Welcome to the Silicon Laboratories IR earnings conference call. (Operator Instructions) Now I would like to turn the call over to your conference host this morning, Ms. Shannon Pleasant. Ms. Pleasant, you may begin.

Thank you and good morning. This is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the company’s quarterly financial results. 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 investor.silabs.com. This call is being simulcast and will be archived on our website. There will also be a telephone replay available approximately one hour after the completion of the call at 800-333-1872. I am joined today by Necip Sayiner, President and Chief Executive Officer; Bill Bock, Chief Financial Officer; and Paul Walsh, Chief Financial Officer. We will discuss our financial results and review our business activities for the quarter. We will have a question-and-answer session following the presentation. Before we begin, let me comment regarding the safe harbor statement under the Private Securities Litigation Reform Act of 1995. Our comments and presentation today will include forward-looking statements or projections that involve substantial risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call. This information will likely change over time. By discussing our current perception of our market and the future performance of Silicon Laboratories and our products with you today, we are not undertaking an obligation to provide updates in the future. There are variety of factors that we may not be able to accurately predict or control that could have a material adverse effect on our business, operating results and financial conditions. We encourage you to review our SEC filings, including the Form 10-Q that we anticipate will be filed today, to identify important factors that could cause actual results to differ materially from those contained in these forward-looking statements. Also the non-GAAP financial measurements which are discussed today are not intended to replace the presentation of Silicon Laboratories’ GAAP financial results. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Silicon Laboratories’ Chief Financial Officer, Bill Bock.

Thanks, Shannon. Once again we’ve delivered outstanding performance despite the continued economic uncertainty in the larger marketplace. We have taken a cautious view, given the status of overall markets, that the business continues to perform well and results were materially above expectations on every measure, even exceeding the revised guidance we offered last month. The company delivered revenue of $104.6 million in the second quarter, representing almost a 40% increase from the same period last year. Operating income reached near record levels and net earnings increased more than 80% year over year. We are also very pleased this morning to announce the close of our acquisition of Integration Associates. Our forward-looking guidance will include a two-month stub period in Q3 for the consolidated company and Q4 will be the first full quarter of consolidated results. The second quarter results that follow do not include any historical Integration financials. I will first cover the GAAP results. Gross margin increased to 63.1% of revenue. Operating expenses declined. Research and development investment was $23.4 million and SG&A expense was $24.5 million. Other income, principally interest income on invested cash, was approximately $2 million. The tax rate was 27%. Fully diluted GAAP earnings per share was $0.29, more than doubling over the same period last year. Our non-GAAP adjusted financials that follow exclude $10.2 million of stock compensation expense. Non-GAAP gross margin increased sequentially to 63.5%, which is above our target range. This was driven by ASP trends and revenue mix that were slightly favorable to our expectations, as well as product cost productions. As I’ve stated before, the strength of our business model will allow us at times to exceed our target gross margin range as we did this quarter. However, we expect margins will return to the high end of our target…

Thanks, Bill. The significance of our stellar results in a poor economic environment is that our business strategy can deliver top line growth well above the industry growth rate while maintaining an attractive gross margin profile. I believe as a management team we have demonstrated the ability to optimize our reinvestments such that we can translate the growth in the business into an even higher level of quality earnings growth. We remain committed to building upon our diversified business model and the innovative engine we possess to outperform our industry. While delivering a very good quarter, we also executed on a strategic acquisition. The close of the Integration Associates transaction is the beginning of another exciting growth story for Silicon Labs. The acquisition adds a new vector for us in short range wireless. We believe the company’s combined mixed signal capability and Integration’s existing products and customer engagements will jump start growth in this key market. The acquisition also adds scale to our emerging power business, a promising mixed signal growth area. Through the acquisition we are also adding engineering talent, IP and cycles of learning enabling new developments. We’ll be sharing our progress in these two areas with you as we begin our consolidated reporting of the company’s products in future periods. Second quarter results continued our strong annual growth trajectory. In the first half of the year revenue has grown 35% compared to the same period last year. At this rate, we are on track to exceed our growth targets for 2008. Additional revenue from Integration only improves that picture. The revenue upside in the quarter was due primarily to better than anticipated demand in our voice and modem products. In voice, strong demand from our large customers and share gains in cable drove the increase while in…

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

(Operator Instructions) Our first question comes from Srini Pajjuri - Merrill Lynch.

