Good morning. My name is Lisa and I will be your conference operator today. At this time, I'd like to welcome everyone to the Silicon Labs Third Quarter 2016 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'd now like to turn the call over to Jalene Hoover. Please go ahead.

Thank you, Lisa. Good morning, everyone. Thank you for taking the time to dial-in. Tyson Tuttle, President and Chief Executive Officer; and John Hollister, Senior Vice President and Chief Financial Officer are on today's call. We will discuss our financial performance and review our business activities for the third 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 Web site at www.silabs.com. This call is also being webcast and a replay will be available for four 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 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 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. In addition, it is not our intent that the non-GAAP financial measures discussed today replace the presentation of Silicon Labs GAAP financial results. We are providing this information to enable investors to perform more 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 Labs Chief Financial Officer, John Hollister.

Thank you, Jalene. We are pleased to report outstanding results for the third quarter with revenue achieving an all time record at $178 million representing year-on-year growth of 14% as well as excellent earnings with GAAP earnings per share of $0.47 and non-GAAP earnings per share of $0.77. Each of these metrics exceeded guidance for the quarter due to upside in revenue, strong gross margin performance on product mix and favorable expense control. IoT revenue achieved a new record of $82 million or 46% of Q3 revenue. Wireless products performed particularly well with a continuing ramp in mesh networking ICs and modules as well as proprietary wireless products. Infrastructure products significantly exceeded our expectations with revenue up $38 million or 21% of third quarter revenue up 23% year-on-year, which is well-above our strategic growth target. Our timing products delivered a second consecutive record revenue quarter with strong demand for our high-end clocks and oscillators. We also achieved a seventh consecutive record in our isolation products. As we expected broadcast delivered growth in the quarter, with revenue coming in at $41 million or 23% of total Q3 revenue. Third quarter performance was primarily driven by seasonal strength in consumer including a recovery in our TV tuner market share over the past year. Broadcast automotive posted another solid quarter with revenue near record levels. As expected, access declined in the third quarter to $80 million or 10% of total revenue. We saw growth in all geographies during Q3 and the strongest performing end-market was industrial up nearly 30% year-on-year reflecting solid performance in our IoT and isolation products. Worldwide distribution revenue was 68% of total revenue and experienced another growth quarter. Third quarter non-GAAP gross margin ended significantly above expectations at 61% exceeding the high-end of our target model range and driven…

Thank you, John. We are delighted to report outstanding third quarter financial performance including 5% sequential and 14% year-on-year growth in product revenue, which reached an all time high. We are executing on our growth strategy targeting IoT and infrastructure markets and are seeing our efforts translate into strong financial results. Silicon Labs is well-positioned for success in the IoT providing technology that is connecting the world. We have built a comprehensive portfolio silicon, software and solutions to address IoT end-node applications. Our broad portfolio of multi-protocol wireless SoCs, ultra-low power MCUs, sensors, software stacks and development tools continues to grow. As the IoT evolves a new class of embedded application is emerging presenting feature rich and task intensive used cases. This growing complexity is driving the need for real-time operating systems or RTOS, simplifying software development for IoT applications by coordinating and prioritizing multi-protocol connectivity, SoC peripherals and other system level activities. You can think of an RTOS as an operating system for embedded IoT nodes just as Microsoft Windows is the standard OS for most PCs. To address this market need, earlier this month, we announced the acquisition of Micrium, the leading supplier of real-time operating systems software for embedded computing supporting more than 50 processor architectures and providing a commercial grade RTOS solution across key embedded markets including automotive, medical, avionics, industrial and consumer electronic devices. For example, NASA's Mars rover runs on Micrium's RTOS making this not only the leading RTOS on earth, but also on the Red Planet. The strategic acquisition serves as a unique differentiator further solidifying Silicon Labs position as the leading IoT solutions provider and accelerating the evolution of the IoT ecosystem. Silicon Labs and Micrium share a common goal to provide innovative hardware and software solutions to the embedded systems market…

Thank you, Tyson. Before we open the call for the question-and-answer session, I would like to announce conferences that we will participate in during the fourth quarter, including the Credit Suisse 20th Annual Technology Conference in Scottsdale on December 1st and Barclays Global Technology Media and Telecommunications Conference in San Francisco on December 7th. We would now like to open the call up for your questions. To accommodate as many people as possible before the market opens, we ask that you please limit your questions to one with one follow-up.

