Good morning. My name is Sean. I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs Fourth Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Ms. Jalene Hoover. Jalene Hoover, you may begin your conference.

Thank you, Sean. Good morning everyone and thank you for joining us this morning. I am joined today by Tyson Tuttle, Chief Executive Officer; Bill Bock, President; and John Hollister, Chief Financial Officer. We will discuss our financial performance and review our business activities for the fourth quarter. After our prepared comments we will take questions. Our earnings press release and the accompanying financial tables are available on the Investor Relations section of our website at www.silabs.com. This call is also being webcast and a replay will be available for two weeks. Our comments 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 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 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 core results of 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. 2014 was a pivotal year for Silicon Labs. Our broad-based products now represent more than half of total revenue, with microcontroller, wireless, sensors, power, and timing delivering record revenues. Broadcast continues to deliver strong results setting new records for automotive radio products and achieving more than 55% share of the global TV market. Access exceeded expectations for the year surpassing 2013 revenue. Before I turn the call over to John, I'd like to comment briefly on our acquisition of Finland based Bluegiga, a leading supplier of wireless modules and software. This strategic acquisition rounds our Silicon Labs wireless portfolio for the IoT, and enables us to address a broader range of market opportunities and customer needs. Silicon Labs and Bluegiga have decided to join forces to expand our combined participation in the large and growing IoT market. I'll talk more about other product developments and business trends shortly. But now I'd like to turn the call over to John who will review our fourth quarter financial results and guidance. John?

Thank you, Tyson. We are pleased to announce that revenue for the fourth quarter and full year established new all-time highest for the company, with Q4 coming in at $162 million and reaching $621 million for the full year. Fourth quarter revenue exceeded the high-end of our guidance range. During Q4 we experienced strong demand for MCU, wireless, and sensors, which propelled our broad-based products to a third consecutive record with $85 million in fourth quarter revenue, representing 52% of our total revenue mix and achieving a year-on-year growth rate of 17%. MCU, wireless, and sensor products, are meeting our growth expectations, with a 2014 annual growth rate in excess of 20% well above the industry. Timing revenue was about flat to Q3, reflecting continued softness in second half telco expense. Fourth quarter broadcast revenue was stronger than expected and down only slightly from Q3, with our automotive radio products reaching a new record, and delivering better than typical seasonal results in our broadcast consumer products. Broadcast generated $50 million in revenue for the quarter, representing 31% of total Q4 revenue. Our automotive radio products continue to gain traction in the market with a growing list of design wins at Tier 1 automotive manufacturers, based on industry leading performance, scalability, and integration. Access outperformed our expectations with an eight quarter high, delivering $27 million or 17% of total fourth quarter revenue. This reflects strong demand for our ProSLIC products driven by optical network rollouts in Asia. Channel revenue remained strong at 62%, which is up around 50 basis points year-on-year. Geographically we saw growth across the board for the quarter, with progress in the Americas the most significant for 2014, fueled by expansion in industrial and consumer, as we increase our leadership in the Internet of Things. Non-GAAP gross margin…

Thanks, John. This week we announced our acquisition of Bluegiga, a leading provider of Bluetooth and Wi-Fi modules and software. We projected nearly half of all low power wireless devices will ship in module form in the next few years. This purchase greatly accelerates our roadmap enabling us to offer a complete market proven family of module software stacks and development tools. These solutions compliment our expanding portfolio of ZigBee, Thread, and sub-Gigahertz connectivity options for the Internet of Things. Pre-certified by the FCC and other standards bodies, wireless modules simplify our customers design and accelerate their time to market. Our strategy is to offer customers a one-stop-shop for connectivity with leading wireless protocols targeting a wider array of IoT applications. Additionally we will provide customers with a seamless migration path from modules to ICs for high volume cost sensitive application. With this acquisition, the combined portfolios and development ecosystems will enable Silicon Labs to address a broader range of market opportunities and customer needs. We're very pleased to have ended 2014 with record revenue for the quarter and for the year. Our revenue grew 7% over 2013, fueled by the growth of our broad-based products which are achieving critical mass. Year-on-year design win activity increased by almost 20% and we expanded our customer base by nearly 30% to greater than 25,000. Total revenue for the fourth quarter increased 11% year-over-year exceeding the $160 million mark. MCU, wireless, and sensor products, represented 32% of fourth quarter revenue, growing 6% sequentially, and establishing a third consecutive record revenue quarter. Revenue for the year grew 23% over 2013. We see steady growth in our IoT related revenue as we continue to gain traction in home automation, security systems, modules, wearables, and smart-metering. Silicon Labs has been at the forefront of the sub-Gigahertz…

