SiTime Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 9 speakers on the call.

Operator

Afternoon, and welcome to Sidime's Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. At the conclusion of today's conference call, instructions will be given for the question and answer session. As a reminder, this conference call is being recorded today, Wednesday, August 2, 2023. I would now like to turn the call over to Brett Perry of Sheldon Group Investor Relations.

Operator

Brett, Please go ahead.

Speaker 1

Thank you, Chris. Good afternoon, and welcome to Cytame's Q2 2023 financial results conference call. On today's call from Sidime are Rajesh Vashist, CEO and Art Chadwick, CFO. Before we begin, I'd like to point out that during the course of this call, the company may make forward looking statements regarding expected future results, including financial position, strategy and plans, It's not possible for the company's management to predict all risks, North and the company assess the impact of all factors on its business or the extent to which any factor or combination of factors May cause actual results to differ materially from those contained in any forward looking statements. In light of these risks, uncertainties and assumptions, the forward looking Events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied.

Speaker 1

Neither the company nor any person assumes responsibility for the accuracy and completeness of the forward looking statements. The company undertakes no obligation to publicly update forward looking statements for any reason after the date of this conference call to conform the statements to actual results or to change the company's expectations. For more detailed information on risks associated with the business, we refer you to the risk factors described in the 10 ks filed on February 27, 2023, as well as the company's subsequent filings with the SEC. Also during the call, we will refer to certain non GAAP financial measures, which are considered to be an important measure of the company's performance. These non GAAP financial measures are provided in addition to and not as a substitute for nor superior to measures of financial performance prepared in accordance with U.

Speaker 1

S. GAAP. The only difference between reported GAAP and non GAAP results is stock based compensation expense. Please refer to the company's press release issued today for a detailed reconciliation of GAAP and non GAAP financial results. With that, I'd now like to turn the call over Sirajesh, please go ahead.

Speaker 2

Thank you, Bharat. Good afternoon. I'd like to welcome new as well as existing investors to SciTime's Q2 2023 earnings call. Q2 was in line with our guidance. Revenue for the quarter was $27,700,000 non GAAP gross margins 0.022 dollars per share.

Speaker 2

As forecasted, we see a turnaround in our business, so we expect Q3 revenue to be higher than Q2. For those of you that are not familiar with CyTime, we are the leader in a dynamic new semiconductor category called Precision timing. In electronics, timing is ubiquitous and ensures reliable functioning. Saetan created the category of precision timing to serve the needs of applications like automated driving, data center, 5 gs and AI. We are early in our growth as we transform the $10,000,000,000 timing market.

Speaker 2

SciTime has shipped 3,000,000,000 precision timing chips to 15,000 customers In past calls, we noted the negative impact of higher than normal inventories At our customers' contract manufacturers or CMs on our revenue. For the past few quarters, These inventories have continued to decline. Though the decline is at a slightly slower rate than previously anticipated, We have factored this into our guidance for now. So looking towards Q4, We expect the quarter over quarter growth trend over Q3 to continue. Previously, we forecasted that our revenue should accelerate in 2024 and beyond based on 4 factors.

Speaker 2

These are SAM expansion from additional products, single source business, design win momentum, and expanding ASPs or average selling prices. The fact that these trends continues into Q2 2023 Is a good indicator of the fundamental health of our business even though Q2 2023 was our lowest revenue quarter in recent history. More on these trends now. First, we continue to grow our SAM from $1,000,000,000 in 2020 to $2,500,000,000 by the end of this year. Our product strategy is consistent.

Speaker 2

We solve our customers' toughest timing problems by delivering compelling precision timing products, which are defined as products that deliver high performance in tough conditions. Much of the SAM growth is our focus area of Enterprise and Communications, Automotive and Aerospace Defense, which gives us a bigger footprint at Focus customers. In Q2, we introduced a compelling new product, the SiT-162X that we believe enables greater safety in automotive applications such as ADAS automated driving. As you may know, the incumbent timing technology, Quartz, is provided by around 40 companies worldwide. Customers have a pattern of typically buying from multiple servers as they've been previously been impacted by variable levels of quality, reliability, performance and delivery in these quartz based timing products.

