and that transition of the business is behind us and feel good about the roadmap.
We've got 2 new products on the roadmap that are going to also increase the dollar share going forward. So that's the audio business.
Was there another question?
Craig Berger - FBR Capital Markets & Co., Research Division
No. I mean, is there any margin difference between the consumer audio piece and the automotive piece?
G. Tyson Tuttle
Yes. Certainly as we've gone from the handset into consumer, it's certainly held up.
I mean, the audio business is compatible with our corporate margin targets. Solid on the automotive side.
I would say that that's at a higher margin level, so that business ramps. Those are at higher ASP's.
And addressing a large market you're talking about close to 100 million units at multi-dollar ASPs there. So it's a good business for us to be getting into a good investment business and a good stable long-term growth vector for.
Operator
Your next question comes from the line of Ian Ing of Lazard Capital Markets.
Ian Ing - Lazard Capital Markets LLC, Research Division
You're guiding Broad-based up 25%, 35% this year, but you've got a lot of diversed customers you have to reach given your relative size. So are there any improvements you're making or can make to your go-to-market approach whether working with your distributors, Edom and Avant, or direct sales or should we think of it as just exposure to secular trends and new product cycles?
G. Tyson Tuttle
Right. We have made a large investment on the tool side and I think that having the collateral available and having the tools that make the parts easy to use, having reference designs that target specific application help to sell the existing products into the channel more effectively.
So that is -- a large part of the growth is also just expansion of the portfolio and moving in the 32-bit is going to be a great growth factor for us. The ARM processors that we wrap our mix signal contents around and then the synergy that it has with our power and our sensors and our radio technology, is really strong.
So I think that the value proposition that we're able to deliver in terms of the precision mix signal, low power type of designs makes the product very attractive, both for the distributors to take out to new customers and for the end customers themselves and you got to make those products easy to use and specifically targeted for many of the applications as you can. So it's definitely a challenge in terms of the breadth of all the markets but I believe that we've got a solid portfolio and expanding portfolio and a great opportunity for share growth there.
We've got a small share and there's a lot of opportunities and it think that that's one of our brightest product lines and product areas for growth in taking the company to a billion dollars.
Craig Berger - FBR Capital Markets & Co., Research Division
Okay. And then in the Access business, just want to confirm, set-top boxes, modems and set-top boxes, is that about 3% or 4% of sales and stable at this point?
And Paul talked about some less favorable mix within Access, so is that transient or would you potentially walk away from some business there?
Paul V. Walsh
Ian, this is Paul here. Yes, you're right on the percentage of revenue, it's in the 3% to 4% range.
We don't comment specifically on some product lines inside of Access but every product line certainly has areas where gross margin is stronger relative to other pieces of that product line. And we certainly saw that in Q2 and I think what we're seeing in Q3 is that mix shifting away.
Let me just say that the Access business is one of the strongest gross margin businesses in the company. So a movement away from or an unfavorable mix within that product line isn't necessarily very low margin either.
It's relative to the other product lines.
Operator
Your next question comes from the line of Steven Eliscu of UBS.
Steven Eliscu - UBS Investment Bank, Research Division
First question on TV tuners. Does the Gen 4 rounds that you expect to see in Q4 have the potential to offset your typical seasonality that you've described as being down.
And just looking a little further out, just given your current visibility, do you expect the TV tuner business to grow in 2013 versus 2012?
G. Tyson Tuttle
Yes. This is Tyson.
In terms of the Gen 4 wins, I mean, they are still relatively modest in terms of the overall revenue and I think that if you look at the business for the year, going into the year, we talked about getting greater than 30% share of the unit volume and we feel comfortable that we're going to be able to hit that this year. So I don't believe that, that will be much different from the typical seasonality there but I would say that overall, the video business is -- doesn't see the same magnitude of swings that may be the audio business or some other consumer-type businesses have.
So that's about all the color I can give you there. In terms of the growth of the business long-term and going into 2013, we're seeing extremely strong design win traction with our Gen 4 tuner across a wide range of applications in set-top boxes and in TVs, both with the Tier 1 makers and in the Tier 2 makers and talk Taiwan and China.
