Silicon Laboratories Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 10 speakers on the call.

Operator

Hello. My name is Sarah, and I will be your conference operator today. Welcome to Silicon Labs Second Quarter Fiscal 20 23 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded.

Operator

I will now turn the call over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead.

Speaker 1

Thank you, Sarah, and good morning, everyone. We are recording this meeting and a replay will be available 4 weeks on the Investor Relations section of our website at silabs.com/investors. Our earnings press release and the accompanying financial tables 2 are also available on our website. Joining me today are Silicon Labs' President and Chief Executive Officer, Matt Johnson and Chief Financial Officer, John Hollister. 2.

Speaker 1

They will discuss our 2nd quarter financial performance and review recent business activities. We'll take questions after our prepared comments. 2. Our remarks today will include forward looking statements subject to risks and uncertainties. We base these forward looking statements on information available to us 2nd quarter fiscal 2020.

Speaker 1

As of the date of this conference call, I assume no obligation to update these statements in the future. We encourage you to review our SEC filings, 2, which identify important risk factors that could cause actual results to differ materially from those contained in any forward looking statements. 2. Additionally, during our call today, we will refer to certain non GAAP financial information. A reconciliation of our GAAP to non GAAP results 2.

Speaker 1

I'll now turn the call over to Silicon Labs'

Speaker 2

2. Thanks, Giovanni, and good morning, everyone. Despite a challenging market environment, 2nd quarter. Silicon Labs team delivered solid second quarter revenue and non GAAP earnings per share in line with our guidance. However, during the quarter, we saw further market erosion, 2.

Speaker 2

Broad demand weakness and elevated customer inventory continue impacting both of our business units, although our industrial and commercial business showed resilience, 2. This demonstrates the strength of our position and the favorable impact of our strong design win momentum. 2. So far in the first half of twenty twenty three, our design win pipeline is up 23% year over year. 2.

Speaker 2

Looking ahead, we've continued to design with production ramps in the second half of the year that will offset the ongoing market headwinds at some level. 2. However, how much is difficult to call given the dynamic market environment. It's important to note that even with these short term market challenges, 2. We're confident in our mid and long term revenue growth potential and we are excited by the continued strong design growth and an expanding twenty eighteen funnel, which now stands at over $18,000,000,000 up 17% over the same time last year.

Speaker 2

I'll now hand it over to John to cover the financials.

Speaker 3

2.

Speaker 4

Thanks, Matt, and good morning. 2nd quarter revenue was $245,000,000 above the midpoint of our guidance range and down 7 percent year on year. ASPs in the quarter declined slightly on a sequential basis. Unit volume was up sequentially. 2.

Speaker 4

During the quarter, we saw strength in the industrial and commercial business unit, which ended at $165,000,000 up 15% from the same period of last year. 2. All three segments of our I and C business performed well. In the industrial segment, the connected equipment category was strong, 2. The commercial and retail space, we had a strong quarter in electronic shelf labels and in smart cities, we saw strength in smart metering.

Speaker 4

2. The Home and Life business unit declined 33% year over year to end at $80,000,000 High levels of customer inventory continue to impact shipments for Home and Life. 2. Geographically, during Q2, we saw the greatest strength in Europe, which was up 14% year on year. Revenue for APAC in the Americas was down year on year.

Speaker 4

2. Distribution revenue was 77% for the 2nd quarter. That mix is down from the Q1 due to stronger shipments in Q2 to direct customers. 2. GSI was stable in Q2 at 79 days.

Speaker 4

Our largest customer was under 4% of revenue in the quarter 2. And our top 10 customers were about 24% of revenue, consistent with our historical results. Non GAAP gross margin 3. Ended lower than expected at 58.9 percent on product mix. There were no price increases in the quarter and we experienced 2.

