Welcome everyone to the Silicon Laboratories third quarter earnings conference call. All participants have been placed in a listen-only mode until the question-and-answer session. (Operator instructions) This conference is being recorded. If you have any objections, please disconnect at this time. I would now like to introduce Ms. Shannon Pleasant. Thank you Ma'am, you may begin.

Good morning. This is Shannon Pleasant, Director of Corporate Communications for Silicon Laboratories. Thank you for joining us today to discuss the company's 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 Web site at www.silabs.com. This call is being simulcast and will be archived on our Web site. There will also be a telephone replay available approximately one hour after the completion of the call at 866-513-1237. 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 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 review 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 condition. We encourage you to review our SEC filings, including the Form 10-Q that we anticipate will be filed today but identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements. Also, the non-GAAP financial measurements, which are discussed today, are not intended to replace the presentation of Silicon Laboratories GAAP financial results. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Silicon Laboratories' Chief Financial Officer, Bill Bock.

I'm very pleased to report revenue of $125.9 million for the quarter that’s a high end of our revised guidance range. This represents an increase of over 10% compared to our peak revenue performance in the same period last year. This record breaking quarter exceeded expectations on all fronts delivering exceptional margin and earnings performance as well as very strong cash flow. Let me first cover the GAAP results which include approximately $11 million in non-cash stock compensation charges. Third quarter GAAP gross margin increased considerably to 64.4% of revenue. R&D investment for the period was $25.9 million. SG&A increased to $28.6 million. Other income principally interest income on invested cash was under $1 million. GAAP operating income was a record 21.1% and fully diluted earnings per share was $0.47 more than doubling from the second quarter. For investors focused solely on GAAP measures, these results demonstrate that our business model drives considerable leverage to the bottom line inclusive of stock compensation. And these non-cash stock charges are declining as a percent of revenue a trend we expect to continue over the next several years. Turning now to our non-GAAP results, revenue of $125.9 million was up more than 20% sequentially and 50% above where we started the year in Q1. The better than peak revenue performance was driven by strength at tier one customers and our broadcast business and an excellent recovery in our MCU business. Non-GAAP gross margin was 64.7%, a 220 basis point improvement over the prior quarter. This quarter’s result include some one time favorable variances that was principally derived from continued cost reductions, improved test yields and outstanding performance from our operations team. We expect gross margins will continue to be excellent and will hold at or above 63% for the foreseeable future. We are…

Hello everyone. As you’ve just heard we had a tremendous quarter. We made progress on a number of key fronts, customer diversification, market share growth and new products. I will [point] on each of these as we cover the different businesses. Starting with the access business, Q3 was down sequentially by about 8% due primarily to an expected slowdown in set-top boxes and Voice over DSL gateway demand. Shipments into point of sale and infrastructure equipment offset this to some degree. Our performance in this business compared to the large double-digit year-over-year declines of our two primary competitors supports our internal view that we have gained about 300 basis points of share in the last 12 to 18 months. These share gains on the modem side are coming from set top box and points of sale wins in Europe. On the voice side, our recently introduced ProSLIC product, are successfully winning designs among top tier customers and helping to establish beachheads in new accounts including leading OEMs and ODMs in China. We are also benefiting from the trend towards integration of Voice over IP into data and content delivery equipment for the digital home, ideal for our highly integrated small footprint solutions. Our RF business which represented about 40% of revenue in Q3 had a very strong quarter growing nearly 40% year-over-year. Strong tier one customer demand for the audio products was the highlight of the quarter as our largest customer moved aggressively to gain share and we added new major customers that began to [ramp]. Some investors have been concerned that the audio business will begin to decline in 2010. To the contrary, we expect our business to grow again next year. In handsets, we have held off integration threats and have grown our volume and revenue by gaining…

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. Operator please review the question and answer instructions for our call participants.

(Operator instructions). Our first question today is from Craig Ellis. You may ask your question and please state your company name.

