Silicon Laboratories Inc. (SLAB) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Brandy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs Third Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Jalene Hoover. Ma'am, you may begin.

Thank you, Brandy, and good morning, everyone. As a reminder, this call is being webcast and will be archived for 2 weeks. 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 am joined today by Tyson Tuttle, Chief Executive Officer; Bill Bock, President; and John Hollister, Chief Financial Officer. We will discuss our financial results and review our business activity through the third quarter, and then take questions. Our comments today will include forward-looking statements and 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, and that information will likely change over time. By discussing our current perception of our markets, the future performance of Silicon Labs and our products with you today, we are not undertaking an obligation to provide updates in the future. There are a variety of factors that we may not be able to accurately predict 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, which identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements. Also, the non-GAAP financial measures that 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 more meaningful comparisons of operating results and more clearly highlight the results of our core ongoing operations. I would now like to turn the call over to Silicon Labs' Chief Executive Officer, Tyson Tuttle.

Thanks, Jalene, and good morning, everyone. I'm glad to report record revenue in the third quarter. We established another all-time high in broad-based revenue, driven by our microcontroller, wireless and sensor products. Our access to broadcast products also exceeded expectations. These results reinforce our confidence in Silicon Labs' near-term outlook and strategic positioning for long-term growth. I'll talk more about our latest product development and business trends shortly. For now, I'd like to turn the call over to John, who will review our third quarter financial results and fourth quarter guidance. John?

Thank you, Tyson. Revenue for the third quarter was $158 million, which includes $2 million from patent sales and $156 million in product revenue, setting a new all-time high. Strong seasonal performance in consumer markets, helped by new product ramps in wearables, elevated total revenue to above the high end of our guidance. During Q3, we achieved a number of revenue milestones. We continued to grow our broad-based products with revenue exceeding $80 million and representing more than 50% of our total product revenue. Our microcontroller, wireless and sensor products delivered another record, growing to 32% of total product revenue with continued strong performance in the wearables, home automation and security and smart metering markets. Third quarter revenue from 32-bit MCU products obtained from the Energy Micro acquisition have surpassed expectations, accomplishing more than 100% annual growth. In the Internet infrastructure, timing was down slightly, ending the quarter at 14% of total product revenue. Our power products continue to gain traction in the market with our digital isolators achieving a new record in Q3. Turning now to Broadcast. Revenue exceeded our expectations at $53 million for the quarter, including $2 million in patent sale revenue. Broadcast automotive achieved a new record, driven by the continued ramp of our AM/FM and digital radio products. Broadcast video was higher than expected, with strong performance in our demodulator products, which also reached a new high in the quarter. Access also outperformed our expectations, slightly up from Q2 at $25 million or 16% of total product revenue, driven by strength in our ProSLIC and Power over Ethernet products. Geographically, during Q3, we saw strength in Asia Pacific and the Americas with Europe essentially flat to Q2. Our distribution business accounted for 63.1% of total sales, up 3.7 percentage points year-on-year. Non-GAAP gross margin was 61.1% which was toward the lower end of our guidance range reflecting product mix. Non-GAAP operating expenses were slightly lower than we expected, ending at around $67 million at the low end of our guidance range. Non-GAAP R&D costs were up only slightly from Q2 at $35 million, with some of the new product development costs we had previously anticipated for Q3 rolling into Q4. Non-GAAP SG&A costs also increased slightly from the second quarter at $32 million primarily on higher legal spending. Non-GAAP operating income exceeded our expectations at $30 million, or 18.9% of third quarter revenue, reflecting strong top line performance and good expense control. Other expenses were in line for the quarter and our effective tax rate was slightly favorable at 22%. Non-GAAP EPS ended at $0.52 per share, exceeding the top end of our guidance range. On a GAAP basis, third quarter gross margins were 60.8%; R&D investment increased to $43 million; and SG&A expenses increased to $44 million, resulting in GAAP operating income of $10 million or 6% of revenue. GAAP EPS for the quarter ended at $0.13 per share, which was below our guidance range of $0.18 to $0.24. GAAP SG&A expenses include a $6 million acquisition-related charge due to improved expectations regarding the achievement of the Energy Micro earnout. This charge was not reflected in our Q3 guidance and has an approximate $0.14 per share effect. Turning now to the balance sheet. We ended the quarter with cash, cash equivalents and investments totaling $340 million, which was flat to Q2. Cash flow from operations for the 9-month year-to-date period was $108 million, reflecting excellent cash flow performance. We executed $43 million in share repurchases during the quarter, retiring more than 1 million shares. Third quarter year-to-date, our total repurchase amount is $54 million, with 1.3 million shares retired. Just last week, our Board of Directors refreshed our stock repurchase authorization. Our newly authorized 100 million share repurchase program replaces the remainder of our previous plan and runs through the end of 2015, allowing us to remain opportunistic buyers as we continue to return cash to shareholders. Accounts receivable ended 41 days and inventory ended at 5.3 turns, both in line with expectations. Our balance sheet remains very healthy. Before turning the call back over to Tyson, I will cover Q4 guidance. First, please note that Q4 is a 14-week quarter. The last day of fiscal 2014 will be Saturday January 3, 2015. We expect fourth quarter revenue to be in the range of $155 million to $161 million. We expect broad-based to achieve a new high in Q4, led by our MCU wireless and sensor products. Total broadcast revenue will be down in Q4 due to seasonality in consumer markets, partially offset by continued growth in our automotive products. We anticipate another strong quarter in access, which we expect will be about flat to Q3. While all geographies are forecasting sequential growth, the outlook is most bullish in the Americas. Non-GAAP gross margin for Q4 is expected to be in the range of 60% to 61%. We expect fourth quarter non-GAAP operating expenses will grow to a range of $68 million to $69 million due to new product investments, the effect of the 14th week of operation and headcount growth. Our non-GAAP effective tax rate should remain stable at approximately 23%. We anticipate a fully diluted share count of 43.1 million shares for Q4, and we expect non-GAAP EPS to be $0.43 to $0.49 per share. We expect GAAP EPS for Q4 to be in the range of $0.12 to $0.18 per share. Now I'll turn the call back over to Tyson.

