Silicon Laboratories Q3 2024 Earnings Call Transcript

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November 4, 2024

There are 8 speakers on the call.

Operator

My name is Michelle, and I will be your conference operator today. Welcome to the Silicon Labs Third Quarter Fiscal 20 24 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Thank you, Michelle, and good afternoon, everyone. We are recording this meeting and a replay will be available for 4 weeks on the Investor Relations section of our website at investor. Silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs' President and Chief Executive Officer, Matt Johnson and Chief Financial Officer, Dean Butler.

Speaker 1

They will discuss our Q3 financial performance and review recent business activities. We will take questions after our prepared comments, and our remarks today will include forward looking statements that are subject to risks and uncertainties. We base these forward looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future. We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward looking statements. Additionally, during our call today, we will refer to certain non GAAP financial information.

Speaker 1

A reconciliation of our GAAP to non GAAP results is included in the company's earnings press release and on the Investor Relations section of our website. I'd now like to turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson.

Speaker 2

Thanks, Giovanni, and good afternoon, everyone. Silicon Labs delivered solid third quarter results with revenue and earnings exceeding the midpoint of our guidance. Our surveys indicate that many of our customers' excess inventory levels have now normalized. However, there remain outliers whose destocking will continue to take time. Bookings patterns and distribution POS have modestly improved, but have not significantly accelerated, indicating to us that a demand recovery is likely to be more gradual than many of our customers originally expected.

Speaker 2

Broadly speaking, the majority of our customers remain positive looking forward into 2025. Our current quarter outlook reflects near term uncertainty around the timing of a more robust end market recovery and importantly does not assume any significant channel restocking. Looking ahead, our growth in the near to mid term is underpinned by design win ramps in the secular growth areas that we have previously discussed including connected health, smart metering and commercial retail as well as many other applications. We are currently ramping shipments to multiple customers in all of these and are confident we are gaining share in these markets giving us conviction in our growth opportunity moving forward. Over the last quarter, Silicon Labs Works With Developer Conference was a huge success.

Speaker 2

We hosted over 500 unique existing and new customers in person for 2 days, as well as our ecosystem partners including Amazon, Google, Samsung and now NVIDIA. At Works With and at Embedded World North America, our CTO, Daniel Cooley and I delivered keynotes discussing how AI is rapidly becoming a growth catalyst that will enable the total number of IoT devices to reach over 100,000,000,000 over the next decade. We also detailed the continued success of our industry leading Series 2 platform and new to industry capabilities of our upcoming Series 3 platform. Simply said, AI not only enables better use of existing IoT devices, it will also enable and accelerate even broader device deployments moving forward, further expanding the Silicon Labs addressable market. At the product level, we are currently shipping Series 2 devices with integrated machine learning inference engines.

Speaker 2

This includes our XG24 family of SoCs, a device where Silicon Labs was first to bring machine learning acceleration to wireless SoCs and still currently delivers more performance per unit of power consumption than any other wireless SoC based on a recently publicly available benchmark done by a third party. Also in the quarter, we announced Series 2 enablement of Bluetooth channel sounding on our XG24, enabling secure and precise distant measurement between Bluetooth devices and opening the door for a new wave of proximity based applications in home security, location tracking, geofencing, vehicle keyless entry and building access control. This capability is already driving another wave of customer interest and design wins on our Series 2 platform at existing and new customers. At the same time, we are now sampling our first Series 3 device to customers, which is purpose built to extend our successful Series 2 architecture to new to IoT levels of performance for the industry. For example, Series 3 will have dedicated hardware acceleration to create the world's most flexible IoT modem.

