Silicon Laboratories Inc. (SLAB) Q1 2012 Earnings Report, Transcript and Summary

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

Good morning. This is Shannon, 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'm joined today by Tyson Tuttle, President and Chief Executive Officer; and Paul Walsh, Chief Financial Officer. We will discuss our financial results and review our business activities for the quarter. We will have a question-and-answer session following our prepared remarks. Our comments today will include forward-looking statements or projections that involve substantial risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call. This information will likely change over time. By discussing our current perception of our market and the future performance of Silicon Laboratories and our products with you today, we are not undertaking an obligation to provide updates in the future. There are a variety of factors that we may not be able to accurately predict or control that could have a material adverse effect on our business, operating results and financial conditions. We encourage you to review our SEC filings that identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements. Also the non-GAAP financial measurements, which are discussed today, are not intended to replace the presentation of Silicon Labs' GAAP financial results. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Silicon Laboratories' Chief Executive Officer, Tyson Tuttle.

Thank you, Shannon. Good morning, everybody. We had a great quarter with strong results driving meaningful upside to both revenue and earnings. New product cycle momentum allowed us to overcome what is typically a weak seasonal first quarter. Revenue of $125.7 million was down only slightly from a strong fourth quarter we reported with the share gains in TV tuners and the ramp in touch surprising to the upside. While weakness in the telecom market and a general slowing in the consumer end market persisted, new design wins continue to propel our business. I'm going to turn the call over to Paul to review the specifics for the quarter and then I will provide some further commentary on the business and our Q2 outlook. Paul?

Thank you, Tyson, and good morning. As Tyson mentioned, the revenue of $125.7 million exceeded our expectations, up 5% from the same period a year ago. First, I'd like to cover the GAAP results, which included approximately $6.7 million in non-cash stock compensation charges, or $7.9 million, excluding the reversal of prior stock compensation related to Necip Sayiner's separation agreement. The Q1 impact of the separation agreement included a net $1.2 million credit for stock comp and $300,000 cash component. The balance of the agreement will be recognized through Q3. We also recorded a $950,000 one-time credit related to purchase accounting from a prior acquisition. First quarter GAAP gross margin was 59.7%. R&D investment of $32.9 million and SG&A expense of $25.4 million offset the gross margin decline and resulted in GAAP operating income of 13.3%, an improvement over the same period a year ago. The GAAP tax rate was 16.3%, resulting in GAAP earnings of $0.33, a 14% sequential increase and a 6-quarter high. Turning to our non-GAAP results, going into the quarter, we had anticipated that Broadcast would be down seasonally, access will be about flat and Broad-based would be up. Given that mix profile, we expected gross margin to stay about flat. As near-term gross margin is largely a function of mix, better-than-expected Broadcast revenue brought gross margin down to 60%. Starting with Broadcast, as the quarter progressed, we saw significant strength in video, which was up by more than 15%. As a result, video largely offset the seasonal weakness in audio. And our broadcast products in total ended the quarter above flat versus the guide down. Access was down sequentially about 10% as PON equipment demand slowed somewhat, affecting our SLIC business. And modems into set-top boxes continued their anticipated decline. Set-top box modems represented between 3% and 4% of our total revenue in Q1. This has become a much less significant headwind, particularly given the potential for growth in modems as we gain share in multifunction printers. The Broad-based products were up by about 4%, driven primarily by strength in our touch controller at Samsung. Our MCU and isolation products also posted modest counter-seasonal gains during the quarter. Timing declined about 7% sequentially, despite significant share gains across our target customers. Telecom and market weakness was the driver behind the lower demand. Softness in timing also contributed to the lower corporate gross margin. On a long-term basis, however, this remains one of our most promising product lines and we expect they'll return to growth as the market improves. Moving down to P&L, operating expenses came in lower than initially forecasted at $52.7 million. R&D remained virtually flat at $29.3 million, while SG&A increased slightly to $23.3 million. Despite seasonal increases in payroll, taxes and salaries, some delays in hiring and tape-outs, combined with spending controls, resulted in just a 1.2% rise in OpEx, considerably favorable to the 4% increase we guided. We expect the operating expenses to increase sequentially primarily in R&D. Operating income therefore was better than expected at 18.1% of revenue and net income was 14.9% of revenue. The Q1 tax rate was 19.2%. As discussed last quarter, until the federal R&D tax credit is reinstated, we expect our tax rates to remain higher than what we have normally enjoyed. I expect it to be in the 21% to 22% range in Q2. Solid operational results provided significant earnings leverage, resulting in earnings per share of $0.43, an increase of 7.5% year-on-year and above the high-end of our guidance. I remain very satisfied with our inventory levels and the health of our balance sheet. In Q1, accounts receivable increased to $61.4 million or 44 day sales outstanding. We continue to have no known collection or bad debt problems. Inventory was down sequentially to $34.3 million or 5.9 turns. This is a meaningful improvement from 4.5 turns during the same period last year. Channel inventory grew slightly, ending at a lean 45 days while the balance increased by 13% sequentially. Cash flow continues to be strong with an ending balance of $351 million, up $26 million sequentially. There were no share repurchases in the quarter on the $50 million authorization that expired this month. I am pleased to report, however, that our Board of Directors has authorized the new share repurchase program of $100 million through January 31, 2013. So in summary, we began 2012 on a strong note, exceeding guidance on the top and bottom lines. Operating leverage remains a key component of our near-term strategy as we achieve higher revenue levels and control expenses to maximize bottom line performance. Tyson?