Thank you, Tyson. Before we open the call for question-and-answer session I'd like to review the Investor Conferences we will participate in this quarter including the Stifel Technology, Internet and Media Conference in San Francisco on February 10; and Morgan Stanley Technology, Media and Telecom Conference in San Francisco on March 5; and Piper Jefferies Technology, Media, and Telecommunications Conference in New York March 11. We would now like to open up the call for your questions. Should accommodate questions from as many people as possible before the market opens we ask that you please limit your questions to one with one follow-up. Sean?

Thank you. [Operator Instructions]. Your first question comes from the line of Tore Svanberg from Stifel. Your line is open.

Yes, thank you and congratulations on the record results. The first question is on Bluegiga. Tyson, could you talk a little bit about where Bluegiga's revenues are today, either by market or application? And as we think about this module strategy, could you also refer to, a little bit, the competitive landscape? Are you sort of at the forefront now, or are you starting to see more and more competitors coming out with similar module-type solutions?

Tore, thanks for the question. Bluegiga sells into a wide range of markets. I mean they've got a very broad-based business and there model is to be able to support both medium and smaller size customers in large numbers. So they come in with a fairly rich pipeline of opportunities across everything from industrial, consumer applications, some automotive applications its actually quite broad. Their business today is more focused on Bluetooth than on Wi-Fi they've recently introduced Wi-Fi modules and that's a new growth area for them as well. If you look at the competitive landscape there are a number of other module providers out there including other semiconductor companies. Bluegiga has had a lot of success in the market by differentiating their products as very easy to use, cost effective, and highly capable from a technical standpoint, the RF performance, and these types of things. But again it is a broad market. They have a decent share but there are a number of providers. We think that having this capability in-house to have a captive capability for modules has a number of benefits for us. One we can take our silicon and apply that into modules in more creative ways and make it easier for our customers to get to market and we're also able to in high volume applications be able to seamlessly move customers from a module solution to an on-board design and we believe that is more sticky. So we get more visibility into the customers, we get to hold on to those customers as they move from medium volumes into high volumes and overall it just really simplifies our customers ability to get to market quickly.

Great. Thank you. And as a follow-up, I had a question on the broadcast business. So the momentum there in automotive has been quite impressive, and you probably don't break it out -- or you're not willing to break it out yet. But I mean is automotive becoming close to a third of your broadcast revenue? And if not, at what point should we expect it to become that type of a size?

Yes, I would that now it's not at the level of a third although it is a significant contributor to the growth in revenue. The growth in the automotive area is we view that is offsetting any potential declines that we have on the consumer area as we reach kind of market saturation there. But the -- we had a very nice 45% growth year-on-year and a nice quarter-on-quarter. I mean we see the broadcast automotive revenue just having a nice steady increase as we move through the year. But we don't -- I don't think it will be at the third level but it will certainly exit the year with a good trajectory.

Your next question comes from the line of John Vinh from Pacific Crest Securities. Your line is open.

Hi, thanks for taking my question. Just a follow-up question on Bluegiga. Does Bluegiga have any wireless ICs? Are they strictly modules? And then can you also just talk about any sort of customer overlap that you have there?