Speaker 4

No major changes in manufacturing input costs. The sequential decline in gross margin from the Q1 is largely due to the one time effect of price increases at 2nd quarter. Non GAAP operating expenses were lower than we expected for the quarter ending at $104,000,000 2. This was primarily due to lower variable costs based on our expectations for the year combined with specific favorable items such as lower fringe expenses in 2nd quarter in the United States. Non GAAP operating income was $40,000,000 or 16.3 percent of sales.

Speaker 4

2. Our non GAAP effective tax rate was slightly higher than we expected. The requirement to capitalize research and development costs for tax purposes 2. We estimate that a normalized long term non GAAP effective tax rate without the effect 2. Earnings per share on a non GAAP basis 2nd quarter.

Speaker 4

We ended slightly above the midpoint of our guidance range at $1.04 primarily on the upside in revenue and favorability in OpEx. 2. On a GAAP basis, gross margin ended at 58.7%. GAAP operating expenses were $127,000,000 2. Our GAAP pre tax income was favorable to the midpoint of our guidance range by around $3,000,000 However, due to the capitalization of R and D expenses 2.

Speaker 4

And the timing of forecasted income for the year, our GAAP tax expense was unfavorable by about $5,000,000 2. Accordingly GAAP earnings per share were $0.33 for the quarter, slightly below our guidance range. Turning now to the balance sheet. 2. We ended the quarter with cash and investments of $506,000,000 Our accounts receivable balance grew in the quarter to $98,000,000 2.

Speaker 4

With day sales outstanding of 36 days, we added about $12,000,000 in net inventory in the quarter to a total of 146,000,000 2. As we continue to leverage the softer market to accumulate strategic dive in based on the strong design win momentum we've seen for the past few years, 2. Inventory turns ended at 2.8 times. During the Q2, we finalized the redemption process on our 2025 convertible notes. 2.

Speaker 4

As expected, we funded the par value of the notes, which was $535,000,000 in cash. We settled the in the money component with shares, 2. The total shares issued around 900,000. We were also active in the buyback market in Q2 executing about $184,000,000 2. Retiring around 1,300,000 shares.

Speaker 4

The net result of these activities in the quarter was a reduction of our share count 2. And our fully diluted shares outstanding in Q2 ended at just under 33,000,000 shares, which is an all time low share count since our IPO. 2. On July 20th, the Board of Directors authorized an incremental $100,000,000 for the repurchase of the company's common stock, 2, bringing the total amount authorized through the end of 2023 to $116,000,000 At this point in time, we have fully deployed the excess capital of the company 2. Divestiture of our INA business 2 years ago and we are in a normalized pattern for capital deployment.

Speaker 4

2. To partially fund these various cash outlays in Q2, we drew $80,000,000 from our revolving credit facility 2nd quarter. And we also renewed the facility with the existing banking syndicate for a new 5 year term. Overall, 2. The balance sheet remains very healthy and we have ample financial capacity to execute the business stretch.

Speaker 4

Before I turn the call back over to Matt, 2. I will cover guidance for the Q3. As Matt indicated in his opening comments, over the past several weeks, we have experienced very low levels of bookings. 2. This has impacted both of our business units.

Speaker 4

Accordingly, we are guiding revenue for the Q3 in the range of $190,000,000 to $210,000,000 2. And we expect both business units to decline in Q3. Given the uncertainty in this market environment, 2. We are temporarily expanding the range to plusminus10,000,000 from the midpoint. We expect non GAAP gross margin to be slightly higher in the 3rd quarter at 59%.

Speaker 4

2. We are taking additional interim steps to control our OpEx in the 3rd quarter. Accordingly, we are expecting non GAAP operating expenses in the 3rd quarter to $2,000,000 We expect the non GAAP effective tax rate to be approximately 23% in the 3rd quarter. 2. The lower tax rate includes a one time discrete benefit of approximately $3,000,000 related to a pronouncement from the IRS last week 2.

Speaker 4

Our non GAAP earnings per share is expected to be in the range of $0.45 $0.73 On a GAAP basis, we expect gross margin to be 59%. We expect GAAP operating expenses to be approximately 120,000,000 2. And we expect GAAP earnings per share to be between a loss of $0.08 and $0.20 income per share. 2. I will now turn the call back over to Matt.