Thanks, Paul. I'd like to start by acknowledging Necip Sayiner in its contribution to the good results we're reporting today. I'd also like to thank him for the very smooth transition he presided over during the last few months. As I take the helm, I see tremendous potential for the business as we hone our product focus and extract the maximum value for innovative technology. We have a team -- the team, we have the product lineup and the market runway to become one of the leaders in the semiconductor industry. I'm looking forward to guiding the company forward as we breakthrough and grow to be a larger force in our space. Now I'd like to provide some color on the major product areas for the quarter. Let's start with Broadcast, which is about 1/3 of total revenue in Q1. Video revenue grew double digits sequentially as the design wins we captured for 2012 TV models ramped in a big way. Even with the annual typical price declines, the business grew 30% compared to Q1 last year. Tier 1 customers continue to dominate the volume as they transition to Silicon tuners. We're also starting to see more activity from TV makers in China and Taiwan that could translate into revenue late this year and early next year. The impressive start to the year in video may result in some inventory overhang in Q2 as module makers, who ordered ahead of the larger TV growth. We are therefore forecasting the video revenue to be flat to down slightly as module and TV makers balance their inventory. There is still a cautious view of the overall TV market with little end market growth anticipated. But given the strong conversion at our large customers to Silicon tuners, our dominant position and a very positive start to the year, we're comfortable with our initial expectation that we can grow our market share to 30% or greater in 2012. The audio products declined in the first quarter as expected. Q1 is typically a seasonally weak quarter for this consumer-oriented business. FM tuners into handsets have stabilized somewhat, and are now less than 5% of total revenue. The non-handset business was down more meaningfully with demand in Europe being notably weak. I like the size of the opportunity we're addressing in the broader consumer and automotive market and see this is as a growth business. We're continuing to add design wins across radio segments, which gives me confidence that we'll see a rebound near-term as we benefit from seasonal improvements in the second half and longer-term as our emerging automotive business ramps. The Broad-based business was up again and with 46% of our total revenue in Q1. I'll start with the touch product line, given its contribution to the outperformance in the quarter. We mentioned early in Q1 that we were seeing a strong ramp at Samsung in the Galaxy Y handsets. As a result, touch was nearly 8% of revenue in Q1. While we've been steadily working to diversify our customer base in touch, I don't have any new customer wins to report today. At Samsung, we did have derivative handset wins to the 2 platforms we've secured, but we did not add any new platforms during the quarter. The revenue profile for the product brand therefore will likely parallel the life cycle of the current Galaxy Y over the back half of this year. As you know, this is a competitive and fast-growing market. New entrants in Korea and China are having success establishing a foothold in low and mid-range handsets and pose a significant threat to incumbents. We have a compelling technology and a good cost structure. But with the market requirements rapidly evolving, I'm reviewing this business through a strategic lens to be sure it's one we'll be happy with for the long term. The largest product line in our Broad-based category is our MCU business, representing about 17% of total revenue in Q1. MCU grew modestly on the strength of communications and industrial applications while consumer was relatively weak. Regionally, Asia was down as expected, while the American and European distribution channel grew. Design wins increased by 25% year-over-year, and we added a new high-volume win for wireless LED wristbands. USB MCUs were also up again sequentially due to notable design wins in portable medical devices. Strategically, the company added a new growth sector with the introduction of our Precision32 MCU line. The new family of 32-bit ARM microcontrollers gives us access to the fastest-growing segment of the MCU market. Our new product offers a significant improvement in terms of power, flexibility and ease-of-use compared to solutions from existing 32-bit suppliers. Following our successful strategy in 8-bit, we focused on creating a unique set of integrated mixed-signal peripherals that offer system saving, enable new features or interfaces and are easily designed in with a common tool ecosystem. Early customer activity on the 32-bit product has been in test and measurement, home automation, metering and portable medical devices. We plan to further expand the 32-bit portfolio this year and expect to see early revenue this time in 2013. The second-largest piece of our Broad-based business is timing, which was about 12% of revenue in Q1. Timing declined sequentially, reflecting the continued weakness among our telecom customers. We did see good growth in non-telecom applications in Q1, including broadcast video, test equipment, medical equipment and embedded computing. These growth areas are expected to gain momentum given the design win pipeline. Overall, we increased design wins by nearly 50% year-over-year in Q1, reaching record levels. The design wins were spread across the entire timing portfolio with particularly good performance from some of the newly launched products, so I don't have any concerns about the fundamentals of this business. In fact, we continue to believe that operators will realize their plans to deploy higher-speed optical transport equipment to lower the cost per bit, improve performance and expand capacity. This move will benefit our high-end timing business. We also view an inventory snapback as highly likely given the market is under shipped relative to demand for some time, although we are not able to pinpoint the exact timing. And finally, we have substantially expanded our timing portfolio over the last 18 months, allowing us to address the full spectrum of applications in market segments and drive further incremental growth outside the core telecom market. The emerging pieces of our Broad-based business continued to show good promise as well. Isolation, in particular, grew nicely in the quarter on the heels of volume in plasma TV and green energy application. We announced our latest generation EZRadio Pro product line in Q1. These high-performance, low-power sub-gigahertz transceivers are capable of exceptional range and are targeted applications from smart meters to security devices. We see a large degree of synergy between our wireless and low-power MCU products and continue to identify applications where this combination is highly valued by customers. The wireless and MCU products, along with other broad-based technologies, are well positioned to capitalize on long-term trends in green energy, smart energy and the Internet of Things. I see this as a key opportunity to propel accelerated growth in our broad-based business going forward. This is the beginning of a larger strategic initiative to develop a suite of technologies and software that will allow us to own the content of the many embedded systems being interconnected in home, commercial and industrial application. We're building a set of capabilities that I feel strongly are going to be the backbone of a very substantial and valuable piece of our business in the future. Now for Q2 guidance. We're currently expecting the strength of our business to continue with revenue up 3% to 7%. We're anticipating that Broad-based and Broadcast will be up and access will be flat. We expect gross margin to be flat to up slightly. We anticipate operating expenses will be up by about 2% to 4%. On a GAAP basis, we're projecting earnings of $0.24 to $0.29. On a non-GAAP basis, we expect earnings to be up 5% to 16% to $0.45 to $0.50. Thank you.