Bill, first on the gross margin and operating expenses, obviously I think you are seeing some impact from the acquisition. I am just wondering, will the gross margin come down further in Q4 as you integrate an extra month of Integration? How should we think about the OpEx as well?

Srini, I think that in gross margin we forecast for you at the time of the acquisition that the Integration product line would impact our overall corporate margins by about 1 point. That still continues to be our expectation. We are not ready to give formal guidance for fourth quarter on gross margin, but I think the level that we have been indicating toward the high-end of our target range of 60% to 62% feels reasonably comfortable to us at this point in time. On operating expenses, Necip provided guidance on R&D for the third quarter. We would expect that R&D will continue to grow in fourth quarter. Our objective will be to hold the line on SG&A expenses and we expect that will be relatively flat in third quarter on a percentage basis to that we achieved in 2Q and we will try to hold absolute dollars relatively flat as we go into the fourth quarter of the year.

Necip, a couple for you on the strength that you are seeing in voice and the modem business, looks like fax is beginning to contribute there. I am just wondering how much of this is just the market being healthy versus your market share gains and new product ramps?

In embedded modems we have seen very strong demand from set-top box customers in the quarter. We have very healthy share at DirecTV and all customers serving to that operator. We are definitely gaining share on the fax side and it is reflecting in our results in embedded modems.

My last question on the FM business, Necip, given all the weakness that we are seeing on the handset side, it looks like you are still doing well. As I look out to the next few quarters, what are some of the key drivers here? Is it basically new product ramps at Nokia and Samsung or are you expecting [inaudible] to come back? I am trying to understand which one is going to drive the growth for the next few quarters. Thank you.

Certainly for the balance of the year we expect to see growth both in handsets and in non-handsets. We’re pleased to see that the fraction of new design wins at handset customers that are coming from our higher value products is increasing. One prong of our strategy with handset customers has been to move those customers to the PIN-compatible, higher value products such as embedded antenna tuners or transmitters and we are succeeding in that strategy. Our customers are seeing value in those new products and that’s certainly helping mitigate some of the ASP erosions that you would normally see. We are also seeing a broader design win traction with consumer audio customers, particularly in Asia. Some of the design wins we have obtained with radio customers in Asia has started to ramp strongly and many others, particularly in China, are following those market leaders in designing our products in. So I expect that trend to continue, particularly on the non-handset side into 2009.

Your next question comes from Craig Ellis - Citi.

Bill, just a clarification on the gross margins, you mentioned three factors that drove upside to guidance in the second quarter. Can you give us the relative magnitude of those three?

I commented on favorable ASP trends. What this really relates to is the fact that our forecasted declines in ASP have been less than we expected which are providing us with somewhat better margins. I think this is indicative of a competitive environment where we are enjoying the benefits of new product ramp and we are enjoining the benefits of products that really offer unique differentiation and don’t yet today have direct competition. We did have some favorable mix in the quarter. The business was very strong in our mature businesses, in voice and modems which are good margin products. Finally, product cost reductions that we have been working on for quite some time are taking effect and contributed to the 63.5% margin result that I indicated. I would basically suggest that each of those factors is roughly equal in impact. No one of them was materially greater than any other. We are very pleased with what was an outstanding margin result in Q2.

Necip, on the broadcast forecast increase for growth this year at 35%. As you think about the handset and non-handset business, is that increase driven equally by both of the subcomponents or is it more one versus the other?

In the beginning of the year, Craig, we had taken a cautious outlook in our broadcast business, particularly on the handset side. Our view going into the year in terms of end user demand was relatively cautious and that remains the same. However, we’ve been able to gain share and add new customers and move some of our customers into the higher value products I mentioned and we feel better about increasing the growth target for the year. So I would say a larger portion of the upside to our original target is coming from handsets.