Thanks, John. We are very pleased with our strong performance in the third quarter. Many of our investment businesses, including microcontrollers, wireless and sensors, as well as broadcast automotive, delivered record design wins in revenue. Revenue from our MCU wireless and sensor products grew 6% sequentially and 21% year-over-year. This excellent performance is a direct result of our increased investment in hardware and software platforms, driving steady growth in our IoT related revenue as we continue to gain traction in connected device applications. Our position in emerging IoT markets, such as wearables, home automation and security continues to strengthen on an absolute and relative competitive basis and will drive what we expect to be a record fourth quarter. To succeed in the Internet of Things, it's imperative to offer platform solutions and not just components. Unlike the mobile handset industry and other vertical markets, dominated by a few large customers, the Internet of Things is a greenfield of tens of thousands of prospective customers ranging from startups to established name brands. Increasingly, customers are viewing Silicon Labs as a complete solutions provider, enabling them to leverage our components -- software, development kits and simplicity studio -- to efficiently create their own differentiated products. Our solutions begin with a comprehensive portfolio of energy for the MCUs, high-performance radios, and smart sensors, available through our global distribution channels. We believe Silicon Labs is one of the few semiconductor companies today with the ability to integrate these essential product building blocks into system on chip platforms to serve this broad market opportunity. As an example of our platform solutions, in Q3, we introduced environmental and biometric sensing development kits to the streamline of process of creating IoT products that sense humidity, temperature, light and biometrics. Target applications include security systems, smart thermostats, weather stations, smart watches, and other wearables. The kits operate on coin-cell batteries, demonstrating the energy friendly benefits of our solutions for battery-powered application. We are excited about our strong position in the connected home market as a leading supplier of ZigBee solutions and a founding member of the Thread Group, along with Google, Nest, ARM and Samsung, sets Silicon Labs as driving the future of wireless connectivity through the IoT. With an estimated 50 billion connected devices to be deployed by 2020, our customers need a connectivity solution that extends Internet protocols to each individual node. These IoT nodes are predominately low-power, low data rate devices, often interconnected in mesh networks. The Thread Group is addressing this need with a new IP-based networking protocol that combines the best features of industry-leading standards to securely connect hundreds of devices throughout the home. Silicon Labs is spearheading the development of Thread software and we recently announced the creation of a beta program for selected customers and ecosystem partner,s, enabling them to accelerate their product development plans. We now have Thread networks up and running, with key customers using our existing ZigBee Wireless SoC. I would now like to comment on the $6 million adjustment to the earnout payable to Energy Micro shareholders that impacted our third quarter GAAP earnings. While the charge against earnings, this is an expense we are delighted to incur, as it underscores real success of this acquisition. We're outperforming our 2014 target and also raising future year forecast. As with our goal, we have accomplished making the July 2013 acquisition accretive to our financial performance of the second half of this year, and we are extremely pleased with the results of this transaction. Accelerated demand for bandwidth are pushing Internet infrastructures suppliers to develop networks and data center systems that support dramatically higher data rates. Timing technology is essential for upgrades, and Silicon Labs is the leading supplier of timing products. We enjoyed record design wins in timing in the third quarter, and we continue to expand our one-stop shop timing portfolio through further market penetration and a strong pipeline of new product introduction. The demand for more