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 question to one with one follow-up. Operator, please review the question-and-answer instructions for our call participants.

[Operator Instructions] Your first question comes from the line of Craig Ellis. Craig A. Ellis - Caris & Company, Inc., Research Division: Just following up on the TV tuner product, can you give us an update on where you stand with cost reduction efforts on that part? And how should we think about the company's ability to impact the gross margin profile of our product line as we go through this year?

Yes, I'd be happy to share with you a little bit about our TV tuner business. The -- we're on our fourth-generation TV tuner that we are currently locking in wins for 2013 and the current third-generation part is what is in production this year. So compared to what we were shipping last year, we've been able to achieve significant cost reductions for the parts shipping this year, and we'll see a further cost reduction going into next year. And we anticipate that those cost reductions will outpace the ASP -- natural ASP declines that we're seeing in the business. So we believe that going forward, that margin and that product line in video will improve even as we grow units and even as we grow revenue going into the second half of the year and into next year. Craig A. Ellis - Caris & Company, Inc., Research Division: And so you would expect the gross margins on that product line to improve half-on-half as we think about 2012, is that clear?

Yes, that's right. I don't believe that that's going to get to the corporate average gross margin. But as video has -- it's been a little bit of a drag on the corporate gross margin, it will be becoming less of a drag and also as you see in the Broad-based business and other businesses gain a larger fraction of our revenue, that will also diminish in terms of its swing on the gross margin. Craig A. Ellis - Caris & Company, Inc., Research Division: And then you mentioned doing a strategic review on the handset capacity of touch business, can you expand a little bit more on your thoughts there? What is it that you'll be focused on? And what time period will you be conducting that review? And when should we look for an update on what your findings are there?

Right, I mean, when we look at markets, we look -- certainly, we look for a growing market and this is certainly a growing market in terms of units. But we've seen some strong ASP declines in this market, not in terms of our sales but just in terms of winning new socket. So if you look at the competitive landscape, there are a lot of low-cost, low-margin players that are getting their solutions to be good enough. And so these are, in particular, guys in Taiwan, China, Korea. And so that reviewing the competitive landscape, looking at the market, we actually believe that the market may be shrinking in overall dollar terms. And then we'd also look at the integration trends and whether those are favorable to us either in terms of this function getting integrated into an SoC, which is not the case here but also into the driver ICs and trying to get our hands around that. In other words, we want to be confident that the further investment in this business is going to be justified in terms of a long-term successful business for us, both in terms of profitability and our ability to hold onto it in terms of integration. We're currently going through that process right now. I don't have any update for you now, but we'll update you as soon as that is complete. We still believe that the touch business is a strategic business for us in terms of it has a broad range of applications. Our 32-bit product line that we just announced has touch capability integrated into it. So while the handset piece of this may get very competitive, we still believe that what we've learned in addressing the handset market will be broadly applicable into a number of different areas. So that's also a part of the review. Craig A. Ellis - Caris & Company, Inc., Research Division: And then lastly, throw one to you, Paul. You mentioned there was a credit for stock comp in the first quarter results. Can you quantify how much that will be in 2Q and 3Q?

Yes, Craig, the accounting for the separations is a bit complicated. What it resulted in was a credit as you note in Q1 and then, there'll be a charge of about $3 million in Q2, so that's baked into our GAAP guidance since it's known and since it's public -- has been publicly communicated. And in Q3, it will be probably between $500,000 and $1 million.