[Operator Instructions] And our first question comes from the line of Anil Doradla from William Blair. Your line is open.

Hey, guys. Congrats on the fantastic results. Couple of questions, when I look at the big picture and look at your results from a growth point of view, gross margins point of view and operating margins point of view, we have not seen some of these metrics after maybe 2012/2013, clearly you guys are executing well, it sounds like you are taking market share. But, Tyson, if I were to step back and simplistically look at it, how would you explain these -- basically these wonderful results.

Since 2012, we have been focusing our efforts both from a M&A perspective and from an internal development perspective on the IoT and the infrastructure market. And as you know in the semiconductor industry, it takes some time to turn the ship and to get the products out and to get them designed into customers and we are pleased that we are starting to see good results particularly on the IoT side where we had 46% of revenue now coming from IoT, strong design win traction, solid year-on-year growth, solid margins, especially on the infrastructure side and timing and had a record quarter in timing which comes above the corporate average as well. So that help to drive good performance on the margin and then close down to the OI side. So I think that for the last four years, we have been investing and are now seeing the fruits of those investments and the design win start to take hold and for the revenue to start to ramp. I would also add that the proportion of our revenue coming out of these strategic growth vectors is now over 2/3rds of the total revenue. So the strategic growth vectors are -- that is now becoming a predominant piece of our revenue. And so that also helps to drive the growth.

Very good. And as a follow-up John, looking at the balance sheet, we saw an $8 million increase in deferred revenue at distributors. Can you help us understand what happened there?

Certainly, we had a high rate of shipment end of the distribution channel through the quarter. We had somewhat light day sales in the inventory and the channel as we wrapped our Q2, so really see that primarily as a reloading the channel and looking at the guidance we were able to offer for Q4 like that as a reasonable amounts of inventory we would be carrying out there.

Great. And congrats once again guys, great results.

Thank you, Anil.

Our next question comes from the line of Blayne Curtis from Barclays. Your line is open.

Hi, guys. Thanks for taking my question and congrats on the great results. Just curious John, when you look at the OpEx you obviously did an acquisition although I think it's small, can you talk about what's driving the increase and is that the right phase as you look into March or some cost amount from the deal?

Yes. We saw favorability in Q3 really with a somewhat lighter tape-out quarter as well as the seasonal roll-off of some of the fringe related costs for employees. Looking at Q4, we are layering in the acquisition related headcount, which is about 20 folks that's roughly $1 million. And then, we also have an increase to the number of tape-outs that were projecting for Q4. As we head into 2017, we are going through the annual operating plan construction right now with the management team and then with the board. And we will have more to talk about on the January call. But overall, we are pleased with the OpEx control, in 2016, we had initially guided 5% year-on-year growth and we are going to come in at this mid-point roughly just below that. So pleased with the progress we are making in terms of operating margins as well.

Great. And then, video has been such an up and down business, looks like you -- it finally came back for you in September. Can you talk about, looking into December, you guided it flat, is that a mix of video still being up and the rest down or how do you get to that flat, can you just about the overall kind of health of that video in any dynamics that you saw in the quarter.

So, the year-on-year performance in video was quite strong. We recovered our market share at our lead customer that was taken down in the second half of last year due to the Cresta Technology lawsuit that is largely played out. So we have been able to maintain our market share there. And we are pleased with the performance in the third quarter. In the fourth quarter, we think that broadcast will be approximately flat, Q3 is typically a seasonally high quarter, but the booking patterns suggest that we will have reasonably flat performance in video. And then, of course, you would expect that to tail-off as we head into the first quarter just due to consumer type trends. So, overall, have got about mid-60s market share now on the TV tuner front-end, we have been able to recover that. And feel quite good about our position in the video market.