So we believe that our -- we're going to be able to grow share significantly going into 2013 and we will also see a good revenue growth in 2013 over 2012 as well. So we think that that's going to be a strong growth driver for us in 2013.
Steven Eliscu - UBS Investment Bank, Research Division
And a question about Ember. I mean, that business has been around a long time.
Clearly, there was some interesting assets and revenue stream. But in terms of being able to get some growth from Ember's own core business, you did refer to some synergies.
Near-term, if we look at the next, say, 18 months, specifically what are some of the programs you have in place to be able to jump-start some of the near-term revenue opportunities Ember may have so that core business, at least, gets a some more significant growth than it's had historically.
G. Tyson Tuttle
Right. So certainly our sales forces has a much larger reach than Ember was able to achieve by themselves.
And we also have a lot of synergies in terms of our manufacturing supply chain and they're able to go in and be more aggressive with these products to win share and to drive new applications to convert over to ZigBee. They also had some strong customer relationships in the metering space where we also had a footprint with some of those same customers.
And so, we're able to come in with more of a bundled solution and win some business and there's some early indications that, that strategy is going to be successful. And then you've got customers in the home automation and security space that are rolling out security systems, the cable operators are rolling out security systems and that's a large growth driver and there's a lot of attach.
So it would be where a cable operator would give you quadruple play. So you would have TV, Internet, phone and then they would also offer security competing with a company like ADT.
And so that rollout is occurring with the Ember products and a large number of devices that will hook to the central controller in each home. And so there's a high attach there and we also believe that there's some synergy on the home automation and power side as well.
So we feel quite good about -- that the Ember business as it came in and our ability to drive it both with those devices, as well as attaching it to some of our wireless devices in our microcontrollers in various customers. And then you look at it integration path of our technology and with their's and being able to drive the roadmap forward and that is a rich number of opportunities and vectors that we can pursue.
Operator
You're next question comes from the line of Brendan Furlong of Miller Tabak.
Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division
A couple of follow-ups more than questions. On the video side, as we ramp into Gen 4 products in the typical seasonal March quarter for that in 2013, will that be a mix -- gross margin mix enhancing for the year?
G. Tyson Tuttle
Right. So the Gen 4 products -- in general, the design start in Q1 and will ramp.
We think that the majority of the parts that will ship next year will be on this Gen 4 platform. And that does come at a strong cost down.
So going from our Gen 3 to our Gen 4 device, we had a very strong cost down that will exceed any amount of ASP reduction that we'll see in the market next year. So we think it will be positive to the gross margin in the video business.
I would say that I would not set the expectation that, that business gets up to the corporate level, but it's going to get reasonably close.
Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division
Okay. And then the other question and a follow-up is on the MCU business, which is typically kind of macro driven and obviously the macro is kind of weakening here, but your outlook's pretty positive on design cycles and design wins.
Is there any particular area that you're gaining a lot of traction on market share in the MCU market?
G. Tyson Tuttle
Right. So in the MCU market, with our 8-bit products, we've seen strength in industrial automation.
There's a broad range of applications there, motor drives, lots of sensing-type application in home security applications, test and measurement. We've also got [indiscernible] in communication, consumer markets as well.
A lot of low power wins, a lot of USB connectivity wins in the MCU. So there's a lot of activity there across a real broad range of customers and application.
Operator
Your next question comes from the line of Sujeeva De Silva of ThinkEquity.
Sujeeva De Silva - ThinkEquity LLC, Research Division
Tyson, you have a couple of quarters under your belt now. Can you talk about the company's product pipeline relative to historical, how you would characterize it now and within that, what are the subsegments you think will drive the best growth in the next 6, 12 months you had highlight?
G. Tyson Tuttle
All right. So in terms of the product pipeline, we've been diverting more and more of our R&D resources into the Broad-based businesses and you look at the opportunities that we have and what internally we referred to as embedded systems.
So you've got the microcontrollers, you've got power applications sensors and wireless. And that's really where you layer on multiple technologies that we have into integrated solutions that are really going to drive tremendous differentiation.