Speaker 2

Dedicated security cores designed to enable post quantum level encryption and an advanced machine learning core designed to enable an order of magnitude increase in performance over our already industry leading energy per inference benchmarks. We are excited with our progress on Series 3 and our Series 2 platform continues to build momentum with new exciting products and features, growing market share and new use cases through its industry leading power consumption, security and multi protocol wireless performance. This includes our 1st Wi Fi 6 device, the 917, which we expect to be in ramping at customers as early as Q1 of 2025 and can deliver up to 2 years of battery life on a single AAA battery. This equates to meaningfully better battery life versus any competing alternatives. Customer engagement with our 9 17 device is strong and we are ramping our design wins quickly across multiple application spaces.

Speaker 2

Our initial intent in Wi Fi is to work with our broad existing customer base to identify opportunities for pull through and applications where Wi Fi is becoming more relevant and where power consumption and security are also key requirements. We've been investing significantly in WiFi because of our firm belief in its relevance and growth potential within our IoT space. We're hyper focused on driving the same market share expansion in WiFi that we are currently achieving with our Bluetooth solutions after increasing our strategic focus in that technology around 5 or 6 years ago. In addition, we are continuing our focus to end growth in Bluetooth. Not only is it now our fastest growing technology by revenue, but it is now our largest opportunity pipeline by technology as well.

Speaker 2

Our early integration of new to industry capabilities like PSA Level 3 secondurity and benchmark setting machine learning performance continues to generate strong engagement and growth. Lastly, our commitment to building matter infrastructure alongside our leadership in threat technology positions us well as trusted partner to ISPs, ecosystems and developers who are working to integrate matter into their solutions and support interoperability of edge devices. Overall, in the near term, the timing of the end market demand recovery remains uncertain. However, we expect a solid growth year in 2025 as the significant design wins we have driven over the last few years begin ramping to production. We will continue to focus on solid technology innovation and execution, gaining market share and returning to our financial model as fast as possible.

Speaker 2

Now, I'll hand it over to Dean for the financial update.

Speaker 3

Dean? Thanks, Matt, and good afternoon to everyone. I'll first review the financial results for our recently completed quarter, followed by a discussion of our current outlook. Revenue for the September quarter was $166,000,000 up 14% sequentially and slightly ahead of the midpoint of our prior guidance. Year over year, revenue was down 18% as demand continued to be hampered by excess inventory absorption across distributors and end customers.

Speaker 3

In our industrial and commercial business, September quarter revenue was $96,000,000 up 10% sequentially, but down 20% year over year. The sequential increase was driven by a strength in applications such as smart building controls and smart meters. Home and Life September quarter revenue was $70,000,000 up 22% sequentially and down 16% year over year. As expected, home and life grew faster than industrial and commercial in the 3rd quarter, which we believe is at least partially driven by consumer oriented end markets being further along in their inventory correction relative to the industrial end markets. Wearable related applications such as smart watches and fitness trackers saw strength in the quarter contributing to the 22% sequential growth.

Speaker 3

Inventory in our distribution channel declined 2 days to end the September quarter at 53 days. We are monitoring our distribution inventory and allowing shipments into the channel to flow naturally despite being lower than target level. Distributor POS continued to grow sequentially in Q3 as we believe many long tail customers have now worked through the majority of their excess inventory, potentially paving the path to further recovery in 2025. Distribution made up approximately 72% of our revenue mix for the September quarter, an increase from the prior quarter, but below our historical distribution versus direct channel sales mix of around 80%. For the September quarter, our GAAP gross margin was 54.3%.

Speaker 3

Non GAAP gross margin was 54.5%, which was an improvement versus 53% in the prior quarter. GAAP operating expenses were $120,000,000 which includes share based compensation of $16,000,000 and intangible asset amortization of 5,000,000 dollars Non GAAP operating expense of $99,000,000 was below the low end of our prior guidance range as we manage expenses during times of more limited visibility. GAAP operating loss was $30,000,000 and non GAAP operating loss was $8,000,000 both of which were substantial improvements from the prior quarter moving us in the right direction. During the quarter, we recorded a GAAP tax expense of approximately $2,000,000 Our non GAAP tax rate remained at 20%. GAAP loss per share was $0.88 Non GAAP loss of $0.13 per share was better than the midpoint of our guidance range due to lower operating expenses.