Great. Thanks guys.

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

Yes. Good morning, guys. Tyson, I just want to ask quickly, I think that the long-term growth rate that you guys subsided for your IoT business is in the 20s and start with the two -- I hope to understand a little bit more about the organic growth rate in Q4. I know you guys had several acquisitions that got folded into that business last year and it looks like the organic clean growth rate is now at that 20s level. So if you could tee that out a little bit of course to just help us model that organic business on a go forward basis. That would be really helpful. Thanks.

I think that using a long-term organic growth rate in the IoT business of 20% that's about what we will hit this year is the right number to use.

Got it. Thanks. And I think Tyson on your prepared remarks you talked about 30% growth from sort of global infrastructure spending into your business or global industrial spending into your business. Maybe you could talk a little bit about that and in particular given an update on how things are progressing in China and then the [afib] [ph] microcontroller market where there is some movement in market share I believe. Thanks.

So industrial is our fastest growing market segment. And so that is driven by both our IoT products and our isolation products. Isolation going into things like motor controls and power supplies, hybrid electric vehicles, and IoT going into things like metering and security systems, commercial building automation, lot of industrial type applications there and those have been the fastest growing component. And on the IoT side, I would say that the growth is -- there is a lot of different wireless application. So the growth on the wireless side has been stronger than the microcontroller side. We have seen nice growth year-on-year on the 32-bit MCU side and fairly consistent performance out of our 8-bit microcontroller. We had single-digit growth year-on-year in 8-bit. So we are -- we have been introducing new products there. And do continue to see that as an attractive market for us. But the 32-bit year-on-year did have somewhat higher growth than the 8-bit that we saw growth in both 8-bit and 32-bit year-on-year.

Thank you very much.

Our next question comes from the line of Tore Svanberg from Stifel. Your line is open.

Congratulations on the results. First question, Tyson, we are now starting to talk about RTOS into the revenue mix, I guess first of all, is there a way to monetize RTOS and how does that kind of change the dynamics for you as you start -- as you continue to work with other operating systems.

So Micrium was the leading RTOS in the industry, if you look at the embedded market surveys, they had somewhere north of 30% to 40% market share. And that was supported across a wide variety of processor architectures like 50 different processor architectures and so a lot of that licensing revenue comes from a broad range of end products. So they license end products to use the RTOS and we will continue to support those various processor architectures and continue to promote this broadly throughout the market. So that's one path to monetizing the revenue. That's in mid-single digit millions of revenue that comes in and that as a software licensing model. The second way related to monetize the RTOS technology is to deeply embed that into our IoT devices. And so to optimize the RTOS programming methodology and to integrate our stacks and to integrate low power functionalities into the RTOS that will further differentiate our products. So as we take our products out as that functionality continues to increase with multi-protocol activity and more rich applications having that RTOS capability will further differentiate our products and help to drive differentiation in the market. And so I believe long-term that is the more significant component of this and it still opens up the opportunity to move into more of a software licensing model for services and maintenance and those sorts of things as well.

That's very helpful. And as the IoT and infrastructure pockets are now more than 2/3rds of revenue, how is that kind of change the way you manage the business, I'm thinking more sort of from a visibility perspective, does it give you a little bit better backlog going into any given quarter and that in turn give you a better handle of the way you manage your expenses?

Yes. Tore, this is John. It's pretty consistent. We generally see six to eight weeks of lead time on orders as we enter a quarter and the IoT and infrastructure portfolios follow a similar pattern. So, those were important tracking points for us. We also measure our opportunity and design win activity as well for these products, but it's just reasonably consistent with the rest of the portfolio.

Sounds good. Great quarter. Thank you.

Our next question comes from the line of Harsh Kumar from Stephens. Your line is open.