bandwidth drives the need for a wide variety of clocks at different frequencies. To address this need, in Q3 we introduced a new family of high-performance clock generators and jitter attenuators designed to reduce cost and complexity. Our new clock-tree-on-a-chip portfolio provides the industry's lowest jitter and greatest frequency flexibility, enabling developers to use single, high-performance clocks to replace multiple timing chips. Moving now to Broadcast. Our audio and video products represented 33% of Q3 product revenue, exceeding expectations with strength across the board. Our broadcast products primarily address 2 primary markets: consumer and automotive. In the consumer market, our TV tuner product has achieved more than 55% share of the worldwide flat-panel TV market. Q3 TV tuner design wins were at record levels as we continued to expand at the new geographies and drive additional share gains for the adoption of multi-tuner technology, further penetration of our demodulators and expansion into the set-top box market. Fourth quarter demand looks solid, with expectations to be down slightly due to normal seasonality. As we have reported previously, we are engaged in a lawsuit before the ITC, with an entity named Cresta Technology. We were sued for patent infringement related to our Broadcast media tuner product line and are vigorously defending ourselves in this action. We believe that claims are without merit and are hopeful for resolution of this issue during the first half of 2015. Moving on to Broadcast automotive. Third quarter year-on-year revenue growth again exceeded 50% as we continued to take share. The automotive covering the market, including AM/FM radios, digital radio tuners and advanced multi-tuner systems, offers an attractive $300 million opportunity. We believe we can continue to expand our market share going forward. And in Q4, we expect Broadcast automotive to set its fifth consecutive revenue record. During Q3, we introduced the industry's most advanced automotive tuner IC family, which offers a global radio solution, supporting all leading broadcast standards worldwide. These new radio products use our patented digital low-IF architecture. The scalable architecture allows entertainment systems suppliers to leverage their investments across multiple product lines, ranging from entry-level car radios to cutting-edge multi-tuner, multi-antenna radios for premium vehicles. Our tuner IT exemplifies Silicon Labs' core strength: the ability to integrate multiple discrete components in the single chip solutions that deliver the highest levels of performance. Mix signal integration has been in our DNA for nearly 20 years and our prowess in circuit design, software development and platform solutions has enabled us to leapfrog the competition time and again. These capabilities are serving as well in the large and growing IoT and Internet infrastructure markets, where we are well-positioned for growth and technology leadership. Our strategic investments are producing results, as evidenced by our strong third quarter. Our MCU, wireless and sensor products generated record revenue in Q3, and we have guided that they will do so again in the fourth quarter. We see many exciting opportunities ahead in the IoT market and plan to deliver new platform solutions that will give us the technology edge over our competitors, while making the things in our lives, smart, connected and energy friendly. Looking ahead to 2015, we are very excited about what we have on the pipeline. We will support ZigBee, Thread and Bluetooth Smart, the system-on-chip solutions built on a common wireless platform. These solutions will consume the lowest energy on the market and will support multiple wireless protocols on a single chip. We are targeting the largest growth segment for the IoT, and by continuing to expand our portfolio in the market, such as Bluetooth Smart, we will expand our SAM and further differentiate ourselves as the leading IoT semiconductor company. It's an exciting time to be at the forefront of the IoT. We are well-positioned for growth in 2015 and beyond, and look forward to introducing new and disruptive silicon and software solutions to solve our customers' toughest challenges. Thank you for your time and attention. Before we take your questions, I will turn the call back to Jalene. Jalene?

