At this time I would like to welcome everyone to the Silicon Labs fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions.] I would now like to today's conference over to Shannon Pleasant. Ma'am, you may begin your conference.

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 call is being simulcast and will be archived on our website. The financial press release, reconciliation of GAAP to non-GAAP financial measures, and other financial measurement tables are now available on the investor page of our website at www.silabs.com. I'm now 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 overtime. By discussing our current perception of our market and the future performance of Silicon Laboratories and our products with your today, we are not undertaking an obligation to provide updates in the future. There are a variety of factors that we may not be able to accurately predict or control that could have a material adverse effect on our business, operating results, and financial conditions. We encourage you to review our SEC filings, including the form 10-K that we anticipate will be filed this weeks, 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 at 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.

Good morning everyone. Fourth quarter results of $112 million in revenue, GAAP EPS of $0.28, and non-GAAP EPS of $0.46 were all improvements relative to our guidance. For the full year, the company delivered revenue of $493 million, a 12% increase over record revenue in 2009. Non-GAAP operating income was an impressive 26% of revenue. Non-GAAP EPS was $2.34 and we completed over $140 million in share repurchases. Additionally, we are announcing this morning the strategic acquisition of SpectraLinear, a pure play manufacturer of clock solutions. This acquisition will expand the breadth of our timing portfolio and significantly enhance one of our most promising businesses. Necip will discuss the acquisition and the rest of our product lines in detail after I cover the financials. Let me start with the current quarter and year-end GAAP results, which include approximately $9 million and $40 million, respectively in non-cash stock compensation charges. GAAP gross margin was 63.5% for the fourth quarter and 65.7% for the full year. R&D investment was up in the fourth quarter to $32.6 million and was $123.8 million for all of 2010. SG&A decreased again to $27.5 million in Q4, and was $113.8 million for the full year. GAAP operating income declined for the quarter to 9.8% of revenue, but was up for the full year at 17.6%. Other income was negligible. The GAAP tax rate was a credit for the quarter, reflecting a $3.7 million R&D tax credit, retroactive to the first of the year. The credit resulted in an $0.08 improvement to the fourth quarter earnings result. Fully diluted GAAP earnings per share, therefore, was $0.28 for the quarter and $1.57 for the full year. Turning to our non-GAAP results, revenue of $111.9 million represented about a 7% sequential decline, driven by the expected weakness in our…

Thanks Bill. Good morning. Given today's announcement of the acquisition of SpectraLinear, let me start my commentary with a summary of the deal and how it will augment our fast-growing timing business. As you know, we've been working our way down market from very high performance clocks and oscillators to higher-volume applications. Much of the timing business we've developed to date is in networking applications like core switching equipment. Over the last two years, we've substantially increased our served market to more than a billion dollars through the introduction of a series of clock and oscillator products addressing new applications from test and measurement to broadcast video equipment. Most recently, in December, we launched our first clock family targeted at HDTVs, set-top boxes, gaming systems, blade servers, and other high-volume markets. We've been able to grow our timing business in the high double digits, even through economic headwinds, because of the compelling differentiation of our products. In 2010, our timing business grew by more than 70% to about 11% of total revenue. We remain the only company able to offer a broad portfolio of both clocks and oscillators, making it possible for us to become a one-stop shop for timing products. And timing products, as you know, form the heartbeat of every electronic system. SpectraLinear is a five-year-old startup focused purely on the clock market. They are on an about $3 million per quarter run rate. Like Silicon Labs, they focus their development efforts on programmability and flexibility, while also optimizing for size and low power to address consumer and embedded applications. Their products align very nicely with ours in terms of differentiation and target markets. The addition of their Tier 1 consumer-oriented customer base will accelerate our penetration of the high-volume consumer market, and our relative scale, resources, sales…

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

[Operator Instructions.] And our first question comes from the line of Adam Benjamin with Jefferies.

As always, a lot of moving parts. Just if I got this calculation right, roughly you're talking about access business being down about $30 million year-over-year and you look at broad-based being up about $30 million, so it seems as if the broadcast segment would be the one that drives it either up or down. I know you're talking about the video business essentially tripling, but if you can clarify, Necip, as it relates to the SM business, you've traditionally talked about that being up or down. I know obviously handsets are declining, but how are you looking at that business netting out for the year?

