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Edited Transcript of SLAB earnings conference call or presentation 26-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Silicon Laboratories Inc Earnings Call

AUSTIN Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Silicon Laboratories Inc earnings conference call or presentation Wednesday, April 26, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* G. Tyson Tuttle

Silicon Laboratories Inc. - CEO, President and Director

* Jalene Hoover

Silicon Laboratories Inc. - Director of IR & International Finance

* John C. Hollister

Silicon Laboratories Inc. - CFO and SVP

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Conference Call Participants

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* Atif Malik

Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst

* Blayne Peter Curtis

Barclays PLC, Research Division - Director and Senior Research Analyst

* Cody Grant Acree

Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst

* Craig Andrew Ellis

B. Riley & Co., LLC, Research Division - Senior MD and Director of Research

* Harsh V. Kumar

Stephens Inc., Research Division - MD

* Joe Hodes

William Blair

* Matthew D. Ramsay

Canaccord Genuity Limited, Research Division - Principal and Senior Analyst

* Ruben Roy

MKM Partners LLC, Research Division - MD

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Tore Svanberg

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs' First Quarter 2017 Earnings Conference Call. (Operator Instructions).

I would now like to turn the call over to Ms. Jalene Hoover.

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Jalene Hoover, Silicon Laboratories Inc. - Director of IR & International Finance [2]

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Thank you, Kim. And 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 first 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 4 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 conditions. 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 to 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.

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [3]

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Thank you, Jalene. I'm pleased to report that first quarter revenue was $179 million, at the high-end of our guidance range and representing year-on-year growth of more than 10%, consistent with our target model.

Revenue results for Q1 were primarily led by upside performance in our IoT business. IoT started off the year on a strong note, with revenue ending at $88 million or 49% of total revenue, surpassing our expectations with robust 24% year-on-year growth. The upside in IoT was led by our 8- and 32-bit MCU products combined with another solid quarter from our mesh networking products.

Infrastructure finished the quarter at $36 million or 20% of total revenue, representing year-on-year growth of 14%. Infrastructure revenue was slightly behind our expectations on a sequential basis, down around $1 million due to weakness in the optical networking market, which affected our timing products. Partially offsetting this was another strong quarter for our isolation products, where we have now completed 9 straight quarters of consecutive growth.

Broadcast finished the quarter at $37 million or 21% of total revenue, which was seasonally down sequentially as expected. Our Broadcast automotive products performed well in the quarter with around 16% year-on-year growth.

Access declined in the quarter as expected to around $18 million or 10% of total revenue.

Geographically, widespread growth in our IoT products drove record performance in Europe in Q1, which was offset by declines in the Americas and Asia.

Looking at revenue by end market in Q1, we saw growth in industrial, primarily on strength in IoT. Consumer and communications were down.

Distribution revenue for the quarter was 70%, up 1 percentage point from last quarter. No single customer represented more than 10% of total revenue.

Non-GAAP gross margin for Q1 was in line with our guidance at 59%. Our total non-GAAP operating expenses were also in line at just under $75 million. Non-GAAP R&D expenses increased around $500,000 in the quarter and non-GAAP SG&A expenses increased around $1 million.

The increases in OpEx for the quarter were primarily driven by merit increases, headcount and the effect of the annual payroll tax reset with some offsets in other controllable spending areas. Comparing Q1 '17 OpEx to Q1 '16, we saw a year-on-year increase of around 4%, meaningfully less than the 10% increase in revenue.

Non-GAAP operating income for Q1 was $31 million and non-GAAP operating margin was 17.3%, which is 180 basis points higher than the same period of the prior year due to strong year-on-year revenue growth and operating leverage in the business.

The non-GAAP effective tax rate was 10.6% for the quarter. This was favorable to our guidance primarily due to higher-than-expected R&D credits and additional interest expense deductions related to our convertible notes.

Non-GAAP earnings per share ended at $0.63 for the first quarter based on upside revenue performance, which was at the top end of our guidance range. This represents a 24% increase in non-GAAP earnings over the same period of fiscal 2016.

On a GAAP basis, gross margins were 58.7%. GAAP operating expenses were $92 million with $10 million in stock compensation and $7 million in amortization of intangibles. GAAP operating margin ended at 7.1%. GAAP earnings per share was $0.36, above our guidance range, due to favorability on the early settlement of the interest rate swap on our credit facility.