The Bluegiga modules today are based on third-party silicon from a number of different suppliers. Going forward, we intend to continue offering those types of modules but also to integrate our own silicon technology as time goes forward. We've talked in the past about our roadmap to include Bluetooth capability and certainly that will be first on the list but you can also imagine solutions around ZigBee, Thread, and sub-Gigahertz applications as well. And I think that that same simplicity will apply. In terms of the competitor -- the customer -- actually because they serve such a broad range of customers we're in similar areas and we do have a few common customers but in general they're bringing a new set of customers into the mix and have been very successful at serving a very broad range of customers for distribution. So we think that for the most part this is completely additive in terms of traction.

Great, thanks. And then just my follow-up question. You gave us some perspective on 2015 on the OpEx line. In terms of the segments, I was wondering if you could give us some additional color. I know you guys have talked about -- looks like broadcast is back on track to kind of grow at the 15% to 20% long-term outlook. You've got, obviously, the automotive broadcast business growing quite nicely. Is that enough to kind of keep broadcast flat into 2015? And on the access side, that segment continues to outperform, despite you guys talking about that could decline over time at a more modest rate. Could we also see another kind of flat year in access?

Yes, John. This is John Hollister. Yes, the answer on broadcast, we think the automotive growth is sufficient to maintain a stable mix for the broadcast category overall with some decline with flat, slight decline possible with the market saturation in ASPs on the consumer side, but having that offset by growth in automotive as you mentioned. On the OpEx side, I provided some color there. We've got some incremental hires yet to make. But we're pleased with the progress on change in the mix of operating expense to be heavily, more heavily weighted toward R&D here in 2015 with the legal expense rolling off some, so that's a nice benefit. The final point I'll make is the improvement in the tax rate will certainly help contribute to our bottom-line results which will help as well.

John, this is Tyson, just one more color just to complete the picture on the revenue. On the access side we had give a guidance earlier in 2014 that that business would be down 10% or less for the year and we actually ended up with a slight increase year-on-year for access. But again in 2015 we believe that that category will decline 10% or less for 2015 versus 2014. So just, so you can fine-tune your models there.

Your next question comes from the line of Suji De Silva from Topeka. Your line is open.

Hi, guys. Congratulations on the acquisition here. Can you tell me if you -- did you offer a module before, or would this be initiation of that? And if so, were you missing business because you didn't offer a module? And how quickly can you get other SLAB products into that module format? Is it a couple of quarters, or so forth?

De, we actually see a numbers of our chips to a numbers of different module suppliers and we've done that for years. In the broadcast category, some of the tuners go into modules and then in the wireless area we had a number of partners that we believe will continue to use our products and really look at the addition of this module capability as an expansion especially into the Bluetooth and Wi-Fi side where we haven't yet participated. So that's completely additive both from a module standpoint and in terms of the release of those -- our own internal Silicon into the Bluetooth area, we do anticipate that happening this year. We had a specific announcement around that but it's been in process and we believe that this is the quickest path to get that type of Silicon into the market quickly.

Okay, great. That color helps; thanks, Tyson. Then also in terms of the timing business, looking into the first-half 2015, I know the end markets have been somewhat muted. Can you talk about the prospects for that business and the end-market circumstances going into the first half?

We actually in timing have seen decent bookings coming into the quarter. We believe that timing is not -- the market is not necessarily completely strong in the areas that we serve, in particular the core networking area, the core communications network infrastructure area. But as we move through 2015 given the design win momentum that we have and the visibility that we have we believe that that business will have a resumption of growth as we enter into the year and march through the year.

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

Thanks for taking the question and congratulations on the results, guys. The first question is on Bluegiga, and it's got two parts. The first part is: what are the drivers to the full-year accretion? Is it revenue growth or some type of optimization? And related to that, with the Bluegiga product portfolio now part of SLAB, how does the management team look at additional technology needs or additional areas where you may have to go out and do further deals such as this most recent one?

Hi, Craig. Yes, the drivers on the accretion are really around the revenue growth in the business. We will continue to look at optimization and areas where there may be some ability to take advantage of a bit of overlap. But the main drivers is going to be growth in the revenue performance for the acquired products.

