Jalene Hoover - Head-Investor Relations Tyson Tuttle - Chief Executive Officer John Hollister - Chief Financial Officer.

Tore E. Svanberg - Stifel, Nicolaus & Co., Inc. Blayne Curtis - Barclays Capital, Inc. Matthew D. Ramsay - Canaccord Genuity, Inc. Craig A. Ellis - B. Riley & Co. LLC Anil Kumar Doradla - William Blair & Co. LLC Suji De Silva - Topeka Capital Markets John N. Vinh - Pacific Crest Securities LLC Harsh V. Kumar - Stephens, Inc. Ian L. Ing - MKM Partners LLC Ryan C.

Goodman - CLSA Americas LLC Rajvindra S. Gill - Needham & Co. LLC.

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Silicon Labs Second Quarter 2015 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. Thank you.

I would now like to turn the call over to Ms. Jalene Hoover. You may begin your conference..

Thank you, Steve. Good morning, everyone. We appreciate you taking the time to dial in. I am joined today by Tyson Tuttle, Chief Executive Officer; Bill Bock, President; and John Hollister, Chief Financial Officer. We will discuss our financial performance and review our business activities for the second 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 the 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 be able to 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. Also, the non-GAAP financial measures discussed today are not intended to replace the presentation of Silicon Labs' GAAP financial results.

We are providing this information because it may enable investors to perform more meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Silicon Labs' Chief Executive Officer, Tyson Tuttle..

Thanks, Jalene, and good morning, everyone. We delivered another record quarter in our strategic growth businesses, including our Internet of Things, Infrastructure and Broadcast automotive products. Our second quarter revenue and the third quarter guide, however, are impacted by adverse market dynamics in our Broadcast consumer business.

I'll talk more about our product developments, market opportunities and business trends shortly, but first I want to address the decline in Broadcast. Broadcast revenue for Q2 was $39 million, down $7 million or 15% sequentially.

While our market share and design win activity remained strong, our prior forecasts did not anticipate the drop in demand that we are seeing from our primary Tier 1 TV tuner customers in Korea. We believe macro trends continue to stifle the global demand for TVs, with the latest market estimates calling for a reduction in unit demand for 2015.

Furthermore, fluctuations in foreign currency and geopolitical unrest have slowed demand in Europe and Russia where we sell greater content per TV. Accordingly, we expect third quarter Broadcast revenue to decline again by approximately 15%, counter to typical seasonality.

Now, I'd like to turn the call over to John who will review our second quarter financial results and guidance.

John?.

Thank you, Tyson. We are pleased to announce that second quarter revenue was within our guidance range at $165 million and we delivered non-GAAP earnings of $0.56 per share which is at the top end of our guidance.

Total Q2 product revenue was up 10% year-on-year, in line with our growth model or 6% year-on-year, inclusive of $5 million in Q2 2014 patent sales. We had an excellent quarter in all of our growth markets, including the Internet of Things, Infrastructure and Broadcast automotive.

Internet of Things revenue reached another record at $69 million, representing 42% of our total revenue, up from 37% in Q1. IoT grew 13% sequentially in the second quarter and 35% year-on-year, exceeding our expectations.

We saw strong performance from our micro-controller and wireless products, and sales of Bluegiga module products grew by over 70% in the quarter. We also had a strong quarter in Infrastructure with our timing and isolation products each delivering new records. Total Infrastructure revenue for Q2 was $30 million or 18% of total sales.

Access delivered another solid quarter in Q2 at $26 million or 16% of sales and was down only slightly from Q1. Second quarter Broadcast revenue declined to $39 million or 24% of total revenue, with consumer lower than expected, more than offsetting gains in automotive.

Our automotive products delivered another outstanding quarter with high, double-digit, year-on-year growth, reflecting continued share gains and a robust worldwide automotive market. The importance of our distribution channel continues to grow, with second quarter channel revenue increasing three percentage points sequentially to 67%.

We had no customer greater than 10% of total revenue for the quarter. Geographically, during the quarter, we saw growth in Europe and the Americas, reflecting continued strength in our IoT and Broadcast automotive products. Asia-Pacific was down due to exposure in Broadcast consumer.

Historically, communications and consumer have been our largest market segments, but this quarter, our participation in the industrial market segment took the number one spot on the strength of IoT. Non-GAAP gross margin for Q2 was at the high end of our guidance range on favorable product mix at 60.3%.

(06:59) for Q2 were lower than we expected, ending at $70 million, reflecting slower than anticipated head count growth and favorable legal spending. R&D expenses were down slightly to $37 million and SG&A expenses decreased by a small amount to just under $33 million. Non-GAAP operating margin improved 100 basis points in Q2 to 17.8%.

