Welcome to the Silicon Laboratories Third Quarter Earnings Call. All participants will be on listen-only mode until the question-and-answer session. Today's conference is being recorded. If you have any objections, please disconnect at this time. Now, I will turn the call over to Ms. Shannon Pleasant. Ma'am, you may begin.

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 www.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 800-294-9508. I am joined today by Necip Sayiner, President and Chief Executive Officer, Bill Bock, Chief Financial Officer, and Paul Walsh, Chief Accounting 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 day of this call. This information will likely change overtime. 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 our control and could have a material, adverse effect on our business, operating results and conditions. We encourage you to review our SEC filings, including the Form 10-Q that we anticipate will be filed today 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 of results of core ongoing operations. I would now like to turn the call over to Silicon Laboratories Chief Financial Officer, Bill Bock.

Thanks, Shannon. I'm delighted to report another outstanding quarter. Our business continues to deliver very strong performance in the face of a deteriorating economic environment. Q3 revenue of $113.5 million is above the midpoint of our guidance range representing a sequential increase of 8.5%, and a 29% increase over the same period last year. Pro forma earnings of $0.68 far exceeded our guidance, due in part to one-time favorable tax events but also due to better than projected operating performance. Fully diluted GAAP earnings per share, which include acquisition-related charges was meaningfully better than expected at $0.02. The GAAP earnings of $0.02 per share include significant charges related to the acquisition of Integration Associates. There is a $10 million write-off of in process R&D and a $1.4 million fair value markup of cost of sales for the quarter. In addition, we incurred a $12 million tax expense associated with incorporating the acquisition into our international operating structure. Finally, and as is typical, the GAAP results included the impact of stock compensation expense of $10 million, which was flat to last quarter levels, despite the addition of more than 100 new employees during the quarter. GAAP gross margin decreased as expected to 61.1% of revenue, due primarily to the effects of the acquisition. Operating expenses increased due mostly to the acquisition-related headcount increase. Research and development investment including in process R&D was $36 million and SG&A expense was $25.9 million. Other income, principally interest income on invested cash was approximately $2 million. Turning to our pro forma results; on revenue of $113.5 million, non-GAAP gross margin was 62.4%, which is above our target range. This performance, particularly given the acquisition of product lines with current margins lower than our corporate average, highlights the strength of our diversified business and the potential…

Thanks, Bill. I continue to believe that our diversification, sustainable differentiation, new products and customer penetration are the basis for our success in this market environment. When coupled with the strong financial management Bill described, we are uniquely positioned to outperform relative to our peers and to take advantage of competitor weakness to emerge in a leadership position when the market recovers. We are looking at our expanded portfolio in three major categories to try and help simplify the business for investors. Our RF business includes our broadcast audio products, which are the large majority of the RF revenue today. The video products which are just beginning to contribute and the short range wireless products we recently acquired. On a long-term basis, we believe the RF business can grow at 15% to 20%. Our asset business includes our voice and embedded modems products. This is a stable, profitable business we believe can achieve modest long-term growth. Our broad based business includes our MCU, timing and power businesses today. MCU represents about 60% of the broad-based pie followed by timing and power. The long-term growth rate for the broad-based business is expected to be 40% to 50%. There is a small portion of our business, which we categorize as mature products that are not the focus of current R&D investment. These products represent less than 10% of our revenue. In Q3 our RF business had a stellar quarter. All of our Broadcast Audio Products, FM tuner, transmitters and AM/FM receivers were up double-digits sequentially, and both handset and non-handset revenue were also up double-digits. We continue to gain share with top handset OEMs and our blended ASP's help as we ramp new higher value products at large customers. Demand from portable navigation device makers resumes in Q3. We also continue to…

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

(Operator Instructions) Our first question comes from Tore Svanberg. Your line is open.

Yes. Thank you. I was just wondering if you could add a little bit of comment on your visibility. Obviously, you're doing quite well here compared to your peers, but could you just talk a little bit about your visibility as far as backlog and maybe current booking from that business concerned?

So in the guidance we provided for the business for 4Q follows the same principles we always have in terms of considering the amount of backlog and a bottoms up forecast from our sales team. We haven't applied any additional judgment to our guidance other than the usual conservatism that we usually attach to our revenue guidance fourth quarter.

Sounds good and as a follow-up re the microcontroller business it seems like you are expecting that to be a little bit more moderate next couple of quarters. Is that really because of the economy or were there any key customers or key programs there that have already ramped and are now slowing down?

In the third quarter we had a couple of specific events with some factory shutdowns in China and some inventories being worked out again in China with a couple of customers, and some of the design wins we have had ramping more slowly than we had anticipated. But beyond those specific events, I also believe that there is a softness in overall demand that we are seeing, which we are accounting with some of the new product cycles and new customers. But I believe for the next few quarters, until the macro environment improves, the growth rate for the MCU business will not be sustained at the 30 plus percent range we've enjoyed.

Great, thank you and congratulations on the results.

Thank you, Tore.

Next question comes from Craig Ellis. Your line is open.