Caris & Company. Bill can you clarify the one-time benefits that you mentioned in the gross margin line in the quarter?

Sure Craig. We had some accounting adjustments in the quarter that helped boost margins above the 64% level. That is why my guidance for the fourth quarter and looking forward is in the 63% to 64% range.

Okay, great. And then as we think about the target margin model of the company Bill, how would you guide us to think about that, given the margins that you are currently achieving on the growth and the operating line.

I think that we are at the moment just very pleased and proud of the performance of the business, you know we are above our model on gross margin by 2 to 3 percentage points. We are also above our target on operating income by a full 5 percentage points in this quarter. I think we will continue to enjoy above model performance in the fourth quarter and we are in the process of developing our plan for 2010 which also looks quite strong to us right now. I think that we will retain our business model as a multi-year target for the company as we move into 2010. So we have no plans to make a formal change but we are certainly pleased with the fact that we are out performing today.

Excellent and then if I could follow up with Necip on the product question. Necip, it did sound like you are getting increased customer diversity on the FM tuner side of the business, can you talk a little bit about the way the OEM balance could shake out as you look at design wins now for and what that could mean in 2010.

Certainly, we continue to get design wins with large handset customers and consumer audio customers but we are also winning designs across the board particularly with ODMs in greater china with our AM/FM products. We have become the product of choice in that region for a variety of end products including AM/FM as well as some home theater system wins with household names, large OEMs in Japan and Korea. So I don’t have a specific breakout of how large OEM versus smaller customer revenue will shape up for 2010. But I am very pleased to see the number of design wins in our broader base business within audio.

Thank you. Alex Gauna, you may ask your question and please state your company name.

JMP Securities. You mentioned good comfort that your audio business is going to be up next year in that kind of low visibility environment can you give a little more color on why you have that confidence and what’s going to drive either customers or new platforms of that growth.

We are ramping in second half of 2009 two large customers with our FM tuners we expect that business will continue to support growth for the audio business in 2010 but perhaps more importantly to Craig’s earlier question we continue to diversify our customer base significantly in this business, AM/FM business in particular and that will be more than doubling in 2009, will continue its growth trajectory into 2010 based on the design and momentum we see and enjoy today. So based on all of these and even taking into account the uncertainties that we allude to especially in the short product cycle segments like handsets we feel confident that we can grow the audio revenue year-over-year in 2010.

And you mentioned that you had strong timing results here. Is there anyway you can differentiate between what might be the rising pride of the networking market versus your new design wins contributing? And may be how far are we into bringing to market all the design wins you are getting in timing?

I would argue that we are still in the early innings of our growth story and timing. The revenue that we drive from oscillators and clocks, both grew approximately 30% year-over-year. We continue to bring to market new products. We are adding tens of new customers every quarter, we are getting hundreds of new design wins every quarter and as importantly we also continue to proliferate inside large customers. One anecdotal example I can provide for you is a recent business review we had with one of our large infrastructure customers where we now have 35 distinct products that they are utilizing compared to only 18, 12 months earlier. So not only we are continuing to get new design wins and adding new customers but also expanding our business with the existing customers.

All right. Thank you. Congratulations on a strong quarter.

Thank you.

Tore Svanberg, you may ask your question and please state your company name.

Thomas Weisel Partners. The first question is if you look at RF you expect to pause there in Q4 and you talked about some inventory adjustment with Samsung, is that just a seasonal adjustment, do you expect it to be over in Q4 or is there anything beyond that?

Well this sort of ordering pattern is not unique to this year for Samsung. In prior years we have seen similar trends were their business with us in 3Q is higher than in 4Q. This year it’s amplified further for two reasons, one the volumes are significantly higher now due to our continued success with this customer and higher tax rate of FM tuner functionality in to handsets. And secondly, our customer had some specific needs and goals this year that we supported them with. So, on a sequential basis you see a reduction in 4Q but overall the volume of business for us at this customer for the second half is significantly higher than what I would have projected only 90 day ago.

