Welcome to the Silicon Laboratories' second earnings – I’m sorry. Welcome to the Silicon Laboratories' Second Quarter Earnings Call. Thank you so much. At this time, participants are in a listen-only mode. (Operator Instructions) Today's conference is being recorded. If you have objections you may disconnect. And now, I'll turn the meeting over to Ms. Shannon Pleasant. You may begin when ready.

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 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 888-484-8258. I'm 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 this conference call. This information will likely change overtime. By discussing our current perception of our market and the future performance of Silicon Labs and our product review today, we're 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 including the Form 10-Q that will be filed this week 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 Financial Officer, Bill Bock.

Good morning, everyone. An all time high in revenue of $134.6 million was the catalyst for a number of records in Q2 resulting in an outstanding quarter for the company. We also crossed the $500 million revenue milestone on a trailing 12-month basis, another first for the company. Earnings per share far exceeded expectations, due to a very strong operating performance, which I will outline in detail. We also had a tremendous quarter in terms of share repurchase activity as we took advantage of what we believe is a depressed stock price. Let me start with the current quarter GAAP results, which include approximately $10.7 million in non-cash stock compensation charges. Second quarter GAAP gross margins increased 150 basis points substantially to 67.5%. R&D investment for the second quarter was up slightly to $30.5 million. SG&A increased to $29.7 million. GAAP operating income was nearly 23% in the quarter. Other income was negligible. The GAAP tax rate was 31% as it included a one-time charge related to the acquisition of Silicon Clocks, which we announced in April. Fully diluted earnings per share, therefore was $0.44, more than double the result in the same period last year. It's worth noting that our stock compensation expense was just below 8% of revenue, representing solid progress toward our goal of 6%, on all fronts, an outstanding quarter. Turning to our non-GAAP results, revenue of $134.6 million represented 6% sequential growth and was driven primarily by strong performance from our broad-based products, including the fourth consecutive record quarter for MCU. This mixed shift and increasing concentration of distribution versus direct customers contributed to an increase in our average selling price for the quarter. This led to an outstanding gross margin result, a post divestiture record of 67.8%. We expect gross margin to decline sequentially…

Good morning. We're pleased to announce this larger share repurchase program. The compression we've seen in Silicon Labs multiple relative to our operating performance and earnings growth makes it clear to me that buying our stock continues to be one of the best uses of our cash. The profile of our business continues to improve in Q2. The results demonstrated the increasing diversity of our business. Our top 10 customers accounted for just 33% of revenue, down from 39% last quarter and 45% a year ago. Our increasing customer market and product diversity has served us well throughout the current cycle and when combined with growth from new products has enabled us to outperform relative to the market and many of our peers. As forecasted, the broad-based business became the largest percentage of our revenue in Q2. Growth in new product areas is also enabling continued strength in our broadcast business and new opportunities in our access business. We introduced a steady stream of new products in the quarter including new video ICs, timing products, low power MCUs, isolation products and embedded wireless solutions. Underscoring the investment we're making in our new product pipeline and future growth. With such a strong start to 2010, we are on track to deliver higher revenue and earnings growth for the year than we initially projected. We'll provide an update to our product line growth target set back in January in the context of our discussion of each business. I'll start with the broadcast products, which grew modestly sequentially and represented about 32% of revenue in Q2. While revenue declined as expected in handsets due to lower unit shipment and ASP declines, the overall audio business was up nearly 5% sequentially. This growth was due to our strength in consumer-oriented, non-handset products, which represented…

Thank you, Necip. We will now open the call for the question-and-answer session. So that we can accomodate 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.

Thank you so much. (Operator Instructions) Our first is from Adam Benjamin of Jefferies. Your line is now open. Adam Benjamin – Jefferies: Hey, guys. Couple questions, first on the broadcast business. You mentioned -- I think I got it right, that it was up slightly, Necip, but the consumer for the first time represented greater than 50% of mix. I think last quarter you talked about a 60-40 toward the handsets, so it seems like a dramatic shift toward consumer. Just curious, if I got that right and if you can give some more color there?