Our non-GAAP effective tax rate was in line with our expectations for the quarter at around 15%. With in-line revenue, favorable gross margin performance and positive OpEx results, our earnings for the second quarter ended at the high end of our guidance at $0.56 per share non-GAAP. On a GAAP basis, second quarter gross margins were 59.1%.

R&D expenses increased slightly to just over $47 million and SG&A expenses declined to $41 million, resulting in GAAP operating income of $9 million or 5.5% of revenue. GAAP EPS for the quarter ended at $0.17 per share, which was at the top end of our guidance range. Turning now to the balance sheet.

We ended the quarter with cash, cash equivalents and investments totaling $280 million. For the first half, we have completed just over $10 million of stock buyback and we have $82 million remaining authorized. Year-to-date cash flow from operations is $37 million. Accounts receivable ended at $71 million or 39 days sales outstanding.

Inventory levels were down slightly in Q2 to just under $61 million, reflecting turns of 4.4 times. Channel inventory decreased in Q2 to 41 days. I'm pleased to announce that last week we amended our credit facility with our banking syndicate.

The new amendment provides for a $300 million revolving line of credit due in 2020, with a $200 million accordion feature. This comprehensive $500 million in debt capacity expands and replaces the company's existing term debt and revolver structure.

I'm delighted to report that all members of our prior credit syndicate have participated in this new financing, which was led by Wells Fargo Bank. We elected to amend the credit facility to allow for sufficient domestic capital to fund our capital deployment strategies, which remain focused on strategic M&A and our share repurchase program.

We are also benefiting from favorable credit conditions and achieved a number of improvements in the facilities terms. I will now cover third quarter guidance. We expect revenue for Q3 to be in the range of $151 million to $156 million, with Internet of Things and Infrastructure revenue about flat to Q2.

We anticipate Access will be down slightly, consistent with anticipated long-term trends. We expect Broadcast revenue to decline. We anticipate third quarter non-GAAP gross margins will be 60% plus or minus 50 basis points.

In light of our third quarter revenue guide, we are slowing our planned OpEx growth, while continuing to fund investments required for success in the IoT. In Q3, we expect our non-GAAP operating expenses to be flat to Q2 at around $70 million.

We are lowering GAAP OpEx estimate for the year to an increase of 7% over fiscal 2014 versus the 9% increase previously estimated. Our non-GAAP effective tax rate is expected to be stable at around 15%. We estimate third quarter non-GAAP EPS will be in the range of $0.39 to $0.45 per share and GAAP EPS will be in the range of $0.04 to $0.10 per share.

Now I'll turn the call back to Tyson..

Thanks, John. The Internet of Things represents our largest and fastest-growing market opportunity, offering a long-term multi-decade trend based on thousands of applications and tens of thousands of customers.

Our IoT solutions include a broad portfolio of microcontroller, wireless connectivity and sensor products built on a common platform of silicon, software and development tools to serve this rapidly expanding market. Our IoT products grew 35% year-on-year and established a new record in Q2.

We are executing on our roadmap and building a comprehensive portfolio of energy-friendly solutions for a smarter, more connected world.

Our new product development pipeline is strong, responding to the needs of this emerging market and fueling record design win activity in a variety of applications including connected home, building automation, security, lighting, metering, wearables and industrial automation.

Adding to our broad IoT wireless connectivity portfolio, we recently announced our highly anticipated Thread networking solution, delivering a wireless software stack built upon our many years of expertise and the industry's most advanced development tools.

Thread provides the first IP-based low-power mesh networking solution, filling a critical gap in the IoT, with many device manufacturers adopting this technology and planning to roll out products in 2016.

Silicon Labs is actively engaged with dozens of customers, including Nest, Tyco and Kwikset, who are beta-testing our solution for a wide range of connected home and security products.

Bluetooth Smart is the fastest-growing wireless technology for the IoT, providing direct connectivity for smartphones, and is expected to represent over 40% of the total low-power wireless module and chipset market by unit volume in 2018. Earlier this year, we acquired Bluegiga to gain a market-proven Bluetooth stack and a leading module business.

We've made substantial progress in the Bluetooth market, accelerating our roadmaps, growing our customer base and greatly expanding our SAM. Silicon Labs' modules provide a pre-certified, plug-and-play RF design that integrates the antenna, speeding time to market and reducing costs, complexity and compliance effort for our customers.

Our acquired Bluetooth module business remains on track with our 2015 revenue goals. In Q2, we introduced a pre-certified dual-mode solution for applications requiring Bluetooth Smart and Classic Connectivity such as home automation, wearables and point-of-sale devices.