Speaker 2

One can imagine that sole source positions are uncommon in the quartz timing business and that is in fact the case. In contrast, SciTime is focused on building a timing business that is largely sole source because we make timing easy and our customers value that. A useful metric is that 83% of our Q2 revenue is sole sourced, which is an increase from 79% in Q1 2023. On the 3rd factor, our number of design wins, our momentum continues from previous quarters. In Q2, we set a record For the total number of design wins closed in any quarter, which grew by 55% from the same quarter a year ago.

Speaker 2

In addition, the number of design wins in each of these end markets, communications enterprise, Industrial Automotive Aerospace and Mobile IoT Consumer also grew by more than 50% from a year ago. Our ASP depends on our end market mix and product mix. In Q2 2023, ASP declined from Q1 due to a higher business from Mobile IoT Consumer and a decline in our comms enterprise revenue. An insight is that despite the normal supply in the market today, our Q2 2023 ASP was higher Then Q1 2022, which you may recall was at the height of an industry wide shortage. We believe that the higher ASP products that we introduced Since Q1 'twenty two and the increase in business from Aerospace Defense contributed to this.

Speaker 2

Our strategies of SAM expansion with higher ASP products and focus on end markets where customers recognize the value are playing out well, and we expect our ASPs to remain stable for the rest of the year. Cytine has maintained that ongoing trends driving the electronics industry, automated driving, electric vehicles, cloudification, Internet of Things and AI Depend upon precision timing. Most have seen the recent developments on the increasing role of AI. We believe that AI processors from chip companies and the top cloud service providers are prime users of our timing solutions that deliver low jitter and high stability. We've been working with these key players who are leading the charge in AI and expect to benefit from the AI macro trend for many years to come.

Speaker 2

In conclusion, our SAM and design wins continue to grow. Our sole source business is a strong indicator of a strong connection with customers and the value we deliver to them. As inventory is consumed and demand returns, we expect to be in a great position to take advantage and resume growth. We remain very confident in Citimes' future success. And I'll now turn it over to Art.

Speaker 3

Great. Thanks, Rajesh, and good afternoon, everyone. Today, I'll discuss Q2 2023 results and then provide some guidance for the Q3. I'll focus my discussion on non GAAP financial results and refer you to today's press release for a detailed description of our GAAP results as well as a reconciliation of GAAP to non GAAP results. Revenue in the Q2 was $27,700,000 Down 28% from Q1.

Speaker 3

Sales were down in most of our major markets as customers worked through excess inventory. Inventory in the channel is still high. And though it continues to be consumed by our customers, it will likely take some customers much of the rest of the year to get back to more normal inventory levels. Sales into our Mobile, IoT and Consumer segment were $10,400,000 38% of sales. That's up from $8,800,000 in Q1 due to higher sales to our largest customer.

Speaker 3

Sales to that customer were $4,600,000 up from $1,200,000 in Q1. Excluding sales to our largest customer, sales into this segment were $5,800,000 or 21% of sales. Sales into our Industrial, Automotive and Aerospace segment were $12,400,000 or 44 percent of sales. That's down from $18,700,000 in Q1. Sales into our Comps and Enterprise segment were $4,900,000 or 18% of sales, down from $10,900,000 in Q1.

Speaker 3

2nd quarter non GAAP gross margins were 58.2%, down from 61.8% in Q1 Due to the lower overall sales level and to changes in product mix towards more mobile IoT and less comps and enterprise sales. 2nd quarter non GAAP operating expenses were $27,400,000 essentially flat with Q1. Expenses were $16,600,000 in R and D $10,800,000 in SG and A. The 2nd quarter non GAAP operating loss was $11,200,000 Interest and other income was $6,500,000 Up from $5,700,000 in Q1 due to higher earned interest on our T Bill investments. The 2nd quarter non GAAP net loss was $4,800,000 or $0.22 per share.

Speaker 3

Accounts receivable were $15,800,000 with DSOs of 51 days as compared to $21,500,000 and DSOs of 50 days in Q1. Inventory at the end of the quarter was $64,300,000 up from 60,000,000 Last quarter, as we continued to make strategic wafer purchases. During the quarter, we generated $3,000,000 in cash from operations, Invested $3,900,000 in capital purchases and ended the quarter with $574,700,000 I'd now like to provide some financial guidance for the Q3 of 2023. To begin with, we are now confident that Q2 will be the low quarter for the year, Given that we are now seeing a rebound in our business, we expect sales in the Q3 will be up approximately 25% from Q2 With growth coming from higher sales to our largest customer as well as higher sales into comms and enterprise. Though the higher revenue will help gross margins, this will likely be offset by a change in product mix Towards a higher percentage of mobile IoT sales.