Yeah. You got it right. More than 50% of revenues is now coming from consumer audio. Compared to our expectations, we have seen handsets, handset units declining a little bit more and the AM/FM units and terrestrial station in to new customers moving forward faster. And I think that dynamic is also evident in the gross margin profiles for the business. Adam Benjamin – Jefferies: Got you. And then following up on the gross margin, you know, it seems like you’ve asked every quarter if you guys are willing to change that dynamic, it sounds like the mix away from handsets which is probably more toward the lowest end of your gross margin range, definitely provided the benefit in the quarter. If you can give some more color, Bill, whether there were other puts and takes and then just going forward, that should continue to be a lower percentage of the mix as it continues to decline and some of the newer businesses and broad-based grows faster. I know you're not looking to raise your target, but why shouldn't it settle in closer to these levels than some of the lower 60s that you've talked about previously?

Yeah, Adam, I think that what we saw in the quarter was with the broad-based businesses, achieving such scale and an accelerated shift to consumer electronics versus handsets and audio, the margins were outstanding. I also commented that we had a higher concentration of businesses through the distribution channel, which means a smaller portion of revenue to large consumer customers and that helped margins, as well. So as we're looking into the second half of the year as Necip pointed out, we're continuing to be willing to suggest that margins will exceed our target model and it will likely be around 66% in the third quarter. So the mix dynamics that you're alluding to should continue in the second half of the year. We're not at a point right now where we want to go through a revision of our financial model because this is supposed to be a multi-year model for us and is the -- a metric around which we make our investment decisions but we're clearly enjoying a really strong gross margin performance presently. Adam Benjamin – Jefferies: Got you. And then one last question, Necip, maybe on the video business. You talked about another tier one that you're adding to the mix. Can you just kind of give an update on that business and kind of how you're thinking about it really for next year as there's a broader move to silicon tuners.

I think the traction we are seeing with the customer base is very encouraging. As I reported 90 days ago, all top brands are evaluating our silicon tuner solution. In the last 90 days, we have expended the number of wins we had with the customers, we had one. We have added a new model for Fall 2010 in Japan with 3DTVs. We have another win, again in Japan, for a European model with one of the leading TV brands. We have a new win at one of our Korean customers for a 2011 model. So what we're seeing across the board is due to the performance we are able to bring to the table. A much more open mind to evaluate the technology and I think the adoption rate will be relatively fast as I projected in our last earnings call. And I view video as being one of the major growth drivers for our top line along with the embedded mixed signal business into 2011 and also 2012. Adam Benjamin – Jefferies: Great. That's all I have, guys. Thanks a lot.

Okay.

Our next request is from Craig Ellis of Carris & Company. Your line is open. Craig Ellis – Carris & Company: Thanks for taking the question. Nice job on the gross margin, guys. Necip, just following up on the TV tuner product, are you seeing any change in the competitive landscape as you see customers increasingly willing to design those solutions in and ramp into 2011?

There are a number of competitors entering the market. Our customers give us the feedback that from a performance standpoint our solution is clearly better than every other silicon tuner out there today. So our primary competition continues to be incumbent can tuner solutions. We are not taking that performance lead for granted. We’re continuing to develop new items on our roadmap, some of which we will be bringing to market shortly. But we are engaged with those customers, not just for the new term opportunities of 2011, but on roadmaps including 2012 and beyond. So I see that willingness to adopt the silicon tuners to be very encouraging and I think we are enjoying a competitive lead at this point. Craig Ellis – Carris & Company: Okay. And then a clarification, at the end of the broad-based business comments, you talked about a close to 50% for the year. Was that for timing or was that for both timing and MCU's?

Comment is for the aggregate broad-based business but equally applies to embedded mixed signal and timing. Craig Ellis – Carris & Company: Okay. And then just lastly, there was mention of an isolated inventory issue on the access side of the business. Can you just provide some further color on why the company thinks that's relatively isolated and when do you think that inventory issue will be resolved?

