Good morning. My name is Marcella, and I will be your conference operator today. At this time I’d like to welcome everyone to the Silicon Labs Fourth Quarter Fiscal 2017 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 will now turn the call over to Jalene Hoover, Director of Investor Relations and International Finance. Jalene, please go ahead.

Thank you, Marcella, and good morning, everyone. Tyson Tuttle, Chief Executive Officer; and John Hollister, Chief Financial Officer, are on today’s call. 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 in the Investor Relations section of our website 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 subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call, and assume no obligation to update these statements in the future. We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will make reference to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company’s earnings press release and also in the Investor Relations section of Silicon Labs website. I would now like to turn the call over to Silicon Labs’ Chief Financial Officer, John Hollister.

Thanks, Jalene. We are very pleased and proud to announce that our revenue for the fourth quarter surpassed $200 million for the first time ever. This is a remarkable milestone for us, reflecting the successful multiyear transition of our business model, while achieving target operating model, profitability and growth for the quarter and full year 2017. Total revenue for the fourth quarter ended at $201 million, which was at the high-end of our guidance range and up 10% year-on-year. For the full year, we posted strong performance, with revenue ending at $769 million and delivering 11% annual product revenue growth. Our IoT products led these strong results with an eighth consecutive record revenue quarter of $109 million, representing 54% of total fourth quarter revenue and delivering year-on-year growth of 28%. Looking at the full year, IoT delivered $395 million in revenue at 26% annual growth. We continue to see excellent traction in the adoption of our Wireless products. Ramping demand for mesh networking is a key driver of our success followed by broad adoption of connectivity solutions, using proprietary and Bluetooth protocols. We also had a very good year in the MCU market, with our 8 and 32-bit MCU products posting high single-digit growth for 2017, exceeding expectations. Our Infrastructure products also grew in Q4, with revenue ending at $39 million, up about 5% year-on-year. Timing revenue grew slightly reflecting some stability. Looking at the full year, Infrastructure products contributed $152 million to total revenue and delivered 7% annual growth, led by our isolation products, which achieved robust double-digit growth. Our timing products were impacted by the general slowdown in optical networking demand. Broadcast revenue declined as expected to $36 million in Q4 due to typical seasonality associated with our consumer products, primarily video. For the full year, Broadcast declined…

Thank you, John. We are very pleased to report outstanding fourth quarter and full year 2017 financial performance, including 10% year-on-year product revenue growth for Q4 and 11% for the year. We have delivered target operating model performance on product revenue growth, non-GAAP gross margin and non-GAAP operating margin for five of the past six quarters and on full year 2017. Continued growth in our IoT and Infrastructure products is the key driver of these results. More and more standalone devices are becoming connected to the internet. Adding wireless connectivity to everyday things such as lights, power tools and thermostats greatly enhances their value, making them more convenient, secure, easier to use, track and upgrade. Creating these connected devices requires integrated, comprehensive solutions, including low-power wireless SoCs and modules, a variety of protocol stacks, multi-protocol connectivity, advanced security features, energy and device management and development tools to simplify the design process. To meet this challenge, Silicon Labs offers the industry's most comprehensive portfolio of connectivity options for the IoT. We see the IoT as an $8 billion market, growing to about $13 billion over the next five years, which creates a tremendous long-term growth opportunity for Silicon Labs. Supporting tens of thousands of customers and thousands of applications requires a platform-based hardware and software model to scale across this large and growing market. Our Wireless Gecko platform provides a flexible, cost-effective means to support end-market needs, drive portfolio efficiency and control the silicon and software at the heart of the device. By controlling the integration path, we will continue to lead in IoT SoC design. In 2017, our IoT products surpassed more than half of our total revenue, achieving annual growth of 26% and exceeding our 20% strategic growth target. Our wireless products now make up more than 55% of…

Thank you, Tyson. We would now like to open up the call 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] Your first question comes from the line of Cody Acree from Drexel Hamilton. Your line is open.

Thank you for taking my questions. Tyson, could you just talk about – you made a brief comment in your opening statements or John, I guess did, about some improved visibility in optical, obviously you’ve been working on that for some time. Just curious on what you’re seeing and what’s your expectations for 2018?