In Q3, we plan to introduce a new module family based on our Blue Gecko wireless SoC and Bluetooth Smart stack, enabling developers to preserve their investments in tools and software when they migrate from modules to SoCs for volume production. During the quarter, we also announced the latest addition to our industry-leading EFM32 Gecko family.

Our new Happy Gecko microcontrollers provide an energy-friendly, plug-and-play solution for adding USB connectivity to battery-powered IoT applications. USB is the fastest-growing interface for consumer applications with more than 3 billion USB-enabled devices shipping each year.

Moving on to Infrastructure, our timing and isolation products represented 18% of our Q2 product revenue, with each delivering new records.

Silicon Labs offers the lowest jitter, highest performance and most flexible clock and oscillator products in the market, and we continue to deliver a solid pipeline of new products which are producing strong market traction and record design win activity.

We are beginning to benefit from 100-Gig deployments in metro and data center applications and are optimistic about our market expansion into wireless infrastructure. In Q2, Silicon Labs introduced the industry's most highly-integrated clock IC for wireless infrastructure applications.

While base station suppliers must develop new 4G and LTE equipment to provide increased network capacity and coverage, this has become an increasingly difficult design challenge for small cells, which are often deployed in congested urban environments.

Silicon Labs' new Si5380 clock is the industry's most integrated timing solution available for these base station applications. Our isolation products also established record revenue in the second quarter, growing approximately 25% year-on-year.

These products are gaining traction in infrastructure applications where our isolation technology enables energy efficiency for precision power control. Our digital isolators are used in power supplies for high-speed switches, servers and base stations and also widely deployed in industrial automation and green energy applications.

Broadcast automotive achieved its seventh consecutive record revenue quarter, reflecting growth of approximately 70% year-over-year. We're winning designs based on performance, scalability and integration and anticipate share gains in the Americas and Europe to continue to fuel revenue growth for these products. Silicon Labs is a resilient innovator.

We have consistently delivered breakthrough products and technologies that solve some of the industry's toughest challenges, achieving market success many times over. Our track record has proven our agility in transitioning rapidly to new growth opportunities. We've been steadily expanding our IoT solutions for a number of years.

The IoT offers an enormous growth opportunity and we're focused on becoming a leading player in this large, broad and dynamic market. While we are disappointed in the performance of Broadcast consumer, our strategic growth products now represent two-thirds of product revenue and are delivering approximately 25% year-on-year growth.

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

Jalene?.

Thank you, Tyson.

Before we open the call for the question-and-answer session, I would like to review the investor conferences we will participate in this quarter, including Pacific Crest's 17th Annual Global Technology Leadership Forum in Vail on August 11, Canaccord Genuity's 35th Annual Growth Conference in Boston on August 13 and Citi's Global Technology Conference in New York on September 9.

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..

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

Yes. Thank you. My first question, so looks like Broadcast is going to be about 20% of revenue in Q3.

Could you talk a little bit about how much of that is still TV because obviously this segment continues to decline? So just trying to understand how much of the Broadcast business will still be a headwind going forward?.

Hi, Tore. Looking at Broadcast, we haven't broken that out specifically. And we have – 24% of Q2 revenue was comprised of Broadcast, that includes both the automotive and the consumer elements of that. The consumer piece is larger than the automotive piece, and – but that is beginning to change.

So, it's still a significant portion of the overall Broadcast mix..

Very good. And as my follow-up question on gross margin, just given that Broadcast is going to decline sequentially, I guess I would've expected the mix to look a little bit better in Q3.

Anything specific going on there, or are you just being conservative on the mix?.

Yeah, we just don't want to get ahead of ourselves, Tore. We had good performance in Q2 and the guide we're giving for Q3 is consistent with that guide. It's that range of plus or minus 50 bps allows for some upside based on the final mix. So we'll just see how that plays out..

Sounds good. Thank you..

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

Thanks for taking my question. Maybe just a high level, trying to understand the guidance, in the press release you said Broadcast would be down 15% if you add in a slight decline in Access, and flat broad-based, it seems like you get a little bit higher number. Just wondering where I was off..

Yeah, so you have to look at the Access number, Blayne, We talked about returning to more normal levels of decline, so to speak, for that business segment. We'll see how it plays out, but overall, with this weakness we're seeing in consumer, we're just being deliberate about the guide here for revenue on Q3..

Makes sense. And then I just wanted to follow up on video. Obviously, that business has come down substantially. Even if you grew in December, I don't know if you'd sign up for that, you'd be down 30%, 40% for the year. Obviously, TVs are weak and the macro is weak, but probably not down that much. So, I was wondering if you could just square the two.

Thanks..

