Silicon Laboratories Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by. My name is Jonathan, and I will be your conference operator today. Welcome to Silicon Labs' 4th Quarter Fiscal 2023 Earnings Call. After the speakers' presentation, there will be a question and answer As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Giovanni Pacelli, Silicone Labs' Senior Director of Finance.

Operator

Giovanni, please go ahead.

Speaker 1

Thank you, Jonathan, 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 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 Interim Chief Financial Officer, Mark Malden.

Speaker 1

They will discuss our Q4 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 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 the Silicon Labs website. I'll now turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson. Matt?

Speaker 2

Thanks Giovanni, and good morning, everyone. The Silicon Labs team delivered 4th quarter results above the midpoint of our guidance. During the quarter, we saw reductions in both channel and end customer inventory. We expect end customer inventory destocking to continue in Q1. On a units basis, disty inventory is now at lower levels than during the supply crisis.

Speaker 2

We believe Q4 of 2023 represents our low point of revenue. We expect to return to sequential growth starting in Q1 as our customers' inventory start to normalize and we begin to see the further benefits of design wins ramping to production. We've Also seeing slight improvements in our weekly bookings activity, but demand visibility continues to be low. We are encouraged by another year of outstanding design win achievement despite the challenges of the current operating environment. The projected lifetime revenue of our 2023 design wins was up low double digits year over year in line with the ambitious targets we set.

Speaker 2

These design wins span a broad range of technologies, applications and customers And we are expected to deliver strong growth in earnings power as the market dynamics improve. Before we turn the call over to Mark, I would like to take a moment to express our gratitude to John Hollister, who has stepped down after 20 years of dedicated service to Silicon Labs, 10 of those years as CFO. John's financial stewardship has been instrumental to our success over the years and his insights and partnerships have been invaluable. On behalf of the entire team, thank you, John, for your outstanding work and commitment, and we wish you the best as you join GlobalFoundries. In addition, I would like to thank Mark Malden for stepping in so effectively during this transition.

Speaker 2

I can also share that the search for our new CFO is going well. We're impressed by the caliber and potential fit of the candidates we're engaged with and are looking forward to concluding the search as quickly as possible. Now I'll hand it over to Mark for the financial update. Mark?

Speaker 3

Thanks, Matt, and good morning, everyone. 4th quarter revenue was $87,000,000 above the midpoint of our guidance and down 66% year on year. ASPs declined sequentially in the quarter, primarily due to product and customer mix. Unit volume was also down on a sequential basis. Revenue was down year over year for both business units in the quarter.

Speaker 3

The industrial and commercial business unit ended at $60,000,000 down 62% from the same period last year and 51% sequentially. All three product groups in I and C declined in the 4th quarter with the broad industrial category experiencing the largest decline. However, for the full year, the Smart City and Commercial Product Groups achieved record revenue levels, driven primarily by strength in electronic shelf labels and metering. Weak demand and High customer inventories continue to negatively impact the home and life markets. H and L revenue was down 73% year over year and 67% sequentially at $27,000,000 Despite the near term weakness, we are well positioned as demand recovers and inventories normalize with growth expected in smart home and particular strength in connected health.

Speaker 3

Successful market initiatives are driving H and L design wins above our targets in terms of projected lifetime revenue. Distribution revenue was 63% for the 4th quarter, down sequentially and well below our typical levels. Inventory in the channel decreased to 79 days and on a units basis, Disse inventory was down to its lowest level since the divestiture. The decrease in distseemix in the quarter was due to a temporary shift toward direct customers as channel partners work through their inventory. This mix shift also contributed to lower ASPs in the quarter.

Speaker 3

Our top 10 end customers were about 42% of revenue for the quarter, an increase from historical trends driven by the lower revenue level and the mix shift. Non GAAP gross margin ended lower than expected at 51% due to product and customer mix. We continue to see a generally stable pricing and input cost environment with no significant change expected on a like for like basis in the next quarter. Non GAAP operating expenses of $91,000,000 were better than expected largely due to earlier pull in effects of the restructuring, which commenced in November. Non GAAP operating loss was $47,000,000 and our non GAAP effective tax rate was lower for the quarter at 14%.