Issue that we've seen is with two telecom operators in Europe, namely Telecom Italia and Deutsche Telekom. It appears that they do have more inventory with them and our customer who are serving them than the current demand requires. The input that we have received from all those customers suggest that the demand for the third quarter for those operators is going to be very soft. So hence we are looking at a down quarter for access in spite of the ramp we are enjoying with PoE. I don't have any other data points, Craig, that would suggest this inventory problem to be broader. That's why I made the note in my remarks that we see this as an isolated issue. Craig Ellis – Carris & Company: All right. Thanks for that, Necip.

Our next request from Anil Doradla of William Blair. Your line is open. Anil Doradla – William Blair: Yeah. Can you -- Necip, can you comment quickly on some of the issues on the macro front. You know, are you seeing anything on the inventory? And also on the handset side with, you know, a large customer, can you talk about the dynamics. There's been some talk about some softness out there. Can you comment on that, too?

Are you referring to our larger -- largest customer on handsets? Anil Doradla – William Blair: That's correct.

Okay. Let me take that question first. We continue to enjoy a majority share with Samsung. We continue to get designed into their new models, including some of their leading smart phones that they'll be bringing to market in the second half but also the more generic feature or entry level phones. Samsung has been one of the customers that adopted our lower ASP solution that we brought to market last year. So some of the revenue declines in our handset business also has to do with the lower ASP. Those lower ASP products do not commensurately carry a lower growth margin but they are at a lower ASP impacting the revenues. They continue to be very quick adopters of those new products. Our units in the first half with that customer remains about the same, quarter on quarter. With respect to your first question on inventories in general, we don't see with our customers and our distribution channel an increase in inventories that is out of place. As Bill reported, days of inventory with the distribution channel actually came down slightly, albeit flat on a dollar basis and we had wanted to increase our inventories given how low they have become at the end of the first quarter. But we're not seeing other than that spot issue I mentioned in Europe, we're not seeing any build-up of inventories in our channel. Anil Doradla – William Blair: Thank you.

You're welcome.

Our next from Tore Svanberg of Stifel Nicolaus. Your line is open. Eric – Stifel Nicolaus: This is [Eric] calling in for Tore. Just want to follow up really quick on the gross margin earlier. It seems like it is trending above your target rate and it seems like it probably going to be there in the foreseeable future. When do you expect to normalize back to your target range or is this -- you think this might settle -- we might start looking at a more normal rate at a higher rate?

Eric, I think you can assume this higher rate is intact for the third quarter and likely through the second half of the year. We will re-evaluate gross margins when we get to the January call, when we set some expectations for 2011. Generally speaking, you know, we think that the target range that is 62 to 65 is appropriate for our business in the long run. As I commented to the earlier question, we're just certainly in an environment right now where we are over performing and we expect that to continue for the next couple of quarters. Eric – Stifel Nicolaus: Great. Thank you. Thanks for clarifying that. Your new product you recently announced, introduced a single chip DVD mod. I didn't catch it. Is it shipping and what is the general interest been like with customers, if you can kind of give a little color there.

That product combines terrestrial cable and satellite and particularly DVB-S2 which is the most up-to-date satellite modulation scheme. The modules that have brought all this functionality together to date had to use multiple devices. So being able to offer this all in one chip is creating some interest with some of our customer base. But this is a product we just brought to market. So it's not shipping. However, we’re competing for design wins for 2011 models. Eric – Stifel Nicolaus: Okay. Thank you. That's all I have.

Okay.

Next from Sandy Harrison, Signal Hill. Your line is open. Sandy Harrison – Signal Hill: Yeah. Thanks for taking my question. As far as you made some comments in your prepared remarks about being able to turn some product pretty quickly and capture some market share. Have you guys -- did you have some additional inventory? You have supply that kicks out maybe a little bit more fill in on how you guys are able to do that?