So the video, we were a bit surprised by the decline in bookings that we saw in Q2 and that's continuing into Q3, primarily with our Tier 1 customers in Korea. We believe that our share with those customers remains strong, our design win activity remains strong, but there is, we believe that there's some over-inventory in the channel.

We've got some macro effects with the euro, we've got weak demand there, and we also have higher dollar content there, so that's kind of exacerbating some of the swing in revenue that we see. We don't really have visibility into what Q4 is going to look like at this point.

There are some indications that the TV makers are going to refocus, but we haven't seen that yet in our bookings. And really I think it's a little bit early for us to start talking about what it looks like in Q4. But if you just look at our market share with those customers, we would stand to benefit from any rebound if that was going to occur..

Okay. Thanks, guys..

You next question comes from the line of Matt Ramsay with Canaccord Genuity. Your line is open..

Yes. Good morning. Thank you for taking my questions. I guess first a little bit bigger one, obviously, the bigger picture, I guess, rather the IoT business has seemed to perform well, and Tyson, I wanted to dig into one of the things you mentioned in your prepared remarks about the ramping traction of Bluetooth Smart.

You guys had traditionally been quite strong in the ZigBee market.

Maybe you could just talk a little bit long-term about how you're seeing trends from your traditional base of strength being ZigBee into the Bluetooth Smart space where you guys obviously made an acquisition to get stronger in that market and just how you're well positioned in each one and how those trends are playing out? Thanks..

Sure. We've traditionally been very strong in the ZigBee market. One of the, if not, the leading supplier of ZigBee solutions. And Thread is essentially the latest incarnation of the 15.4 standard, which ZigBee is based on and we have a leadership position there in the standards body.

We have the leading stack and are partnered with all the key customers around this new trend. There's hundreds of customers signed up with the Thread group, and we believe that the momentum both with ZigBee and with Thread in especially the home automation and security markets is quite strong.

We're seeing a lot of traction there with operators and in the retail channel, with large retailers coming in and putting platforms in place, many of which are based on our silicon and software solutions. So, we start in the wireless connectivity market from that strong base. Our next-generation platform adds Bluetooth Smart capability to that.

So, we have both ZigBee, Thread, some proprietary solutions as well as Bluetooth Smart in a common silicon platform. And then the Bluegiga software runs on that chip.

And so the Bluegiga business came in, it was one of the strongest Bluetooth module providers and they had a leading software stack with over a decade of maturity, and that software running on our chip and chip going into their modules and then also going onboard is going to be an important SAM expansion for the company.

We have not traditionally participated in Bluetooth Smart. You've got predictions of that being over 40% of the Bluetooth or of the low-power wireless chipset market.

It's a very critical standard for the IoT and it allows devices to connect directly to smartphones, and you can start to imagine where the ZigBee capability and the robust wireless mesh networking starts to dovetail with the ability to connect directly to smartphones in the same device, and that opens up entirely new use cases.

So the multimode capability is going to be a big advantage for us and just the participation in that market and the rapid expansion of the number of applications and volume is going to be an important growth driver for us.

And we've got important traction in that market with our Bluetooth module business, with the Bluegiga module business that we have and a tremendous amount of customer traction both at the silicon level and the module level around Bluetooth Smart.

So we're quite optimistic about this being a very important component in the IoT and a very important component of us and our business and a growth driver for our business going forward..

No. Thank you for that color. That's really helpful. As my follow-up, I wanted to ask a little bit about the Infrastructure business.

Obviously, there's some pretty exciting timing products there that at least I feel are quite differentiated, that took a little bit longer, maybe, to get material volumes or traction in the market than some of us might've hoped. But it sounds like things are pretty optimistic going forward for you guys against what seems to be a pretty choppy macro.

So any forward commentary you could give on the traction of those products against the spending or macro environment would be quite helpful. Thank you..

We're quite pleased with the performance of our Infrastructure business in Q2 and going into the second half. While we've seen a lot of companies talk about the weakness in the wireless base station market, our business has traditionally been focused more on the core network and on data center applications.

And we're seeing strength in bookings and in the – just in the trajectory of that business in the second half, really driven by our record design win activity and performance over the last 18 months.

So we've had very strong traction with new products and with existing products in our clocks and our oscillators, into those applications and our latest-generation products going into wireless base stations, we do believe is a market expansion, a SAM expansion for us.

But overall, we're quite pleased with the performance of that and also see that the market segments that we're in are healthier than many others we're seeing..

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

Thanks for taking the questions, guys. Just wanted to clarify the Broadcast issues in 2Q and 3Q. I think I'm hearing that Broadcast is a consumer sub-segment issue in 2Q and more of a TV tuner and demod issue in 3Q.

And the market share position sounds firm, but are there any pricing issues with TV turner (29:26) quarter?.