Your next question comes from the line of Sandy Harrison [ph].

As far as the TV tuners, there has been some discussion about pricing in the market and as I understand it, you guys locked up pricing in ahead of shipping usually a year, and is that fair to say that you're pretty much holding it here throughout '12? And at what point do you start looking in discussing '13 to give you more confidence per your earlier remarks about how having some margin expansion for next year?

Yes, I mean, right now we've locked in a number of wins already for '13 and are in the process of locking down additional wins in '13 right now. So I would say that by -- certainly into Q3, we will have locked in the majority of what we would have in '13. And so looking at the pricing that we've been winning, our strong position of Tier 1s, our incumbent position in terms of the performance -- I mean, there's a very high bar to entry here. And we've been able to maintain ASPs through this process which, I believe, will lead to margin expansion in this product line next year. So I'm quite confident getting where we stand that, that we're in pretty good shape.

And, Tyson, you sounded pretty excited about the 32-bit products and the opportunity there. You've mentioned a couple of times not only in the prepared remarks but in the Q&A, could you remind us on what, sort of, you view the time expansion for that product and when you think you can really start to recognize revenues from that?

Right, I mean, the 32-bit market is a multibillion-dollar market. We believe that the first products that we've introduced address about $1 billion of that. So that's incremental, I believe, on top of the 8-bit market that we've been addressing. So I mean, just a -- it does expand the types of applications that we're able to address. Within our existing customer base, we've got customers that are requesting 32-bit, so that we can expand our business with them. And so certainly, those are some of our first target alpha customers for these products. And we also are integrating all of the software and the tools to make it very easy to migrate between the 8-bit and the 32-bit platform that we've developed a lot of its peripherals that we've surrounded our microcontroller core with an 8-bit, we've carried over and has been enhanced into 32-bit platform. So we think that we are really a differentiated product. It opens up a whole new frontier of applications and additional segment of SAN for us, and we're very excited about the prospects for this. I think just in terms of modeling the -- this is going -- this is a broad-based business and we do believe that we'll start to see some revenue starting this time next year and -- but we will see the typical microcontroller ramp. So I believe this will also be very long-lived products and have a very favorable margin profile.

And just a quick housekeeping item for Paul. The higher R&D in the second quarter, I'm assuming that's some of the masks in labor costs that didn't come in, in Q1?

Partly, and there are some plan safe-out [ph] activity that's the mix of a very strong tape-out quarter, Sandy. [indiscernible] a little bit of fall-over in this, and there's some -- there's a lot of activity that's taking place in the first half of the year.

Your next question comes from the line of Anil Doradla. Anil K. Doradla - William Blair & Company L.L.C., Research Division: A couple of questions. Tyson, can you talk about the growth of the Chinese and Taiwanese players on the overall TV tuner business? These guys are very cost-sensitive. You talked about your fourth-generation. You talked about offsetting some of the ASP declines. But given that these guys can be very price sensitive, what makes you feel confident of the overall trends? And the follow-up question I have was on the telecom side, especially from the timing perspective, any thoughts on when you can see some improvements? Or any thoughts on the overall telecom improvement from your timing product segment point of view?

Okay, thank you, got your 2 questions. Let's start off with the TV tuner in China and Taiwan. We started the TV tuner business going after the Tier 1s, where we believe that we -- they have the highest performance requirements but also if we proved ourselves in that market, that we would have a substantial barrier to entry for the products. And so that position takes us as we're coming out to China and the Taiwan markets from a position of strength. When you say that there is a Samsung, you're in the Samsung TVs or you’re in some of the Tier 1 base, they definitely listen. A lot of the China makers use reference designs, and we are working with the SoC makers in order to be on those reference designs to make it easy for these customers to design in the product. We also believe that some of those -- while the Tier 1 makers are using modules for the most part and putting our chip inside of a module and then putting that inside of a television, and we believe that a lot of the China and Taiwan players may put the tuners directly on board. And the way our chip is designed, it's very favorable for that integration on the board. We don't require any external components, and it's a fully tested solution. So it reduces the yields issues that you would see with less integrated type solutions. And just the pricing environment, I would say that the higher volume Tier 1 business is similarly price competitive to the China and Taiwan market. So I don't see any difference there in terms of the profitability as we expand into those customers. I mean it's a competitive market, but they still value the performance. A lot of this -- certainly, the China market analog performance is key. So having that performance advantage, I believe, helps us win in those markets as well. And again, the fourth-generation part that we're sampling has a very favorable cost structure. That's on the TV tuner side. That's why I answered the question there. On the telecom side, we are well positioned to benefit from a snapback in the telecom market. We've seen some indications of improved bookings in this area, but I don't think we're ready to predict when a full snapback of this business would occur. I think that our timing business is well positioned there. We've also expanded the portfolio a lot and are gaining share outside of the telecom market. So I feel very good about our opportunities and timing both within the telecom market, with the build-out of the infrastructure and the increased demands on bandwidth and that's going to be a good long-term driver and also our opportunities outside. So hopefully, I answered your question.