Speaker 3

Non GAAP loss of $1.19 exceeded our guidance, driven largely by the OpEx and tax rate favorability. For the full year, our non GAAP operating margin was 8%. Non GAAP earnings for the full year were 1.65 On a GAAP basis, gross margin ended at 51%. GAAP operating expenses were $117,000,000 which was better than expected. GAAP operating loss was $73,000,000 for the 4th quarter and $24,000,000 for the full year.

Speaker 3

GAAP loss per share was $2.19 for the 4th quarter and $1.09 for the full year. The GAAP results included approximate $9,000,000 charge for the separation costs associated with the reduction in workforce during the Q4. Turning to the balance sheet. We ended the year with cash and investments of $439,000,000 Our accounts receivable balance declined in the quarter to $29,000,000 indicative of the lower revenue levels. Our day sales outstanding reverted back to 30 days, reflecting strong elections in the quarter and no known bad debts from our customers.

Speaker 3

We added $27,000,000 in net inventory in the order to $194,000,000 We anticipate that our internal inventory will level off in Q1. Inventory turns ended at about one time. As a reminder, we hold a significant portion of our inventory in die bank, which provides flexibility as to its ultimate end use application and customers and helps to mitigate inventory obsolescence risk. We continue to have $45,000,000 outstanding on our revolving credit facility. Our Board of Directors has authorized a new share repurchase program in 2024 for $100,000,000 We will continue to be very opportunistic on share as we manage liquidity and optimize the use of working capital.

Speaker 3

Overall, the balance sheet remains very healthy and well positioned to execute our strategy and weather the current market environment. As we announced last week, We identified a material weakness in our internal controls related to the operation and documentation of certain inventory controls. There is no impact to any amounts reported in our current or historical financial statements. We are in the process developing a plan to enhance the design and operating effectiveness of our internal controls to address the material weakness and still expect to file our Form 10 ks in a timely manner. Before returning the call to Matt, I will cover guidance

Speaker 1

for the Q1.

Speaker 3

We expect revenue for the Q1 to be in the range of $100,000,000 to $110,000,000 We anticipate both business units to grow in the quarter. We expect non GAAP gross margin in the Q1 to be approximately 52%, The lower gross margin for this quarter continues to reflect the fixed cost absorption over lower revenue levels. We expect non GAAP operating expenses in the Q1 to be approximately $96,000,000 We expect the non GAAP effective tax rate to be approximately 20% in the first quarter. Our non GAAP loss per share for Q1 is expected to be in the range of $0.92 to 1 $0.04 On a GAAP basis, we expect gross margin to be 52%. We expect GAAP operating expenses to be approximately $118,000,000 and we expect GAAP loss per share to be between $1.89 $2.05

Operator

per share.

Speaker 3

I will now turn the call back over to Matt.

Speaker 2

Thanks, Mark. Looking ahead in 2024, we're excited about several trends in wireless connectivity, including more Matter certified products coming to market, as well as strong growth in our life, smart cities and commercial segments. In Q4, the CSA released Matter 1.2, which extends the benefits of Matter to a wider array of devices, including household appliances, air conditioning and smoke alarms. At CES this year, we were encouraged by the strong level of engagement with customers, ecosystem partners and ISPs regarding the matter protocol. It's clear that interest in matter and the availability of matter enabled devices is accelerating.

Speaker 2

As part of this, We announced our collaboration with Arduino to make Matter protocol and advanced IoT development more accessible to all. We are partnering to integrate Arduino's first ever matter software libraries with Silicon Labs hardware, so developers get our leading security, energy efficiency and processing power for matter in an intuitive, easy to use development environment. Additionally, Samsung recently announced matter enabled connectivity in its smart TVs and selected appliances that includes our silicon and are currently hitting the market. We're excited to work with Samsung on their SmartLink platform as they expand their Matter enabled ecosystem. Wi Fi is playing increasingly important role in IoT devices, included in conjunction with MATTER.

Speaker 2

In Q4, we expanded our portfolio of industry leading Series 2 based products with the soft launch of our ultra low power Wi Fi the 917, which was selected as an honoree in the inventive category of the CDS Innovation Awards. The 917 has the lowest power consumption of any competing Wi Fi 6 product on the market, enabling meaningfully longer battery life to a whole new class of applications. We believe this will continue to drive new opportunities and design wins as customers look to integrate Wi Fi into their products. In our Life segment, we are securing new wins in connected health and aPAP, where we are engaged with more than a dozen customers for continuous glucose monitors. The demand for connected health devices is growing rapidly, driven by demographics and an increase in chronic illnesses or diseases like diabetes.