Well, if I understand your question, within the quarter we got some upside business in our broad-based business and if you ask me in the month of May we had quite a bit of delinquency to customer request dates. But, we strived to catch up demand by the end of June and June by virtue of that was a heavy shipping month, and partially explains why our account receivables went up. Sandy Harrison – Signal Hill: Got you. And then on the networking market, looks like you guys throughout a couple of your different product lines to touch, especially in timing, you guys have done pretty well there. What's your view on the networking? We've had some pretty strong quarterly growth in the enterprise phase and reporting so far has been pretty encouraging. What's your view on how that market goes and how we finished the year and what your customers are telling you from a networking perspective?

Actually, I've had the opportunities to touch a couple of large customers in the networking space in North America in the last couple of weeks. And the outlook for their business continues to be very positive and even more positive for us. They are very willing to proliferate the solutions that we have particularly the timing solutions and to some degree the (inaudible) solutions within their platforms. So the input that we have received from a macro point of view from our customers continues to be solid. And I think our positioning, especially with the lead times that you alluded to for our timing product continues to be very, very attractive. Sandy Harrison – Signal Hill: Okay. Thanks for taking my questions, guys.

Okay.

Next from Alex Gauna, JMP Securities. Your line is open. Alex Gauna – JMP Securities: Thanks for taking my questions and nice quarter. I was wondering if you could go into, I know you've given the guidance for the third quarter, but with regard to your mix moving more toward some of that consumer and multimedia. Can you characterize exactly or approximately how you view some of the consumer FM and your video tuner gross margin opportunity? I know you mentioned the ability to reduce costs without sacrificing gross margins with what you're doing in handsets. What is that and can you compare it to the upside opportunity perhaps coming from higher gross margin products, and power Ethernet and timing?

Okay. Let me take, let’s start this and we can follow up if it's not adequate. Let me first address the broadcast audio. I think what we're seeing in the third quarter is, handset units to continue to decline and with the move to lower ASP products as I mentioned, I think we'll see a definite reduction in revenue. So much so that, I think the handset revenues will likely be no more than 10% of our company revenues in the third quarter. To offset that, we are looking at a continued increase in our revenues from AM/FM coming particularly from China, the ODM base there and domestic consumption there for our AM.FM product. We'll see a solid ramp with our TV tuners particularly in Japanese customers in the second half. We'll start shipment of a demodulator product into one of the Taiwanese ODMs in the quarter and our large portable media player customer, of course, is ramping seasonally in the third quarter. So the net of all that is, continued increase in audio revenue albeit maybe not commensurate with the type of sequential growth we've shown in prior years. On the broad-based side, I think, there's some mix in our embedded mixed-signal business that would suggest slightly lower gross margins for the quarter and that's contributing to the margin projection we have for you but I don't see this to be a trend. Many of the trends that were observed earlier in the call both with respect to handsets and broad-based business becoming a larger portion of our revenue are, I think, all accurate. We will see some early shipment, additional expenses that will hit the gross margin line with so many new products ramping. TV tuners, our easy radio product and so on. So some element that might pull the gross margin lower in the second half but all the trends indicated so far are accurate. Alex Gauna – JMP Securities: Okay. And as a follow-up, I know you broke out quick sense from a design win perspective being perhaps 80% consumer to 20% industrial and smartphone. Do you expect the revenue mix to be approximately that or there's some design wins on the handset side that could boost that? And with Samsung as or handsets as a less than 10% contributor on the FM tuner side, do we see a shift in your seasonal patterns for the December quarter? Thank you.

You know, only a small number of those design wins are going to generate revenue for us in the second half, Alex. And, it's too small base at the moment to really dissect it to be able to tell you how much of it is from handset versus not. I think in general obviously handset wins tend to generate more revenue per design win than industrial wins but both are equally important for us. I think we want to drive volume on the handsets, but we do see a lot of untapped opportunity on the industrial side. You know, in terms of the second part of your question with respect to 4Q. I will not be able to answer that question accurately without divulging what our large customers would do in the fourth quarter with respect to their shipments although we have some visibility to that obviously, it wouldn't be appropriate for me to comment on that. Alex Gauna – JMP Securities: Understood. Thank you.