Your next question comes from the line of Vern Essi. Vernon P. Essi - Needham & Company, LLC, Research Division: So going back to your strategic overview on the touch front. And I think holistically, you've always sort of talked about this market as, you call it, I guess, human interface. Can you discuss what are the puts and takes of that in terms of some of the other things that go into that bucket and maybe how they relate to your strategy longer-term? We've always thought the proximity sensor side would have been a good cross-sell with these touch solutions, how do you see that playing out over time with what your originally outlined?

Right. So in the human interface bucket, we do include our infrared and proximity sensor, ambient light sensor products and we've seen a broad range of traction with those products. On the touch sensor side, you got this -- everyone pays attention to the handset and that is the very highly-visible and high-volume piece, but there's -- there are a lot of applications for touch sensor technology outside of handset. And I've always viewed the handset win that we got. We started developing these solutions really with the microcontroller business and the broader range of applications in mind. And as we were addressing the touchscreens, we had a good solution that was suitable to design into Samsung. And we've had a long history with that customer. We've shipped them products for the last dozen years or more. We ship them products that are televisions, FM tuners and their handsets into modems into their fax machines, isolators and into their TVs, so in a lot of different ways, we are engaged with Samsung and so this was an opportunistic win for us. We've remained focused on the broad range of applications, I mean, from buttons, to sliders, to screens and lots of different applications of that capacitive touch technology and continue to integrate that more deeply into our microcontroller platform. So -- and going into the handset, there are stringent performance requirements that they have, and we've gone through a learning curve there as they've raised the bar in terms of performance. So the review that we're having is, do we want to go after with both feet this handset touch controller market. So you got to understand where the competition is. And when you start to see companies in China and Taiwan and Korea that have competitive solutions, is there -- is that really something that's smart for us to go after? And would we be able to hold onto that long-term so -- and be happy with that business? So that's the way I'm looking at it. I think you've got this as a fundamental core technology that will get integrated into a variety of devices and that's really been our focus since the beginning and will continue to be our focus even as we evaluate the Samsung piece. Anil K. Doradla - William Blair & Company L.L.C., Research Division: So to put that very simplistically, it could play out to some extent maybe like your FM tuner business has in the handset area, where it would be deemphasized then you'll be getting revenue elsewhere outside of the business using those core technologies?

Exactly. For instance, our FM tuner went into consumer applications and automotive applications, and that will be a significant business for us. In the growth business today, going forward, we view this in the similar fashion. Anil K. Doradla - William Blair & Company L.L.C., Research Division: And then just to switch gears. And, Paul, just on the SG&A side, can you review again what the causes are for why that's sort of declining and looks to be relatively flattish sequentially?

Well, we've had a couple of things going on with SG&A burn. One of the areas of SG&A, one of the significant areas is G&A and one of our profitability indices is such that we try to leverage G&A as the company grows. And we make -- we do make modest investments in sales and marketing to support the R&D investment. But ultimately, the -- holding G&A flat will bring down SG&A as a percent of sales over time, and that will remain a goal for us. Anil K. Doradla - William Blair & Company L.L.C., Research Division: And is there any -- just a follow-on point here onto that. I think it has to be the talk about bringing on a new distribution partner, I think, in Arrow. Any changes in terms of your commissions that you've been paying out or anything that might move in terms of percentage of sales on the selling side?

Arrow has been growing. Each quarter, they continue to penetrate the market even further. They've grown from a base of 0 to be a significant contributor of revenue today, and we expect them to continue to -- to continue down that path. And they really -- what they really helping us in our Broad-based business. So we see them as a long-term strategic partner. Fundamentally, from the SG&A side, there's really no impact that they have on our spending there.

Your next question comes from the line of Tore Svanberg. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: Tyson, I was hoping if you could talk a little bit more about the Q2 outlook? What are some of the moving parts? I mean you're of course expecting growth, but I just want to understand on what's going to drive the growth in that quarter and maybe if you could also talk a little bit about the type of visibility you have towards that 3% to 7% guidance?

We do anticipate the access piece to rebound somewhat in terms of the -- will be flat in terms of the guidance, but we do believe that there is some strength in there in terms of gaining share in fax machines and potential on the flip side as well, so that we'll feel comfortable with our flat guidance there. In terms of Broadcast, we talked about the TV tuner having commitment to be overhang on the modules. And with the TV makers, we do believe that the audio piece will make up for that again. And on the Broad-based side, we see a fairly good strength across all of those businesses. So I think that the growth that we're predicting here is really driven by strength in the Broad-based pieces, and we do believe that the touch piece will continue to deliver but we'll start to see the natural life cycle of that, that galaxy business. So those are -- we can get into a little bit more if you'd like. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: On the touch business, I think you mentioned it was 8% of revenue this last quarter. I mean, should we start to think that maybe that peak sale a little bit near-term and then it comes down and sort of stops at a certain level, especially the level of your non-handset business? I'm just trying to see how we should model this going forward, given your comments about the strategic change?