Speaker 3

We therefore expect 3rd quarter gross margins will be relatively flat with Q2. We continue to manage expenses closely and plan to reduce 3rd quarter non GAAP operating expenses to between $26,000,000 $27,000,000 Interest income should be at least $6,300,000 Share count will be approximately 22,000,000 shares. And as a result, we expect 3rd quarter non GAAP net income We'll be approximately breakeven. Though we are not giving specific guidance for the Q4, we do expect sales will be up sequentially From Q3. As I mentioned before, we are seeing a rebound in our business and believe that our recent downward trends are reversing.

Speaker 3

We firmly believe that our long term growth story is intact. We continue to aggressively invest in our process and product development. We have unique and superior technology that addresses large and growing markets. Design win activity continues to be strong And that coupled with new product introductions and expanding SAM should lead to renewed long term growth. And on that note, I'd like to hand the call back to the operator for Q and A.

Speaker 3

Thank you, everyone.

Operator

Thank Our first question will come from Tore Svanberg of Stifel, your line is open.

Speaker 4

Yes. Thank you and congratulations on the turnaround here. As it relates to Q3, I think your largest customer, I mean, that's seasonal. So I think that makes sense. But I think you also said communications and enterprise will be up sequentially.

Speaker 4

Could you just elaborate a little bit on some of the sub segments there? Because obviously the data points And some of those markets remain pretty mixed. And I also assume that's where AI is embedded. So any further color you can give us there, that'd be great.

Speaker 3

Territory. So to begin with, comms and enterprise was down pretty substantially from Q1, as I mentioned in my commentary. Our largest customers in that segment, again have built up too much inventory. And so Order rates from those customers were down substantially in Q2 and that's why revenue decreased from Q1 to Q2 as much as it did. They are starting to work through that inventory.

Speaker 3

So we're seeing something of a rebound there from Q2 to Q3. It's across both data center and our communications markets. So it's hard for me to be more specific than that when we report Our numbers at the end of Q3, we could probably give a little more detail. But it's primarily due to the fact that our customers Are going to start getting back to more normalized purchase levels.

Speaker 4

Great. And as my follow-up question for Rajesh. Rajesh, the sort of 55%, I think, is the word you the number you use for increase in design wins year over year. How should we think about that in relation to that 30% long term growth rate that you have? And then especially when we consider that now 83% of your revenue is proprietary, just hoping you could just put some more framework around that?

Speaker 2

Yes. So, I think that 55% gives us a lot of comfort that, the guidance that we have given for long term growth 30% is a good guidance. It's solid, particularly since a lot of that is happening In the comms, enterprise, automotive, aerospace, defense areas, the ones that we really want to, Although we continue to get strong design wins across the board in consumer, in Internet of Things, As well as industrial. As far as What is the second question was around?

Speaker 4

Yes, the 83% that's now our proprietary revenue.

Speaker 2

Yes, the 83%. So Remember that the 80% is I wanted to make a case for that it is holding steady or even marginally growing From 79 to 83. So the point that I wanted to make was that a question we get asked quite a bit is what happens when things get to normal? Did you just enjoy a brief flurry in 'twenty one and early 'twenty two of shortage? And my point that I'm making is not doesn't have to do with shortage.

Speaker 2

It has to do with the specificity of the product. The fact that we make it easy to design in, the fact that we have easy to get information and data on our products and then of course that they are Truly precision timing, in other words, high performance under tough environmental condition. So that's the point I wanted to make that We continue to show that we are quite different from the existing technology as witnessed by the fact that Multisource versus single sourced.

Speaker 4

That's great perspective. Congrats again.

Speaker 2

Thanks. Thank you.

Operator

Our next question will come from Suji Desilva of ROTH Capital. Your line is open.