Speaker 4

Matt?

Speaker 2

Thanks, John. Disciplined execution remains a top priority as we navigate the current environment. 20. As John mentioned, we've taken deliberate but temporary actions to appropriately manage expenses in a way that doesn't impact our mid- or long term potential 2. Our ability to service all the new business we've been securing.

Speaker 2

We are confident that our Series 2 portfolio of products is capturing market share 2. And we have invested in securing strategic inventory ahead of our expectation for market recovery. In the second quarter, we continue to expand our industry leading 22 Portfolio Products. We announced a new dual band FT28 SoC, which addresses key customer needs 2. The FG-twenty eight's dual band capabilities allow for multiple protocols on a single design, 2, including radios for Bluetooth low energy and sub gigahertz, which supports device communications over 1 month and enables new edge applications 2.

Speaker 2

2. The FT28's built in AI ML hardware accelerator is the industry's first and a sub gigahertz SoC, 2. Bringing artificial intelligence and machine learning to the edge. The F2208 also offers energy efficiency ideal for battery powered end nodes 2, as well as Silicon Labs Secure Vault Support, allowing designers to choose this level of security they need for their applications. 2.

Speaker 2

Within our product portfolio, a standout feature is our industry leading security and our PSA Level 3 certification serves as an advantage for Silicon Labs. 2. The recent announcement from the Biden administration about the development of a cybersecurity certification and labeling program, 2. Coupled with the commitment of numerous device manufacturers and retailers to enhance cybersecurity in their products positions us favorably to offer the most 2. We've already seen customers proactively adopting higher levels of security for their products 2.

Speaker 2

And we anticipate a growing trend of more customers all in suit. Also in the quarter, we opened registration for our 4th annual Works 2 Conference, which attracts over 8,000 IoT developers every year. A virtual conference will be held in August 22 and 23rd, 2. Conference is incredibly popular with our developer community 2. We'll come away with practical knowledge and skills to accelerate their product development.

Speaker 2

In my opening keynote at the conference, I'll share a preview of Silicon Labs 2nd Quarter. The Series 3 platform represents a major leap forward for the IoT 20 and our already industry leading Series 2 platform. The developer conference will also feature keynote from our CTO, 2. Daniel Cooley, who will address what is needed to achieve the full potential of cloud connected embedded computing and the challenges that lie ahead. 2.

Speaker 2

Silicon Labs Senior Vice President, Manish Kothari will also showcase real world examples of the IoT being harnessed for the greater good, 2, such as caring for the planet, caring for our health and other novel use cases that we never would have imagined a decade ago. 2. In May, we hosted a highly successful grand opening event for our connectivity lab at our Boston site, bringing together a wide range of important customers and industry partners. 2. Our connectivity lab serves as a cutting edge simulation of a modern smart home, showcasing a diverse array of IoT devices, 2 Applications, Ecosystems and Networks.

Speaker 2

With the aim of assisting developers and expediting the launch of their matter products, 2. The lab offers an ideal testing environment and allows them to assess prototypes within real world scenarios, accommodating a wide range of protocols and device brands. 2. This invaluable resource empowers developers to refine their products efficiently ensuring seamless integration into the market. 2.

Speaker 2

In closing, we are focused on maximizing the significant mid and long term growth potential ahead of us despite the current industry challenges. 2. Our strong market positioning and incredible product portfolio allow us to capture this opportunity while maintaining profitability. 2. Despite short term headwinds, we are confident in our ability to outperform the market through the effective execution of our long term strategic plan.

Speaker 2

2. I'll now hand it back over to Giovanni for Q and A.

Speaker 1

Thank you, Matt. Before we open the call for Q and A, I'd like to announce our participation in 2 upcoming 2. KeyBanc Capital Markets Annual Technology Leadership Forum in May on August 7 and Citi's 2023 Global Technology Conference in New York 2 in early September. We'll now open the call for questions. To accommodate as many people as possible before the market opens, 2.