Turning now to the balance sheet. We ended the quarter with cash, cash equivalents and investments totaling approximately $627 million, up $327 million sequentially. We generated strong operating cash flow of $42 million during the quarter and also issued $400 million worth of convertible notes with a portion of the proceeds used to pay off our credit facility balance of $73 million.

We ended the quarter with accounts receivable of $76 million or DSO of 38 days, which is a reasonable level. Our inventory balance increased slightly to $61 million with turns of 4.8, within our target operating range. Our share repurchase program continues to be in effect with $100 million authorized.

Our diluted share count for Q1 was 43 million shares. With the completion of the convertible notes offering in early March, we now have a total of $400 million in convertible debt with no borrowings outstanding on our credit facility.

I will now cover our guidance for the second quarter. We expect revenue in the second quarter to increase to between $184 million and $189 million, with IoT and Infrastructure up and Broadcast and Access about flat versus Q1.

We expect our non-GAAP gross margin will be approximately 59% and our total non-GAAP operating expenses to be between $74 million and $75 million.

We expect our non-GAAP effective tax rate to be 11.5% and we expect non-GAAP earnings per share to be in the range of $0.68 to $0.74.

We expect our GAAP gross margin to be around 58.8%. We expect GAAP operating expenses to be approximately $92 million for the quarter with stock compensation at $11 million and intangibles amortization at approximately $7 million. We expect our GAAP effective tax rate to be 11%, and we expect GAAP EPS to be in the range of $0.27 to $0.33 per share.

Please note for modeling purposes that GAAP earnings now reflect an additional charge relating to the amortization of noncash interest expense on the convertible notes. We expect this amount to be approximately $2.7 million per quarter and this amount is adjusted out of our non-GAAP results, which only reflect the cash coupon interest and amortization of cash debt issuance cost.

I will now turn the call over to Tyson.

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [4]

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Thank you, John. We are very pleased with our first quarter 2017 financial results, reflecting solid year-on-year progress with more than 10% revenue growth and 24% growth in non-GAAP EPS. Our Internet of Things and Infrastructure businesses now represent nearly 70% of revenue, targeting large, high-quality, sustainable and growing markets.

Silicon Labs' largest and fastest-growing market opportunity is the Internet of Things, with revenue approaching half of our total revenue. In Q1, our IoT products achieved a fifth consecutive record revenue quarter with year-on-year growth of 24%, exceeding our 20% strategic growth target.

The IoT is made up of thousands of applications and tens of thousands of customers, spanning a wide range of market segments. Our IoT customers need wireless connectivity solutions, which simplify development, streamline deployments, offer high performance, are reliable, easy to maintain, and have a long lifetime in the field. We are seeing a growing number of use cases and business models unlocking value by connecting things to the Internet.

For example, municipalities are increasingly incentivized to maintain their Infrastructure, optimize the distribution of services and comply with regulations. They are turning to Smart City technology to accomplish these objectives through energy management, parking systems and smart lighting. Silicon Labs is addressing these needs with a broad-based wireless portfolio built on a flexible hardware and software platform.

We are capturing market share with a strategy built around our software architecture, which is fundamental to the IoT. Unlike the PC and handset markets where software is optimized around a single application, software for the IoT must support a variety of market segments and applications. Our multiprotocol wireless Gecko solutions enable enhancements, upgrades and updates, which are increasingly critical to the maintenance and life cycle of IoT devices. In markets with emerging use cases, standards and protocols, the ability to extend the relevant lifetime of IoT devices becomes a differentiating factor.

Silicon Labs is one of the few companies with a deep understanding of the underlying hardware and software architecture of end node devices, which we believe is necessary to make secure device-to-cloud connectivity a reality in the IoT. With our strategic acquisitions of Micrium last October and Zentri in January, we have a platform for multiprotocol device management that enables connection of devices to the cloud in a secure and scalable manner. We now have a node-to-cloud strategy that our customers find compelling and anticipate that a majority of IoT devices will increasingly run a real-time operating system or RTOS.

During the quarter, we released Micrium OS and a new platform builder tool offering a powerful approach to embedded design that substantially reduces complexity and accelerates time to market.