Tore, this is – or, I'm sorry, Craig, this is Tyson. Really, the pricing is set on essentially a yearly basis, and we're in the middle of a model year.

So there's no pricing dynamic that we're seeing in the market that's influencing the Q2 and Q3, and really, there's not much difference in terms of – there are some design wins in midyear models, but overall, this is purely an inventory and a macro issue that we're seeing, not a pricing issue at all..

Thanks for that. And then the question is on the IoT segment. Very strong 2Q performance, it looks flattish, maybe down a little bit in 3Q.

Tyson, is that initial design wins with Energy Micro and a lot of the connectivity solutions really hitting a run rate and so performing on a flatter growth trajectory? Or are you seeing some of your customers draw down inventory? How do we reconcile the trailing two-quarter to four-quarter design win history with the flattening of the growth rate here midyear?.

Well, if you look at the performance of the IoT business over the last five quarters, we've driven 35% year-over-year growth.

If you look organically, that is still in the strong double-digit range, and that reflects broad traction across our 8-bit, 32-bit, proprietary wireless, ZigBee wireless, really across the board and even our sensor products are starting to gain traction in the market. So if you look at it on a year-on-year basis, it's solid.

And if you look at the design win traction, we've actually been seeing increasing design wins and customer design-in activities across all of those products. Our EFM8 MCUs, which we introduced in Q1, our new wireless products that we're out sampling.

So I believe that while we may see a little bit of impact from what's going on in the macro economy, I don't believe that there's any decline in the overall trajectory and the long-term trajectory of that business. We had hoped that Q3 would be a little bit stronger than it is.

And the design win activity would've indicated that, but overall, if you just look at it on a little bit larger, longer scale, we're very pleased and very optimistic with how that business is coming through..

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

Yes. Thanks for taking my question. Tyson, you talked about the pricing environment. You talked about the macro inventory and demand on the TV.

What about market share dynamics in the Broadcast? Do you feel that your market share in the September quarter is at or higher than the June quarter? Or was there some level of decline?.

Anil, I think you have to look at this really two different ways. I believe that our market share with our primary customers and really overall has remained the same. We continued to enjoy dominant share at our Korean Tier 1 customers.

We did lose a little bit of share in North America due to the CrestaTech patent suit or lawsuit that we were involved in. We believe that we'll be able to get that share in Korea back as we move forward through the year and into next year. But overall, our market share with our Tier 1 customers, if anything, has increased slightly.

I think that the other way to look at this business, though, is that the overall TV market is down. We've got a pronounced decrease in shipments out of our Tier 1 suppliers.

And so, whether our overall market share, where last year, we were 55% of the overall TV market, we really have to see have the year plays out, but our overall fraction of TVs shipped this year may go down. It's not because we're losing share with our customers, but possibly because our customers have a smaller volume share of the overall TV market.

But it really depends, I think we've also seen the Chinese TV shipments have also slowed down with the Chinese makers. And certainly, Japan is seeing these effects as well. So, how it all shakes out, but I think overall, our market share is solid with our Tier 1 customers, our design wins are solid.

We feel very good about where we are and where we're positioned going into the 2016 model year. But we'll see how it all plays out..

Great. And as a follow-up, Tyson, stepping back, I mean, as we entered into the year, you guys did suspect, and you kind of talked about it on the fringes about TV being an issue with not perfect visibility. But this segment, with about 20% plus revenues will move the needle for you guys going forward.

And given that there's so many other positive things going on with IoT, this, potentially the volatility around this segment will continue to be impacting the overall company as it is on a day like today.

So the question I had is, why not look at strategic alternatives for this segment? Why not dispose this segment? I know in the past, you've talked about this being a cash cow, but this will continue to be a volatile segment that might provide some headwinds to the overall company and might mute some of the great things that are going on in the IoT.

I'd love to hear your comments on that..

Well, first of all, as the other components of the business perform, we've had Broadcast automotive, we've had our IOT products and Infrastructure products growing 25% year-on-year. We've had – that's now two-thirds of our business.

So, as the consumer portion of Broadcast and specifically I think you're talking about the TV portion, as that becomes a smaller fraction, it will move the needle less.

We do feel like this is a long-term business for us in terms of – this is not either, the TV tuner is something that we believe is going to be a separate device over a long period of time, and we have very good technology, and it generates good profits for us.

So we believe that it's something that while that's not the strategic growth area for us that we do believe it will move into more of a mature category similar to our Access business and that once we get through the volatility that we've seen recently, will return into more of a steady-state sort of business from year-to-year.