Speaker 1

Sarah?

Operator

2. 2. Our first question comes from Matt Ramsay with TD Cowen. Please go ahead.

Speaker 3

3. Thank you very much, guys. Good morning. I guess, my first question, I'm just trying to I guess, first, I know you guys usually don't guide 2. Specifically by segment, but just given the delta in the outlook.

Speaker 3

John, if you could maybe share the 2 segments and what 2. And I guess the real part of the question is the Home and Life segment got up to $125,000,000 a quarter, give or take, at the peak and 2. It's pretty clear now in retrospect that was maybe over shipping a bit. And you're going to be under shipping, I assume, sell through for a bit here to try to get all this inventory cleared 2. So if you just kind of assess the end markets that you're serving in that Home and Life segment, any sense as to what sort of a steady state sell through for 2.

Speaker 3

Your end markets looks like in that segment, a normalized revenue once all these perturbations on inventory get sort of back to normal? Thanks. 2.

Speaker 4

Yes, Matt, I understand. It's hard to call it, just in where we are right now. We do think there is excessive inventory in the channel, 2. As you indicated, and I think the market is in a period of digesting that and clearing it out. Suffice to say, 2.

Speaker 4

Over the mid long term, as we indicated, we feel good about the business and see the 20% long term CAGR as 2. The goal that we have for ourselves and see that as a very realistic outcome. 2. As we talked about in the past, the industrial and commercial business has a market that in and of itself is growing slightly higher 2. And we expect that trend to persist, but we do have some very exciting new wins and applications in the life business in 2.

Speaker 4

We're looking at, for example, Horrible Medical applications as well.

Speaker 3

2. Just a follow-up there, John, anything on the guidance split between the segments?

Speaker 4

It's roughly split, Matt, in terms of what we're seeing 2. Sequentially for Q3.

Speaker 2

Got it. The only addition I'd add to that Matt and what John said is, 2. As we've been saying, we're not immune to macro and we're definitely seeing that here. But we do expect that over time that will definitely perform better. 2.

Speaker 2

And that's what we're seeing in industrial and commercial. And that's what we saw in Q2. But we're definitely seeing 2. Each of those end segments have their own unique experience. Home definitely most impacted with that consumer exposure, 2.

Speaker 2

Life showing itself to be, I think, more resilient. And then within industrial and commercial, overall performing stronger than home and life, 2. But still within, it depends. The broad industrial is softer or softening, I think, 2. Then the other spaces where you see more strength on big trends within those like metering continuing to grow, ESL continuing to grow.

Speaker 2

So 2. Each of those big picture, home and life weaker, industrial and commercial stronger, both being impacted overall by the market. 2. And then underneath the next level, it varies by the sub segments, if you will.

Speaker 3

Got it. No, thanks for all the color there, guys. Matt, maybe 2. A bit longer term, you're going to be ramping, all the Series 2 stuff, and you've talked about strength in design wins. So what I'm trying to 2.

Speaker 3

Get an idea about is, the inventory burn that needs to happen of current generation and maybe legacy products versus how quickly the design wins for the new programs can ramp and really contribute to revenue and what that balance looks like. So 2. Just kind of time to revenue across the different segments for the Series 2 platform as you secure the design wins? Any color there would be helpful.

Speaker 5

2.

Speaker 2

Yes, sure. So a few things, the Series 2 ramp has already started. 2. So I think that's important. If you step back and look at the opportunity funnel of $18,000,000,000 it's the driver of that funnel growth over the last few years 2.

Speaker 2

If you look at our design win performance over the last few years, it's Series 2 has been the driver of that design win growth 2 and our revenue growth over the last couple of years. Series 2 has been the biggest contributor to that growth. So 2. It's important to recognize that's already happening. That being said, it's still very early days in that ramp.