Thank you, Tyson. Before we open the call for the for the question-and-answer session, I would like to review the investor conferences we will participate in, in this quarter, including the Crédit Suisse Annual Technology Conference on December 4 and Barclays Global Technology Conference in San Francisco on December 9. And now for Q&A. [Operator Instructions] Operator, Brandy?

Your first question comes of the line of Matt Ramsay with Canaccord Genuity.

Tyson, a couple of questions, if I could. I guess the first one is, obviously you're raising the expectations for the Energy Micro acquisition. The MCU business did really well in the quarter and it seems like in the outlook. Others in the space have given a bit of different commentary on the overall market environment. Maybe you could just talk about how you see the microcontroller market overall and the distribution level of inventory in the market, broadly.

Okay. Well, I can comment on the market and then I'll let John comment on the inventory situation. Overall, we are extremely pleased with the Energy Micro acquisition, the product portfolio and then the traction that we've gotten in the market in terms of ramping its design wins and getting into a lot of new applications that are emerging in the IoT. The 32-bit business was up 100% year-on-year, which exceeded our expectations going into the acquisition and allowed us to have an accretive transaction here in the second half of the year. So overall, the demand for the low energy solutions in 32-bit is quite strong. The design win traction is quite strong and positions us well as we introduce wireless capabilities and additional families of ARM products as we go into next year. I'd also like to say that our 8-bit business is quite solid. We've had very strong design win activity in our 8-bit family. We continue to make investments there in new product development and believe that there are a lot of applications that are suitable to 8-bit as we integrate that into our sensors and into our wireless -- low-end wireless solutions as well. So quite bullish on our view of the MCU market, both the 8 and 32 market, 32-bit market and our positioning in those markets, I think, is quite strong and indicates that we should be able to continue to take market shares and move forward into next year.

Matt, this is John. I would indicate the distribution inventory that we see as normal. We're seeing some increases in the balances on our side, but we see growing revenue numbers and a higher mix of distribution business for Silicon Labs, so I would describe that as normal.

And as a quick follow-up on the Timing business, I think you mentioned in the prepared remarks, Tyson, some very strong design win traction there. Maybe you could give us a little bit of an outlook at how you see, maybe, growth recovering in the Timing business because, at least the way I view it, that's a very differentiated part of the portfolio that maybe underperformed a bit in recent quarters relative to the potential of the long-term business?

In the second quarter, we had record revenue in our Timing business, but that was off a bit of softness from the end of last year. And coming into the third quarter, we were a bit cautious about our outlook, given the CapEx spending out there and some of the indications. I think that, that was borne out. I think we still see some slowness in the telecom infrastructure market. We mainly play in the wireline side, optical networking, high-speed, backbone networks, and less on the wireless side. But we have seen kind of mixed results here in Q3 on Timing. It was down just a hair from what it was, off the record. And we actually think it should be up a bit, but probably not back up to record levels in Q4. That being said, we've introduced, really, a fantastic new product, they are lowest jitter clock generator, which is targeted at that sweet spot of the high-end, expands into some of the wireless infrastructure market as well. And we've had very tremendous design win traction and customer interest in that part. And so we continue to invest in the roadmap here. We continue to believe that the increasing demands for data are going to continue to drive demand for our clock solutions and we think that we are, again, well- positioned to gain share and we stand to benefit from any improvement in the market conditions that we see out there right now.

Your next question comes from the line of Ruben Roy with Piper Jaffray.

Tyson, John mentioned some new product investments, and I was wondering if you could offer some perspective on what you're hearing from your customers as it relates to IoT, specially in light of the recent acquisition of Qualcomm, of the CSR by Qualcomm and I think Microchip was interested in that asset as well, kind of, where you are on your connectivity roadmap and what's some of the new products investments are related to you.

Yes, so a lot of the activities that we've got going on in the second half of the year of our R&D investment is going into our next-generation platform for microcontrollers and wireless. It's a common platform that will be able to address a broad range of applications, and it would be a portfolio of products coming out of that. And as I've said in the comments, that will support ZigBee, it will support Thread, it will support proprietary protocols and it will add Bluetooth Smart, which is the low energy Bluetooth standard. So that will dramatically increase the SAM. It will also be interoperable between those various standards on a real-time basis. And we've got an incredible amount of interest from customers that want to have a robust wireless mesh network with ZigBee or with Thread, and also want to be able to access those nodes with smartphones. So we think that, that is going to be a very differentiated solution, it will include full MCU, low energy MCU functionality and it will have the lowest energy consumption on the market. And if you look at the vast majority of applications in IoT, these are battery-powered, lower data rate [indiscernible]. This platform is targeted squarely at that, and I think that as those products are introduced throughout 2015 and into 2016, that's going to position us quite well. I think that Qualcomm certainly saw in CSR their past leadership in Bluetooth, and I think that has not traditionally been a strength at Qualcomm. And I think certainly a recognition of the value of connectivity solutions and I believe that on top of connectivity, you also have to have a broad channel and you have to have a full portfolio of parts to address the broad range of applications, and that's where we believe our strength is, and that seems to be proven.