Yes, I mean I just add that the -- this was a profitable business coming in they've been able to differentiate their products in the market and drive nice growth over the last numbers of years and that's dropping at the bottom-line. So that made this very attractive acquisition. If you look at the need, I think it does fully round out our wireless portfolio. If you look at our organic R&D internally the silicon network developing, plus the module capability that's coming in, we think that on the whole we've got a complete development around all these various IoT technologies. That being said, we have a very strong position in terms of our cash balance and are looking for strategic acquisitions that would augment our IoT vectors and really solidify that. But right now we think we've got the core elements of microcontrollers, we've got a numbers of sensor products, we've got a complete suite of wireless networking technologies, we've got a lot of efforts ongoing in building the channel and our ability to serve a broad market. And we think that we're very well positioned to continue to take share and grow that IoT based revenue strongly as we move forward.

Thanks for that. The follow-up question is a longer-term question, and it relates to the target model. You mentioned the adjustment on gross margins. On revenue growth and operating margins, any update to those? And related to that, any thought on when the business will intercept the revenue growth and operating margin targets?

Yes, if you, we are not changing our target operating income or growth targets, our growth targets being 10% to 15% and our operating income targets being 20% to 25%. As we enter the year we are operating slightly below that operating income level. We finished the year out at 7% revenue growth but as we see some inflection on the broad-based products those being the fastest growing as well as being over 50% we believe that that will be able to tick up our revenue growth closer up to the target range. And we believe that as the business scales we can achieve profitability in the range of 20% to 25% over time with the caveat being that we are investing very heavily to win in the market and so that's why we wanted to update you on the OpEx that we're going to see this year and get more clarity into that. But overall we feel comfortable with the overall model. On the gross margin side just because the modules are coming in with a slight somewhat lower gross margin model than the company has, we felt that it was prudent to trim the overall gross margin level to reflect that.

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

Thank you and congratulations, guys. First question is around IoT. And Tyson, I think John mentioned modest headcount growth coming, related to some IoT projects. You've got the Bluegiga acquisition. I'm wondering if you could just characterize how you are seeing design activities specifically around IoT over the last quarter or two, or may be relative to this time last year. And if you would take a shot at what you think the IoT growth rate might be for 2015. Thanks.

I mean we have incredible design win activity going on in IoT across a broad range of applications I mean a broad range, home automation, security, wearables -- I'm just lighting a lot -- a lot of different broad applications with IoT. I would say that if you look just across the company both from a revenue perspective and from a design win perspective that is our strongest area. And we have been factoring an increasing proportion of our R&D activity into this area, we've also been adding software capability, largely Bluegiga coming in, is adding a significant software capability focused on connectivity but there is a numbers of different areas there where we believe we have to make selective adds as we move through the year to bring in additional talent to be able to meet the market opportunity that we've got in front of us as well as all of the next generation platforms and products that we have in pipeline. So we believe that that's the right thing to do given the market traction and we're trying to be as prudent as we can to maintain our investments on the infrastructure side and timing and to maintain our business on the broadcast and access side as well. So overall it's a careful balance but I think justified give where the markets are. I think the markets are really coalescing around IoT this year, around the various wireless standards. I believe we've got a best-in-class microcontroller platform and roadmap and we're just marching ahead with all those developments and I think the results for the year are going to prove that out.

Thanks, Tyson. A quick follow-up for John on gross margin. As Bluegiga ramps to a full quarter of revenue in Q2 and beyond, is it reasonable to assume that we're going to be at the lower end of the gross margin target range that you provided? And then do you need the chips -- your chips to ship into the module to kind of improve from that lower end? Thanks.

Yes, Ruben. I would not necessarily target to towards the low-end of the range. I mean, we provide the range to create some band around that. But there are opportunities for us to improve margins over the course of this year with growth in the timing business, which is, as you know, above the corporate average that can help lift the margin some. And there are likely some things we can do to help improve the module margins. Clearly, the item you mentioned is a major step that would be fourth coming and further out in time. So certainly, we have the opportunity to improve margins over the course of 2015 with growth and timing.