Thank you. Our next is from Srini Pajjuri, CLSA. Your line is open. Srini Pajjuri – CLSA: Thank you. Good morning, guys. If I take your guidance for the segment that you gave us for the full year, looks like it is implying in a mid to slightly higher than mid-single digit growth for Q4, I just want to make sure I'm doing the maths right. And if that is correct, what segments do you expect to do well in the fourth quarter? And wondering if that is mostly seasonality or if you're expecting any new product ramps there?

Are you asking about the fourth quarter? Srini Pajjuri – CLSA: Yeah.

Revenues, I didn't think I was commenting on that particularly. What I am saying is for the full year, when I look at access, we'll be able to maintain mid-to high single-digit growth that we projected even in spite of the weakness. On broadcast, we had suggested the audio business will be 10% or better growth for us. And broadcast overall would likely grow in the mid-teens. I think that's largely intact. And we see the broad-based business, providing the upside. I'm not yet prepared to give you guidance on 4Q. I can tell you, however, that, we'll see the audio business be seasonal from what we see today. In 4Q and the video business will continue to ramp from third-quarter levels. Srini Pajjuri – CLSA: Okay. Great. And then you said you expect the handsets portion of the audio business to be not more than 10% in third quarter. Can you give us some idea as we look out to the next year, how should we think about that business. Will it decline to minimal levels by end of next year or will it stay at that 10% level?

I just want to clarify my comments. I said that, with, the projected third-quarter revenues for handsets that will be approximately 10% of the total company revenues. Okay. Just to make sure for everyone’s benefit. We'll see that business continue to decline at an orderly rate into 2011. The design wins, the rate of design wins, we are getting with our customers support that. And I also reported – really a record number of design wins for the audio business across the board. So that continues to support our expectation that the consumer audio increases will more than offset that. So there's nothing in the last 90 days that changed our review in that regard. Srini Pajjuri – CLSA: And then you mentioned that you somehow price pressures on the set-top box market. I’m just wondering, given, it looks like the set-top box market in general is doing fairly well. Just wondering what's causing those price pressures and if you expect them to continue into the next few quarters?

Well, I think what we are seeing for our modems and set-top boxes, essentially is a market where there's some modest ASP declines, with really no unit increases to offset that. So when we look at our modem business, embedded modem business, for the year we are seeing a slight decline in revenues year-on-year, which is exactly what we have projected in the beginning of the year. That's partially due to a better start to the year than we had expected, so the second half is certainly weaker. But there is really nothing out of the ordinary in the ASP decline side. I didn't mean to suggest that it's a new phenomena. Srini Pajjuri – CLSA: Okay. And then one last one for Bill. Bill, you said that you spent about $75 million in share buybacks and you did mention that, the multiples I guess it was – Necip did mentioned that multiples are relatively cheap. And obviously the estimates are going to go higher today and the multiples are probably going to be even cheaper. So my question is, are you likely to be equally aggressive in the near-term as you were last quarter? Thank you.

Well, I'm not sure I'm going to report a specific number, but I would expect with the new $150 million authorization. The purpose behind the board providing that authorization is to put us in a position where we can take advantage of dips in the stock price. So I expect we'll be active in the market during 3Q. Srini Pajjuri – CLSA: Thank you.

Thank you. Our next is from Arnab Chanda, Roth capital. Your line is open. Arnab Chanda – Roth Capital: Thank you. First question -- If you look at your gross margin profile, you obviously have a lot of different products now. But is there a dramatic difference between FM audio business going into handsets? Is there a dramatic difference or range with the rest of your product lines? If that is the case, it's an elevated level in longer term or do you think maybe there's some beneficiary in unit pricing or mix that are unusual and output cost?

So, Arnab, I think that it's the same question that I addressed earlier. We're very comfortable that the mix shifts that we have seen support continuation of above model gross margin performance for the remainder of the year. We will provide additional color on gross margin expectations for 2011, when we get to our call in January, but right now, all of the dynamics are playing to our favor. We have a mix shift in product, a mix shift in distribution channel and a great execution from our operations team that are yielding these above model performances.