My second question is on your new human interface product line. How should we view this sort of from a competitive landscape I mean you mentioned some strong IP mixed signal architecture and so on but I mean if this is where you actually have very high integration using a vanilla CMOS process to potentially gain significant share in this market.

I think the differentiation comes not only from the mixed signal capability you alluded to but also our ability to offer a comprehensive portfolio to our customers. Not just MCU-based capacitive sensing which has become an arguably crowded space but also to couple that with infrared and ambient light sensing products. We believe that we have a significantly better solution in terms of power efficiency and I don’t mean just 2X or 3X whether I am talking about orders of magnitude better due to the approach that they have taken and with our infrared sensing products, we offer a much longer range as well as some very unique features such as proximity sensing that I think our competitors will be hard pressed to duplicate.

Thank you. Adam Benjamin you may ask your question and please state your company name.

Jefferies. Thanks guys. Necip I know again we are at the end of the year here and typically you’ve in the past kind of talked about growth potential on a year-over-year basis, you talked about some of the businesses, I wonder if you can give us some better view into 2010 as we are kind of getting near the end of the year and what you are thinking about each one of the main three businesses and how should we be thinking about year over year growth given the incremental opportunities you have and you talked about. Thanks.

I think in terms of providing a full year growth targets I am going to wait until January to get a little bit more visibility into our design win traction with various product lines. I have already talked about the audio but I can’t give you a sense for 2010 in this regard that I think a significant portion of our growth into 2010 will come from our broad-based products, that’s all I can tell you at this point.

Okay, got you. And then just a follow up as you look at Samsung and you talked about having an inventory adjustment typically in Q4 and then you have a big audio, portable audio customer ramping in Q4 offsetting some of that decline. As you look out into Q1 how should we be thinking about those two meshing together. Should we be thinking about better than normal seasonality on the handset side obviously being offset by a bigger decline on the portable audio side which is typical of their production. You can give some better color there as to what you are thinking about that would be helpful.

Okay, that’s a great question. I think compared to a couple of years ago and I am going to refrain from comparing it to last year for obvious reasons, compared to two years ago I think we have a higher exposure to consumer and high end consumer in our business as those businesses about serving the consumer segment have grown above and beyond the corporate average. So from that perspective I would expect the seasonality in Q1 to be stronger than prior year. However, you have pointed out that we are ramping some major customers as we speak so that will provide a balance to that stronger seasonality. We will have to wait a little longer and see how the holiday season goes before being able to provide a more precise color on the trends in Q1, Adam.

Got you. Thanks a lot guys.

Terence Whalen you may ask your question and please state your company name.

Hi, with Citi Investment Research & Analysis. Thanks for taking my question. The first one relates to inventory levels and distributor inventory levels. We saw the increase there I think you said this before the growth into 4Q. Do you expect inventories heading into 1Q in the distribution channel to then decline after moving a level in the fourth quarter and I guess related to that do you expect OEMs to grow less than distributors in fourth quarter or more, thanks.

No, the general story on inventories is that the growth that you have seen from the midpoint of the year to today is to support this early dramatic increase in overall demand that we are seeing across the board. We have guided fourth quarter revenues and we think the current level of inventory is appropriate to support that. Consequently, we think inventory both within our own company and in distribution will be relatively flat as we exit the year. Typical seasonality patterns and this is certainly supported by our distribution business and consumer I would suggest that there is some fall off in demand in first quarter. So it is not unreasonable to think that inventories would actually decline in March.

And then in the fourth quarter do you expect distributors or OEMs to grow more or is it a pretty balanced outlook?

I think it’s pretty balanced. The expectations we have for our distribution business in fourth quarter is quite good.