Also in Q1, we announced a major expansion of our EFR32 Wireless Gecko portfolio, the most versatile and feature-rich multiprotocol platform available today. Our new wireless Gecko SoCs deliver superior RF performance, enhanced cryptography acceleration, larger memory options, on-chip capacitive touch control and additional low-power peripherals and sensor interfaces. These new features enable the SoCs to support broader and increasingly complex multiprotocol and multiband use cases for home automation, connected lighting and industrial IoT.

Wireless Gecko SoCs support ZigBee, Thread, proprietary wireless protocols and the industry's first implementation of Bluetooth 5 on a multiprotocol multiband platform, making it easier for developers to add connectivity to ever more complex IoT applications.

Our new SoCs offer 4 times more flash memory and 8 times more RAM than previous generation wireless Gecko devices. This significant memory expansion makes it easier to develop feature-rich IoT applications supporting multiple protocol stacks, over-the-air updates for field upgrades to extend the life of IoT products and real-time operating systems, such as Micrium OS.

Moving on to Infrastructure. Our timing and isolation products grew 14% year-on-year in Q1, exceeding our 10% long-term growth target. Our timing products benefit from a number of mega trends, including the shift from enterprise to cloud computing and a 100-gig adoption in data center interconnect and metro area networks. Rising demand for more data and the need to transmit that data faster requires higher performance timing chips.

Our isolation products delivered a ninth consecutive record revenue quarter, driven by customer demand for robust isolation technology, designed to address energy efficiency and regulatory requirements. Our digital isolators offer better performance, higher integration, longer lifetimes and greater reliability than legacy optic couplers used in power, automotive and industrial applications requiring high-voltage protection.

I'm delighted to announce Gregg Lowe's appointment to our Board of Directors. Gregg is a visionary and hands-on strategist with a track record for helping great companies become even greater through his disciplined focus on growing market share and revenues. With more than 3 decades of leadership experience at Freescale and TI, Gregg is a valuable asset to Silicon Labs as we continue to execute on our growth strategy.

The explosion of connected devices and increasing demand for data are driving enormous opportunity in the large, high-quality sustainable and growing IoT and Infrastructure markets. We are leveraging our proven capabilities in RF, integration and software with the goal of driving simplicity throughout to expand our portfolio and further extend our technology and market leadership.

Thank you for your time and attention. Before we take questions, I'd like to turn the call back to Jalene. Jalene?

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Jalene Hoover, Silicon Laboratories Inc. - Director of IR & International Finance [5]

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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 second quarter, including Canaccord Genuity's Technology Conference in Toronto on May 25, Stifel's Technology, Internet & Media Conference in San Francisco on June 6, Stephens Spring Investment Conference in New York on June 7 and NASDAQ's 36th Investor Program cohosted with Jefferies in London on June 15.

For those of you who were unable to attend our Analyst Day in March, you may obtain a copy of our presentation and listen to the webcast in the Investors section of our website at www.silabs.com under Events and Presentations.

We would now like to open up the call for your questions. (Operator Instructions) Kim?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Tore Svanberg from Stifel.

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Tore Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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First question for Tyson. Tyson you talked about the new Gecko SoCs having more memory. Could you maybe expand a little bit on that, especially as far as how that opens up potentially a bigger market or new customers, just trying to understand the potential return you can get on that investment.

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [3]

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So the new wireless Gecko SoCs are the largest memory footprint devices and part of a growing portfolio of devices that we've been talking about for some period of time. We have seen a number of trends in the industry where customers are adding multiple protocols to the wireless SoC or their Internet end node connected devices. This would, for example, be a device which would connect to a ZigBee network to achieve mesh networking capability, but also be able to speak Bluetooth Smart and talk directly to a mobile phone. So we've seen a number of different combinations of these wireless technologies and customers wanting to integrate those into a single device, so that requires more functionality and more memory. You also have desired -- customers want to put that capability and update that over time, so as the wireless protocols change, as the functionality changes, they want to be able to push updates. So that means that you'll have to take multiple stacks and multiple versions of the stack and keep those in memory as well. So those are all trends that are driving additional memory and that at the same time is driving higher selling prices for the devices and tending to push the overall level of functionality up. We see this as a very positive trend and very happy to introduce this new product to be able to address those needs.