Speaker 5

Hi, Rajesh. Hi, Art. Maybe can you talk about the linearity in Q2 to July? It sounds like it's steadily improving. Just wanted to get the color there and really the factors that give you confidence And 4Q you'll increase again.

Speaker 5

Are the customer forecasts stabilizing these levels? Is that one of the things that's changed from 3 months ago?

Speaker 3

Yes. Well, to go back to our commentary, we've certainly seen a turn, a positive turn. As I mentioned, we view Q2 to absolutely be the low quarter for the year. Order rates have been up nicely as we started the Q3. We are very comfortable with our Q3 guidance being up 25% or so from Q2.

Speaker 3

And if those trends continue, then that will also help us later in the year. But the other thing that will help us also is the fact Our customers continue to work through this inventory that we've talked about. And as more of that gets consumed, we'll get back to more normalized Shipment rates. So we're very comfortable with our Q3 guidance and we're also very comfortable that Q4 will be up from Q3.

Speaker 5

Okay. Great. Thanks, Art. And then also just on the gross margins here, it sounds like mix is the primary driver, but What's the correlation that was pricing? Because I don't think you have tailwinds there, particularly as the mix continues to improve.

Speaker 5

Is that something that Can override the mix or is that something that is kind of steady gross margin across the product?

Speaker 3

Yes. So for Q2, as I mentioned, higher revenue improves gross margin because of our manufacturing overhead absorption. But going from Q2 to Q3, there will be a higher mix of mobile IoT and consumer sales, primarily driven by our largest customer. And that has generally gross margins that are somewhat less than our corporate averages. So that will offset the benefit of the higher sales.

Speaker 3

So the guidance for Q3 of relatively flat gross margins, I think that's solid. Longer term, what we've always talked about and what I Still firmly believe will happen is that all of our new products that we have introduced over the past 1 2 years that we And generally higher gross margins. So as these new products become a larger and larger percentage of our overall sales, That is a general driver of higher gross margins going forward. And I believe that that will that trend will continue. So that is positive for gross margins in the longer term.

Speaker 5

Okay. All right. Thanks, Ark.

Operator

Our next question will come from Quinn Bolton of Needham and Company LLC. Your line is open.

Speaker 6

Hey, guys. Congratulations on seeing the turn in the business. I guess a few questions. One, Art, you mentioned that sort of mix shift to mobile IoT consumer driven by your largest customer, in the Q3. Do you expect that customer to get back to sort of more normalized run rates In the Q3, is there still some inventory being consumed at that customer so that you might see sequential growth again in the December quarter, as that customer comes back to more normal purchases.

Speaker 3

Sure. So they are clearly making progress and working through their inventory. As we've reported before, our shipments to them were only $1,200,000 back in Q1 and they were $4,600,000 in Q2. This is well below a normalized run rate. We will be getting closer to our normalized run rate in Q3 and I believe we'll probably get there by Q4.

Speaker 3

And so that would argue that sales to that customer, and this is consistent with our internal forecast would increase from Q3 to Q4.

Speaker 7

Perfect. And then last quarter,

Speaker 6

Art, you had mentioned sort of an estimate that there might be about $30,000,000 worth of inventory That was still out in the channel that needed to be burned off. Obviously, it looks like you've continued to make progress, but I think in the prepared script you talked about Maybe that inventory taking a little bit longer to burn. Do you think you made progress on that $30,000,000 Do you have any update? Is that down closer to $20,000,000 at this point? Or Any thoughts on how much inventory might be out there that still needs to get consumed in the back half of the year?

Speaker 3

Yes. Clearly, our customers are making progress. What makes it a little challenging is it's different for every customer. As I mentioned, some of our customers, it'll Likely take the rest of this year for them to work through their excess inventory. Other customers will work through it before that.

Speaker 3

So I don't want to put a hard number on how much it was worked down through the quarter. We're very confident that it is. We have internal analyses and what we think that number is, That's not a number I want to put out there right now.

Speaker 6

Understood. If I can sneak one more in. Last quarter, you talked about some Softness still in the China EV market. I think some of the others that have reported this earning season maybe starting to see a little bit better Trend in the China EV market, I think, Cytamp has got some pretty good exposure there. Have you guys seen any turn in the China EV side of the business?