Maybe I can provide one additional perspective since we've receive a number of questions on gross margins going forward. If you look at where we're most likely to see upside revenue in 2011, those areas are in embedded mixed signal in video and in timing. All those products, video because of the end market that we are addressing, are projected to be below corporate average. Embedded mixed signal, you can think of as above our corporate average and timing is certainly above average. So going from where we are today to 2011, with those three product lines showing considerable growth, depending on the mix between those, you'll see a move in gross margins. I mean, all the trends that we are highlighting, you're asking about, are accurate. What we tried to do on a quarterly basis is to provide ideal projections based on bottoms-up approach, looking at each and every product and how much of it we're planning to ship in the quarter. And we concur that more often than not either our ASP assumptions or our ability to continue to improve costs appear conservative in the beginning of the quarter than at the end. But we do try to give you the best view we have of the margins at any point in time. Arnab Chanda – Roth Capital: Thank you, Necip. A question about -- If you look at your microcontroller business or your human -- let's talk specifically about the human sensing application. You must have pretty -- exciting and maybe industry-leading portfolio with both the ability to have micro as well as sort of analog sensors. What plans should we be looking at, in terms of revenue ramps there? Are there specific types of end license or models that we should be look for to sort of gadgets are best at?

In human interface, I think we have brought to market a series of solutions to date, but have a pretty exciting roadmap going forward that is taking shape, based on the feedback that we continue to receive from the customers. We have also indicated when we completed Silicon Clocks acquisition three months ago that the immense technology that we are acquiring, we would like to apply to other applications beyond timing over time. And we're making internally, some progress on that front but we're still quite a ways away from being able to talk about it publicly. Arnab Chanda – Roth Capital: And then one last question. You talked a little about delinquencies in May, seems like things did improved in June. If you look at lead times as well as sorts of ability to meet supply, where are you now versus maybe a quarter or two ago and when do you think they're going to be normal in terms of being able supply, customers at the right lead times they're looking for?

I think we have been operating in an environment where it's particularly difficult to meet the demands, upside demands within lead times within a quarter of our customers. And that was part of the struggle in the months of May and June. At this point, neither in second quarter nor in the third quarter, our revenues are being limited by supply, but it is an ongoing challenge to meet the demands, changing demands of our customers, especially in the broad-based business. Arnab Chanda – Roth Capital: Thank you.

Our last question now is from Craig Berger of FBR. Your line is open, sir. Craig Berger – FBR: Hey guys, thanks for taking my question. Nice job on the results. Wanted to -- Haven't heard you talk much about AM/FM, within the context of the audio business. Can you just update us on, maybe on how big that piece is of the audio business, what the design wins look like and how much of that is going into automotive and then a follow-up. Thanks.

Okay. We reported a record 219 design wins. That's really substantially above any number we've talked about before. And large amount of that, Craig, is coming from consumer audience, particularly AM/FM products. I would say still a majority is coming from applications such as clock radios, boom boxes, docking stations and this is across the board in North America, Europe and Southern China. An increasing number of the automotive design wins, that's obviously very good to see our automotive qualified AM/FM parts, are getting traction and they do have a longer gestation period into revenue. But we're enjoying an increased level of activity there. So net-net, I think the audio business is executing on its plan to change the complexion of the business over this year and next. Craig Berger – FBR: Thank you. And then as a follow-up, within your broad-based business, can just give us an idea of how big some of the components are, what the make-up is of that business between microcontrollers, clock and timing, others and then as part of that, when you look at your microcontroller business, do you think you need 32 bit? What are your plans there? Thanks.

Okay. So the largest portion of revenue in the broad-based is MCU. Certainly, greater than 50% comes from MCU today. It's followed by timing. And then the emerging businesses in short range wireless and isolation. In term of our strategy in MCU, we have not made any announcements. However, as we look to expand, our served market to us at 32 bit offering appears to be the next natural step. I think we're covering a lot of the 16-bit applications to date with our high-end 8-bit engine. And a 32 bit offering would be the next natural step. Craig Berger – FBR: Thank you.

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