Speaker 2

2. If you look at the funnel, if you look at the design wins, we're just at the beginning of that cycle and there's many, many more years to come 2. So I think it's important to frame it that way. It's already started. I think one of the difficult things that we're seeing is, 20.

Speaker 2

As we keep saying, we're not immune to macro, but we think we can do better. It's hard when we have these different ramping businesses And Design Wins ramping and the soft macro environment and to synthesize those 2 things into the picture 2. I think the two things that give us the most confidence are 1, if you look back over last year and even first half of this year, 2. I think we've performed very strong relative to other IoT businesses out there. And if you look at that design win performance, 2.

Speaker 2

Even this year in the first half, up 23% year over year versus last year, which was an incredible year for design wins. 2. So that gives us confidence that not only do we have we've been able to do that, but it gives us confidence we'll be able to continue to do that. 2. It's just tough to reconcile with the current market environment that we're seeing right now.

Speaker 3

Understood. Thank you, guys.

Operator

2. Next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Speaker 6

2. Hey, guys. Thanks for taking my question. And bear with me as I set up this question. Ultimately, what I'm trying to understand is 3.

Speaker 6

By how much we're expecting revenue to trend below the long term trend line. 2. And so as I look at your distribution inventory, it's about 29 days above the I believe your long term target, 2, which is about translates into about $50,000,000 in revenue headwind, about the same amount in terms of the expected sequential revenue decrease. 2. So my question is, is that expected sequential decrease in revenue in the 3rd quarter primarily 2.

Speaker 6

Right sizing the distribution inventory or does it also have to do with just generally weak booking trends?

Speaker 2

2. I'll start. I think you should add, John. Thanks, Gary. So quick answer, it's more than just inventory.

Speaker 2

It's a market 2. As we were getting towards the end of Q2, we just saw bookings really slow and there's just so much, 2. I guess uncertainty with customers, visibility is low. So there's also a market component to that as well. 2.

Speaker 2

But the other thing I'd add that's important, the DSI or those days of inventory, 2. They're higher than historical for us, but they're also not alarming for us either. We are going into ramps that are 2. Significant and substantial for us that are not just one quarter of ramps, but it's quarters and years of ramps. 2.

Speaker 2

And if anything over the last few years has taught us that we need to be better prepared for that. So while 2. It is higher than historical and we're not trying to drive that up by design. We definitely it doesn't 2. I'd tell us that it's at a higher level than historical given the confidence we have in future ramping business.

Speaker 2

Don, anything you want to add?

Speaker 4

Yes, just one quick point. It's 2. A point of clarification perhaps, but as Gary, as we refer to bookings, we're talking about end customer demand. So that's 2. Really what we're referring to when we refer to weak bookings to round out Q2 and so far here in Q3, we are referring to end customer.

Speaker 4

2.

Speaker 6

Okay. Thank you for that color. With respect to some of the levers on the cost side, specifically OpEx, How much of the reduction recent reduction in operating expenses is structural or permanent and how much is variable?

Speaker 2

2. John, you go first.

Speaker 4

Yes, sure. Yes, Gary, it is variable and temporary. 2. We did take some limited structural actions earlier this year, but that is not comprehended at the moment. 2.

Speaker 4

What we are referring to for Q3 and second half is discretionary spending. We have frozen hiring. 2. Our executives are reducing their base pay and other similar items like that, but that is that should be considered temporary in nature. 2.

Speaker 4

And as we hopefully get through this downturn and start to see more of an upswing heading into next year, we would revert those items back.

Speaker 2

2. Yes, temporary in nature and temporary by design. We keep saying the design wins that we're ramping, 2. We need to be able to support them. That's why everything we're doing is setting ourselves up for that ramp, whether it's strategic inventory, having the resources 2.

Speaker 2

We don't want to do anything that diminishes that on the other side.

Speaker 3

2. Got

Speaker 6

it. Thank you, guys.

Operator

Our next question comes from Blayne Curtis with Barclays. Please go ahead.