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Tore Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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That's very helpful. And as my follow-up question, you're guiding the Infrastructure business to be up sequentially in the June quarter. Now there is some reports out there that optical remains weak, especially in China. So is there some new product ramps? Or is there anything else going on as far as that business being up sequentially in June?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [5]

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Yes, look, the timing business in particular was down in Q1, largely due to weakness in our China customers and also in optical networking, and we do see that continuing somewhat into Q2. That will be offset by very good performance on the isolation side. So our isolation products had a ninth consecutive record in Q1, and we see that, that will continue that trend into Q2. So the net-net is we think -- we do think that the booking patterns in Q2 overall will drive the Infrastructure to be up somewhat, but still not back to where our expectations would have been earlier in the year.

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [6]

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Yes, Tore, this is John. If I could just quickly add on to that. So what we see is the bulk of the growth in Q2 would come from the IoT category.

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Operator [7]

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

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Joe Hodes, William Blair [8]

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This is Joe Hodes on for Anil Doradla. Tyson, at the Analyst Day you kind of focused on Infrastructure and IoT and just slightly touched on EVs. I think Mark Thompson talked briefly about automotive. Given that auto has been the third driver in recent years, can you give us an update on your outlook for the automotive segment? What you expect for growth? And if you're seeing anything materially different as a result of the Qualcomm-NXP merger?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [9]

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On the automotive side, we continue to see progress on the Broadcast, the automotive radio. We saw that business was up 14% year-on-year and we believe that we're still very well positioned to take share from NXP or what could be a future Qualcomm in that area as we have a very compelling solution compared to what they have. And we have a number of the Tier 1 makers wanting to incorporate our automotive radio functionality and bring on a new supplier, because NXP being in the #1 position tends to dominate that market. It's about a $400 million market, and we have a small share today, so we think we can continue to gain share there. We also see the electric vehicle market as interesting. That's in our isolation products. That is partially responsible for some of the record performance that we've seen in that business, and we continue to get very good traction in the automotive area. I would like to say that the automotive mix of our business is still relatively modest. It is in the 8% range of total revenue with the majority of that being in the Broadcast automotive area. So overall, automotive is still a modest part of our business, but we feel very good about that as a growth driver for us going forward.

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Joe Hodes, William Blair [10]

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Great. And then you guys -- you talked about your busy M&A streak over the past several years and obviously you just raised a significant amount of capital. Can you talk about some important pieces that you think might be missing from your vision of where and what Silicon Labs can be 3 to 5 years from now? And then could you remind us about any internal hurdle rates you use when you're approaching M&A opportunities?

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [11]

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I'll talk about the criteria. We are seeking targets that are growing and have a strong strategic fit to the company and which can add adjacent capability to what we're doing or accelerate our product development roadmap and which would be accretive to our overall earnings. I'll let Tyson comment on the specific areas of focus.

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [12]

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Yes. So certainly we've been focusing primarily on the Internet of Things area. We have done a number of acquisitions in that area over the last 5 years, and we certainly see that as the primary focus of our M&A activity. But we've also indicated during our Analyst Day that the Infrastructure area, our high-quality businesses in timing and in power in isolation provide good areas for us to consider additional incremental businesses that would fit in with those strategies as well.

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Operator [13]

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

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Harsh V. Kumar, Stephens Inc., Research Division - MD [14]

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Tyson, if I can ask you, we have heard several companies talk about sort of explosive growth in data centers that's on the horizon. You mentioned 100-gig, part of your commentary. I was wondering if you could scale that business. I know it is small, but any kind of relative size idea would be helpful for us.

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [15]

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Our optical networking business is the primary driver of our timing revenue. The data center portion of our revenue and the interconnect within the data center, we have seen comments from other companies where that is a big growth driver. That does not have as much timing content. It's really the metro area networks and the long haul and data center interconnect between data centers that -- where we play more. And those are some of the areas that we did see some weakness in Q1. So I think that the big ramp of 100-gig inside the data center and moving to 400-gig is not something that is going to be a huge driver for our timing, although we do play in there somewhat, but it is mostly in the higher performance longer haul.

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Harsh V. Kumar, Stephens Inc., Research Division - MD [16]

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Understood. And then as a follow-up, you have got this U.K.'s Smart Metering program that's sort of underway. And I was curious for explosive markets -- for explosive growth in the IoT market, which you're seeing, but from lots of consumers, lots of devices, are you seeing any government programs here in the U.S. that perhaps could be huge for us? Just a macro level talk on that or thoughts on that would be very helpful for us.