Hi guys, let me also add my congratulations. I had a couple of questions. Tyson, first one for you, what's the biggest difference between like an RTOS from Micrium versus what's being used today. Could you also tell us maybe I think catch if you said in the press release how much was paid, is it accretive or dilutive in the near or mid-term?

The RTOS is -- a lot of embedded devices don't use an RTOS at all. The applications are written directly on the processor and that we call it kind of a bare metal design. And as the number of functions grows as the timing -- the precise timing of those applications or protocol stacks becomes more and more important. And also just from a programming complexity standpoint keeping all of that coordinated -- the RTOS is really a layer that runs on top of the bare metal and the applications run on top of that. So the RTOS helps to coordinate the timing and simplify the programming in embedded devices. So we are talking about -- we're not running Android or Microsoft Windows or any of the higher level operating systems, but this as for embedded devices, a very similar function to what you would see in a phone or on a PC.

Yes. Harsh, it's John. On the transaction, it was roughly a $14 million purchase price with the revenue as Tyson mentioned and expenses as I mentioned roughly equivalent so that's -- that's an offset impact. So it would be slightly dilutive on a GAAP basis and neutral on a non-GAAP basis.

Understood. And then another one for Tyson. Tyson, we're seeing IoT sort of go longer range here recently. I'm specifically mentioning things like LoRa that Semtech is doing also bunch of cellular wireless type application that we're signing to see here in the marketplace. My understanding is, you guys don't have that yet. Do you feel that there is a need for you to go attach that down the line at this point in time?

There are number of competing technologies out there. You have got the cellular carriers taking LTE technology down into lower power, lower data rates to support IoT type devices. You have the LoRa technology from Semtech getting deployed by a number of carriers. And then you have another company Sigfox which is deploying networks. We actually have engaged with Sigfox for a number of years and our RF and microcontroller solutions are used in a lot of the Sigfox deployments. But if I look just really out that the market has really not taken off in terms of the shipments and deployments of these longer range IoT networks. If I look at the spectrum that the cellular carriers have and the predominance of the LTE technology. It's my belief that LTE is going to be the winner, if the cellular carriers are able to create a billing structure that facilitates the lower bandwidth and lower cost type applications. That being said, we are continuing to monitor all of these technologies, but our focus today on the mesh networking technologies, proprietary technologies and Bluetooth technologies were the predominance of the volume exist today.

And then last one from me and I promise to get off after this. Infrastructure down, any specific area that is hurting more than others are just offset from the large 3Q -- calendar 3Q?

We just had a very strong quarter in both timing and isolation and given the lumpiness that we see in ordering patterns particular from the carriers on the timing side, we think that will be down slightly here in the fourth quarter.

Congrats again guys. Thanks.

Our next question comes from the line of Cody Acree from Drexel Hamilton. Your line is open.

Thanks for to ask the question and congrats on the results. Could you maybe talk about go back to your Tyson, your remark the 100-gig up tick you said it was coming in little earlier, can you give more color there?

So in the timing, we have traditionally been strong in optical networking, long distance in metro area networks and the 100-gig is the next evolution of that. We've been introducing products in that area and working with customers here over the last couple of years and we've actually seeing the adoption of that to be a little bit faster than we had thought it was going to be. So the newer product revenue coming out of timing targeting these 100-gig devices is starting to ramping that, did contribute to the success that we saw in Q3.

And then, how did the margins compare in that business?

The timing margins are above the corporate average and that was partly responsible for the over performance on the gross margin side particularly with the product mix being a slightly skewed towards timing so that being -- that is the strongest margin component of our business and the new ramps would tend to suggest that's going to remind so.

And then lastly, just on modules and SoCs, can you talk about how bigger piece of business that is and how that continues to grow for IoT. How does that maybe change some of your application focus on the future?