Speaker 2

And we are confident that our solutions will continue to gain traction and serve this market well. In 2023, we achieved record revenue in our commercial product group as retail environment continues to digitize. For example, in electronic shelf labeling, we ramp new designs with SES of Architag, Now Fusion Group, in addition, we have also secured new design wins in the ESL space for shelf labels, cameras and sensors with our Bluetooth solution. The Smart Cities product group also had a record year, driven largely by metering. However, we're Also gaining share in the solar market with integrated solutions for both wireless, connectivity and compute and solar panels, which help optimize NFT production and increase fire safety.

Speaker 2

2023 was a difficult year characterized by weak demand and high inventory levels. While we're seeing things moving in the right direction, the market is still working through its direction. As we have stated, we believe Q4 represents our bottom and we expect to return to sequential growth starting in Q1. In closing, I want to thank the Silicon Labs team for their and securing significant design wins and gaining share, prudently managing our expenses and advancing industry leading technology solutions for the IoT. Despite the near term challenges, the long term growth trajectory of our end markets and our strong position within those markets remains unchanged.

Speaker 2

As inventory normalizes, demand improves and design wins ramp into production, we are well positioned to return to growth. I'll now hand it back over to Giovanni for Q and A.

Speaker 1

Thank you, Nat. Before we open the call for Q and A, I'd like to announce our participation in Morgan Stanley's 2024 TMT Conference in San Francisco on March We'll now open the call for questions. To accommodate as many people as possible before the market opens, I ask

Operator

And our first question comes from the line of Matt Ramsay from T. B. Cowen. Your question please.

Speaker 4

Thank you very much. Good morning guys. I guess for my first question and I think during the quarter we talked a number of times about some of these dynamics, but I wanted to get an update On the inventory situation, I we see all the statistics you guys publish on your own inventory, channel inventory. And Matt, we take some of your comments on customer inventory, but I imagine that's an average of products where you have Tons of inventory of some products in certain end markets and perhaps you're even still having escalations at other products and it's a pretty diverse set. So If you could maybe spend a little bit of time talking about areas where you feel like you've cleaned everything up and we're sort of back to normal lead times and normal inventories have that visibility and are there particular areas where you haven't?

Speaker 4

And just give a little bit more detail, maybe not average metrics, but some specifics by end market. Thanks.

Speaker 2

Sure. Good morning, Matt. I understand, I think. Let's see, I'm going to start just working through Internal inventory, obviously, well understood by design. We're building by inventory For the ramp on the other side of this market environment we're in, as Mark said, we kind of expect that to be peaking now And we feel good about where that's at.

Speaker 2

There's a ton of flexibility given that we carry it in die bank and we can configure it as needed. Next piece of inventory channel also well understood. We saw our days go down as we mentioned. What's remarkable about that is the revenue level that, that occurred at. Going from around $200,000,000 in Q3 to $87,000,000 in Q4, The actual material in the channel came down significantly.

Speaker 2

As we commented, it's actually lower than it was in the supply chain crisis. So you can see the clear trend and pattern there as the industry tries to and ourselves work down those inventories. The real trick is customer inventory end customer inventory, which is the most difficult because as you pointed out, you can't get A report that gives you that with precision and given the geos, technologies, applications and just the sheer number of customers we have, It's much more difficult to get an exact number on that like we can with the other inventories I already mentioned. So easy way to say, if you compare to this time last quarter, What we do is we sample our top customers. Last quarter, it was 40 to 50.

Speaker 2

We've expanded that. And what we see and believe is That's coming down and we're happy to see that. And I'm not going to imply precision that doesn't exist. We see it coming down. And that's the average across all the customers and even the count of customers with more inventory than they should is coming down as well.

Speaker 2

So that's encouraging. We expect that trend to continue through Q1. And it also speaks to, as we've been saying, our For lack of better term, end consumption of our products is obviously higher than our revenue levels would imply as we're working down those channel and end customer inventories. So hopefully that's helpful and not going to put specific numbers out there that apply precision that doesn't exist, but we definitely see it moving in the right direction, which is encouraging.

Speaker 4

Thanks, Matt. That context does help. I realize that we're going through a transitory period. But I guess as my second question, I wanted to ask A little bit about gross margin. There's a lot of pieces moving around And I got a few investor questions this morning.