Okay and then my follow-up would be to Necip’s point. Necip I think in your prior response you said regarding first quarter revenue outlook and the degree to which that might be seasonally down you would have to wait to see how the holiday season went. What are some may be if you could name two or three specific indicators that we should be watching for to gain an assessment of the degree to which 1Q might be seasonally down? Thanks.

I think the biggest variance we’ll see will come from handsets and portable media players.

Craig Berger you may ask your question and please state your company name.

I guess my question is you guys have been pretty conservative over the last few quarters and you’ve ended up tracking ahead both on revenues and gross margins. I guess my question is kind of what kind of backlog coverage are you assuming for Q4, how is guidance versus your orders this quarter versus say in the last couple of quarters. Thank you.

Well, in our guidance, we have continued to take a conservative view of demand this quarter. We certainly did not lean forward in terms of what the demand might be in the uncertain month of December. I think there is an overall level of caution with our customers while trying to capture share in their end markets. I have had an opportunity to visit with a number of our customers over the last several weeks and I would characterize their move as having one foot on the gas pedal and one foot on the brakes and they all want to continue to capture the share of the holiday season but are wary of the inventory situation that caught them off guard last year. So we are monitoring this very closely and I think offering the best guidance, we can give with the information we have today.

And just a separate question your microcontroller business ramping quite nicely. I know you guys have various products families that you have rolled out in recent years, kind of how far into the ramp are we in some of those families, how much growth is still left ahead of us. Thank you.

Okay. So to give you some color on the MCU business, if I compare the revenue in third quarter to the same period last year, we would see an increase in our broad-based small phone factor MCUs. We’ve seen an increase in one-time programmable devices. We’ve seen an increase in revenue in our USB products that are targeted towards consumer. The only area that hasn’t yet caught up with the peak revenue is precision mixing of MCUs, which have a heavier exposure to industrial markets. I think all the products that we have brought to market in the last 18 months low power MCUs have been somewhat slower to ramp than we had projected at the time but its starting to ramp nicely especially with the metering applications today. I think the growth trajectory for MCU looks good for the near future.

And then last one for Bill. Thanks for the color Necip. I may have missed it but tax rate going forward?

We had a 16.5% tax rate which is below our standard in the third quarter due to the conclusion of the Statute of Limitations on 2005. I think looking forward our general guidance is approximately 20% and we should be slightly below that in 4Q.

Thanks so much.

Thank you. Arnab Chanda you may ask your question and please state your company name.

Roth Capital. Couple of questions, one, Necip if you want to talk about a little bit more about the video product line, what are your expectations. I know you have a couple of products there TV as well as outside of TV, what are you seeing with the demand product those are video product and tuner product sorry and then what sort of expectations should we have for sort of next year. Thank you.

I think in the last 90 days we made reasonably good progress with our customers in securing some design wins. And those are primarily with module makers where we want the design and they are going through the qualification process with the TV OEM before we can start ramping it. I expect there are three or four models that we have won to date and those will start ramping throughout 2010, a couple of them in the first half of the year. What the customers are doing is to allocate a few select models to silicon tuners given this is a new technology they want to take it slow, they want to gain some experience with this new technology and some shipping history and then turn on the technology to a much larger portion of their volumes in subsequent years. Several customers I have spoken to suggest that they have an internal mandate to start using tuners on their products to be able to continue to drive cost down and now that we are able to offer a solution, that means a performance expectations that has become much more valuable.

Great. One other question of the audio product lines. What is your rough mix today with handsets versus non-handset and I know you talked about the potential of integration of, what type of timeframe do you think that something that we should look out for? And do you think by that time the rest of your business will catch up? The other thing about audios is whether AM/FM somewhat offsets that even within handsets? Thank you.

In the third quarter the mix between handset and non-handset was two thirds, one thirds roughly speaking favored in handsets. I think we had projected earlier that this mix will get closer to 50-50 over time but we continue to have much success with our customers in the handset space. So in spite of very good growth in the consumer audio and AM/FM particular, the mix that stays 65% or higher. I feel confident that we are going to be able to grow our audio business into next year regardless of what happens in the handset market from a unit growth perspective or a tax rate perspective or ASP erosion perspective.