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [17]

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While we do see activity in the U.K. and continued rollout of the smart energy platform there, and that continues as we move here into 2017, I see the main benefits in the U.S. being you've got Smart Home activities. There are a lot of Smart City activities and energy efficiency requirements and the trend towards LED lighting and a lot of various industrial applications. I see that as mostly driven by the economic benefit of deploying these technologies followed by consumer demand for convenience and improving quality of life within the U.S. Really, the regulatory pieces being down the list.

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Operator [18]

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

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Blayne Peter Curtis, Barclays PLC, Research Division - Director and Senior Research Analyst [19]

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I just want to follow up on a previous question in Infrastructure, any perspective at just how big optical is within that bucket? If you could just break out the exposures there that would be helpful.

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [20]

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Optical is about 80% of the timing business.

That's overall. It's at least 3/4 of the business. We've got emerging -- some emerging pockets of that in data center and wireless that we've been talking about, but those ramps are really further out.

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [21]

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Right. And, Blayne, within the Infrastructure category overall, timing is about 2:1 compared to the isolation business.

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Blayne Peter Curtis, Barclays PLC, Research Division - Director and Senior Research Analyst [22]

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Very helpful. And then I just wanted to ask you on the gross margin, you're guiding it flat. Obviously, with the weakness in timing, IoT is a bigger percentage, but you're keeping it flat. Could you just talk about the offsets in gross margin you're seeing? And as you look out the rest of the year if IoT continues to outperform here, just a perspective on gross margin, would it be able to stay at the 59% level or would it dip below?

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [23]

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Yes, Blayne. So there's puts and takes and definitely products mix within these categories, but as we indicated earlier, the bulk of growth in Q2 we expect to come from IoT. And as you've got wireless is now over half of the overall IoT category, and there is a sizable component of wireless now that's comprised of module sales. So that is a bit of a drag on margin. So IoT margins overall a bit below the corporate average, not much, but a bit below. And our goal is to maintain stable within the range and targeting to hold that at the 59% level.

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Operator [24]

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Your next question comes from the line of Matt Ramsay from Canaccord Genuity.

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Matthew D. Ramsay, Canaccord Genuity Limited, Research Division - Principal and Senior Analyst [25]

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Tyson, in your script you talked quite a bit about operating systems and IoT around Micrium, et cetera. I just wondered if you could maybe update us on the landscape there a little bit. How fragmented is the operating systems space in IoT? Are those decisions made in end products typically by a suggestion of the hardware vendor like yourself or from the customer side? And just I guess as a follow-up to John, is this something that as operating system and more software sales are packaged in with your IoT business, is that -- should we think about that as an offset to the gross margin pressure from maybe the mix of sales in the new IoT business with sort of platform hardware pulling the gross margin down? Is software something that could offset that in the long term?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [26]

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So the operating system that came in through the Micrium acquisition, we are in the process of extending that. We launched a new version of that, that supports multiple architectures in Q1 along with some development tools, which make it more flexible and capable. And we're in the process of optimizing that operating system for IoT to create what is essentially an IoT operating system that integrates all of the connectivity and security that's required for these end node devices. That does provide a potential revenue stream for us, although today that's small, in the single-digit millions of dollars. Longer term, there is multiple options for us to monetize both the software as well as service and maintenance and updates of devices. And that's a very exciting opportunity for us, although I would say that, that from a revenue basis is somewhat out in time. You can imagine that when devices get connected to the Internet, like your phone gets connected to the Internet or when you get a device, it lives into the future and it gets additional capabilities that you can upgrade over time and extend, and our customers would like help in doing that. And that again takes us beyond just the silicon and into the realm of software and service sales and device management and all of these sorts of things. So while I think near term it's a very exciting opportunity that is bringing customers to us for our solutions and the real-time operating system and the IoT operating system that we are developing provides a significant differentiator for us. And certainly these customers are -- we support a number of different operating systems and a lot of the customers don't use an operating system at all today, but we think that as the functionality continues to evolve, that there is going to be more and more need for this. And as you extend the business out into the long tail of applications across all these different markets and different types of functionalities that this type of platform approach and kind of fully baked software, ready-to-go software architecture in our operating system becomes really, really important for our customers.