And as a follow up for John, on the gross margin guidance. As broad-based continues to do well, do you think that your gross margins will sort of track towards the lower end of your longer-term target, 60% to 62%?

Sure. We have indicated previously and would reiterate that our strategy is to grow the top line, and we want to be sure that we're not leaving the business on the table. So we're working inside the company to price these products, to win in the market. So we give the 60% to 62% range as a responsible range to manage this to work.

Your next question comes from the line of Craig Ellis with B. Riley.

I wanted to start off, Tyson, with a question regarding, kind of, your prepared comments on wearables. Can you give us some further color on the types of applications you're getting designed into and the visibility that you have for multi-quarter growth in that area? And then, related to that, as the IoT business starts to scale, how are gross margins comparing to the corporate average? And what would you expect as that business grows further?

Okay on the wearables side, we have had a significant amount of traction with our low-energy MCUs into wearables. I don't believe I'm at a position to announce the specific customers that are ramping, but these are with some of the name brand type of devices that need longer battery life and need the flexibility of the ARM architecture. And you can think that over time, the wireless functionality being integrated into that. So we have a nice roadmap, targeted -- not just the wearables, but that plays very well into that space. The other area that we're getting traction in wearables is with our sensor products. And with the number of our developments, we can sense things like blood oxygen level, you can sense the pulse rate, and there's various aspects in sensing that our products have ended up having a nice level of differentiation in a very low power consumption as well. So the solutions are able to measure the activity of people and that's an important function in wearables. So I would say, right now it's predominately, Microcontrollers with some good traction on the sensor side. If you look just overall at the IoT, we've talked about it, we are being very aggressive going out and where we see a strategic market and a strategic customer, we're going out to win that business today. And in general, we would have a very strong roadmap where we can drive our costs over time, drive the integration level over time. That's something that as a company, we've proven very good at doing. And we've got our top talent doing just that here with this next-generation platform and even looking further out. So I believe that long-term, certainly our products are mixed. We've got our timing product and our broadcast automotive products that are well above the corporate average. We've got our video products, which are somewhat below. And the rest of our business is in line with the corporate margin targets. With an eye that -- our focus as a company is to grow the top line, to scale the revenue up, scale the company up. We believe we've got the technology and talent and the product portfolio to do that. And so we're out in the market to win, and we're investing to win, going forward. But overall, we feel comfortable with the overall gross margin target of 60% to 62% going forward. And we'll continue to grow the business within those constraints.

The follow-up is to John. John, you mentioned the fourth quarter is a 14-week quarter. Can you quantify the extent to which that extra week impacted your revenue guidance? And then a longer term revenue-related question. At Analyst Day, you framed a 10% to 15% annual growth target for the company. Do you feel like you had a point where you can start to see a line of sight to get the business into the lower end of that range? And if not yet, when would you expect to have that line of sight?

Sure, Craig. It's a bit hard to call the precise impact that the 14th week has, as that's a slow week toward the end of the year around the holiday time period. But there clearly is some effect. But I would probably best couch it as a partial week impact, that's about the best color I can give. And as far as the line of sight, we think we're on track to deliver the kind of growth that we've targeted in the Broad-based product portfolio and really the key for us is to have that portion of our revenue become the more predominant element of our mix. We're now exceeding 50% and need to look at -- continue to rise over time and sustain those growth rates. So that's the imperative that we have as a company.

Your next question comes from the line of Anil Doradla with William Blair. Anil K. Doradla - William Blair & Company L.L.C., Research Division: Tyson, you talked about auto actually picking up during the quarter. As I look out in 2015, you've got 3 parts of it. You've got the auto, you've got the consumer audio and then obviously the video part. Can you walk us through the dynamics, whether 2015 we'll see the auto kind of offsetting any kind of headwinds in the consumer or even Broadcast video? So we'd love to hear how the dynamics play out in 2015.