So the wireless business is now larger than the microcontroller business in IoT and that's spread across SoC designs which are primarily the higher volume type applications. And then, modules which are more friendly to the channel, easier to design and includes the antenna and come at a higher ASP. The SoC sales are still larger than modules, but through the acquisition of Bluegiga and Telegesis, we do have significant volumes of the module sales on both 15.4 ZigBee and Bluetooth and we continue to believe that that's a good strategy to keep us connected with our customers to make it easier to use our products and to drive the channel sales and to streamline our support activities as well. So that -- wireless business is going to continue to be a mix of modules where we do have a higher gross margin dollar content and a higher ASP that they come at a slightly lower margin and then for the higher volume accounts when they want the price reduction, we can move people over to an SoC design, which takes a little bit more support where you have to design the RF and then go through the certification of the antennas and that sort of thing, but that where we can achieve higher margins on the SoC side.

Thank you.

Our 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 very strong operating margins and the results. The first question is just following up on some of the comments on Micrium. Looks like it's got all the hallmarks of classic Silicon Labs acquisition that is ultimately quite strategic and revenue generative either directly or indirectly for the firm. But that as a backdrop, Tyson, can you just give us an overview of how the company is now with that RTOS acquisition looking at some of its technology or product needs and what should we expect with regards to M&A going forward?

We believe that we have through the acquisitions of Ember in 2012, which brought in our mesh networking technology and the decade long experience in ZigBee, and then, moving into Thread. And then, we acquired Energy Micro which brought in class leading low power of 32-bit ARM based microcontroller technology. And then, with Bluegiga coming in and bringing in the Bluetooth stack and the Bluetooth modules, we believe we have a complete -- and then now with Micrium, we have a complete set of technologies to take these connected device applications, wireless across a number of different standards, multi-protocol designs, the underlying operating system which is going to help us scale as these applications become more full featured as well as the wireless functionality continues to evolve. So we think that we've got a lot of the technologies and how certainly to compete within the markets that we're in. We continue to look for areas with which to both make investments internally to expand into additional wireless standards or to integrate additional functionality, but that being said we think that in IoT that we have a class leading best-in-class portfolio parts and in all the pieces that we need to compete and carry those product going forward.

Thank you. The next question is more for John on mix. John, as we look at the IoT segment clearly it's performing quite well and there are two big areas of end-market exposure industrial and consumer. Can you characterize the degree to which revenue mix is shifting in the second half and in the fourth quarter specifically more from industrial to consumer and are there discernible seasonal patterns that are emerging with these two end markets as we go to the year.

Yes. Craig, it's a good question. Not so much, there is some consumer elements in the third quarter which adds to that. But, really the more notable item is the module and IC mix shifts. We did see a bit stronger IC mix in third quarter than we were expecting that was also a factor that was contributing to the upside performance in gross margin. And conversely we're seeing increase in module sales coming up in Q4 that's having the inverse effect. So we will continue to see how this develops overtime, but the industrial continues to perform quite well.

Thank you. And then, lastly, in a clarification, I believe in the prepared remarks it was stated that the change in control procedures weren't triggered by any specific inbound increase, but can you clarify if there have been any inbound increase over the period or you had a new compensation officer on your board.

We have not had any active inbound interest or offers come into the company. This was not driven by any inbound interest and it was driven by the fact that our new comp share committee or comp committee share was coming from the company that had just gone through a change in control situation and was reviewing all of our practices and documents and highlighted this is an area that we should get more inline with the market.

Make sense. Thanks guys.

Our next question comes from the Suji Desilva from ROTH Capital.

Hi, Tyson. Hi, John. Congratulation on the 20th anniversary. The IoT market industrial seems strong. What are the application that are driving that smart metering et cetera? And I think the end markets in IoT developing a little slow than expect relatively?