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [27]

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I don't really have much to add to that. This is John.

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Operator [28]

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

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Craig Andrew Ellis, B. Riley & Co., LLC, Research Division - Senior MD and Director of Research [29]

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John, I think you said in your commentary that in the outlook, operating expenses would be in a range that, I think, implies a sequential decrease of about $0.5 million. I know that mask set costs were expected to tick up in 1Q. Is the decrease lower mask set and slightly lower FICA? Or why would operating expenses be lower? And how should we think about the second half of the year on that line item?

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [30]

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Yes, Craig. So the mask [cleaning ] has been relatively stable. What you're really seeing is more on the payroll tax effect Q1 rolling off into Q2, but the delta is pretty modest. We came in just below $75 million in Q1 and indicated a range of close to that, just slightly below that for Q2. We do have a modest amount of incremental hiring in a few areas, but the overall goal would be to have the roll-off of those annual effects offset this modest incremental hiring and to basically hold OpEx flattish for the balance of the year. We provided a 3% call earlier this year and we have not updated that view today.

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Craig Andrew Ellis, B. Riley & Co., LLC, Research Division - Senior MD and Director of Research [31]

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Thanks for that. And then switching gears and shifting towards much more of a longer-term question. At Analyst Day, the company talked about a goal of $1 billion in revenues in the 2020 time frame. Tyson, I thought I would just open that up and ask you to comment on how you see IoT and Infrastructure evolving over that multi-year period, both from an offerings and market standpoint. And then, John, if we just run the target model out, it seems like $5 in earnings would be possible at that revenue level. Is there anything that you would see as you look out to the longer-term growth of the company that would cause any expense or gross margin discontinuities?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [32]

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So, Craig, this is Tyson. I can comment on the markets and the revenue opportunity. Consistent with what we said in our Analyst Day, we believe that our largest growth opportunity is in IoT and we've provided a strategic growth target of 20% for that. And you've seen at least here in the first -- the last 3 quarters we've exceeded -- have had a very nice growth there. I think that the underlying complexion of that market and the growth drivers are indeed quite long term and spread across a wide range of customers and applications. So we believe that, that is an attainable number. It's certainly my hope that over that long-term time frame our leadership in these areas and the explosion of the market opportunity within IoT, the proliferation of devices and the deployment of networks and gateways is going to continue to drive very exciting performance in our IoT area -- set of products. So I feel very bullish about our ability to maintain the growth in that area. The Infrastructure area is, again, very promising, driven by a lot of long-term trends, the growth of data and the increasing energy efficiency and the deployment of our isolation technology has seen a very good trend and we have a very strong roadmap there. And in the timing area, the continued deployment of advanced 5G wireless networks and data center and continued penetration of our products in the optical networking space tend to give the Infrastructure area a very positive long-term view. We've talked about a 10% rate there and even with the weak Q1 performance, we had a 14% year-on-year growth. So I think that those growth trends are intact, with the legacy portions of our business in Broadcast and Access more stable. We've guided those both at down 10%, but those becoming a smaller and smaller piece. The Infrastructure and IoT areas are now approaching 70% of revenue and that percentage is going to continue to increase. So I feel good about our long-term growth trends, our positioning in the market, the quality of those businesses, the competitiveness of those and certainly you can take that model out in the future and we'll hit that $1 billion mark.

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [33]

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Yes, and, Craig, you can perform your own long-term analysis as you've clearly done there, but if you just look at the company's strategic model as far as how we're targeting to operate the business, we're pleased that we achieved that performance in the second half of 2016. And as we move from period-to-period, we're continuously evaluating the trade-offs between gross margin, stability, the need to invest in the business, revenue growth at any particular point in time. But indeed as you look out at a $1 billion revenue level versus our profitability targets, we think there is definitely the opportunity to expand earnings very significantly.