Speaker 4

So first question is just to confirm, I didn't see it in any of the releases and you guys didn't mention it. So I think this is true. But just to confirm that there weren't any kind of You guys didn't mention it, so I think this is true. But just to confirm that there weren't any kind of explicit inventory write downs. And I guess the second question is Any kind of rule of thumb of how gross margin might trend as we come out of this like revenue levels where we can get back within the long term range?

Speaker 4

I imagine it has a mix component between the two segments as well, but if you could give us any kind of guidance there. You mentioned in the prepared comments there was a little bit of movement on pricing. I was curious about that as well, but anything on margins would be helpful. Thanks.

Speaker 2

Yes, sure. I'll work from the Detail and then up to the bigger picture, I'll answer that. So Q4, first thing is the What I call the low level gross margin from the beginning even in the guide is really driven by that, like better term fixed cost absorption at that low revenue level, but it still came in lower than expected. And the reason for that was really around the mix. At $87,000,000 of revenue, which isn't indicative of our consumption or a normal operating level, The customers come in lumpy, right?

Speaker 2

And that resulted in unfavorable mix that got us to where we're at. We do not expect that to be a permanent trend. So but we should be clear in Q1, we'll still have those challenges lower than consumption revenue level and lower revenue than we want to absorb all those fixed costs. So We still see gross margin challenge in Q1, although improving slightly. To answer your big picture question, I think that's critical and we all know this, we shouldn't be looking at our gross margin in the peak or the trough of these cycles as indicative of the longer Back during the peak of the supply chain prices, we were over 60 by a meaningful amount and there was that to be our new normal, we said no.

Speaker 2

We expect that was a transitory environment and that's proven out. Right now, we believe we're in our trough and that's also a trendstorm. We don't believe that that's indicative of our Long term gross margin. Our commitment to our gross margin model that we've said all along has not changed, is unwavering And we see a continued path of delivering that and we just have to get through this correction cycle and that's what we expect to see. So hopefully that answers your question, Matt.

Speaker 4

Thank you very much. All the best as you guys manage through this. Take care.

Speaker 2

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Thomas O'Malley from Barclays. Your question please.

Speaker 5

Good morning, guys, and thanks for taking my question. I just wanted to first check-in on the March quarter. Could you give us some color as to which of your segments you're expecting to grow more into the March quarter just to get to your guidance of $105,000,000 And then also, You mentioned in the Q4 that units and ASPs are both down as expected with the reset. But can you talk about what you're seeing kind of through the quarter such thus far from a pricing perspective, and just how that's playing into the March guidance?

Speaker 2

Sure, Thomas. This is Matt. So quick answer on segments, Q1, I would expect both of our end segments to grow in Q1. Big picture, it's really tough to call this market environment, but we ultimately believe that Home and Life is probably further through its cycle than Industrial and Commercial. So if I were to buy it, I would expect more there, but we're not calling specific numbers in our guidance.

Speaker 2

In terms of the pricing environment overall, no big changes. So what we've been saying and experiencing seeing is price of data that is very much In line and indicative with this type of environment, no surprises there. It is worth commenting there is a one competitor out there who has done things that I would say are not indicative or typical in this environment. And what I mean by that is setting lower price points and trying to fill fabs to justify capacity. But for us, that competitor doesn't overlap a lot with our portfolio.

Speaker 2

So Not significant, but it would be incorrect to say that everything is normal if I don't call that one out. But aside from that, Very expected behavior, people trying to drum up business, trying to drive, fill their capacity and get demand back up and running. But If we're just honest about it, the problem is the price the problem is inventory and the market cycle that we're going through And no big changes in our outlook or expectations based on what we've seen so far.

Speaker 5

Super helpful. And then I just wanted to follow-up, obviously, You moved the report here due to inventory controls issue. It looks like you're not really seeing any impact of that in the quarter. A couple of things. 1, could you maybe give us a little bit more color as to what's going on there if you can?

Speaker 5

And 2, you mentioned Most of the inventory that you're carrying right now is Dibank. Could you maybe give us the split of how much of that inventory is Dibank? Because I would assume that if you were Looking at inventory controls, it would be more for products. So I'd assume a smaller portion of your overall inventory. Any color there would be helpful.

Speaker 5

Thank you.