That being said, we certainly will look at ways to optimize that situation. We have been re-deploying a lot of resources and focusing in on our strategic growth sectors around IoT and feel really good about those investments and how that's moving forward. And certainly, we would consider all options.

But at this point, it looks like it's going to be a long-term business for us, and a decreasing fraction of the overall business, but an important cash contributor for the company..

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

Thanks for taking the follow-up. It was an excellent quarter for OpEx management in 2Q and the full-year target is coming down from plus 9% to plus 7%.

My question, John, is if we don't see an abatement in some of the volatility that has been with us in the first half of the year with the macro backdrop, how are you thinking about that 7% target if the quarters were to be impacted on a go-forward basis in either segments like Broadcast or some of the more strategic product groups relative to what we've just seen with OpEx management?.

Certainly, Craig. We, as Tyson just mentioned, we have been undergoing efforts to redeploy our resources in some of the more mature categories into our strategic growth areas, and we feel that that's fundamentally important.

This issue that we're seeing in Q3 certainly makes model performance a bit more challenging, but taking a longer-term view, it is fundamentally important to us to continue to invest for success in the Internet of Things and in infrastructure markets. And we'll continue to strike the balance between making those investments and optimizing our P&L.

So it's just something we'll have to watch further, but we don't want to do something over-reactionary and impact those development programs, which are very important for the long term success of the company..

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

Hi, guys. Couple of questions on the TV market.

First of all, can you quantify if you can the inventory of the customers in channel versus typical levels and how long it would take to drain that down, do you think?.

Yeah, Suji. This is Tyson. We believe that our – if you look at the book-to-bill ratios that we had with these couple of customers, they were well below 1% in Q2. And we believe that on the order of – I don't know how to quantify it, but they have many millions of tuners sitting in inventory that they're burning through right now.

And the question is how the sell-through of their end products goes here in the second half and how quickly they can burn that off. But there's a substantial inventory.

We shipped pretty heavily in Q1, they put the brakes on in Q2, and we're feeling the effects of that certainly most prominently here in Q3, and our hope is that they are burning off the inventory and are looking at how to reinvigorate sales here in the second half. But we don't know exactly how long that's going to take.

The guidance that we're giving here in Q3 is to the best of our knowledge what we think the situation is at this point..

Okay. That's helpful, Tyson.

And then also in terms of the cutover in TVs to Ultra-HD models, I'm wondering if that's orthogonal to you guys or whether that causes a refresh that helps you in terms of content and growth here, or whether that's just kind of is part of – you're indifferent to that cutover?.

Our tuners are global, so they work across all the various standards. And when you look at an HDTV versus an Ultra-HD TV, there's a general similar content from our side. So whether it's a high-def 4K TV or an HDTV, it's essentially the same front end that's being used in all those different applications.

So I think just overall, if you look at the TV market, the 3D trends didn't really play out. You've got OLED as an important driver, but that hasn't really sold through. You've had the 4K TVs being quite expensive and an interesting technology, but not a whole lot of content yet.

So I think just if you look at, from a high level of the TV market, there's not really a killer feature or something like that that's driving additional replacement cycles. And I think that as the pricing comes down on the 4K TVs, I think that that could generate some additional demand here as we go into the second half and into next year.

But from our perspective, whether it's an HDTV or a 4K TV, it's essentially the same product from our end. It's really more advances on the display and on the processor side..

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

Good morning and thanks for taking my question. Earlier in your prepared remarks, you talked about seeing strength in industrials. I feel you've gotten commentary from other companies about seeing more broad-based weakness in industrials. I was wondering if you could talk about what's driving the strength there..

Yes. Our industrial business has been our fastest-growing business, and that's really centered around all the IoT opportunities. If you look at the home automation, you look at security, you look at metering, a lot of those segments that have been very successful for us in Europe and in the U.S.

are classified in industrial and that is now our largest market segment. So, our mix has shifted from being more consumer and communications to now being fairly well-balanced between those three, with industrial taking the top place over communications at 35% here in Q2.

And we expect the strength in industrial and automotive to continue as we move into the second half. And it's really driven by product cycles and design win momentum more than the health of the end market and the economy itself. So we're quite pleased, although I think that some of the macro effects are moderating our growth here as we move into Q3.

But overall, that's been driven by product cycles and market share gains..

Thank you. And then my follow-up is on gross margins. If you look at September, you guys guided to 60%, and I know visibility on the TV tuner business isn't great at this point.

But assuming that it does come back to kind of your normal run rate, are you guys still confident that you'll be able to hold 60% gross margins going into 2016 when it does come back?.

Yeah, Rajvindra (sic) [John] (44:24) this is John. So, our model range for gross margin zooming out of it is 59% to 61% and where we end up within that model will depend on the product mix in any given quarter. So, clearly, when the Broadcast consumer is doing better, that puts a little more pressure on margin.