Speaker 4

Well, we certainly see

Speaker 2

more design win activity in that business. We see Some shortages popping up that we did some heroics to satisfy some customers. So that's always a good indication because that hasn't happened for 2, 3 quarters. But it isn't a full on big trend yet, Quinn. And But I will take it as a little bit of a positive.

Speaker 2

There's other murkiness around general growth in China from the headlines. We probably see the same headlines you do. I don't have any inside information, but that's what makes me a bit cautious. So the micro news is good, call it The macro is a little less clear.

Speaker 6

Understood. Thank you.

Speaker 3

All right. Thanks, Quinn.

Operator

Our next question will come from the line of Chris Caso of Wolfe Research. Your line is open.

Speaker 7

Yes. Thank you. Good evening. With respect to some of the inventory that built On your customers over the last year, can you give us some sense of how much inventory you think customers may have built last year another set in different way perhaps, how much do you think You may perhaps over ship the market last year and therefore we have to under ship this year in order to normalize that?

Speaker 3

Yes. Great question, Chris. So we have talked about some of this on our past calls. Clearly, our customers Over ordered last year. I think coming out of the pandemic and the shortages when there was supply and not just with us, I think this is also applies to other companies out there.

Speaker 3

Most of our customers ended up ordering more than they ended up needing last year. We put that number at Somewhere around $40,000,000 So it's hard to get an exact number because we'd have to know exactly what our customers' use rate was versus exactly what They bought and their timing differences. So it's a little bit of a squishy number, but I think it's in that ballpark. We've done internal analyses and that's kind of what we come up with. So that would mean we overshipped to demand by about $40,000,000 If we were to work through all of the excess inventory, if our customers Work through all the excess inventory this year, then we'd be under shipping by that similar amount this year.

Speaker 7

All right. That's helpful. And perhaps you could talk about what's happened with The traditional timing market as well. I think perhaps one of the fears is that with Product being plentiful there that some of the customers that you may have signed up over the last 2 years when product tight, would switch over. Perhaps there would be adverse pricing in the conventional market, which might spill over to your way.

Speaker 7

I know that you've had some confidence in that in the past, but I wonder if you

Speaker 4

can give us an update on that.

Speaker 2

Yes. We've always maintained that Citam is not in a market share game. We've always maintained that Citam's products are unique because we created the precision timing category, Which is not the case with our competitors, our 4 d quartz based competitors in this situation. So therefore, what it means is that pricing normally doesn't come into the equation very much, particularly in existing design wins. In other words, existing design wins do not disappear if somebody shows up with a lower price.

Speaker 2

We have evidence of that because we have tried this out ourselves to see if we can take away market share by taking down price aggressively And it's never worked. So I think that it just doesn't work for anybody because once design wins are made, then they remain stable till they ship. What we I specifically made a point of sharing the fact that our ASPs have continued As demonstrated by the numbers I shared, regardless of whether it is a tight supply or whether it's a no more normalized, which is what is Current supply. So the fact that we could still keep on growing versus Q1 2022 in price Is a testimony to 2 things. 1 is our mix shift, which is continues to occur and will continue to occur going forward.

Speaker 2

And the second is the value proposition that gets our customers to value our products and remain in single sourced significantly. We mentioned 80%, 83%, and that's what helps us. So I think it's a fundamental I think we are waiting for The world to start to understand more clearly how differentiated Citan is from all other players in this market. We're also unique in the fact that we are uniquely focused only on timing, whereas most of these other people are either not focused on timing or if they're focused on timing, they're focused on only some specific parts of it, not on all parts of it, which should be Oscillators, clocks and resonators.

Speaker 8

Got it. It's helpful. Thank you.

Speaker 3

Great. Thanks, Chris.

Speaker 4

Thank

Operator

Our next question will come from Douglas McLaughlin of Fabricated Knowledge. Your line is open.

Speaker 8

Hey, guys. I just wanted a question about, even with some meaningful sequential revenue growth into the back half and some growth next Here, you've raised operating costs significantly and it doesn't look like you're going to be quite at the 2021 level of EBIT. Is that the right way to think about that business as you continue to reinvest in the long run? And then I have a follow-up after.