One clarification. The guidance we provided for the broad-based business calls for 20-30% growth and in dollars that would be $35-50 million for the year. We provided this $40 million increase year-on-year on video. You're right on consumer audio. In audio in particular we will see a down year, driven primarily by handsets, so net-net we're looking at a year in broadcast that is up strongly. And access, on a year-on-year basis, is going to be down nearly as much as you said.

And then as you think about that mix coming in, the gross margin steps down in Q1. I know that the access carries higher gross margin, but broad-based was quite high as well and the broadcast is lower. So how do we think about those netting each other out? Is that really the true dynamic that's happening Q1? Because that's a pretty decent step down, or is there also a pretty sizable component of cost that you had in 2010 that you're not getting in 2011 with your foundry partners?

I think it's a combination of those factors. The biggest impact in gross margin for 2011 will be the mix impact of the video ramp. That's exacerbated in the first quarter with startup related costs and then we think we'll see corporate gross margins improve off the Q1 level throughout the remainder of the year.

And then just to clarify, the timing growth you're talking about, does that exclude the impact of SpectraLinear? And then just secondly, you're talking about high double digits. I'm assuming you're talking about somewhere close to 70-80-90% growth, close to what you saw in 2010.

We weren't specific about the timing growth rate, but it's going to be high. We are looking for that business to continue its stride in terms of delivering a lot of growth dollars to us. It is inclusive of the SpectraLinear acquisition. As I mentioned, SpectraLinear today is on about a $3 million per quarter run rate, so that will augment the organic growth that we're anticipating in the business. I think it's fair to say that within the broad-based segment, in terms of growth dollars, timing will certainly lead the charge this year.

And then just one last question. You guys have been adding a bunch of new segments that are starting to see some material ramps in 2011. Anything else you'd like to talk about that could start layering in as you get to the back half of the year? Thanks.

In the broad-based business, we're going to see isolation grow nicely year-on-year. Short-range wireless will show a high growth rate as well. We expect it to sequentially improve throughout the year, and in the second half of the year we have some expectations for a ramp in human interface that will layer on.

And our next question comes from Anil Doradla with William Blair.

Couple questions. Clearly TV tuners and timing are going to be huge drivers over the next couple of years. Necip, if we look at the TV tuners, would it be fair to say in the next, say, 24 or 36 months 100% penetration of TVs will witness that option of silicon tuners?

You know, I'm not sure exactly when we'll get to 100% penetration. A year ago, when we projected 50% penetration of silicon tuners it looked like a remote possibility to many. Today, with the progress we've made, in my mind it's almost a foregone conclusion that we'll see that. As a matter of fact, along the top tier OEMs, the penetration rate is higher than the average in general. So the Tier 2s and 3s will also, I think, quickly follow the lead of Tier 1s. So it will take a number of years, I think, for silicon tuner adoption to be complete and hit 100%, but I think it's going to be on a pretty steep curve over the next 24 months.

And when you talk about the silicon tuner sales and growth, this does not include D modulators, or does it include D modulators in your guidance and projections?

When I gave the revenue guidance, that does include everything, tuners and D mod. Of that $60 million, a significant majority is coming from the tuners. And when I talk about the market share, talking exclusively about the tuner share in IDTVs.

Great. Now, on the timing side, given the size of this market, why would we not see over a 2-3 year timeframe, the growth trajectory you've established over the past year, over the next 2-3 years, given that it is such an underpenetrated market and your solution, perhaps, is viewed very uniquely across the industry?

Well, I think we're essentially projecting that. We've been on a 50-70% growth rate tear for the last several years. We are anticipating another strong year in 2011. And if I put down a target for us publically to become one of the top two players in this market over the next three years, which will require us to continue to grow strongly, I think by the end of this year, as we exit this year, the fraction of the business coming from timing will measurably increase from the 11% we reported for 2010.

And finally, we saw some inventory issues over the past quarter or two. Can you give us an update on where you see the demand and supply being across the market as we move in 2011. Do you see some of these issues get abated?