Great. And then one question on the microcontroller business. If you look at your microcontroller business obviously there are a lot of touch products out there. What’s your strategy in terms of design wins? Are you going for places where you already have some penetration with FM or are you going to be doing a more distribution oriented approach? Can you talk a little bit of what kind of metrics we should be looking for? Thank you.

Sure. If I look at the target markets for the portfolio we announced today, it covers a broad base of applications ranging from handhelds, consumer gadgets, interactive toys to industrial applications, kiosks, security panels and so on. Clearly with many of the consumer names, we have existing relationships through our existing portfolio of products. So they have already shown some interest in what we have to offer in that space both from a capacity of sensing perspective as well as proximity sensing perspective. But also there product plan themselves very well to the distribution channel where we have a long list of growth in products particularly with the MCUs. So we are going to be pushing this product line in both sectors.

A last question for Bill. If you can talk a little bit of why your gross margins and operating margins. I think the operating margin; this might be an all-time high for you even since IPO et cetera. And gross margin seems like your revenues are increasing in areas where the gross margin is actually higher. Can you talk a little bit about; there are analog companies sort of the mid-60s or even high-60s. Even if you’ll leave out linear, what are the things that we have to look for, is it a mixture in or is it more about cost reduction? Where can it go from here? Thank you.

Thanks Arnab. I appreciate the comment on the operating income statistic. 30%, we do believe is a record and it is really a stunning accomplishment given the year that we have been in. I think the dynamic on gross margins for us going forward is less about mix and its more about the simple, normal course of the business in terms of competition and pricing and cost. So we will enter 2010, need to go through new rounds of negotiations with both our customers and our vendors. And margins will be impacted by that next year. In general, what you have seen over the last six or eight quarters is that we have had relatively significant mix shifts into the business that are not driving dramatic changes in gross margin.

I just also want to comment that I think our gross margin model allows us to compete effectively and various kinds of environment, pricing environment with our suppliers as well as the end markets that we serve. Over the last couple of years, we have made steady improvement in our gross margin profile. In 2008, we’ve had about 50 basis points improvement on an annual basis over 2007. And in 2009 we’ll have a similar improvement again on an annual basis to bring that to about 63% for the full-year. I think its safe to say that our [aggressivity] in winning new business is only matched by our focus on design for cost and continue to receive those cost reductions. So our gross margin model certainly does not prevent us from aggressively continuing those efforts. However, we don’t want to change the model primarily because we want to continue to focus on growth and don’t want to artificially repeat that.

Suji De Silva, you may ask your question and please state your company name.

Kaufman Brothers. Good morning guys. Nice job on the quarter. Just a quick housekeeping question, what do you refer to this being more consumer and being more seasonal. What’s the historic seasonal level you are referencing for 1Q there?

Suji, the first quarter of 2009 notwithstanding, previously, we have suggested roughly a 7% sequential decline as being a typical seasonal period.

And then just to understand the diversification on the handset FM part, you have I think two tier ones that are seemed to be ramping, is that, correct me, are there other three potential to ramp in the 2010 time frame or is there a different assessment on where you are in the Q1? Thanks.

At this point with handset customers, we are shipping FM receive solutions to all part.

Okay.

They have added the only one this quarter that we weren’t shipping before.

Okay. So you completed the (Inaudible) now there.

Right.

And then last question really with the buyback being announced here, what your thoughts are on comfortable level of cash for you guys and also, any updates on your thoughts on acquisitions prejudicially given the environment and some of the changes that have been happening here in terms of the market.