Your next question comes from the line of Matt Ramsey from Canaccord Genuity. Your line is open.

Good morning and thank you for taking my questions. Tyson, just a couple more follow-ups on Bluegiga. May be you could characterize this and give some revenue guidance ranges for 2015. May be a little bit of commentary around the growth profile of that business versus last year and sort of what you guys are expecting in the acquisitions there, to grow going forward?

Certainly, Matt. This is John. This has been a solid double-digit growing business for several years now. We've been impressed with the market traction that Bluegiga team has been able to execute on. And we provided a range for 2015 of $25 million to $28 million of new revenue for us that covers on a 11-month period of time starting from the closing date on January 30 through year-end.

Great. Great. Thanks, John. And then I guess to follow up on the gross margin side, may be you could give us a little bit of thought about what the weightings are there. I think there's multiple moving parts here, with the Bluegiga integration; may be some timing that's going to be a little bit softer in the beginning of the year and hopefully improve through the end of the year; and I know there was some IP-related revenue in broadcast that happened in 2014. May be some thoughts about all those moving parts, and just the granular nature of those, and the gross margin changes, and outlook. Thanks.

Certainly. First of all, we are very pleased with our gross margin performance for 2014. As you mentioned, we had some of the IP revenues but even excluding that we were solidly at 61% margin for 2014. So we feel like the company did a good job executing in that area. You touched on some of the moving pieces. You've got modules coming in somewhat below the average, possibility for timing to grow which is above the average, broadcast automotive we believe will be a grower in 2015 and beyond, which is above the corporate average, so those things can certainly help. We do not have any IT related revenue on the horizon right now. We'll keep evaluating that area but there is nothing to talk about right now on that particular vector.

Your next question comes from the line of Anil Doradla from William Blair. Your line is open.

Tyson, congrats on the good results. Bluegiga's (technical difficulty) is that how we should look (technical difficulty)?

Anil, this is Tyson. You are breaking up, we cannot understand your question if you could try to repeat it.

Yes. No, my question on Bluegiga was on Bluetooth and Wi-Fi more specifically; are you getting the modules for them and the protocol stack software. And they use third-party silicon? Or I mean, what exactly components do you get beyond just the module?

Right. So they have their own Bluetooth and Wi-Fi stacks both for Bluetooth classic and for Bluetooth smart. They have a Wi-Fi stack and some additional software as well and today that is running on third-party Silicon. So it's not our Silicon inside the modules today. They also used some microcontrollers which again are not our microcontrollers but you can imagine that those will switch over time. But also overtime, we will be, as our roadmap intercepts with module roadmap from a silicon's standpoint, we will be using that module capability to drive further sales of our own internal silicon but we intended to carry both of those modules forward in the near and medium-term where we are still partnering with third-party silicon providers to offer modules across a complete suite. And more significantly the software that we have will run on that third-party silicon but also run on internal silicon as well. So the software capability in some ways is more significant than the module capability per se. And it's also very good that we were able to as customers using our silicon in a module achieve high volumes and want to move on to an onboard design we can facilitate that in a seamless fashion. So we believe that having those captive module capability really helps us serve the full needs of the customer and connects us in a more significant way into the customer base in the channel.

Very good. And on broadcast audio for the automotive segment primarily, given the growth and potential contribution, which is becoming material, is there any seasonal patterns? I mean, will you see some seasonality in this part of the business?

Yes. I think at this point the ramp is so steep that it would be hard to detect any seasonality. So we did a 45% year-on-year. And at this point, it's just quarter-on-quarter we see continued growth in that automotive revenue numbers. We ramp a number of Tier 1 wins as we move through the year and into 2016 and 2017. It is a very nice gross margin profile, as well as we have today a fairly small share. So it's a pretty large market that we continue growing into for significant amount of time.

Your next question comes from the line of Ian Ing from MKM Partners. Your line is open.

Yes, thanks and congrats on the Bluegiga deal. So just a clarification. You said eventually half of Bluetooth would move towards the module approach. Do you expect an eventual similar mix in ZigBee and Wi-Fi, or for reasons would that be different? And what are the implications long-term on gross margins as just more connectivity moves towards modules?