Yes, if we look at the performance that we have in 2017 in optical, we were definitely disappointed by – it did not hit our expectations. We were down about 5% for the year in timing. And as we look into the forecast in 2018, it’s a combination of the new product introductions driving a return to a more normal pattern as well as what we believe to be a little bit better inventory situation within our customers and a little bit healthier ordering patterns, more similar to what we were expecting last year.

Are you starting to see better orders there?

Yes, Cody. Cody, this is John. We are seeing some improvement in the market. It’s part of what enabled us to guide the Infrastructure product category up for Q1.

And then, as my follow up. John, if you would just talk about your OpEx increase. Is $80 million a new baseline for 2018, are we just growing from there? Is there any volatility or any opportunity for any pullback from there? And then, I guess, just as you look at OpEx spend, you’ve had some really nice strides in your operating margins, does this higher spending rate start to maybe limit some of your op margin improvements?

Yes, Cody. So yes, $80 million is a reasonable new baseline. You will have some puts and takes through the course of the year. There is a seasonal uptick in payroll taxes and in infringe overall, in the first quarter. But we do expect to pick up the hiring rate here. So seeing that as relatively flattish, if not a little bit of growth through the course of the year, is a reasonable way to look at this. And yes, as we’ve indicated in recent calls, we do see an opportunity with the growth in our opportunity pipeline to add to the team and both in areas of software and hardware design as well as in sales and application support. The purpose of this is to continue to build out the platform and the portfolio and then downstream to support this large growing customer base. We feel that fundamentally the strategy that the company is undertaking is working and the market opportunity is large and diverse and the moment is here to continue to invest in the business.

Thank you. And congrats on the progress.

Thank you.

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

Hey, guys. Thanks for taking my question. I just want to ask on Broadcast, I know this one is a hard one to forecast, it only declined low single digits, from the 10% out there. But it’s actually growing in March, sometimes it’s down. I guess, maybe if you could just talk about is there anything outside of the fluctuation is the seasonality here? Is there anything structurally in that business that would cause the 10% decline?

Yes, Blayne, this is John. We had a very good year in fiscal 2017. We had the opportunity to retake some share in the China market that helped bolster our numbers last year. Looking forward, we do see a continuation of some of the secular trends that exist in this market, with a substantial market share position that we have, roughly at two-thirds of the overall market and continuing ASP declines. So those are the main factors. We do see an opportunity to grow the automotive radio business as well this year. But the consumer declines we forecast would be at a greater rate than that.

Great. And then, just on gross margin, I understand the mix that you mentioned favorable trends in IoT, I was wondering if you just elaborate on that for December? And then the forecast, kind of 59% for the year at the midpoint. And I know there’s been fluctuations between modules and products in IoT. If you can talk about anything factors for this year as well?

Yes, we had a very good quarter in the fourth quarter in the 8-bit business, with some superior margin performance on some of those high-precision 8-bit products. We also had a great quarter in fourth quarter in the 15.4 IC space. So just overall, in IoT we had some favorable trends and we see an opportunity to continue to operate around the midpoint of our gross margin range and we were guiding just above that model for first quarter.

Great. Thanks.

Your next question comes from the line of Suji Desilva from ROTH Capital. Your line is open.

Hi, guys. I just wanted to drill in on the Infrastructure a little bit more. In terms of your 10% year-over-year guide for 2018, what are your assumptions about timing and the comms outlook in there versus the optocoupler?

Yes, Suji, this is Tyson. If you look at the guide on Infrastructure, it’s really a combination of growth both in our isolation business as well as a resumption of growth in the timing area. So we are forecasting increases in both of those product categories for the year.

Okay. And then as my follow up, you recently acquired a Wi-Fi concerns entry, can you talk – update us to how that technology is layering in and whether that’s a longer-term opportunity or whether you see that coming around the corner?

Right, so with Zentri, we brought in a set of Wi-Fi modules as well as a device management service that takes – basically connects those modules into the cloud securely and lets you manage and update those. In combination with that, we’ve got an internal development that we’ve been talking about for quite some time of developing Wi-Fi internally on our next generation IoT platform. And we view that as an essential part of multiprotocol connectivity for the IoT. And so that team has also been working to implement the – basically the operating system and all the protocol stacks for Wi-Fi as well as the tools to enable that to be used in a broad range of applications. They would be similar to the WICED platform that Broadcom sold to Cypress. But we’ve kind of taken that to the next level in terms of cloud connectivity and device management. Those products are out sampling to alpha customers. And we plan, as we introduce our next generation IoT platform with lower cost, lower power and an enhanced feature set that, that would be part of that offering.