Sure. With the conservative cash management approach we took during the course of this year, which we thought was entirely appropriate given the uncertainties surrounding the macroeconomic environment. We’ve had a significant build in cash during 2009 to now over $400 million. That is clearly more cash than we need for operating purposes. And frankly more cash than we believe we need also for strategic M&A. So the authorization that the Board granted last week of a new $150 million program is designed for a continued return of cash to shareholders but leads us comfortably in a position to operate the business and to take advantage of opportunistic M&A candidates, which we continue to review on a regular basis and while we don’t have any eminent transaction, we are actively in the market and looking at opportunities that could augment this business.

Brendan Furlong, you may ask your question and please state your company name.

Thank you and good morning. I just want to circle back on a couple of things if I can. On the Samsung, typical Q4 inventory drain that maybe from audio increases this quarter. But normally Samsungs re-bills in Q1 would you expect that sort of seasonality continue for Samsung?

There is nothing we know at this point that would suggest other loss.

And then on the general seasonality question you just said normal excluding last year is down 7%, was that comment directed at the consumer end of it or for the whole company?

It reflects the whole company. So we’ve got a meaningful portion of the corporations businesses in the consumer marketplace that we obviously are addressing a lot of other end markets as well. That 7% statistic has been typical for us at a corporate level.

And to that point, in previous years, you haven’t had the exposure to (Inaudible) like the MCU timing and power which tend to be better seasonally in Q1 than the consumer. Should we think of that as an offset to previous seasonal declines?

I think the contraction of our overall business has tilted more towards consumer in the last several years in spite of the growth that you are alluding in broad-based businesses. So I acknowledge the seasonality being whether in those businesses in the first half. But I think overall accepting for any significant customer and seasonality wise, we would expect something more stronger in Q1 than prior year.

I guess my last question then is on. Somebody kind of alluded to this question. But I don’t know if you entered directly, inventory, what is your sense of inventory at your major OEM customers and major distributors at the current time?

We think that they are appropriate, we have seen some growth in distribution inventory but in support of what is a strong demand profile for the fourth quarter, we really don’t believe that there is excess inventory at any position in the channel.

Ian Ing, you may ask your question and please state your company name.

Broadpoint AmTech, thanks for fitting me in. As you go through the annual foundry negotiations, could you give us a sense of what products are up for negotiation and what is in tact in (Inaudible) perhaps new products versus old products. And how much of a help is volume-based question as you enter fiscal year ’10 in ramps?

I prefer not to talk about product level negotiations with our suppliers. All I can tell you is that specially given our increased volumes all our suppliers has supported us with our cost reduction needs today.

All right. I understood. There has been a lot of questions on new design wins but as a relatively smaller company could you talk more about the scaling about your field resources to cover all the geographies and end markets. Is it just a matter of staffing up or are there some other leverage opportunities perhaps using your distributors and [FAE] distributors et cetera.

As our revenue base increased, we have continuously add direct sales resources out in the field as well as expanding our distributor channel partners appropriately in regions that we needed some additional focus on with the new product.

Our final question is from Romit Shah. You may ask your question and please state your company name.

Barclays Capital. Bill we typically see OpEx bump up in Q1 for a salary and bonus accruals. Given how you have managed employee compensation this year. Should we expect a similar or greater than normal bump up in Q1 of 2010. Thank you.

Romit I think that you will see op expense go up in the fourth quarter and probably trend up again in 1Q for some of the reasons that you mentioned. I do think that what we’d like to do here is preserve our opportunity to really offer quality guidance on Q1 to the next call. We’ll have a much better idea of what consumer seasonality will be, what the overall corporate revenue picture will look like and we will have completed our planning exercise. So we’ll give you a much better understanding of the Q1 dynamics when we reach this meeting next quarter.

Makes sense. Thank you.

Thank you. I’d now like to turn the call back over to the speakers for any closing comments.

Great. Thank you very much for your time today. This now concludes our call.

Thank you. This concludes today’s conference. Thank you for participating. You may disconnect at this time.