When the higher margin products like Infrastructure are running hot, that improves our margins a bit..

Thank you. Your next question comes from the line of Harsh Kumar with Stephens. Your line is open..

Yeah, hey. Thank you. Tyson, maybe a question for you. If I look at the September guides, you're basically talking about IoT and Infrastructure flat. So question on that is, I'm sort of surprised, September quarter, I would have expected big IoT type builds, not just in Industrial, but even associated with consumer items.

I'm curious if you could shed some light on it. And also, I'll ask my follow-up. Infrastructure, we're seeing a lot of companies falter, and it's understandable. Now you guys are guiding flat which is relatively speaking, much better than others.

I'm curious what you're seeing there that makes you optimistic for the out-performance on a relative basis?.

So, if you look at our September guide for IoT and Infrastructure, we've just come off a very strong run of year-on-year growth of 35% and strong shipments in Q2 hitting a record, a strong record with those products.

And so, whether the Q2 number or the Q3 number is being flat is – or whether we're being conservative or if – I think just looking at the end-user demand and the consumer demand, it's, I think, taking a bit of a pause. It's not at all related to design wins or traction or share gains.

I believe that you really have to look at it on a year-on-year basis and just look at the string of records that we've had. And I think that there's nothing in the – really if you look at the design win traction, it's increasing among all those applications.

So, whether consumer demand or what's going on there in terms of the near-term quarterly effects, not sure exactly what to read into that. In terms of Infrastructure, again, we do not have a strong exposure to the wireless market. I mean we've seen a lot of companies talk about serious reductions in shipments of base stations, especially in China.

We do not participate directly in those. That does have an effect on the core network deployments, but I think that the strength in Cloud and in data centers and in the overall backbone networks.

You look at the CapEx spending and it is holding in there, and I think that that's also laid on top of the fact that we've had record design win performance out of our Infrastructure business over the last couple of years. And so, those programs are starting to come on line, probably negating some of the macro effects that we're seeing..

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

Yes. Thank you. You talked about the strong dollar impacting Europe and Russia demand. But do you have any offsetting savings given some of your overseas cost structures? You've got Energy Micro, and Bluegiga in Europe, you've got staff in Asia, et cetera? Thanks..

Hey, Ian, yeah, this is John. There is some benefit to that, that's true, and we have incorporated that in our planning for this year and those effects are included in our guidance. And that was true both at the beginning of the year with the 9% call and today with the 7% call. So, it's a valid observation and that is incorporated into our numbers..

Thanks. And so my follow-up, it's on IoT. You talked about some highly integrated single-chip solutions that are sampling at the moment.

Could you talk about the customer reception so far and perhaps the dollar content trend, maybe the high watermark versus some of the current opportunities?.

The IoT solutions that you're referring to are really our next-generation Gecko platform. So, we've – to address this IoT market, it's a broad market and you have to have a complete portfolio of products addressing a broad range of standards, a broad range of functionality and microcontrollers.

And so, we are building our next-generation platform to be able to serve all of those. It's going to have a lot of different parts. And our next-gen part has been sampling since Q1. We have over 30 alpha customers in active development in all of the various wireless standards, ZigBee, Thread, Bluetooth Smart, as well as MCU functionality.

These are single-chip solutions that are highly differentiated in terms of low-power performance, in terms of multimode capability, dual-band capability, and so really take the performance of connectivity and the power consumption and the integration to the next level, reducing the bill of materials costs.

And in the second half, we're going to be launching modules around that solution, around Bluetooth Smart and other standards. And we're going to be launching our single-chip solution out into the market more broadly. But today, we're sampling that with a wide range of customers and working through the initial product development cycles with that.

But we believe that that platform, that that first chip and all of the chips that are going to follow as we move into next year are going to be a critical growth driver for the company as well as a really important component of the rollout of IoT.

Low power, integration, costs, all of those things are going to be important as these applications start to grain traction in the market and get deployed. So this level of integration, this level of power is going to be really revolutionary in transformation of the market, in our view..

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

Hey, thanks for taking the question. So, another one on OpEx. Given with the lowered outlook for 7% growth in OpEx for the year, it seems to imply a pretty meaningful uptick in Q4 spending.

So just curious, am I doing the math right there? And what's driving that pickup in spending for Q4?.

Yeah, Ryan. We're continuing to hire in certain areas, particularly in the software developments, expertise, and we also have our new college graduate recruiting program that has had another year of successful recruiting progress.

So, while the first half head count growth was a bit slower than what we anticipated, we are continuing to ramp heads in a few areas, to resource these critical programs that we need for IoT success long-term..