Yes. We actually believe that this adds several billion dollars of potential stand to the company as we are able to directly address the module revenue on top of the silicon revenue. And that's not just in Bluetooth, I mean in the ZigBee and in Thread, space and even sub-Gigahertz we have a number of customer who today use modules and we think that that's going to follow a similar, if not even a greater trend, in those areas compared to Bluetooth, given the diverse nature of the markets that those serve. And today, on the Wi-Fi side, the majority of Wi-Fi because of the RF complexity shifts into modules and that's even true on the handset side which -- so it really underscores the importance of being able to develop solutions around modules and then make them easy for the customers to use. If you look at the long-term implication on gross margin, the way I view it is that the core module that the added cost to the module outside of the silicon will fundamentally be at a lower margin profile than the 60% range that we have on our silicon sales. And that's really driven by the fact that we're going to be aggressive at offering value to the customers in and out and offering competitive prices and gaining share and growing revenue. I think if you look at the overall gross margin dollars that we will achieve for modules compared to silicon sales, the gross margins dollars will be significantly larger in the module sales compared to a silicon sale into a module provider. And so we believe that on a gross margin dollar basis it's a net win and we believe that as we introduce our silicon into the modules that we will be able to even in the presence of being aggressive in the market to grow the revenue and also bring the gross margin profile of that business up somewhat closer to where we are as a company.

Thanks. Then my follow-up for John. Channel business now is 62% of sales; I think that's up from a little more than half in prior commentary. Do you have any granularity on Edom and Avnet as a percent of sales? I think those were 21% and 11% last year.

Yes, its similar levels and the distribution business will continue to be very important for us, and in fact Bluegiga, has extensive distribution business themselves. So that falls in nicely in terms of the overall channel strategy. So yes the channel is increasingly important to ourselves and will continue to grow as a percentage of ourselves.

Your next question comes from the line of Ryan Goodman from CLSA. Your line is open.

Hey, thanks for taking my question. Wanted to talk about the timing business. Just -- could you talk a little bit about the relative exposure by geography? I know you guys are pretty widespread there. But just may be which areas do you have the highest exposure in? Could you talk about some of the trends you saw in Q4 and what you expect in the first half of 2015?

Right. So if you look at the exposure from end application area, the majority of the revenue is going into the core communications infrastructure market so the wire line optical networking areas and that has a fairly even exposure across the U.S. and Asia with some exposure in Europe as well. So that's we're shipping to the top 12 networking companies in this area. So we ship broadly across the industry and don't have any specific customer concentration in timing. We have introduced and are introducing additional products that address the data center market and address the wireless base station market and that is an expansion of our SAM and we also believe that will be broadly exposed geographically, although we do see a lot of rollout activity in Asia driving some of the volume there. But its more -- that's more of a share gain opportunity into these new applications that we haven't been to serve in the past.

Okay. Then I guess for my follow-on, you had mentioned -- or it was mentioned in the initial comments that the litigation costs could go down in 2015. And I think something was supposed to happen with that in January. So just any update with where the litigation is now and what, I guess, the next milestone that we should expect there is?

Sure. The litigation had a formal theory in Washington, DC, before the ITC the first week of December. That was completed successfully and each party provided a brief to the presiding judge. The judge has until the end of this month to issue a ruling, which is a recommendation to the full ITC for approval. So the next milestone will be a formal ruling from the presiding judge before the end of this month. That will be very significant in terms of suggesting to us and all the other parties in this particular action of what direction it's likely to go, but it will not final until later in the first half of this year. From a litigation expense point of view, we had a very significant build-up of expenses in second half of the year leading to the hearing. They are tapering off in the first half of this year and hopefully we'll largely dissipate entirely if we prevail in this case and we'll be able to give you much better understanding of that when we report our first quarter earnings in April.

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

Thank you, Sean and thanks to everyone for joining us this morning. This concludes today's call. Good bye for now.