Speaker 7

Hey, good morning. Thanks for taking my question. Just I had 2. I just want to understand the 2. On Industrial, like Home and Life has been correcting now, it's the 4th quarter.

Speaker 7

It always takes kind of longer to work through things. Industrial being down the substantial double digits, 2. Just kind of curious if you just comment on the inventory position in industrial and commercial and is this a start of a longer correction?

Speaker 2

2. I would characterize it a little different on the industrial and commercial. We've seen and we've said this 2. Multiple quarters, industrial commercial has definitely not been as impacted as home and life. I mean, that's clear, 2.

Speaker 2

But it has been impacted and it's been impacted consistently. Even yes, we had a record quarter last quarter, 2. That quarter would have been way better because it has design wins ramping and things that have been helping it have a record quarter, but it's still 2. Diminished from what it should have been if it wasn't for this market environment. So I think what's going on is not a new phenomena.

Speaker 2

It's actually been a long march 2. And we're continuing to see that going into Q2 sorry, Q3.

Speaker 7

I wanted to ask on the gross margin. So in June, 2. Top line was okay, but actually you had a higher mix industrial commercial margins, I think were worse than your guidance. So 2. Just trying to understand, I know you mentioned the timing of pricing and costs, but I think that was something that you should have contemplated, I guess, when you gave the guidance.

Speaker 7

I'm just kind of curious 2. What changed in June? And then when you look to September, huge revenue downfalls, but the margins are flat. So So can you walk me through that? And is there any further headwinds?

Speaker 7

Does it take some time for the higher priced inventory to flow through? Can you talk about what happened in June and 2. Kind of any perspective beyond September for gross margin?

Speaker 5

Sure,

Speaker 4

Blayne. And yes, the sequential explanation for the sequential decline was referring to 2. The variation against the guidance was really a result of product mix in terms of specifically what we shipped out in the quarter, 2. Certain products have lower gross margins than others and there was a slightly higher mix of that in 2nd quarter, 2. Stable trend in Q3, but the top level comment here is this is very much in line with our expectations and long time commentary 2.

Speaker 4

Over time, we should expect to see some modest erosion of gross margins and that's a message that we haven't talked about.

Speaker 6

2.

Speaker 2

Yes. I mean, it seems like a long time ago now when we were in the supply chain crisis and 2. We were getting pressure to increase margin models and these types of things. And there was some commentary in the industry that this is new normal. 20.

Speaker 2

Our view was it was temporary. And that's what we at least are experiencing playing out 2. If anything, the easiest way to conceptualize things is they're back to normal now on just 2. Normal pricing pressure that we saw pre supply chain crisis and that's what we're seeing now. And the supply chain prices was the anomaly, 2.

Speaker 2

I think if there was a way to look at it. And it's steady, there's no step functions or anything like that going on. 2. And the other dynamic that's worth pointing out that is substantial is the strength of the product portfolio in Series 2 that we keep talking about. 2.

Speaker 2

We're going to be announcing Series 3 in a few weeks, but Series 2 is still early days 2. In this ramp and the strength of its product cycle, and I just mentioned the FG-twenty 8, a new part that came out. 2. Just to give you all some perspective, that part is it's a solution that integrates both sub gigahertz 2. And Bluetooth and it brings new to industry capabilities, AIML capability, industry leading security 2.

Speaker 2

That has an incredible effect in helping us navigate the market, while there is normal industry price 2. Blayne, this

Speaker 4

is John again. One more comment. The point of emphasis again is that we see ourselves delivering a premium 2. Gross margin to the IoT market. I just felt it was important to highlight that.

Speaker 2

Yes, that hasn't that's been consistent throughout and hasn't changed.

Speaker 5

2. Okay. Thanks, guys.

Operator

Question comes from Srini Pajjuri with Raymond James. Please go ahead.

Speaker 8

Thank you. Good morning, guys. John, just to clarify 2. I guess the 79 days of DSI, are you thinking that's going to be the new normal or do you expect that to come down a bit over the next few quarters?