As we think about Integration Associates and some of the key integration milestones for that transaction over the next couple of quarters, what would you point to as key things that we should be looking for both operationally and then on the P&L?

Well, in the last 30 days we have met extensively with the Integration team and developed product line specific roadmaps. We have the organizational structure in place. Therefore, we are going to be hitting the ground running today on day 1 on many fronts. We have a number of deliverables that we are going to execute over the next 90 days as we integrate the systems, as we execute on the developments that are nearing an end and really maximize the potential of the products that we are inheriting through our sales channel. So I expect that in 90 days when we talk with you again much of the integration will already be behind us.

From a financial point of view, we have talked already about the gross margin impact. I want to point out that we are really pleased that we can continue to guide you to the high end of our historic range, after combining the impact of the integration. Secondly from an earnings point of view, the dilutive impact in the short run of this acquisition is probably on the order of $0.03 to $0.04 quarterly. In Q3 the guidance that Necip provided of $0.40 to $0.43 is equal to or higher than current Street consensus for the third quarter. So we have absorbed that dilution and more than offset it in the first quarter that this acquisition takes place. We believe that will also hold true for fourth quarter estimates. Looking into next year, it’s our goal to improve the financial performance of the acquired business through cost reductions in their manufacturing structure and by ramping volume with our sales distribution channel. We would believe that by this time next year, the business will be fully accretive to earnings and will be materially delivering to the consolidated company’s results.

Your next question comes from Arnab Chanda - Deutsche Bank.

Necip, if you look at your performance in your broadcast business, how much of that do you think is the result of ASP expansion because you’re replacing tuners with transmitters, receivers, et cetera and how much of that is unit related? I am just trying to figure out whether you are seeing any weakness in the end market and you are offsetting that or there are some other factors going on.

First of all, we are continuing to see unit growth in handsets. We have grown our revenues and units in broadcast business that we drive from the handset segment all throughout 2007 and year-to-date 2008, every quarter. So in the second quarter results we announced today, our units to handset manufacturers have increased sequentially again over the prior quarter. So on a blended ASP basis, when I look out into the second half of the year compared to the same period last year, we see ASP erosion I would say in the order of 10%, which is less than the ASP erosion you see in the handset segment for any given particular device. That’s due to the fact of us introducing and ramping higher value product.

On your embedded modems and voice, what do you see as the drivers there? I think you talked about fax modem but will those businesses start to flatten out as we go through 2008 or are there other drivers for growth that you haven’t discussed yet?

So in voice we have seen strong demand from many of our large customers and that’s been diverse in terms of application. We have seen strength from voice attachments on DSL, residential gateways, in North America, Latin America and Europe. We have seen strong demand from our cable customers. We have seen upside from PON applications. We have seen strong demand in wireless fixed terminals in Asia. So the strength in the upside has been very broad and diverse in terms of applications in regions. We expect that the cable share gains we have enjoyed are going to continue obviously into the second half of this year. On the embedded modem side, as I mentioned earlier, we are continuing to enjoy the transition to high definition set-top box equipment with our higher ASP, higher speed embedded modems. But the market shares gain story there is really revolving around fax as we continue to add new sockets with customers. So looking into the second half of the year, I indicated that we wouldn’t necessarily hold the high run rate we’ve seen in the second quarter but certainly above what we’ve seen in the first quarter. So net-net, I think for the full year both of those businesses will comfortably exceed the growth targets we have for them.

Bill, on gross margins you obviously had two quarters where you quite easily exceeded your 60% to 62% goal and you are saying that the Integration Associates will have a margin improvement in ‘09. Do you think that you’ll be able go higher than your 60% to 62% sustainably, or are there some other offsetting conditions by mix or anything like that? Thank you.