Right, I mean, we continue to look for additional opportunities with that in the handset market. And we do have some business in the touch and the human interface category outside of the handset, and we do anticipate that to continue growing. So I don't have anything additional to report at this point in terms of anything beyond what we've already won. And we do believe that the Galaxy Y handset will see its normal life cycle, so it will start tailing off in the second half of the year. Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division: So just to clarify, the 8%, that's exclusively handset touch?

The 8% is -- yes, it's the handset touch piece.

Your next question comes from the line of Alex Gauna.

I know you're not really coming out to offer a full-year guidance here, but I'm wondering what the puts and takes of timing in the video which, I would assume, comes back seasonally in the second half? At least from a year-on-year perspective, would you expect gross margin accretion on a full-year basis at this juncture? Or would the video outlook expected to compress versus last year?

Alex, this is Paul. I would expect gross margin accretion through the year if the trends that we see in Q2 persists, meaning that Broad-based begin its recovery across timing. There are a lot of predictions in the industry that there's going to be a second half snapback in the telecom space, in which we'll be a big beneficiary of that. And so if Broad-based continues to show the strength that we see in Q2, that will bring some natural accretion to gross margin as the year progresses.

But not to belabor the part on the touch sensor with the Galaxy Y, but in the beginning prepared remarks, I believe, you mentioned some derivative wins but then you also mentioned a tailing off, does that mean there is a next-gen Galaxy Y coming in the back half that you are not in and that's how we should think about modeling it?

Yes, I mean, Samsung has a number of different platforms. They take a specific platform and then regionalize that and cost-reduce that. And so for the Galaxy Y that we're aware of, we're in all of that, but there are additional platforms that we are not in. They've got a lot of different platforms and a number of different suppliers in addition to the top 2 suppliers, some of the Korean suppliers and their winning models. So that's where we stand.

Your next question comes from the line of Blayne Curtis.

I just want your thoughts on the video seasonality. Obviously, it's hard for you to gauge, you saw big Q1 last year, I think, obviously, outside of this year, just kind of maybe if you could talk about how you see seasonality progressing? You're obviously seeing it -- I think there may be some inventory in Q2, does it come back in Q3? If you could just walk us through your thoughts on the seasonality, that will be helpful.

Blayne, I'll start and I'm going to let Tyson add some color to it. We do see Q1 was a strong quarter for video. And as it was mentioned, there's a little bit of inventory out there but it's not the dramatic drop off that we saw, say, in the second half or the beginning of the second half of last year. And where the second half of video plays out remains to be seen, but we definitely see a lot more -- see a trend that's a lot more comparable to a normalized TV year than what we saw in 2011.

And then, Tyson, maybe if you could share your curious thoughts on what TV OEMs will be looking for, for the fall refresh and next year, whether they'll look for adjusted tuner only or tuner plus to analog DMOD, any thoughts on just broad level what you think the mix could be.

Right, I mean, we certainly see a number of segments within the TV market going to, what we call, has been [ph] where the analog DMOD is not integrated. And we certainly got very competitive solutions for that partitioning. We've also got a very strong position in particular whether it's in the high-end sets in the Tier 1s where the analog DMOD is integrated, and we've done some specific versions to address needs, add a number of these Tier 1s. So we're very strong in Korea. We've had a very strong -- and have a very strong position in Japan. And the Taiwanese and the Chinese guys are -- they have, again, a mix of architecture [indiscernible]. So if we're able to leverage this whole portfolio solutions, we can address the DMOD integrated. If you don't have the DMOD integrated, we got very little bomb. We're competing out there with our fourth gen part which is extremely competitive. So we believe that we're well positioned in both in terms of cost and in terms of the incumbency that we're enjoying right now.

And then just, Paul, quickly, the tax rate, does that carry through the year?

No, it'll somewhat abate. It will abate a little bit and we'll see a little improvement in the second half of the year. Some of it -- I don't want to go down a rat's hole with the dynamics of the tax rate, but some of it is just how the rate is positioned by quarter and for those quarters particularly or the current, 2Q is particularly higher than normal.

Our next question comes from the line of Srini Pajjuri.

Tyson, the touch business -- I'm just curious when you guys started the review and -- I guess my longer-term question is -- this is a large market, plenty of opportunity. I understand the gross margins are not going to be great, but if you, decide to exit these kind of markets, what will you be focusing on going forward to drive growth? I guess the question is, can you sustain 60-plus percent gross margins and yet outgrow the industry if you take 2- to 3-year view?