I think we have seen quite a bit of improvement broadly speaking in terms of demand and inventory coming into balance. There are still some pockets of over-inventory. One example I can give to you would be in our MCU business, particularly in USBs, small, consumer-centric applications. And still to a small degree in consumer audio, the inventory issues we've talked about last quarter have largely abated, but there are some customers who are still pointing to existing inventories that they also suggest will be cleared by the end of February.

And our next question comes from Craig Ellis with Caris & Company. Craig Ellis - Caris & Company: Bill, you mentioned that the current version of the tuner is more performance than cost optimized. Can you give us some insight into how long it will take the company to come out with a follow up and more cost-optimized version of the product?

We clearly set out to achieve all the performance metrics that the leading OEMs would require in the initial design of this product, and we also priced it last year as we went through our selling efforts to penetrate this market in an attractive fashion to encourage these vendors to migrate from what had been a decades-old technology of the TV canned to a single-chip solution. So we're thrilled with the sales successes that we had last year, and made a calculated decision to try to go after market share and obtain a huge footprint in this market. We commenced design work certainly last year on next-generation product and we're focused on both continued improvements and performance that also cost reduction and a line of chips that are receivers that integrate both the tuner and the D mod into a single product. And we will begin to sample and introduce products on that generation of devices this year. So we'll start to see some improvement in gross margins within the tuner category as we go through the year, and then certainly that will continue as we go into 2012.

The next generation tuner has been sampled to the leading key customers already, so they are in the early stages of evaluation. That could be adopted for some refresh models in the second half of this year, but more than likely they will adopt that solution for 2012 models. Craig Ellis - Caris & Company: Bill, you mentioned that with SpectraLinear there would be a full quarter impact on R&D in Q2. Is it possible at this point to identify how much the step up would be in the second quarter?

We think that the impact of SpectraLinear in the first quarter will be approximately two months and be on the order of $1.5-1.7 million, and then we'll see that go to a full three-month impact in 2Q. Craig Ellis - Caris & Company: And then lastly, maybe more for you Necip, the company has, I think, made three real interesting technology acquisitions over the last three quarters or so. By just taking a step back, can you tell us how you're thinking about acquisitions near-term, given the number of deals you've done recently? And maybe on SpectraLinear, I know it's expected to be something that contributes to revenues this year. What about some of the other deals and how do we think about their contribution?

Clearly, SpectraLinear is somewhat different than the other two acquisitions we've done in the past nine months, because they bring us immediate revenue and an existing product portfolio and a lot of customer interaction. And I think with the guidance we've provided, it will join our business as a cash-generator on day one. With respect to the two other technology acquisitions, I put them in a slightly different bucket, more similar to the acquisitions we've done, say, back in 2006 with Silembia. That brought us the modulation technology that ultimately resulted in product that we've developed internally here with that technology. That brought us good revenue stream in 2009. So that's the kind of horizon I would expect from those investments in terms of generating measurable revenue. Both of these acquisitions, both Silicon Clocks and ChipSensors, will result in product that we are now developing and will be sampling or introducing in 2011, and I expect to see revenue coming from those products in the early 2013 time frame.

And our next question comes from Alex Gauna with JMP Securities.

Just real quickly in terms of your progress on the touch sensor market, the catalyst for growth there, is it still coming primarily in the early stages from more industrial-type applications, or are you seeing some progress or opportunity in some of the mobility markets?

The existing revenue, and that's very modest, and the revenue that we're likely to see in the 2011 fiscal year, is coming from the industrial applications. So we don't have at this point any major wins to announce on the handset front. We are engaged with a couple lead customers with our latest generation device, but have nothing to report on yet.

Can you remind us, with this latest generation, what's differentiating it in the marketplace?

Well, we haven't made an official launch. I think we just hinted at the fact that we'd be following our first entry to this market with a more full-fledged product that improves the resolution on the screen and the response time, some of the things that the applications care deeply about. But that’s all I'm prepared to say at this point.

Okay. And I know a lot's been asked on the TV tuner front, but with regards to what's driving the pricing structure for that to below corporate average, is it the low cost of the legacy canned tuners that you're competing with and trying to displace, or are there other factors such as other tuner integration schemes such as what a Broadcom does or maybe a lower-performing digital solution like a MaxLinear?