Speaker 3

Turning to the balance sheet. We ended the quarter with $370,000,000 of cash, cash equivalents and short term investments. Our days of sales outstanding was approximately 30 days. During the quarter, we further reduced our internal inventory by $27,000,000 ending the quarter at $139,000,000 of net inventory, which contributed to our positive operating cash flow of $32,000,000 for the September quarter despite our operating losses. Days of inventory on hand improved to 165 days, a significant improvement from the 217 days at June quarter end.

Speaker 3

Now let me turn to our December quarter outlook. While visibility remains limited due in part to shorter lead times, the rate of change in our customers' excess inventory destocking process has decelerated after having made rapid progress over the last few quarters. While distribution POS and our own bookings have improved, the pace of our recovery remains somewhat uncertain due to the slower end market demand. Looking ahead to Q4, we anticipate revenue in the December quarter to be in the range of $161,000,000 to $171,000,000 indicating a flat quarter on quarter comparison, which is likely better than seasonality. Considering the relative end market ordering patterns, we would anticipate another quarter of outperformance by our home and life products in the December quarter, being somewhat offset by a muted industrial and commercial end market, therefore resulting in our flat guidance expectations for Q4.

Speaker 3

It's worth noting that the midpoint of this guidance implies a 90% year over year growth rate versus the trough experienced in the December quarter of 2023. Additionally, as previously anticipated, we expect to begin our initial production shipments to continuous blood glucose monitoring customers and have line of sight to full scale customer ramps into 2025. We expect GAAP gross margin in the December quarter to be in the range of 54% to 55%. We expect non GAAP gross margin to also be in the range of 54% to 55%. We expect GAAP operating expenses in the December quarter to be in the range of $118,000,000 to $122,000,000 We expect non GAAP operating expenses in the range of $97,000,000 to $99,000,000 Finally, GAAP loss per share is expected to be in the range of $0.75 to $1.05 loss.

Speaker 3

Non GAAP loss per share is expected to be in the range of $0.01 loss to a loss of $0.21 This wraps up our prepared remarks. I'd like to now hand the call over to the operator to start the Q and A session. Michelle? Thank

Operator

you. The first question comes from Sareen Pajjuri with Raymond James. Your line is open.

Speaker 4

Thank you. Matt, you talked about bookings being somewhat uneven. Maybe you could give us some color, additional color on which end markets, I think you guys are guiding for commercial to be kind of flattish or mute or seasonally and then home and life seems to be doing better. But within those, I guess end markets, any particular sub segments or end markets that are standing out in terms of weakness? Thank you.

Speaker 2

Sure. Yes, I think the broad bookings statement is that we have seen continued improvement overall. But as we said in the prepared remarks, not an acceleration that you'd want to see to say we're on the other side of this cycle that we're all in. In terms of the next level down, quick answer is more strength in Home and Life and not as much strength in industrial and commercial, particularly industrial, which I guess on one hand isn't surprising given that it's later into the cycle, but we'd like to see more strength from industrial than we're now seeing.

Speaker 4

Okay, got it. Maybe a quick follow-up. We hear a lot about edge AI and obviously you have a very strong position in IoT and you did talk about that as well. I'm just curious, I mean, when we look at these markets, we always tend to think in terms of units and ASPs. So maybe if you can help us understand as AI as we see more and more AI functionality in these applications, what sort of ASP uplift are you, I guess, seeing?

Speaker 4

And what should we expect as we, I guess, look out to the next couple of years? Thank you.

Speaker 2

Sure. So quick answer is, it definitely would lift ASPs. That's the first thing. It's important just for framing that there's multiple levels of this, right? As we've said in some of our keynotes as well as in prepared remarks, we do see AI accelerating IoT edge adoption ultimately, whether it's improving the usefulness of existing deployments or helping accelerate broader deployments.