Yes. So certainly looking out at 2015, we anticipate continued strong growth out of our automotive radio product line. There's good visibility into those design wins and those ramps out for a substantial period of time. So we think that, that product line is going to continue to do quite well. On the consumer side, if you lump the radio products together with the TV products, I believe that the right way to look at that is that's a stable piece of the business. We've got good position on the consumer radio side and some opportunity for share expansion into the analog tunes segments. And on the TV tuner side and demodulator, we've got expansion to set-top boxes. We do believe that we may be able to get some level of additional market share next year. We haven't quantified that specifically at this point. And we've got incremental opportunities with our demodulator in set-top box applications and some additional markets for the flat-panel TV. That, of course, offset any sort of ASP declines. But overall, I would say that the consumer business is stable going into 2015, and that the automotive business is going to continue to perform nicely, I think it's about 6% of revenue in Q3. And so we expect that percentage of the overall revenue to march up steadily as that becomes a larger -- larger fraction of the overall revenue. Anil K. Doradla - William Blair & Company L.L.C., Research Division: Good. And finally, I think you might have mentioned this, but the 14th week that you have, the dynamics played out there, how much contribution were you modeling due to this kind of -- this week?

Yes, as John said earlier, the 14th week is really -- it's a pretty slow week. It's right there, New Year's time. So we're only modeling a partial week, a small amount of revenue coming from that 14th week. But it does have an impact both on the revenue side a bit, and also a bit on the expenses, payroll and such.

[Operator Instructions] Your next question comes of the line of Erik Rasmussen with Stifel. Erik Rasmussen - Stifel, Nicolaus & Company, Incorporated, Research Division: I just want to ask on the IoT theme. It looks like you have a lot of momentum in design wins. Where do you think you're going to exit the year in terms of percentage of your overall business?

This is Tyson. Bill made some comments at the Analyst Day that we should exit above the 20% range in terms of IoT revenue. I think the overall for the year will be ahead of that for 2014, and certainly we would be exiting well above that. Just to remind everyone, we're counting the IoT revenue in this breakout with our low-power, 8-bit products, our connectivity products that we make, as well as all of our 32-bit wireless revenue, plus our sensor revenue. Those are predominately chips that get sold in the connected device in low-power applications. So that's going to be, for the year, better than 20% and should be edging well above that as we go into 2015. We'll update on the specific number as we close out the year. That's not something that we update on a quarterly basis. And then on top of that, you have to add our -- there rest of our 8-bit business so if you look at the MCU wireless and sensor piece of our revenue, it was almost 1/3 of the revenue and that -- if you look at that total, that total should again continue to march up as we gain share in this connected device applications and continue to expand the 8-bit business as well. Erik Rasmussen - Stifel, Nicolaus & Company, Incorporated, Research Division: And just -- I don't know if I -- maybe I missed it, but does your outlook include any patent sales from the broadcast business?

Erik, this is John. No, it does not. We had the 1 deal in Q2 and then a follow-on deal in Q3, but there's nothing in the outlook for Q4.

Your next question comes from the line of Blayne Curtis with Barclays.

Just -- Tyson, on the earnout for Energy, just remind me what the time frame of that earnout was for? And then it looks like your GAAP guidance, are you seeing further payout into December? And I think Broad-based kind of came in close to what you guided to. Is the upside more December? Or I guess is -- it's more next year?

Blayne, this is John. Yes, so that calculation is a long-term calculation. That earnout is actually structured around a 5-year view of the business. And it scales with growth in the business. So it's a bit of a complex calculation that goes through some Monte Carlo simulations out in time. But fundamentally, it's reflective of the strength near term and a greater confidence and strength longer term, is what's driving that.

And then John, you guys partially answered this, but the 14-week impact on OpEx is maybe a little easier to calculate. But you do have potentially shutdowns, or what -- in that same time period. As you look in to Q1, you should get some benefit, you actually had a -- you were able to offset that pretty well in December, but can you just talk about the moving pieces in Q1? You obviously had merit increases, you have the litigation. So then you should get some benefit as that 14 week goes -- reverses back.

That's right. There's a few puts and takes there. And we'll be able to comment more on that in January. But the trends are that you would, yes, revert back to a normal 13-week cycle. The legal cost profile is likely to continue through Q1. And we will also, as I mentioned, have merit increases and the annual reset of the fringe benefits like the -- in social security. So there's some puts and takes in there and we'll be able to comment more on that in January.

Your next question comes from the line of Sujeeva De Silva with Topeka.

Can you talk about your wearable opportunity here, whether it's somewhat concentrate on flagship wins and those ramps or whether you feel like it's more diversified in design win profile?

Yes, we -- I would say that it's pretty diversified. We have a lot of -- there's a lot of stardust, that are the wearable space, that are looking for the lowest energy MCU and are both valuating and putting our MCUs into production. So that's been a point of particular differentiation, especially with the levels of energy consumption that we're able to achieve in those applications. So it's not just a single flagship. When we do have a couple of nice, higher volume wins within the wearable space that are shipping here in the holiday season. But I would say that it's -- this is a pretty diverse market, there's quite a few players. And it's a pretty broad opportunity for us. And It's also one where we see that there's just the -- the market is growing and there's a lot of different applications. And not just watches, the things like fitness trackers, sports and fitness applications, those are quite energy-sensitive and one where we're certainly targeting.