Okay. Well, we're starting to review of the touch business now. We've been accumulating a lot of knowledge in terms of the market and the competition in understanding where we stand. I think the real question is, where do we put our resources to drive this growth that you're talking about to be able to succeed in the handset market. We know what it takes to succeed in these markets, and we've done that multiple times both in our wireless business and in our Broadcast, the FM radio business and you got to drive significant R&D to stay on these cost curves. And so, do we invest the money there? Or do we indirectly invest in areas where we think have a better long-term potential and a higher margin potential? And so it's always that process of optimization that we're going through. If you look at the opportunities that we've got in this -- the microcontroller area, the wireless area and all the intersection and the big picture trends that are going there in the traction that we're seeing and then, you look at the timing area and our -- we've got a shot to be one of the, if not, the leading supplier of timing ICs. There's huge opportunities there, and the market that we're addressing is very large. They're growing markets and I fundamentally believe that, that Broad-based piece, even if we exclude the touch, will certainly become the majority that was currently 46% minus 8%. If you count the touch in that piece, that will be over 50% and 60% of our business. That is the fastest-growing piece of our business, the highest margin piece of our business, and we're addressing the largest TAM there. So if you look at the traction that we're getting and you look at the products that we're developing, the 32-bit and all of the things, that has -- all of the wireless opportunities and all of the way things are getting connected. That's the future of the company, and so we've got -- and touch is a part of that in that Broad-based scheme. All of these devices or many of these devices are going to have interfaces to people, and that's going to be one of the primary ways. So whether we go after this handset market or not, I think it's a somewhat of an opportunistic play and if it's something that is not sustainable, that's not the place we should invest our money. But I couldn't be more optimistic in our prospects for growth across our businesses, video and audio, and the opportunities there but in particular, on the Broad-based side.

And then just kind of, again, looking at longer-term, can you help us understand how you are thinking about the business from a top line growth potential standpoint as well as your business model standpoint? And also, how do you plan to get there? Is it in organic internal investments are you looking? Are you open to, kind of, the future potential M&A in Africa?

Right, I mean, certainly, my charter coming into this job is to grow the company. Our stated model is 15% growth. And when we get there, we can talk about changing the model. But -- so that is my charter. I think the way to get there is primarily through organic growth and proper choice of investments and delivering greater and greater R&D efficiency and picking the right products to work on. That being said, we selectively look at M&A to fill gaps in that technology portfolio or the product portfolio and certainly remain engaged in looking at a variety of different opportunities there. So my primary goal is to grow the company and to grow it organically and I believe we've got a great team and a great base, from which to work from. We've gained critical mass in our microcontroller business now. We've gained critical mass in our timing business now. That's occurred here over the last few years. And I think that building from that base, as we can gain scale -- additional scale, will drive that further efficiency and help us drive additional growth. I also -- we very much believe in profitable growth and maintaining the gross margin and profitability of the company. So I remain firmly committed to that as well.

Srini, this is Paul. There's some specifics around that. And as Tyson talks about the opportunities in Broad-based -- for us, today, it's about a $9 billion SAN as we talked about and that excludes anything in 32-bit that we're getting some good traction today. So that's only going to add to that anywhere from $1 billion to $3 billion over the next few years. And we only have a small share of that. So this is where the best opportunity is for us. We come from a position of strength. And if there are many more barriers to entry there and it's a very optimal business. So that's where the focus will be long-term and that's where we'll see profitability accretion as well.

And, Paul, one clarification, as touch declines as the percent of revenues in second half, will that help your gross margins? And if so, to what extent?

Touch today has not been an outlier in gross margins, so I don't expect to see any material swings positively as a result of that.

Your next question comes from the line of Ian Ing [ph].

First question here for the China customers, are you seeing any impact of steadily strengthening your intimacy here, making the products more expensive? Is it somehow impacting the yield of the design wins that ramp or the pricing dynamic? Or does it make the customers you have [ph] with more resilience?

Yes, in terms of -- China is one of our strong regions and we've been very competitive there throughout our product portfolio. We've got certainly at the center for our consumer audio business and some of the automotive audio business, we've got a lot of strength in timing and in our microcontroller business and in wireless there. So a lot of engagement in the China market, and we've made a lot of investments there to be successful. I think in terms of the currency, I think that is probably a minor factor in terms of the pricing environment and certainly a very competitive environment, but I don't see that as being a primary factor and issue for us there in that market. Paul, you may have some comments there as well.

No. I fully support what Tyson is saying in that. So I don't have any additional color to add to that.

And my follow-up is on the timing business. You got some differentiation with any rates features, but looks like IDT still has some dominant share there in the broad reach, could you talk about, given the design wins you see, how shares shift play out in clocks and oscillators?

Sure, yes, certainly IDT is the dominant supplier there right now. We've spent the last few years making heavy investments into our portfolio and expanding our reach in terms of having solutions that addresses a broader segment of the market. We've had a lot of strength in the telecom side and in the performance side, both on the oscillators and on the clocks with our flexibility and robustness and just the numbers that we can hit with our solutions and continue to push that forward. So we -- I believe that you will see additional traction in that business outside of the core telecom area. Certainly, the design win traction and the record design wins that we've gotten and a lot of those being outside of the -- our core area that we've traditionally been serving points in the right direction. We're also making investments on the MEMS side for oscillators to replace crystals and have a lot more to talk about on that side in the future as well.

Your next question comes from the line of Steven Eliscu.

My first question here -- I'm trying to get a better sense of the longer-term strategy. You've laid out some opportunities for synergies between wireless and microcontrollers. Do you see other opportunities for synergies within the product lines that you have and does that suggest that there are particular pieces you may need to acquire?