The IoT markets continue to be quite broad. So if you look at the ones that we've highlighted in the call, you've got probably leading is home and building automation followed by I would say smart metering, you've got the smart metering rollout proceeding in the U.K., that's an example of one that we've been working on for four or five years and is finally taking hold. So you can say that a lot of these applications, some of them surprise you with the quick ramp and other ones take longer than you expect. But, overall, year-on-year you continue to see an expansion of applications and expansion of customers reflecting, I think a long-term growth trend in IoT across a broad range of applications. Some of the new ones that we see coming up are connected lighting is going to be very important market for us as you see the both consumer, industrial, commercial lighting and being driven by energy savings. And then, just a broad range of industrial automation type applications that continue to layer on. So, I would probably characterize there has been a lot of hype and a lot of discussion around the IoT and a lot of high expectations, but I view this as a decade long trend of connecting everything up in the world and this is going to continue to be a very nice set of markets for us, a very diversified set of markets and high quality growth for a long-time to come.

Okay. And then, my other question is on broadcast auto, can you talk about your progress there to the shared level that you are targeting, can you update there? Thanks.

Over the last couple of years, we've seen a significant increase in the broadcast automotive business driven by some Tier-1 wins in both Europe and U.S. And we also have been ramping some of the Asia both in China and some of the aftermarket stuff in Japan. These types of wins come on kind of an annual basis. There are things that come with a high degree of visibility, you work on them for a long-time and then may ramp. So we've seen a nice growth here over the last couple of years. It's been fairly steady business here over the last year or so and we continue to see that as an important growth factor for us albeit at a measured phase given the time cycles that are required to bring on these new programs.

Okay. Thanks again.

[Operator Instructions] Our next question comes from the line of Ian Ing from MKM Partners. Your line is open.

Yes. Thanks, good quarter. So the IoT ecosystem looks like its evolving pretty quickly, you are nimble in terms on getting the right capabilities whether it's RTOS or modules. Do you think there is stabilization at some point and perhaps you can deploy more of your $4.40 per share in cash which was buyback instead of keeping dry powered around the acquisitions?

Ian, we'll continue to see how the market evolves and what capabilities we may want to add as Tyson alluded earlier. We do feel good about the portfolio that we've assembled both organically and through some of the key acquisitions that we've executed. I will note that we are also pleased with the performance we've had in the buyback on the stock we did around 70 million in both 2014 and 2015. And I've executed another 40 million thus far here in 2016, so we think those are kind of the twin pillars of our capital deployment activity and are making progress on both factors.

So Ian, one more comment on that is that M&A that we've done here over the last four years has been focused on IoT, but we also have a high-quality infrastructure business both in power and with the isolation products and in timing. So I wouldn't necessarily restrict thinking on the M&A side just around IoT. We have a very high-quality business on the infrastructure side and there are continuing to be a lot of assets out there that could be attractive.

That's helpful, Tyson. And then follow-up here, I know its bit early, but any implications on the AT&T-Time Warner deal. I think in the past you've talked about perhaps infrastructure spending implications as some acquisitions happen at these telco and content levels.

Yes. Ian, we don't have anything to comment on that at the moment. We'll continue to see how that merger activity plays out.

Thanks. And then one last follow-up here, you had really strong performance in the quarter despite some pretty sharp declines in the access segment looks like that's going to be down about 20% plus for the year. I mean is that sort of the new trend or does it stabilize at some point and looks like that headwind is starting to become more in the rear view for you here.

If you look at the guidance that we've been giving on the access over a multiyear basis, we've talked about that being down 10% year-on-year. We had quite strong performance in 2015 out of access. It was actually -- it was down on -- I think pretty close to flat year-on-year. So that was like 14 to 15, so this year it's come down but we think that steady kind of 10%, if you are going to model things that 10% down year-on-year is a reasonable way to model access. These are long lived markets. We do see the number of ports on the voice side of modems declining over time. These are mature products but once that generate high-quality revenue and we continue to maintain share there.

Okay. Thank you very much.

We have no further questions in queue. I'd now like to hand the call back over to Jalene Hoover.

Thank you, Lisa. And thanks to everyone for joining us this morning. This concludes today's call.