Speaker 4

2. Yes, Srini, we'll monitor that over time here. Certainly, it may come in, it may go up a little bit. We're just monitoring that 2. And not really I don't know, as Matt said, not really concerned about where that is setting.

Speaker 4

Our focus is more on the end demand and that's really

Speaker 8

2. Okay, got it. And then, Matt, 2. Maybe you can talk about the environment. It looks like the units are actually up sequentially.

Speaker 8

So obviously, you said demand is weak. Is it more of a Pricing Commentary because in a cyclical correction, we tend to see units come down quite meaningfully. So I'm just wondering as we look through the September quarter. What does your guidance, I guess, contemplate in terms of units and ASPs? And how are you thinking about just the unit correction over the next,

Speaker 2

2. Yes, I think the easiest way to think about it is we're now in 2. A demand challenged environment, so that's the primary driver. We just mentioned the pricing dynamics are pretty much 2. We expected and we're not seeing anything new or anomalous there.

Speaker 2

So it's really a story of end demand, which is really a story of units ultimately 2. That we're navigating, if that helps frame it.

Speaker 8

Yes, that's helpful. And then maybe one last one for me. 2. Matt, obviously, you've been in the market for a few quarters now with your Wi Fi solutions. Just curious if there's any update on the progress there, how you're thinking about

Speaker 2

20. Yes, sure. So I guess we didn't mention that in the remarks. 2. But if you go back big picture, quick answer is good and strong and we're happy with the progress.

Speaker 2

2. Let me be clear, it's never big enough, fast enough. That's the world we live in. But ultimately, as we've said, we made a focus 2 years ago to increase our focus on Bluetooth. We've loved our progress there, fastest growing space for the company.

Speaker 2

We 2. We have the design room momentum to continue that. And then we added the Wi Fi piece. And now we have the benefit of Wi Fi Being one of our stronger growth areas as well. So we are seeing the progress that we wanted to see there.

Speaker 2

Even with the market 2. Environment that we're in, we're still seeing strong WiFi performance and we're happy about that.

Speaker 8

Thank you.

Operator

2. Our next question comes from Jeremy Kwan with Stifel. Please go ahead.

Speaker 5

2. Yes, sorry. Good morning. Can you hear me? Yes.

Speaker 5

Great. Yes, I guess a couple of questions. First one,

Speaker 3

2. I guess if you

Speaker 5

look at the new cybersecurity labeling, what kind of impact do you see 2. Or when is this something that is expected to impact over 2. The next couple of months or when do you see customers really kind of clamoring for this type of solution? 20. When can we expect to see more of an impact on the top line here from that initiative?

Speaker 2

2. Sure. Quick answer is, it'll be a while. I'd love to say short term, that'd be awesome. But I don't think that's realistic the way these things usually play out.

Speaker 2

2. For anyone who's not familiar, the Biden administration's cyber and security labeling program really creates, for lack of better terms, some 2. Standardization for end markets for consumers and companies around security on these devices, which is 2. Exactly what you'd want to see and what's needed. So to answer the question directly, I think you're going to see this take time to ramp.

Speaker 2

2. As the industry starts to deploy it, you're talking quarters years of impact here. 2. And easy way to frame the positioning, we've been betting focusing on security now for a long time, 2. We have the strongest portfolio and capability out there in the industry and this is good for us.

Speaker 2

This serves us well. And we're already known for this, for our customers. 2. We win business because of this by our customers and this will only help. It gives us a tailwind, but it won't be short term as much as I'd like 2.

Speaker 2

It will be a long game.

Speaker 4

Yes, Jeremy, this is John. It's a good example once again of Silicon Labs 2. Advancing the state of the art in an important area for IoT and being known as a thought leader in our space.

Speaker 2

2. I would think of it the same way as think about it security. Years ago, we were offering these 2. Some people are scratching their heads. Now that we win designs because of it.