I go by many names. Thanks for taking the question, guys. Bill, I'm wondering if you can clarify what the contribution was from Integration Associates in the current quarter and if you can just give us a glimpse into what it would be in the fourth quarter guidance?

We had indicated that IA would contribute about $6 million to third quarter revenue over a two month time period and in fact they were slightly favorable to that outcome. For the fourth quarter, we will have full three months of the acquisition included in the consolidated results. So revenues will increase, although the IA business is being affected by the slowdown in the economy, essentially the same way everything else is, so perhaps a little bit less than our original expectations for Q4.

Okay. And then looking at the gross margin line over time you want to pool the Integration Associates business into your own manufacture. How should we think about the time line for doing that, Bill?

It's going to take awhile because there are multiple different actions that we can take to improve margins within the IA product lines. I think that as a practical matter most of these efforts will be complete by the time we are exiting 2009, but various components will roll in, as we go throughout the year.

Okay. And then lastly for me, on the staffing side, you mentioned that you added a 100 people in the quarter. How should we think about the outlook for the fourth quarter in terms of employee additions and what about 2009?

So the employee additions in the third quarter were dominated by the headcount that we obtained via the acquisition. So the reason that it's a number like 100 is strictly due to that transaction. In the fourth quarter, we will continue to add in our R&D organizations, as we have been recruiting for key technical talent, but we are very tight in terms of resource additions in SG&A and overhead categories. So I expect that the, headcount growth in Q4 will be quite modest. Looking into 2009, we are certainly taking a cautious view until we see the macroeconomic environment improve and headcount growth as we go through the year will be relatively slow and really restricted to key engineering positions.

Thanks, Bill and good job, guys.

Our next question comes from Arnab Chanda. Your line is open.

A couple of questions first of all, can you talk a little bit about your broad-based business, what are the areas that you are targeting in power and in timing, where are you seeing the strength both by product and markets? Thank you.

Hi, Arnab. In power, we have three distinct product lines. One is in Isolators and ISO drivers utilizing our isolation technology that is ramping nicely for us. Second is Power over Ethernet, where we have products in both the power sourcing side as well as the client side and as I mentioned, several customers are qualifying us for early 2009 ramps for those products. Thirdly, we had the AC to DC converter product line that we've acquired from IA that we are seeing strong interest from both their existing customers as well as some of our existing customers in the Access Business.

How about timing?

In timing what we are doing is we are continuing to expand our served markets. We have announced the Crystallized Oscillator 500 in recent weeks. We have another coming up shortly as we round out the portfolio. What we are doing, is we're moving down to higher volume segments of the consumer and communications market that still values the type of performance our products provide. Ultimately, what we'll be able to do in a short timeframe is to offer everything the customer needs to build their clock tree for their entire designs with our oscillators and clocks.

One question for Bill. Your operating performance has been stronger than your historical goals, I think, so has been gross margin. Do you think you're still trying to get to that 25, now that revenues will be coming down or do you think, there is a potential exceeding that or about sort of a long-term goal?

Arnab, I think the 25% objective has served us very well. We came out of the divesture of the cellular business, running at only about 11% of operating income and have really worked hard to improve that metric over the last two years. It's with a lot of pleasure that I see we've achieved 25% for a full trailing 12 month period. Looking into the fourth quarter on a potentially lower revenue level, operating incomes are going to have to moderate slightly, and I suspect that we will stay below 25% as long as the macroeconomic environment remains this weak. But I think we've now clearly demonstrated that the business is capable of running at that level. And as demand begins to return to more normal levels, we would expect to return to this kind of performance.

Thanks, Bill. Thanks, Necip.

Thank you.

Our next question comes from Romit Shah. Your line is open.

Hi, good morning. Bill, just on gross margins, I wouldn't thought you were not raising the gross margin target and especially in this environment, but it does seem conservative given your execution so far and the perceived cost savings from IA next year. Could you just help me think about some of the forces that could bring the gross margins back to the midpoint of your longer-term target?

Yeah, Romit. I think that your point is well taken. We have been above our model, I think in three of the last four quarters now, but we are reluctant to raise our target range. In the fourth quarter I must remind everyone we'll have three full months of the IA acquisition, which does have a drag on margins, so there will be a slight reduction in our margins in 4Q exclusively to that effect. I do think the principal caution that we are dealing with at the moment is the overall state of the industry in the macro environment. So we would not want to raise our target range, you know, as we are facing this relatively uncertain period. But on a longer-term basis, I think all the trends that you've been seeing do argue to a possible margin expansion for us and certainly the mix shift towards broad based businesses over the long run are in our favor as well. It's just that in the short run we are not prepared to make a change right now.

Okay. Necip, just on the broadcast it's on the Broadcast Business you commented that ASPs are holding up okay. Is that just due to a higher mix of transmitter and AM/FM?

Primarily with our handset customers, we've been trying to transition them to higher value devices and that's gaining good reception and we are successful in doing that. So on a blended basis across the customer base our ASP's held in the quarter and I expect that trend to be intact for the fourth quarter as well.

Thank you.