Sure, I can comment on that in a number of different ways. The -- certainly, these embedded applications where you've got -- there will be a microcontroller as the heart. And let's take a thermostat or a smoke detector or a security sensor or one of these Internet of Things devices, you're going to have a microcontroller, you're going to have sensors and we're making investments there in terms of environmental sensors, in terms of proximity sensors, touch sensors, lots of different ways to acquire data. And so there's -- a lot of these devices can be integrated in with the microcontroller and provide the differentiation for that product and a lot of those are additional things that you can integrate with it. If then you've got -- there's a lot of times these devices will be controlling things and so you would -- you would be controlling a motor or you would be controlling something that's powered or you would -- so that -- there maybe there are a lot of applications there which involves our power and our isolation business and I believe that there's a lot of synergy there where that can take place. And then certainly, on the wireless side, you have -- currently, we have sub-gigahertz wireless capability and you certainly see a lot of activity in the 2.4-gigahertz base with 15.4 and 6LoWPAN and ZigBee and Wi-Fi and all of these things that we are developing capabilities in that area, but that certainly is a hot area in terms of that we keep an eye on in terms of all the wireless connectivity pieces and all the software that goes around that. So there -- that is a very rich space in terms of synergy among all the different technologies we have. And can you even imagine that some of the timing products and the MEMS activity that we have going on could also come in there. So it's -- that is a very rich space in terms of growth and integration and differentiation that we think we can deliver.

And as a follow-up question, just trying to understand some of the dynamics that you've seen in the 8-bit microcontroller space, and if we look at the prior to the downturn, the '08, '09 downturn, you grew significantly faster than the markets and then the growth has slowed, can you give us a sense of, sort of, what were the headwinds that you're seeing over the last year or so in that business, kind of how that business now you believe it may be positioned to outgrow again?

Right, I mean, our 8-bit microcontroller business is still growing. We've continued to invest in that area and have continued to introduce cost news and new functionality into that segment. And I think it's got a place certainly at the low-end that the smaller applications where that is going to continue to be a player. Some of the headwinds, I mean -- certainly, we've also been investing in the 32-bit space and that has taken some toll in terms of the pace of product introductions in the 8-bit. But we did have a real strong year in '10 and took a little bit of a pause last year and are resuming a pretty good growth trajectory right now.

One thing I'd like to add to it that on 2011, Steve, is that we grew in 2011 in MCU in single digits, but the market itself, the 8-bit market, declined in the high single-digit. So I think that's indicative of the softness in the market last year, but it also is indicative of the market share gains that we had in 8-bit.

Our final question comes from the line of Gus Richard.

Real quickly on pricing, when you think about growth versus gross margin, how do you think about trading that off going forward? And if you had to optimize one versus the other, you can get to 20% growth but have 59% gross margins that were lower growth to maintain the model, which way would you go?

I mean, certainly, I think, that if we saw the gross margins accelerating like we saw back in '09 and '10, anything above our target model, we will then favor growth, but I'm a firm believer that if we do our job right that this -- it's not just going to be about trading off lower pricing for faster growth. I believe that we can have both. We're very committed to our model and are committed to getting back to the model. We're 60 now and our model is 62. And if you look at the profile of our automotive radio business, as that grows, if you look at the profile of our timing business, a lot of the microcontroller and a lot of these Broad-based markets have a higher gross margin profile than where we're seating right now. So certainly, to the extent that we can leverage that and leverage pricing to grow faster within the model, that's where my head is at. But we're not going to give up profitability. It takes a lot of discipline to have gross margins where we are. It's really easy to take a 60% gross margin business and turn it into 50% overnight by lowering your prices. But that's -- you've got to sell the value of your products in the company to your customers and you've also got to have a strong discipline around cost reduction and maintaining competitive cost structure in the products that you're offering. And that's something that we've been good at for many years and remains a focus for the company. So we're not giving up on this goal of faster growth and, at the same time, profitable at the same time.

And then just as a follow-up on the Internet of Things, there's a number of various standards, which standard -- in wireless, which standard do you think wins first and in what markets?

Right, I mean, certainly, you see Wi-Fi as a very large installed base and it's going to have its reach. And currently, if you have to do higher data rate, that is the standard to pick. It's something that's plugged into the wall where you don't have to worry about power. It's certainly a contender. I think that if you start looking at some of the devices that are using energy harvesting or running off a battery, I think that the Wi-Fi starts to see some difficulty in terms of maintaining the battery life or even being able to operate. So I think if you look at some of the ZigBee and some of the Z-Wave and some of the 15.4-based technologies, I believe that those are starting to get traction in the market and are going to have a place in the market as well. So we're looking at all of this and I think that similar to the way bluetooth and Wi-Fi had a space in the market, I think you're also going to see the emergence of some additional standards over Wi-Fi in these low-powered energy harvesting Internet of Things type of application.

All right. Thank you very much for joining us this morning. We appreciate it. This now concludes today's call.

This concludes today's conference call. You may now disconnect.