Arnab, that’s a great question and we’ll have more to say about that as we get closer to 2009. I think we are enjoying strong performance on gross margins currently. I think my concerns about 2009 relate to the macroeconomic environment that we are in, energy pricing and just costs in the supply chain. Secondly, competitive environment and what we will see as ASP pressure when we enter 2009. So right now we are enjoying a very strong margin performance. I don’t want to suggest that we should raise expectations for next year until we are a little closer to it and have a better feel for those two primary factors.

Your next question comes from Adam Benjamin - Jefferies.

Just a clarification back to the SG&A, Bill, you mentioned that you expect to keep SG&A flat as a percentage of revenue in Q4, as well as on a dollars basis. Should we assume that revenue is roughly flat in Q4 as well?

No, we would expect that revenue will grow into the fourth quarter. The SG&A spending will be held relatively flat. I think as a correction to my earlier comment, you will probably see some absolute dollar growth in the fourth quarter as we will have three months rather than two of the consolidated company. But in general, our intention is to keep SG&A flat as an index of revenue in the next two quarters and then continue its downward trend in 2009.

Got you, that’s helpful. Just on the comment about the gross margin drivers for Q2, specifically on the ASP declines, or less ASP declines than you expected, can you comment about what product specifically that you saw that?

No, I don’t think we want to get into details of product specifics, but I will say that in general we have been really pleased with what we have seen across both the broadcast product lines as well as in MCU. ASPs have been holding up perhaps better than we had originally expected.

On the power segment, Necip, you talked a lot about that. When do you foresee that becoming about 10% of revenue?

Well, it’s still an emerging product line for us. I think it’s going to be one of those product lines that will start contributing meaningfully to our revenues in 2009. Just on that note, when I look out into 2009, at this juncture, I see our growth being driven by several product lines. In particular, I see five engines of growth for us in 2009. We expect MCU is going to continue to grow, particularly aided by the low-voltage MCUs that we introduced. Power, as you mentioned, is going to be a contributor, both due to POE products as well as the combined product portfolio of two companies in general purpose applications. I see timing kind of coming of age in 2009 as it continues its growth trajectory and the numbers become more meaningful. I see broadcast growing into 2009, particularly on the non-handset side as we gain further traction with consumer audio products. And short range wireless is yet another growth engine for us into 2009. So what I’d like you to take away from this is that the growth that we expect to see in 2009 will have a much broader base than in the past.

Just one last question on broadcast, Necip, you talked about the ASP decline being less than you thought, helped by the mix. Can you talk a little bit about the mix there in terms of what you are seeing? You previously have given some perspective. Can you help there?

Well, it’s very satisfying to see that we’ve been able to achieve the gross margins we did in Q2 in spite of the complexion of the broadcast business favoring the handset. So clearly for the balance of the year, we expect to see that the blended ASPs in broadcast sequentially will remain where they are and possibly inch up as the volume of transmitters, AM/FM and embedded antenna tuners increase.

So for AM/FM and the transmit can you give a rough percentage of where you think you would finish the year as a percentage of the total handset mix?

Well, a large majority on the handset side will be our receivers, but I can tell you qualitatively more and more of those are going to be embedded antenna tuners.

Your next question comes from Romit Shah - Lehman Brothers.

Necip, one of your larger competitors in microcontrollers consistently emphasizes distribution as being a key competitive advantage in terms of demand creation. Can you just elaborate a bit on your channel strategy in microcontrollers?

Sure, we are very cognizant of that. As we expanded the product portfolio in the last 24 months, we’ve also commensurately expanded our sales channel in different geographies, particularly in the MCU area by adding distributors in those regions that are specific to microcontrollers. Those distributors specifically work with our MCU products in those regions. So our distribution channel expanded significantly over the last two years and continues to expand as we add new reps, new distributors in a variety of geographies, especially where we gain access to new customers and new applications through the new products that we introduce.

Are you using primarily regional distributors or are you also using some of the tier 1 guys?

We have both. We have both household names representing us in different geographies, but we also have distributors that are region specific.

Bill, there are a number of charges this quarter that drive the disconnect between GAAP and non-GAAP income. Can you give us a feel for what percentage of those charges are cash-related?