This is just replacing the hybrid tuner functionality that existed and will continue to exist in tuners. As Bill alluded to, when we designed the first generation product to make sure that we drive the transition from canned tuners to silicon tuners over a short period of time. We've dialed the knob in terms of performance all the way to the right every way we could and we made all the tradeoffs to make sure that performance was going to be absolutely highest in every aspect that we could think of. Generally speaking, we tend to find the more middle ground between performance and cost tradeoffs, but in this case since we were going to drive that transition for the industry, we did not want to take any chances. So there are aspects of that tuner design that we have modified to improve the cost basis on. At the end of the day the ASPs are driven by market conditions and that being the market it is, generally tends to have price points and associated gross margins that are not comparable to some other lower volume applications that we participate in. So long-term, I think we'll have a good cost reduction roadmap like we've had with other high volume products, but this is going to be more on a yearly model upgrade than an ongoing cost reduction opportunity.

And our next question comes from Arnab Chanda with Roth Capital.

Just a couple questions. First of all, clearly you talked about your very large growth drivers and broad base as well as in video. I have a little bit of a question about your human interface products. It seems like in the most hyped market is - you're seeing things like tablets and smart phones where there's three suppliers that seem to be doing relatively well. My question is first of all, obviously Silicon Labs has great products. We've seen that over and over again. But why would a customer want to engage with a fourth supplier, especially when it seems like the other guys are well established? And secondly, is there a human interface opportunity outside of the obvious smart phone, tablet? And a follow up please.

This product area is no different really than the other product areas where we're bringing new and innovative solutions to microcontrollers, timing, and some of the other areas we talked about, have far more suppliers than the handful you mentioned on the human interface front. And I think human interface is a fast-evolving area that continues to require more features from their suppliers, and I think with our technology we'll be able to find an attractive entry point for our products and gain some share over time. We're not willing to do that at any cost. We're willing to wait and find the best intercept point for our products and the needs of the customer. So that is in progress. I'll be able to report more on the design win progress throughout the year.

Okay great. And then just a follow up on your FM handset business. You didn't mention it, which I assume it's at a point where it's kind of bottomed out. Can you talk a little bit about that? Are we at a point where it's no longer really affecting your growth, which it obviously did in fiscal '10? Thank you.

Actually, if you don't mind, I'll bundle this with the other declining business we had in CPE modems and try to give you an idea of the scale of those two products. So the CPE modems, which are going into set-top boxes primarily, and FM tuners going into handsets, in combination represented about a third of our revenue in 2009. As we exited 2010, the most recent quarter, the two combined represented about 17%. So in terms of percent, cut almost exactly in half. And I expect the combination to be somewhere in the 10% range as we exit 2011. So I would say we are somewhat past the halfway mark in terms of the declines we've seen in those two products, and the current exit rate represents, I think, much of the decline. The handsets in particular, you asked, were just about 10% of our revenue. That will obviously continue to decline over 2011, but these two areas combined I expect will comprise no more than 10% of our revenue as we exit '11.

And our next question comes from Terrence Whalen with Citigroup.

This one's on op ex. It looks like op ex for the first quarter is stepping up, and part of that's obviously related to the acquisition. But if I take a step back and look at op ex for the year, if we grow revenue, say 8% or 10%, what's the tip of op ex growth rate that we should be bottling into the model?

I think the inputs that I've provided will let you get pretty good for the year. The $4 million step up in Q1 is a mix of the impact of the acquisition, and then typical first quarter growth that relates to the reintroduction of FICA taxes and our annual salary increase cycle. Also, simply the full quarter absorption of run rate costs from hiring activity that we conducted during 2010. We expect another slight step up in 2Q, largely from the full quarter impact of the acquisition, and then that run rate in Q2 I would expect to stay relatively constant in the second half of the year. So that should give you a pretty good foundation from which to build an op ex forecast.

Okay, terrific. And then as my followup question, this one relates to the video business. I think you're targeting a $60 million number this year. What type of a growth rate for that business can we expect beyond 2011? How much of that growth rate is driven by penetration into Tier 2s versus upselling to next-gen product?