Speaker 2

Look, the administration's updating policies to 2. Help enable these things that are already built into our inherent capability of our entire portfolio. Think the same of AIML. 2. We're introducing capability and devices that today some people say, how is that going to that is the same concept 2.

Speaker 2

Just a few years later down the road where you're going to see multiple applications and devices taking advantage of these 2 Processors and their efficiency to enable new capabilities on the edge. So same way, just further down the road.

Speaker 5

2. Great. Thank you. Thank you for that color. It's very helpful.

Speaker 5

Maybe just a quick question on geographic expectations. It sounded like 2. Europe was quite strong in the Q2 here. How do you see this playing out in the Q3? Is there any areas

Speaker 4

percent. Sure, Jeremy. I think first thing to note and we did not talk about this 2. In the prepared remarks is China. Our China revenue again has been weak 2nd quarter, we're meaning at about the 10% level 2.

Speaker 4

For the full first half of the year and we have not seen signs of recovery there. 2. So that said, the weakness we're seeing really is global. At this point, there's a widespread 2. Overall weakness in demand, it's not isolated to any particular TR.

Speaker 5

2. Great. Thank you very

Speaker 3

much.

Operator

Our next question comes from Mick Doyle with Needham. Please go ahead.

Speaker 9

Hey, guys. Mick Doyle for Raji, Gill. 2. Just wanted to focus on the September margin guide again, and just kind of ask more directly how you're able to keep the margin declining 2. From declining when we're seeing such a sequential revenue drop and is that an indication of mix or ASP Strength.

Speaker 4

Yes. Sure, Meg. This is John. As a fabless company, we really operate 2. Strictly on a variable manufacturing cost model.

Speaker 4

We do have a limited amount of internal fixed costs, but it's pretty modest 2. So that's to say that our gross margin really is not 2. Influenced by the revenue level that's variable based on what we're seeing at that point in time. 2. That's really the main explanation to your question.

Speaker 9

Okay, got it. For the bookings commentary, 2. Can you just expand on which markets or applications you're seeing more of that slowdown? And then also, do you think

Speaker 3

2. Customers are

Speaker 9

maybe hesitant to order related to this new intra quarter cancellation policy. 2. And could that be a positive in terms of over ordering on the next upcycle? Thanks.

Speaker 2

2. Yes, I'll start and it would be good for John to add as well. The bookings pattern right now is pretty broad. 2. You have to remember, we don't have any 1 or 2 major customers that make up big chunks of our revenue.

Speaker 2

I mean, less than 5% for our biggest. 2. And what we're seeing is broad across customers, broad across the channel, broad across segments and geos. 2. It's really difficult to distill out or tease out a clear pattern there.

Speaker 2

What you can see as a clear pattern is customer, 2. Their certainty, their visibility, their confidence is not strong in terms of current demand and their ability to work through inventory. 2. I don't think their confidence in the long term is shaken, but they're trying to navigate this as well and ordering with very short lead time. 2.

Speaker 2

I mean very short. Just we've easy way to think about it is our current backlog position is now 2. Reverted all the way back to pre supply chain, pre pandemic, where in that pre environment, 2. Tons of backlog and work to navigate supply it. Now we've gone all the way back to that, but ordering with even shorter lead times because of their lack of visibility and certainty as well.

Speaker 2

2. So I know it doesn't help answer what you're looking for, but that's what we're seeing.

Speaker 4

Yes. And second part of your question, Mig, is 20. Not really. I don't see the policy affecting things overall. Our approach is to try to gain as much visibility and confidence as we can short term.

Speaker 4

2. Customers are managing their inventory levels and their own experience over a longer horizon trying to position themselves.

Speaker 3

2.

Operator

2. This concludes our question and answer session. I would like to turn the call back over to Giovanni Pacelli for any closing remarks. 20.

Speaker 1

Thank you, Sarah, and thank you all for joining this morning. This concludes today's call.

Operator

2nd. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Silicon Laboratories Q2 2023
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