Next question comes from Sandy Harrison. Your line is open.

Thanks for taking my call, everyone. Just a quick clarification on some of your guidance, you talked about the forecasts from the RF DRF, you'd expect that the more consumer or the personal navigation devices business to be down. Are you guys seeing cancellations or is this just your forecast based upon sort of trends you've seen and if in fact it turns out to turn out all right, is that a one area that you think one of the bigger points of upside or toward the higher-end of your range could be come from?

To date, we haven't seen any abnormal behavior, if you will, from our customers in terms of cancellations or push-outs beyond what we normally see in a quarter. I think the macroeconomic condition argues for taking a cautionary stance in terms of the consumer end-markets where we serve, through our broadcast and MCU product lines to some degree. So, clearly there are some error bars around the guidance that we have provided. Essentially, we are looking at a relatively healthy quarter for our handset business, where we are gaining share with our top OEM customers as the attach rate for FM tuners continues to go up. The growth is coming from the lower end, low-cost handsets where we participate with our stand alone solutions so those dynamics certainly favor our handset business.

Got you. My follow-up, you talked a little bit about the power products. What's the typical product cycle there? Is it shorter, longer than your typical product cycle and how is that usually involve you in the design process? Is it the front end, the middle or the backend?

For networking applications where we sell our PSE products to Ethernet switch suppliers for example, the design cycles and the qualification cycles tend to be on the longer side, I would say 12 months to 18 months. So, some of the ramps I'm alluding to for early 2009, we have been working with these customers for nearly 12 months now. There are other applications for Isolators or AC to DC converters where the design cycles could be within a nine-month period.

Great. Thanks for taking my questions.

The next question comes from Suji De Silva. Your line is open.

Hi, guys, good morning. Could you talk about the FM tuner business, what do you think the year-over-year growth opportunities in that segment?

I'm sorry. Could you repeat the question, Suji?

Sure. For the FM tuner broadcast business, what do you think the year-over-year growth opportunity is for? You've talked about 20% to 30% this year looking forward, where do you think the business can grow?

Well, this year we have increased our growth rate target for the business and everything we are seeing year-to-date supports this higher growth rate for the broadcast business. I think given the type of environment we are operating under, it wouldn't be prudent for me to provide any expectation for 2009 at this point, but, we continue to believe that that business overall, the RF business that consists of broadcast and short-range wireless will continue to grow at the rate of 15% to 20% over the long-term.

Okay, great. And then also with some of the newer opportunities looking into '09, can you help maybe rank or give us some size, things like video broadcast, power and the EZRadio opportunity?

Surely, I see a five growth engines for us into 2009. These are on the broad-based side, MCU, power and timing, and on the RF side, broadcast and short-range wireless. Many of those are driven by new product cycles, so they will represent a significant growth opportunities in dollar basis for us in 2009. Obviously, the rate of growth for any of these businesses and our business as a total, that has to be modulated within the constraints of the end user demand and the macro concerns, but, I believe all of these growth engines, five growth engines are intact for us moving into '09.

That's fair. Thanks. Nice job on the quarter, guys.

Thank you.

The next question comes from Craig Berger. Your line is open. Craig Berger - Friedman, Billings, Ramsey & Co.: On the FM tuner business, you had 116 new design wins this quarter. That trend has been flattish over the last [two] quarters, so what should that tell us about the kind of the future slope of your revenue growth there?

Well, the mix of that design wins changes from quarter-to-quarter depending on the model plans for the large customers in particular. What I can tell you qualitatively is that we are increasing the number of design wins that we are getting with our broader-based customers, particularly for AM/FM products where we've been focusing quite a bit recently. We are satisfied with the level of design win activity today. In the handset side, we look to see what share of the available FM sockets we're able to win against other stand alone solutions as well as combo solutions and the trend continues to be pretty solid there for us with our product and we are adding more and more customers on the AM/FM side with consumer audio, so that's also satisfying. Craig Berger - Friedman, Billings, Ramsey & Co.: Can you remind us who your large handset customers are in that business? What is the outlook with those guys and also same for automotive on the tuner?

Okay. We are doing business with all the top five handset OEMs today. We are doing particularly well in Korea and Samsung, for example, who continues to expand their share and is targeting more of the low-end segment of the market really appreciates the products that we are bringing on and they are designing us in. With Nokia, we have been shipping transmitters and we continue to add additional design wins there. We have good share with the likes of LG, Sony Ericsson, and Motorola and across multiple platforms, but multiple types of products whether it's plain vanilla FM tuner or embedded antenna tuner or AM/FM or transmitter. Craig Berger - Friedman, Billings, Ramsey & Co.: Automotive?

On the automotive side, we have just announced a couple of days ago, another product from our broadcast portfolio into automotive, AM/FM. There is good pull from the customer base there. We are recognizing the design win cycles tend to be on the longer side on the automotive. So, those design wins that we would get will likely not turn into revenue for a couple years from now. Craig Berger - Friedman, Billings, Ramsey & Co.: Thank you.

(Operator instructions) And at this time we're showing no further questions.

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

This will conclude today's conference call.