We will certainly be looking to increase our penetration with existing top-tier customers we have today. I think we have every indication that they will increase their penetration, and we'll strive to maintain the lion's share of business we have with them on silicon tuners. Just to give you an idea, with some of the top customers we have, we have, say, 40% share today of their TVs, in some cases even higher. So as you can see, some of the customers have rather aggressively adopted silicon tuners. Some others have been slower in this adoption and have chosen to still keep a relatively small portion of their models and direct those to silicon tuners, and they are signaling to us that they will become much more aggressive in 2012. And I think we're well positioned with all of them. I do think we have a competitive lead. We're not taking our position for granted, but it's also a fact that we have both the time to market and performance lead over the competition.

Our next question comes from Craig Berger with FBR Capital Markets.

Can you just review pricing trends in your FM tuner subsegments, or was there anything out of the ordinary?

No. Nothing out of the ordinary. I think in the year, as Bill alluded to, the pricing environment has been slightly more favorable than we might have expected in the beginning of the year as customers focused a lot more on supply continuity than pricing. I think across the board for our entire portfolio we've actually seen ASPs improve in general year-on-year. That is mainly due to the introduction of new products, but it has been a relatively favorable ASP environment.

You talked about improving the sustainability of some of the tuner products, or I might have misheard you. But could you just provide a little more detail on that?

I'm afraid that's all we can say at this point. I just wanted to make sure that our investors understand we continue to invest in audio and that we find areas that mesh well with our core capabilities, where we can increase the [inaudible]. But I can't really expand more on what that product is.

Can you give us some short updates on some of your emerging businesses? Short range wireless would be one I'm interested in. Anything related to the smart meter market would be another one.

I'd be glad to. Actually, short range wireless and metering in particular have been a very good success story for us. We have penetrated into four rather large smart metering customers in North America and Europe in the year with our short range wireless product. We have started shipping into some of those at very modest quantities. A couple of those will kick in in a bigger way in the second half of this year, but the products that we have brought to market have gained significant traction in that space. Another product line I can allude to is our isolation product. There has been a huge improvement in design win numbers in this product line, driven particularly by our larger distribution partners, particularly in Europe in applications such as solar inverters, switched mode power supplies and drives and so on.

Great. A quick housekeeping question for Bill. How do we think about taxes for the year?

So I think with the passage of the R&D tax credit, which was enacted throughout 2011, we have a nominal tax rate expectation going forward of 16.5%, which we think we're pretty set on and there's not too many things that will change that.

And our next question comes from Tore Svanberg with Stifel Nicolaus.

First of all, the $60 million in TV tuner, how is that going to ramp throughout the year? Is it going to be a fairly linear ramp, or is it going to be more back-end loaded?

So the profile of that revenue base, we expect for it to be like this. We're ramping in 1Q now. 2Q should be higher. 3Q should be about the same as 2Q, and then 4Q will be a down quarter. So that's the profile of the business we expect to see.

Very good. And just to clarify, did you say that the innovative tuner demodulator product is already sampling?

Yes, we've sampled it to a very small number of customers, just very recently.

And then just finally, on the SpectraLinear products, you mentioned consumer. What applications within consumer is the company targeting?

They have been selling into applications such as digital still cameras, Blue Ray, residential gateways, graphics applications, a whole host of consumer-centric applications they have penetrated into.

And our final question comes from Brendan Furlong with Miller Tabak.

Quick question. Of the $20 million in TV revenue last year, how much of that was roughly, approximately was D mod related versus tuners?

A slight majority came from tuners, and that was certainly back-end loaded in 3 and 4Q.

And so roughly speaking then, this year, like $50 million or so of your projection is tuners?

A significant majority is, yes.

And then on the last question, kind of circling back on the last one on SpectraLinear. You noted some Tier 1 customers. Given the digital still camera, Blue Ray outlook, is that [inaudible] in Japan, or is it in Korea?

They have business in Japan, in Korea, in Taiwan, and in North America. This is the geographies their larger customers are located in.

Thank you for joining us. This now concludes our call.