And then my other question is on the Energy Micro product. It's doubling year-over-year, really good clip there. I'm wondering if it's able to sustain that level of growth. And if not, what kind of growth are you expecting over the next year for 32-bit products for Energy Micro?

Yes, we are really not ready to give full guidance. I mean, certainly 100% growth is a high bar, but we certainly -- just looking at the moving parts of our revenue going to next year, we believe that the MCU wireless and sensors area is going to be our fastest growing area, just in raw dollar terms. And we'll be able to provide more specific guidance as we move into Q1. But overall, that -- the design win traction has been very, very strong. We've got a strong pipeline of new products coming out, and continue to believe that, that product line is going to deliver nice growth. And looking at the earnout chart that we had to take here in Q3, that's an indication both of the near term and the long term performance of that product line. And that's how the earnout is structured. We're glad to be paying that.

Your next question comes from the line of Tore Svanberg, with Stifel. Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division: So my first question, and I usually don't look at this very often, but it looks like your ASPs were up 1% year-over-year. Is that [audio gap] of your Broad-based business being a higher percentage of revenue? Or is there anything else?

Tore, this is Bill. That degree of change is not significant to us. Our ASPs are typically average around the $1. They tend to bounce around a few cents from quarter-to-quarter. That has continued, so I don't think there's any fundamental change in the ASP structure of the business right now. Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division: Very good. And as a follow up to Tyson. Tyson, at the Analyst Day, you talked about some new distributors and especially with some emphasis on Europe. I think at that time, you indicated you expect the bulk of that benefit to be in 2016. So I was just hoping you could update us on that particular topic.

Right. We -- over the last, I'd say, 5 years, we brought on Arrow and Atmel have been working to broaden our footprint within those companies in terms of additional product development, in terms of training and relationship and partnerships with them. And I think that we were up 63% distribution revenue. Some of that goes into Asia. We have a number of distribution partners in China, as well as the global distributor relationships. So that's been a multiyear investment strategy in the channel, a multiyear investment strategy in products that are appropriate for the channel, and then making the investments in marketing and training and collateral to be able to fully leverage those additional feet on the street. So -- and it's not just Europe, I mean, we have a big focus in Asia, as well, and we've seen quite good results of this, in particular in the Americas here in the second half. A lot of those customers are owned by the distribution channel or they're the main interface. And one of the important aspects of broadening the channel is that we only have so many sales people, so we need additional feet on the street and help to be able to serve the tens of thousands of customers that we need to reach with our Broad-based products. So I believe that, that multiyear investment strategy is beginning to pay off. And certainly, it's helping here in the second half and going into 2015.

Your next question comes from the line of Srini Pajjuri with CLSA.

John, your gross margin guidance for Q4, given that broadcast is coming down and access is holding up, and broad-based is growing, out of that gross margins would be a little bit better than that. So can you give me some puts and takes as to what's going on there?

Sure. So the IoT portfolio is pretty well at corporate gross margins. We're seeing strength in that category. The timing business, we're foreseeing some resumption in growth, but not anticipating record quarters for timing. So that's providing some drag in terms of the mix on the margins. So it's really, again, on the product mix is the primary factor.

The only thing I would add that we do not have any patent sale revenue and very, very high gross margin business in the fourth quarter that we did enjoy in the prior 2. So that's also a contribution to the change in mix.

And then in light of your 14-week quarter for Q4, how should we think about your Q1 seasonality for your different segments? I mean, do you expect it to be normally seasonal or do you expect it to be slightly worse?

This is Bill. Srini I do think we will see normal seasonal pattern going into Q1. So we'll have a typical fall-off in our consumer business that was quite strong in Q3 and continues into the months of October and November but will drop off in December and into the first quarter. So we'll see a typical seasonal profile as we roll into the first quarter of next year.

Okay, great. Maybe one final question. On the access business, obviously, it's been holding up better than you thought. Is there anything that kind of coming back, any particular product segment? And as we look out to the next year, should we continue to model the business to decline at this pace of mid-single digits, or do you think it's going to go back to double-digit declines?