Okay, great. Congrats on the results guys.

Thank you.

Your next question comes from the line of Ravindra Gill from Needham & Company. Your line is open.

Yes. Thanks for taking my question and congrats as well. On the IoT business, in the past you kind of talked about the split amongst wireless MCU and modules. And last year you saw a lot of strength in the 8-bit, 32-bit microcontroller market. I was wondering if you could maybe talk a little bit about the mix going forward in 2018. And specifically, within Wireless, is there one, kind of, protocol or connectivity standard that you think is going to grow faster than the others versus say, last year?

So if you look at IoT, we’ve got now the Wireless business is over 50% in fourth quarter it was about 55% of the IoT revenue. Actually, I’m sorry, that the IoT revenue was about 55% of the overall revenue. The Wireless is now the fastest growing and largest piece of that. You also have to remember that Wireless has 32-bit microcontrollers integrated in that. So there’s a little bit of a pull from the – from the microcontroller category into Wireless where you’re essentially adding wireless to a 32-bit MCU. And so we have a number of customers that are making that transition. We saw solid growth in our 8-bit microcontrollers. We’ve continued to invest in that portfolio with our EFM8 products and expect to continue to see some growth in that category. You’ve also got 32-bit the MCUs. And so basically, the microcontroller category, we expect to see some growth in that. But the larger portion of the IoT business and the faster growing piece is Wireless. That’s a combination of modules and chips. And we continue to see strong demand for both modules and ICs and there will be a mix between those. The fastest growing piece is really in our mesh networking products. So you’ve got very, very strong adoption of 15.4 Zigbee across a variety of markers in metering and in lighting, in home automation and others. We’ve been introducing products that also combine that with Bluetooth low-energy functionality. And that, plus just standalone Bluetooth are also strong growers for us, and you've got modules and chips, both within – both of those categories, with the higher volume customers moving into the chip on board and the broader market using models. So we see growth across the board within IoT. We didn't mention sensors but we also had some – we've announced some new sensors and have growth in that area as well. So there’s modules, Wireless, all of the various protocol standards. This is really our first generation platform that we now fully have out and beginning to ramp into the market. And with the development of our second generation platform following close behind that. So we're very excited about our opportunities in the IoT market right now.

Very good. And my – for my follow up on IoT as well, could you maybe update us on the competitive landscape, this year say versus in the previous years. Now that the IoT market has existed probably for about say three, four years now and it's starting to become a real market, although it's fragmented. Wondering if you could maybe describe how the competitive landscape has, kind of, changed over time?

Yes, so if you look at our overall strategy, about six or seven years ago, we really targeted these low-power end nodes with full levels of integration, targeting a broad variety of IoT applications. We've talked about what a lot of those are. These are traditionally applications that might not have been wirelessly connected. They might have had microcontrollers inside but now you're adding wireless connectivity. And so we focused our integration in software and tools on that connectivity aspect. And now we're seeing those markets starting to really take off. You look at home automation, you look at metering, you look at a lot of industrial applications, really no new product is viable now without having some level of connectivity. A lot of the traditional connectivity providers really got it coming from the mobile phone. And so that would be where you have Wi-Fi and Bluetooth combo chips. But it's not where you have the same level of integration as is required in a lot of the high-volume IoT applications. And those are really optimized for mobile phone type of energy and functionality. So we've been optimizing this with the mesh networking, with Zigbee, with Bluetooth low-energy. And now adding a low-energy version of Wi-Fi into that in our next generation platform. So I think from a competitive standpoint, we've got companies like TI have been there in the past with a variety of wireless protocols. You've got Microchip, which has made a number of acquisitions there. But we view our ability to do the level of integration, our focus, the complete offering that we have from modules to all of the software stacks that we're doing internally and the way we've internally and the way we've integrated those together, we really think that we've got a multiyear lead within the market from a comparative basis. So we're competing mostly with the microcontroller companies and more discrete solutions, somewhat with the mobile phone optimized solutions, like you would see from Cyprees or from Qualcomm or MediaTek. But in terms of the mainline high-volume applications, we think that our level of integration functionality really stands above the rest right now.