Speaker 2

Yes. Hey, Doug. So to

Speaker 3

answer your question on operating expenses, we yes, we grew operating expenses over the last few years, but we've held them absolutely flat for the last 4 quarters or so. And we're actually ratcheting them down a little bit more in the back half of this year. I mentioned that Our guide for Q3 is operating expenses between $26,000,000 $27,000,000 That's slightly less than where we were in Q2. So we are managing that very closely. But we've invested a lot in the team at Side time, right.

Speaker 3

Most of our expense are invested in people. And even though our revenue has because of this whole inventory issue out there in the last couple of quarters. We did not think that it made sense for us to make radical changes to our Spending patterns. So we're going to hold them flattish, squeeze them down just a little bit. Going forward, we'll increase expenses Only when our top line revenue grows sufficiently.

Speaker 3

So to answer your question, yes, They've increased over the last few years, but we're holding the line on it and we're going to continue to hold the line on our OpEx right now.

Speaker 8

Perfect. Thank you for answering that question. My next my follow-up question is mostly about the design win timing. Each quarter you talk about how record new levels of design wins. Is there any kind of visibility when a design win hits production?

Speaker 8

Because that's like In theory, as 2024, 2025 come along, you have the single source deals, so it's just you guys. These design wins should move to revenue. Any kind of timing on when this cliff of new design wins will roll through? Or is it just This could be many, many years and we don't really have any kind of visibility.

Speaker 2

No, I think you got it right, Doug. It's 24, 25. There are some That are particularly in aerospace or defense that are further out or actually even in automotive, there's some that are out in 2026. But 2024, 2023, 2026 with the peak being in 2025 is probably a good way to think about it. The other way to think about it is that, as you know, we service multiple markets and the longest Design win cycles are probably in automotive, although that's not a given if it's in infotainment or it's in some of the EV companies that move very fast.

Speaker 2

The new companies that we all know about that are not the traditional relatively slow moving companies. On the other hand, incumbent companies in automotive move a little bit slower. So that's one thing. The second is that in the consumer side, we may find our industrial, We may find a design win paying off in revenue within a few quarters, maybe as little as 6, sometimes 6 to 9 quarters. We've seen that happen as well.

Speaker 2

So it's hard to get much more specific on that Other than to say we're building for the future for a highly diversified differentiated product line, which will start paying off In 2024, particularly second half of twenty twenty four and twenty twenty five and twenty twenty six. So we're pretty focused on going in that direction.

Speaker 8

Perfect. Can I sneak one in real quick? I think you guys said comp Sequential growth a little bit. Which end market have you are you willing to comment on where you think the inventory is Better or worse by the end markets that you guys talk about? Or is that not a disclosure you want to do?

Speaker 3

Yes. I think that's more detailed than We can go into right now.

Speaker 8

Okay. Cool. I'll hop out of the queue. All right. Thanks, guys.

Speaker 3

All right. Thank you, Doug.

Operator

Thank you. I am seeing no further questions in the queue. I would now like to turn the conference back to Art Chadwick for closing remarks.

Speaker 3

All right. Well, I just want to say thank you to everybody that listened to the call. We appreciate your interest in Sidetime and hope everybody has a great day. Thank you.

Speaker 2

Thank you very much.

Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant

Powered by Quartr

Key Takeaways

  • Q2 2023 results: Revenue was $27.7 M (down 28% sequentially) with a non-GAAP net loss of $4.8 M ($0.22/share), attributed to customer inventory destocking.
  • Channel destocking and guidance: Customer inventories remain elevated but are declining; management expects Q3 revenue to rise ~25% and Q4 to grow further as inventory normalizes.
  • SAM expansion and new products: Total addressable market doubled to $2.5 B by year‐end, driven by focus on Enterprise/Comms, Automotive and Aerospace & Defense, including the launch of the SiT-162X for automotive safety.
  • Design-win momentum and sole-sourced sales: Q2 design wins increased 55% year-over-year, with sole-sourced products accounting for 83% of revenue (up from 79% in Q1), reinforcing customer stickiness.
  • Margin and cost trends: Non-GAAP gross margin was 58.2% in Q2; Q3 margins are expected to be flat due to a shift toward mobile IoT products, while operating expenses will be reduced slightly to target breakeven results.
AI Generated. May Contain Errors.
Earnings Conference Call
SiTime Q2 2023
00:00 / 00:00