We’ve got a variety of different charges that are related to this. In-process R&D, writedown of any impaired assets, severance charges for employees that are not coming over with the acquisition, we are also shutting down a facility, and then there is a tax impact of incorporating this acquisition into our operating structure. Of those, the first ones are generally non-cash related, and we’ll have obviously cash effects of severance and facility and the tax impact will have a cash effect. On balance, all of these are one-time charges that we’re very pleased to take upfront, in effect get them out of the way and allow for better operating performance in future quarters as the acquisition is fully merged into our business.

Your next question comes from William Harrison - Signal Hill.

Under the guise of what have you done for us lately, now with the IA Associates put to bed, and going through the integration progress, how do you guys look forward on additional acquisitions? Is this something that was enough that you have got your handle on it now and if something else could come on? What I am getting at is there is a lot of opportunity the out there right now with companies and IP, and you guys are in an excellent position with the amount of cash you have. Is this another area, or is there a time to take advantage of the current environment and your strengths?

Well, we continue to look at multiple opportunities. Clearly over the next 90 days or so we are going to be focusing internally in making the integration of this acquisition successful. But as you point out, the market conditions with our strong balance sheet allows us to look for businesses that fit our stringent criteria. What we wouldn’t do is to compromise on the criteria that’s set for any type of M&A regardless of the valuation, but those companies, private or public that might fit our criteria has certainly become more affordable as of late.

I would add that we’re really focused presently on successfully completing the integration of this acquisition. It’s a major undertaking internally to do this right. So any deal that we would be looking at presently would have to be one that we feel we could take advantage of without sacrificing the efforts that we’re putting into the current deal.

Now that it is part of the group and you guys have had a little bit more time to get in there, Necip, could you maybe talk about some of the products that you think could come out of that going forward or some divisions that we could look to hear from sooner rather than later with some of the integration of the two firms now that they are together?

Well, we fully intend to share our progress on the two primary fronts, those being power and short range wireless. Over the last 30 days since the announcement of the agreement, we have had the opportunity to talk a broader set of customers, both Integration’s current customers and our prospective customers about the short range wireless products and the reception we have gotten from them has been very positive. The technology is well received by the customers and the fact that now they are under our umbrella makes them more comfortable to adopt those solutions. So we continue to be very optimistic about short range wireless being a good growth driver for us next year. On the power front, we’re going through the roadmap alignment. This will certainly provide us additional scale and additional product in the portfolio. So we are going to be sharing our progress on that front with you as well.

Your next question comes from Tore Svanberg - Thomas Weisel Partners.

I know you don’t really quantify your bookings and backlog, but could you just qualitatively talk about the current visibility, either near term or longer term?

Well, usually for the quarter we give guidance for we have pretty good visibility, I think, from a backlog point of view. There is nothing in this quarter that would give us a specific concern. We are obviously coming off of a very strong second quarter in many of the product lines and the momentum that we have, particularly in the broad-based business, continues into the second half.

I think that in general we have demonstrated over many years that our guidance for the quarter that we are in has proven to be pretty good. Our visibility beyond that is less so, but we think that the current quarter guidance is solid and are looking forward to growth in the fourth quarter as well.

On the power side you mentioned a ramp in POE product sales for the second half. Is this the result of many different small design wins or do you actually have some big customers there driving that revenue growth?

Both, Tore, on the PD side we have a number of smaller design wins driven by applications like IP cameras and on the Power Sourcing side on the PSE side we have a couple of design wins with a very significant customer.

Your next question comes from Gus Richard - Piper Jaffray.

You haven’t mentioned the video broadcast products you’ve been working on. I was just wondering if there are any updates?

Well, this is certainly part of the growth story for broadcast in 2009. We are in the process of competing for some significant design wins with our demodulator products that we announced, particularly the combo of DVBT and DVBC is attractive for many of our customers. We have, as you know, additional developments ongoing in this area and at this point in time I have no updates on that front, but the developments are going on track.

At this time, we show no further questions.

Great, all right. Thank you very much for joining us today. This now concludes our call.