Speaker 2

So that's exciting and encouraging to see. At the device level, simply said, it takes more cores, more compute, more silicon space, more performance to bring inference at the edge. What we shared in the earlier remarks is we have production release devices that provide industry leading inference at the edge for machine learning for battery powered applications. And we see that increasing in its adoption. And for sure, when customers use those, there's an ASP lift associated with that.

Speaker 2

So think of it as ASP lift. And I'd also add, you should also think of it as SAM expansion, because it opens the door to additional application and use cases for our devices. So net positive for us on product level and at end market adoption level.

Speaker 4

Got it. Thanks, Matt.

Operator

The next question comes from Quinn Bolton with Needham and Company. Your line is open.

Speaker 5

Hey, guys. Nick Doyle on for Quinn. Thanks for taking my questions. You guys mentioned no channel restock next quarter. So I guess how are you thinking about the distributor mix overall?

Speaker 5

And can that mix get back to 80% in early 2025? Thanks.

Speaker 3

Yes, Nick. We're not assuming that there's a broad restocking into the channel. I would just remind everybody that our target channel days of inventory is approximately 70 to 75. We just ended the quarter at 53, the prior quarter was 55. And so really I think to see the channel restock is going to take several quarters.

Speaker 3

I think as POS continues to grow, as confidence and customer forecast continue to grow, which they happen sequentially every quarter, you'll gradually see distributors continue to take more and more stock and put them on the shelves as turns actually go up. And that's one of the notable things that I think we've seen in the last quarter is to have short lead times turns orders coming in, which of course is heavily dependent on the channel being able to support that. In terms of getting the channel back to closer to our historical mix of about 80%, we're in no rush. I think ultimately that's where the company heads back to kind of our normal course of business. But again, the channel is made up of tens of thousands of customers and we're going to just slowly continue to participate and support our customers as they continue to grow as their destocking gets over with and they return back to normal consumption.

Speaker 3

And once you get back to that point, I would expect it to get back nearer to that 80%. But it didn't take a few quarters. You won't see that move in 1 quarter. You won't probably see it move in 2 quarters. It's just a little bit of a patience game, I'd say, Nick.

Speaker 5

Thanks. Helpful. The second question on CGMs, you mentioned line of sight to full ramps in 2025. Can you give us any more details on what that looks like in terms of units? I think you've talked about millions or tens of millions of an opportunity.

Speaker 5

And I think online, I think CNBC was talking about 100,000,000 units or more in terms of the overall market. So any help there would be nice. Sure. Thanks. Yes.

Speaker 2

So as we've said in the past and it's unchanged, easy way to think of it is as a company essentially very little historical revenue and continuous glucose monitors and insulin management in general. We've shared multiple design wins at multiple end customers. We've said more than a dozen And we are starting to see those ramp and as we exit this year, so we'd expect that those would start contributing in a way they haven't been able to as we go into 2025. To answer your question directly, we believe that end market represents 100 of millions of units of opportunity. And that's a statement in terms of the SAM or served available market there.

Speaker 2

And we feel that we are doing a pretty good job at securing market share there and we expect that to continue moving forward.

Speaker 3

Thank you.

Operator

The next question comes from Cody Acree with The Benchmark Company. Your line is open.

Speaker 6

Yes, guys. Thanks for taking my questions. Maybe if you can just talk about your in consumption levels with revenue here in the back half about flat, obviously after a strong sequential improvement in Q3. What do you think that that is saying about your in consumption levels?

Speaker 2

Yes. So it'd be good to hear from Dean as well. The quick answer is not at consumption yet, Cody, is the quick answer. We've seen an improvement in the end customer excess inventory that destocking has made a big impact in working those levels down. But as we've also said, it's not complete yet and still has some more work to be had for that to be complete.