All right, great. Thank you and congratulations.

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

Yes. Thank you and congratulations on the another record. So first of all, I was just wondering what voices an interface does for your IoT business types? And obviously, at CES, clearly voice in interface is becoming a pretty big deal in the IoT landscape. And I was just wondering if this – does it change it all, does it accelerate the growth of the market? If you could just comment, that would be great.

Yes, we saw a lot of activity around voice interface at CES. Our chips are integrated in a number of the gateways that are enabling that, a lot of the devices that are enabling that. But I view it more as that – the convenience of voice control is really an enabler for the market. It really helps to unify these use cases and Echo systems and the interoperability of devices, it really makes the connection of things more useful. And so I view it as an interesting opportunity from a revenue standpoint for us to offer chips into the voice control devices. But that's the bigger impact, I think is in the proliferation of these Echo systems and networks and additional devices that you're going to be controlling with that interface. And just the efforts that the Echo system providers are doing to integrate all of that together is a net win for the overall IoT market in deployment.

Very good. And as a follow-up question for John, if we look at the whole year calendar 2018 given the new tax policy, any rate that you want to guide us through at this point.

Yes, Tore, and it's preliminary. Our understanding of this continues to refine as we comprehend the numerous changes embedded – encompassed in that new legislation. The guidance we provided for first quarter on a non-GAAP basis could be viewed for the rest of the year, but we'll definitely need to continue to look at this and provide further updates as the year progresses.

That’s good. Thank you.

Our final question comes from the line of Craig Ellis from B. Riley FBR. Your line is open.

Thanks for taking the question. Let me start just by noting that it was an exceptional 2017 performance guys, given the headwinds that you overcame in timing to perform well against the target model. Tyson, I wanted to start with – related question, and I'll tie 2 different things together. You talked about the mix of Wireless within IoT getting to 50%. As we look out over the next couple of years, how should we expect that to evolve? And somewhat similarly with distribution now 73% of sales, is that a normalized level or where would that continue to go up as well?

So let me first start with Wireless. We certainly, see the growth in the Wireless area being up 40% for the year and now over half of the IoT business. And we see those trends continuing going forward. So we see Wireless continuing to outpace the growth within IoT. So it's going to continue to become a larger and larger fraction of the revenue going forward. So you've got growth in microcontrollers, that's going to be a significant base on the 32-bit side. We have a common platform between those and our Wireless products have continued to see opportunities for standalone microcontrollers. But the number of opportunities that we see on the Wireless side is – if I look at the traction that we had and just the pipeline opportunity and the customer engagement on the Wireless side, we think that we have a significant competitive advantage and a very large market opportunity there that's expanding. In terms of Disty, we saw an expansion of the Disty business. We continued to drive a lot of activity and optimization within our Disty Channel. And if you look at the mix, so I think that, that mix of – 73% in the fourth quarter, I think that, that's in the range that we're going to continue to see going forward. We have a number of customers that we serve directly and we continue to optimize within that range. But we still do rely heavily on the distribution channel for engaging into the broader market.

Thanks for that. And then the follow up for you and maybe for John as well. I think in John's prepared comments, he mentioned the $770 million cash balance and even after the Z-Wave acquisition that would leave the company with more than $500 million, especially given the robust free cash flow. So at the risk of putting the cart a little bit before the horse, how should investors think about the company's potential use of that $500 million? You've been active with the buyback in the past, you've executed well on strategic M&A. Do those remain the priorities or do they shift a little bit, given how the business is scaling here?

Yes, Craig, this is John. Really nothing has changed. So we will continue to look at M&A as a use of capital in the company. And with the Z-Wave asset transaction headed towards its final step, we will continue to look for additional ways to grow the business inorganically, both in IoT and potentially in Infrastructure as well. And of course, the other pillar of our capital deployment is the share repurchase program we have, an open authorization and we will continue to be opportunistic about that as well.

Thanks and good luck guys.

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

Thank you, Marcella. And thank you all for joining us this morning. This concludes today's call.