So I think in the Broad-based products, all the areas where those devices can touch has been a strong focus for us in all of those areas. You also look at timing, the timing area and we've been focusing a lot of development there on expanding the portfolio and enhancing our differentiation at the high end and you look at the market opportunities there and it's quite large.
And we think that in both of the -- this embedded systems area and in the timing area, that we've got tremendous growth opportunity and potential. So that's where we've been directing a lot of our R&D resources.
In terms of going forward, the next 6 to 9 months in growth, I think that again you saw the Broad-based product as whole, 25% to 30% growth from last year to this year which reflects strong share gain. I think we're still in that mode and we've got our 32-bit products that are starting to get traction and starting to ramp into production.
And so -- and on the timing side, we've also got the expansion of the portfolio there into additional new applications for timing devices. And I think that those again are going to be out growth in terms of driving the growth going into 2013.
But if you look across the company, I mean, with Access stable, we have audio and video both growing into 2013 and then if you look acrosin the broad range, the Broad-based products was, specially with the addition of Ember, the company's firing on all cylinders right now. So I think we're looking at a strong '13.
Sujeeva De Silva - ThinkEquity LLC, Research Division
A quick follow-up here in terms of micros. 32-bit versus 8-bit, does the wireless business disproportionately drive 32-bit up demand or is it more even and does that help the margin if that's the case?
G. Tyson Tuttle
It's actually both. The wireless -- there a lot of lower and applications that require a simpler functionality where an 8-bit processor is perfectly optimized and that's with our existing wireless products, that's what we had integrated.
And so you can put a small stack on top of that and have that work effectively in a lot of the lower range applications. And then the ZigBee and the wireless mesh networking really folds on top of the 32-bit.
And I think if you look as you drive down Moore's Law into the next generation of devices, those low-end ARM processors are going to be more and more be used across the range of wireless devices.
Operator
Your next question comes from the line Terrence Whalen of Citi.
Terence R. Whalen - Citigroup Inc, Research Division
This one refers to the deferred income, the distribution line. It looks like it declined sequentially.
Can you just comment on what channel of inventors did during the quarter and perhaps comment where channel inventories are across your different regions?
Paul V. Walsh
Terrence, this is Paul. Yes, channel inventory declined sequentially, it ended at 40 days, which I think is a -- it's a very comfortable level for us.
We like to be in the 40- to 50-day range. So I think -- indicative of all this is that what we're shipping into distribution is shipping to end demand also.
And it's been a very consistent level throughout the quarter and it's been fairly consistent over the net past few quarters. In Q1, it was 45 days and I think in Q4, it might have been -- it was in the same range.
So our distribution businesses is significant for the company. It represents almost 2/3 of our revenue and it's something that we watch very closely.
Terence R. Whalen - Citigroup Inc, Research Division
Okay, terrific. And the follow-up question's on the TV tuner business.
Just to be clear, it sounds like composition of growth next year will really come from some of the Tier 2 players. Do you expect your Tier 1 revenue from video tuner to grow next year?
And just how is the different composition in the customer base, how does that affect things like your pricing strategy and your inventory strategy?
Paul V. Walsh
Okay. Well, if you look -- Tier 1 business this year is a mix of silicon tuner and discrete can tuner.
So that the penetration of silicon tuners within the Tier 1s will increase next year, which will drive growth. I think also with a number of the Tier 1s, we've been able to customize the parts and integrate some value-added IP, which tends to drive additional value with them.
So I think that if you look at the Tier 1 business next year, we will see growth. You also are going to layer on top of that growth in the Tier 2 and the Tier 3 makers in China and in Taiwan.
And that was an area that when we first entered this business, we focused on the Tier 1s, which we thought we required the highest level of performance and would set the highest bar and we did not focus as much on the Tier 2 makers. And they are now converting from the discrete tuners into the silicon tuners.
And so that's the second driver. In terms of pricing, we've got an optimized portfolio now across the range from the high-end with the Tier 1 all the way down to the low-end type of devices for set-top boxes and in the Tier 2, and 3.
So we feel like we've got a great position moving into 2013 with the TV business with multiple growth vectors at hand.