Speaker 2

So getting closer to consumption, but not there yet. And just as a reminder, big, big picture, the 3 big pieces we've been talking about, one is that in inventory, getting closer, but not corrected yet, but definitely has gone in the right direction and we've made some big gains there. 2nd piece is end market. End market continues to be low in visibility and choppy and uncertain in terms of what to expect. And our customers I think just are trying to navigate this environment and they're not sure either, I think is the honest answer.

Speaker 2

And then the 3rd piece is our design win ramps. And as we've said, we've benefited from significant design win levels over the last few years and those are now starting to ramp. And that's giving us the confidence to say we see a path to continued growth here even with the uncertain market environment that we're all dealing with.

Speaker 3

Cody, maybe I'll just add just a couple of points. One, we've made pretty rapid progress in the last 3 or 4 quarters to actually get majority of customers past their destocking process. I think as we look into Q4, what the dynamics are today is a little bit choppy in between different end markets. For example, industrials seem like that's sort of gotten a little bit weaker lately. I don't know if there's a sort of hesitancy on some of those customers.

Speaker 3

While some of the consumer based applications seem like they're largely past their destocking and their forecasts continue to go up. So we still see sort of pockets of differentiation between some of the end applications. And more notably recently, we've seen a lot more short order lead times. So that short order lead times makes it hard to give us visibility on, hey, what does the next quarter, 2 quarters, 3 quarters look like as customers sort of sit on their end demand waiting till almost the last moment. So that is sort of caused a little bit of visibility, gray area for us as we look forward.

Speaker 3

But largely, I think people we are making progress and I think we're not quite there yet on end market consumption level, but we're making progress every quarter. And every quarter, a little bit of pockets change and those customers move past and it looks more and more positive.

Speaker 6

Thanks for that color. It's very helpful. Maybe if you can just carry on that thought into the Q1, any quick thoughts on normal seasonality or what your order rates are suggesting for the first half?

Speaker 3

Yes. So for the first half, I would say there is a lot more turns orders that we're starting to see. So it gives us a little less stability on what we might be able to see into a typical Q1. Q1 for a lot of our end applications is seasonally not their strong point. I think the balancing point for us in Q1 and Matt I think mentioned in some of his remarks were some of the design win ramps that we see looking to go into mass production.

Speaker 3

We have some going here in Q4. We have some pretty good ones that looks like Q1 is going to be the right timing. So I think our focus largely is around the design win ramps. Cody? All right.

Speaker 3

Thanks guys. Thank you.

Operator

Our next question comes from Peter Ping with JPMorgan. Your line is open.

Speaker 7

Good afternoon and thanks for taking my question. I want to follow-up on the design win ramp. Maybe if you can just kind of give us on how material this could be to revenue contribution for 2025 that will be helpful versus 2024?

Speaker 2

Yes, that's not something that we provided more color on. I think the easiest way to say it is, right now in this market environment, once the inventory destocking is complete, for all intents and purposes, we're assuming that the end consumption or demand environment is relatively flat. It's got to change at some point. We've got to see more strength there, but we're not seeing it right now. So we're assuming that the other side of that, all the growth is coming from design win ramps.

Speaker 2

And what we've shared is we see a path to solid growth moving forward based on those design win ramps in that flat market environment. That's the most color we can provide right now.

Speaker 7

Got it. Okay. And then as we think about some of these new design win ramps, maybe you can talk about whether there's any margin implications either to the up or down as we think about 2025?

Speaker 2

Yes. No meaningful changes. We remain committed to our overall gross margin model. We see a path to continuing doing or meeting that model. So those ramps will definitely help our revenue, but won't meaningfully change the gross margin outlook.

Speaker 7

Great. Thank you, guys.

Operator

I show no further questions at this time. I would like now to turn the call back over to Giovanni for closing remarks.

Speaker 1

Thank you, Michelle, and thank you all for joining us this afternoon. Before concluding today's call, I would like to announce our upcoming participation in Stifel's 2024 Midwest Conference in Chicago on November 7. This concludes today's call. Thank you.

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