I'll continue. Srini, I think you do need to continue to model that. Business will show modest declines going forward. We're enjoying good strength in the business in the second half of the year but access has always been a bit lumpy and we've got some significant customers that manage inventory in that business. But the longer-term trends, particularly in modems, has to be down. So when you're building your longer-range forecast, continue to forecast that taxes will decline slightly on a year-on-year basis.

Your next question comes from the line of Harsh Kumar with Stephens.

I wanted to ask a question on OpEx management, perhaps the philosophy of that. Do you guys have a -- sort of rule or a mechanism where you manage OpEx as a percentage of growth? Or is it a situation where you're still feeling like you're in a sort of a hyper-growth mode with your IoT business and that ultimately, with revenue growth that will settle out in the absolute dollars, OpEx will stay the same for now?

Right. Harsh, our long-term model is to get back into this 20% to 25% operating income range. We've been operating below that for the last couple of years. Over the last year, we touched that and if we pull out our legal expenses this year and also pull out the package sales revenue, we're not far from that here in 2014. And we had the Energy Micro acquisition last year that we've been growing into, as well. That being said, we also have a huge opportunity sitting in front of us, with the Internet of Things, in particular. There's a lot of investments it will require in terms of software and tools and solutions and platforms, product portfolio, takeouts and we do not want to undershoot those opportunities by under investing. And so we are continuing in a judicious and careful way. We are adding some level of resources to address those needs, especially in areas that are new for us or where we really need to change our mix, in particular, on the software side as the mix of our R&D trends up over time, more biased towards software than hardware engineers. We are being careful about that, but we are investing to win in this market, and with the goal to continue to grow the top line and the revenue and get back within that 20% to 25% operating income range as soon as we can.

As a follow-up, I wanted to follow-up on the question about the first quarter seasonality. Do you feel, at this point in time, that we should expect your IoT business or even maybe the Broad-based business to be flat to slightly up in 1Q?

Well, we will give you more specific guidance on each of these businesses in January. But I would suggest that the consumer business is going to be down across the board. That will include both the video business, the consumer audio business and portions of our 8-bit microcontroller business. So you should forecast a decline in revenue in Q1. We'll be much more specific about the absolute dollar amount of that when we're closer to it and give you a guide after the fourth quarter results.

And your final question for today is with Ian Ing with MKM.

First question on this -- just the type of litigation getting resolved in the first half. What gives you confidence now with that time frame? And the December ITC hearing, did that potentially pull in or push out the resolution?

So, there has been no change in the schedule regarding this lawsuit. We had a hearing that is scheduled to occur before the ITC the 1st week of December. That will be enlightening to us because we'll get to actually observe the case being presented and the judge's reaction to it, but it is unlikely that we will get a ruling in the month of December. My expectation is that we'll get formal input from the ITC in the first quarter. And that's why the legal activity will continue, at least through that time frame. We're very hopeful that we get a favorable outcome, and that we can put this whole issue to bed by the first half of next year. But this is still an action that is to be determined.

So depending on the timing, is the communications equipment is coming back, or is it still up, the process of capturing some design wins?

Could you repeat that again, Ian? We -- I think you dropped out.

Yes, sure, let's try that again. So update on -- just an update on Siemens oscillators. Is it a matter of -- I know it's still early innings of adoption, but is it more reliant on the comms equipment market coming back? Or is it more a matter of capturing some more design wins, at this point?

The Siemens products, we continued to get some design win traction. The first set of products are targeted at more high-volume applications, so they're not targeted at the communications infrastructure piece. We were hoping for some replacement business where people would drop our solutions into existing pockets. And that did not materialize the way we had anticipated and I would also characterize the design win traction with those products being somewhat behind our internal projections just based on the size of the opportunities that we -- large number opportunities that we have to go after, and with this particular first product being a little bit slower to adopt. So that has not contributed to the extent that we had hoped for 2014. That will extend into the ramp as we move into 2015, but we continue to offer these products out into the market and have the products in production and continue to push those products forward on a road map basis. So, well -- while I think it's a little bit less than what we had hoped, it is something that we still continue with.

So it's a matter of this fitting your products or just the marketplace still coming around to adopting them?

I think given that the first product that's out into the market, it's really a very programmable and flexible, but standard crystal oscillators. So the functionality is fairly basic. Really, it was there to land volume and prove the technology as we move it into different areas. But we had predicted that the revenue there would be ramping faster than this. But we continue to get design wins and get traction in the market with this product.

I would now like to hand the call back over to Jalene Hoover.

Thank you, Brandy, and thanks to everyone for joining us today. Goodbye for now.

This concludes today's conference call. You may now disconnect.