Operator
Your final question comes from the line of Cody Acree of Williams Financial.
Cody G. Acree - Williams Financial Group, Inc., Research Division
Tyson, maybe at a high level, this being your first full quarter and congrats on a good quarter here, what are some of the changes on a high level that you think you've tried to begin to implement? What might we see to drive future growth?
Paul V. Walsh
Right. So one of the first things we did was that we redirected our efforts in the handset touch.
And really, those resources have moved in to and are focused into our microcontroller business. And really, they were working.
Those are similar type technologies. And that's been able to accelerate our roadmap on the microcontroller side, in particular on the 32-bit.
We've been working on applying some additional rigor into our new product introduction, quarterly, milestone, tracking-type stuff and just applying some diligence into our business practices. And I think that that's going to pay off and some of the improved execution in visibility into our performance.
We talked a little bit earlier in the call about a lining around our Broad-based technology platform and being able to leverage those technologies across a wide range of applications, layering on software tools and firmware and algorithm expertise on top of that to be able to target them, add specific applications to be able to drive increased differentiation in a lot of these areas. So there's been a lot of activity, a lot of excitement around here about all the opportunities that we've got in front of us.
And we're just trying to focus and execute and we've got a great team. We're going to make sure that we're working on the right things and I think we've got a lot of opportunity in front of us in terms of growing the company from $0.5 billion now to $1 billion and beyond.
So a lot of excitement, thank you.
Cody G. Acree - Williams Financial Group, Inc., Research Division
Any other areas that you're deemphasizing that we've not discussed?
G. Tyson Tuttle
No. The realignment, the handset touch and we've continued to focus on touch and Broad-based applications that we're comfortable with all of the rest of our businesses like we've talked about.
The Broadcast is in great shape, the Access is stable. And across the Broad-based product areas, there's multiple growth sectors in places where we're putting the pedal to the metal.
No more surprises there.
Cody G. Acree - Williams Financial Group, Inc., Research Division
Very good. Lastly, on the TV tuner side.
Could you maybe categorize or maybe give a little bit of definition as to where do you think the penetration rates now are with the Tier 1s? We know that some of these are using some internals, what the competition looks like.
I'm just trying to get a sense of what's the headroom left into the Tier 1s and then what's the size of the opportunity in the Tier 2s and how quickly do you think you can move into those?
G. Tyson Tuttle
Right. So with Sony, yes.
The Sony corporate models has -- they use the Sony tuner. There is some ODM stuff that is open.
But within the Tier 1s, it's not 100%, it's probably -- it's hard to say but it's more than half but less than 3/4, probably in that range. But there's some headroom terms of unit growth there.
And then in the Tier 2 and 3, we're engaged with now that entire market in all of the major makers in Taiwan and China. So that's a substantial opportunity.
But having a great position with the leaders in that industry and having the shipment history and being proven in the market, having the leading analog for performance puts us in a great position to be able to gain share as we move forward.
Cody G. Acree - Williams Financial Group, Inc., Research Division
And I guess, the size opportunity Tier 2 versus -- Tier 2, Tier 3 versus the Tier 1?
G. Tyson Tuttle
It's hard to break that out in terms of absolute dollar terms but certainly those are lower-end models, whereas the Tier 1s have a higher value-per-socket but it's substantial number of units. I mean, there's a lot of headroom going from what was a modest amount of revenue this year to a substantial, more substantial share.
So you've got total TV market for TV tuners and hybrid tuners is probably on the order of 300 million units. And so you've got, going from where we are today, we've got several years of solid growth ahead of us in the system.
Cody G. Acree - Williams Financial Group, Inc., Research Division
You think the Tier 2, Tier 3, is it a quarter of the opportunity, half? Is it -- any relative size?
G. Tyson Tuttle
It's probably close to half of the overall market if you really add up all the units and all the opportunities, yes.
Operator
There are no further question at this time. Management, are there any closing remarks?
Shannon Pleasant
Thank you. No.
Today, that now concludes our call. Thank you very much for joining us.
Operator
Thank you again for participating in today's conference call. You may now disconnect.