Okay. And then for a follow-on, just back to IoT and just the outlook for kind of a flattish trend in Q3. I think your competitor was talking a little bit in the 8-bit space for microcontrollers seeing some inventory build at customers.

I'm just wondering if you're seeing anything like that as well, or if this is just a demand pause or, yeah, if you're seeing any inventory pull down similar to that?.

No. We are not seeing any inventory pull down. We see strength in our 8-bit business. We see strong design win activity going on in our EFM8 solution. We continue to invest in the 8-bit area and launch new products in that area.

So we believe that we're in share gain mode with 8-bit and view that as an important driver of the microcontroller business at the low end. So no, we don't have any – we don't see an inventory issue at all, in fact, fairly healthy metrics in that regard..

Thank you. Your next question comes from the line of Rajvindra Gill with Needham. Your line is open..

Yeah, thanks for taking my questions. Just wanted to get a sense of seasonality. This year has been a bit volatile in terms of seasonality compared to your five-year median rates. If I look back over the last five years, Q2 is usually up about 6% and Q3 is usually up about 2%. This year is obviously much different, much lower.

And so I'm trying to get a sense of kind of the back half, Q4. Q4 historically is up 2% sequentially. Now we're coming off very, very tough – easy compares in second quarter and third quarter, but it seems like there's been ongoing issues in terms of the Broadcast business and some softening of the macro.

So wanted to get a sense of kind of how you're looking at the second half relative to kind of historical growth rates..

Raj, your observation is spot on. This has been a very strange year from a seasonality point of view with a significant uptick in revenue in Q1 from the Broadcast business category, which is highly unusual, and now a third quarter guide down for Broadcast which is also highly unusual. So, it has skewed the character of the year significantly.

I also believe that if you look at our peer group and the guides that we have been experiencing throughout this earnings season, many participants in broad-based markets are showing macro weakness in the second half that have significantly impacted their third quarter guides. And we're not immune to that type of activity.

So I think we are seeing an exacerbation in the third quarter from both a Broadcast dynamic around TV consumer demand and a general macro slowdown that's affecting all of our product lines. The big question for us is, what will fourth quarter turn out to be? And we're not able to give you a clear understanding of that today.

I think by the time we get to the October call, we will know whether these TV OEMs have begun to resume more normal ordering patterns and that business starts to recover.

I think incrementally to all of this discussion about IoT guide for the third quarter, we would expect that business to continue to expand in the fourth quarter, and we would believe that IoT and Infrastructure will have good 4Q and continue solid momentum into 2016.

But to summarize, this has been a highly unusual calendar year from a seasonality point of view. And we would expect to return to more normal trends and conditions next year..

Just switching topics, last month, Google had announced their new operating system, Brillo and their language for connected devices Weave to address the IoT market.

So, wanted to kind of get your thoughts on kind of how you're looking at Google and maybe their attempt to standardize the home networks and how that will affect your strategy targeting the IoT market..

So, Google is an important partner for us. And I believe that the drive to standardization and the way devices talk to one another is of critical importance to the rollout of IoT. We've got a lot of different players building incompatible solutions and trying to stake out their claim.

And I think that there's a coming shakeout of those players and standards. We've seen moves by Qualcomm into the Thread group, which is an important, that's a Google and Nest initiative together with us and ARM and Freescale that that is the networking layer which basically takes ZigBee and turns it into an IP-based low-power mesh network.

Think of it as a Wi-Fi for the IoT. And the Weave application layer is essentially the language that devices can use to talk among themselves. You also have ZigBee as an important application layer. You also have HomeKit to some degree. So there are a variety of application layers that run on top of the networking layer.

And I believe that there's going to be three or four major ways that devices will talk to one another and those standards are all coming forward and shaking out right now. The introduction of Thread is actually – I don't underestimate that. It's going to be a huge deal.

And the fact that we can get all these IoT devices with an IP address and talking to one another and talking over the Internet directly allows these application layers to span across all the various networking, whether it's a wired networking or Ethernet and Wi-Fi or over a thread and that's going to improve the interoperability of these.

And Google and Silicon Labs and ARM and others, and now Qualcomm, are all really pointed in the same direction that that is the right way of connecting these devices and the importance and imperative of a low-power standard like Thread compared to Wi-Fi.

You're going to battery-power a lot of these nodes which I believe majority of the nodes in IoT are going to not have a wire, are not going to be powered, you have to have a low-power standard. And these new standards like Thread are going to be critically important.

And we're starting to see the companies coalesce around this, and we'll see how that plays out in 2016, but it's very exciting for us going forward..

Thank you. There no further questions at this time, Ms. Hoover, I'll turn the call back to you..

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

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