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Operator [34]

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Your next question comes from the line of Suji Desilva from Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [35]

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So in IoT the last couple of years, the first quarter has been strong. I recall the 8-bit market had seasonal weakness typically in the first quarter. Are we past the point where the legacy 8-bit product seasonality impacts that? Or are those equally growing in the secular IoT trend as much as the 32-bit ones?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [36]

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We see quite strong performance out of our 8-bit products. If you look at the revenue in Q1, I mean, despite there is a consumer seasonality piece of 8-bit, but we actually had record revenue in the 8-bit, all-time record revenue in Q1 in our 8-bit area. And we've continued to introduce new products in that area. If you look out into the market, you've got consolidation of companies like Microchip and Atmel and you've seen comments from those competitors where they are constrained on capacity and also raising prices out in the market. That's very favorable to us. It is driving some customers to us, and we have a very broad 8-bit portfolio, with which to address that. And we see quite strong performance out of our 32-bit products as well, although more and more of the 32-bit area is moving those -- a lot of those customers are moving into integrated wireless functionality, and we do see the wireless as being the strongest growth driver in all of the IoT and that continuing forward as well.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [37]

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Great, Tyson, that's helpful color there. And then on the products in the IoT area, you guys have done a lot already, and it seems to be put together a very compelling product platform. Can you help us understand what kind of remains, if you would, in the product road map? What vectors you would move the products forward on to help us understand what more you can do to solidify your position, because it seems like you've done a lot already?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [38]

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Can you repeat the first part of your question? I didn't hear exactly whatever you were talking about, I'm sorry.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [39]

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Sure, Tyson. It seems like you guys in IoT, the products you've done a lot already to kind of solidify the product features and sets. I'm wondering what other vectors you continue to move the products forward on in the roadmap. What other things you can approach to try to continue to strengthen that position?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [40]

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Got it. Thank you. In IoT, we continue to expand our portfolio, especially on the wireless side, with all of the multiprotocol capabilities of this wireless Gecko platform. A lot of the aspects of those products are now software, and we continue to invest in tools, in communication stacks, in operating systems and cloud and device management technologies to be able to offer more and more of the solution to our customers as they create these end node devices. We also have a number of sensors that go into those and that business, that portion of the business is also quite strong. So we see the majority of the investment and the focus on driving cost and integration and functionality into the wireless area, but that also spills over using the same platform into the 32-bit MCU area with some continued modest investment in the 8-bit area, like we just talked about in terms of that opportunity.

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Operator [41]

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Your next question comes from the line of Ruben Roy from MKM Partners.

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Ruben Roy, MKM Partners LLC, Research Division - MD [42]

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Tyson, I just had a quick higher-level question around IoT. John noted that the performance surpassed expectations and it's great to see continued year-over-year growth in the 20%-plus range. Just wondering if you can characterize design activity that you're seeing out there across the various vectors that you're selling into. Comparing that to last year, obviously, you guys have more technologies that you're offering, et cetera. And I'm just wondering what you're hearing from your customers and how you can characterize that design activity as you look ahead here?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [43]

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So we measure our design activity both in the size of the funnel and in the lifetime revenue of the design wins that we continue to tick over as time moves on. And we have seen substantial growth in both of those, in the IoT category year-on-year as we've introduced our wireless platform and engaged in the market. And those growth rates support our long-term growth target as well. The design activity is very strong in Smart Home, in lighting, and I would say just classify a broad range of industrial applications. The other exciting trend that we see is in gateways that -- you can think about this as the access point that goes into your house and that could come from an operator like Comcast or it could come from a retail operation. And we see the integration of mesh networking capabilities of ZigBee and/or Thread into those gateways as a substantial trend. And that really talks about the need for these low-power mesh networking command and control areas, the integration of those with Echo systems like you see from Nest and Google and from Amazon and others. And the deployment of these is going to drive -- is driving the development and deployment of a lot of end node devices where we're very strong with our SoCs. And we also see the development of the Echo systems driving the interoperability between those and the ability to control and make them more useful. And so all of those trends, we see that customer activity and we are seeing evidence of that in our metrics that we use to measure the growth in the business.

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Ruben Roy, MKM Partners LLC, Research Division - MD [44]

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Just a quick follow-up. You mentioned ZigBee and Thread and I probably should know this, you might have mentioned this at Analyst Day, but what's your opinion on Z-Wave? And what are you seeing out there with the adoption of Z-Wave?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [45]

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Z-Wave is a technology developed by a single company and supplied by a single company. And while they got some early traction in the connected home space, kind of the DIY, the do-it-yourself space, we see the momentum in that technology continue to erode. It is not a technology that we believe has a roadmap into the future, it's not an open standard. It's again supported by a single vendor, and we see a lot of customers moving away from that and moving toward more standard-based technologies like ZigBee and Thread. But certainly there is room in the IoT given the size of it and the longevity of that for multiple standards to continue to coexist, but we see the momentum in Z-Wave declining over time.

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Operator [46]

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

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Cody Grant Acree, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [47]

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Tyson, maybe you alluded to this a little earlier, but last night on TI's call, there was a lot of discussion about the health of the distribution and the inventory channel, and I think Microchip has even been out talking to customers about needing to place longer lead time orders or maybe end up short on supply. Have you seen anything in the supply-demand environment that would prompt you to have any similar discussions and maybe if you can just kind of talk about your lead times individually?

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [48]

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Yes, Cody, this is John. We see generally a healthy landscape out there. We've seen a number of peer companies with pretty solid results thus far in this cycle and overall, the industry seems reasonably healthy. I think our days of inventory both on hand here at the company and at the distribution channel are normal. So we are doing a good job managing inventory and managing the company's working capital overall.

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [49]

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Yes. I would also just comment that given our use of standard technologies we are fabless. We leverage companies like TSMC and others with very, very large production capacities and we work with them to lock in capacity for the business that we see and don't see constraints in the supply chain holding back on our ability to grow the business over the year.

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Cody Grant Acree, Drexel Hamilton, LLC, Research Division - Senior Equity Research Analyst [50]

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And I think at the Analyst Day you mentioned about 60% of your revs coming through the disti channel. Anything stand out there one way or the other, either application wise or product wise?

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John C. Hollister, Silicon Laboratories Inc. - CFO and SVP [51]

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Yes. That's, I think, is 70%. For Q1, Cody and that's been reasonably stable. It's been rising over the last several years. We have a chart on that both in the Analyst Day deck and the updated IR deck that's on the website this morning. But if you think about it across the 4 major categories, in IoT, you have a heavy distribution focus, in the isolation business you also have a heavy distribution focus. The Broadcast tends to be a little more vertical as does the Access with a smaller set of customers, but those contributions are more modest today to our overall revenue as compared to the IoT and Infrastructure.

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Operator [52]

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Your next question comes from the line of Atif Malik from Citigroup.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst [53]

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Tyson, can you talk about the proliferation of AI, Artificial Intelligence, and its impact you're seeing for your IoT demand in the factory of the future. I mean, you did talk about home and personal assistants kind of employing AI, but can you just talk about your -- how AI is impacting your opportunity in the factory of the future?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [54]

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Certainly with the Internet of Things, you get a proliferation of sensors and a proliferation of data, and there is a lot of work in the analytics of that data and in making actionable judgments about what to do and that is part of the value proposition of why people deploy both IoT and AI type technologies. And the more data you have the more useful it is. And the more processing power and the more that makes it to the cloud and the more insights that you can gain from that, the more useful it is. So those are trends that are tied together. I would say that more of the IoT that we're in is in lower data rates and command and control type things. So certainly if you made a decision and you need to control something, that factors in. The large amounts of sensor data that you get from a growing number of devices becomes a part of that equation. We are certainly not in the vision side or in real-time, driving, autonomous driving and these sort of things that a lot of the other applications that are out there. But it's certainly one of the drivers that we see for the demand in the end node devices where we play.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment and Specialty Semiconductor Analyst [55]

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Okay. And then as a follow-up, I know this has been asked in different forms before, but your auto business, which was up 16% year-over-year in the March quarter, how do you see that tracking in the June quarter?

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G. Tyson Tuttle, Silicon Laboratories Inc. - CEO, President and Director [56]

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Yes, so the automotive business for us, the automotive radio business was up 14% year-on-year and that's the largest portion of our automotive business. We don't break that out separately and talk about growth rates in the automotive area. We will occasionally provide updates on the performance of the automotive radio. And then you've also got a portion of automotive in our IoT business actually, in our 8-bit MCUs as well as in our isolation business where we sell into power inverters and electric motor controls and battery packs for electric and hybrid electric vehicles. But we don't provide specific guidance there. But those are certainly all trends that are in our favor and performing quite well for us here in the first quarter.

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Operator [57]

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

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Jalene Hoover, Silicon Laboratories Inc. - Director of IR & International Finance [58]

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