Speaker 3

Sure. This is Mark. For the controls issue, late in January, we just identified some areas within our inventory accounting process that needed some improvement there. We are working to develop that plan to address addressing going forward. The way these things work generally speaking, we're going to have to have The new controls in process and shown as effective at least for more than 1 quarter.

Speaker 3

So we'll have that item open out there at least through the Q1. But in general, it just had to do with having more documentation and reviews over some of the assumptions that go into the judgmental aspects of the inventory valuation.

Speaker 5

Thank you very much guys. Appreciate it.

Speaker 2

Yes. And just a comment, meaningful majority of our inventories in die bank because for people out there just important to understand, While we have a remarkable diversity in our end customers and applications, what we try to do is not have that same diversity in silicon. So in silicon, we'll have SoCs that address as much market as possible And they could be tailored, customized, configured in silicon to address, for lack of better term, different part numbers and SKUs and applications that customer needs. And on top of that, there's silicon I'm sorry, software flexibility that is substantial as well. So it's really an advantage for us Cary and Die Bank, it gives us the maximum flexibility to respond and to manage inventory responsibly by taking that approach.

Speaker 2

So quick answer is that's where most of it is in.

Operator

Thank you. Our next question comes from the line of Tore Svanberg from Stifel, your question please.

Speaker 6

Yes, thank you. First question is on the Home and Life business. So Matt, I know this is a difficult question to answer, but I'll ask it anyway. So I think that it peaked at a run rate of 500,000,000 Now the run rate is $100,000,000 So it's quite stunning. And I'm just wondering if you could unpack a little bit, As you had that $500,000,000 peak, what was cyclicality and what was more secular businesses?

Speaker 6

And if you look at the mix today, That $27,000,000 how much of that is more secular business versus cyclical business? I know, again, it's difficult, but if you can unpack some of that, That'd be great. And I assume you're not going to give us a true consumption number of that business, but any more color you could add would be really helpful.

Speaker 2

Yes, sure, Tore. Yes, that is not easy to answer, but I'll do my best to provide some perspective and context that Hopefully, it will be helpful. So maybe just going way up to the top, big picture, we haven't provided that an exact consumption number for the company or for the segments. But it can be helpful to remember that We did do some meaningful OpEx actions in Q4 of last year. And obviously, those were With that consumption level in mind and whatever you do there for cuts, you want your breakeven point to be below that consumption level.

Speaker 2

So that's important It's actually just as a way to help think about it. Going into Home and Life, it's been what 4, 5 plus quarters now of declines that we've seen in that business. We do see what I call Cautiously optimistic signs that we're seeing some improvement in bookings, seeing some Not push outs anymore, it's more pull ins, but visibility remains low because people aren't even ordering within lead times, ordering on much shorter basis as they need. I think they're still working through their inventory. They've been rattled.

Speaker 2

They're uncertain. So I do believe we're much further through that cycle correction, and we're seeing encouraging signs, but not at the level to say we're on the other side of this yet or we're out of the woods. So want that to be clear. That being said, yes, we went through a remarkable journey, right, from Demand, well, 1, I think there was a shift from services to goods and then back to services, demand spikes, people wanted expected demand levels would be continuing in perpetuity, people built inventory and then there's a whole bunch of trends under there that Difficult to pull out or tease out or parse out how much is contributing to each, but you have the end market strength, you have the secular that are very important, right? Matters started to show a lot of strength in there in our prepared remarks.

Speaker 2

And then we talked about life a few times that Life has been durable throughout this because of that secular strength. But at the same time, The design and momentum we've started sharing with the world on that is really just in its early stages and that will be impactful as well. So I'd say it's shown resilience because throughout this, because of those ramps that are starting, but the real growth there and real impact is yet to come. So, and the last piece is the home piece as an end market, we continue to see solid progress and opportunity there, whether it's trends such as matter, such as Amazon Sidewalk, such as just the market finding its footing on the other side of this downturn. What I'm trying to convey is our confidence in that end segment from a growth perspective remains very strong.

Speaker 2

And our confidence in our position there also remains very strong as we bring in Really great momentum around Bluetooth where we're clearly gaining share and we're going to do the same thing in Wi Fi and that will help not only Firm or stabilize the home for us, but actually grow the home moving forward. So I know that's a lot, Torey, but those are all some of the moving pieces in there. And the punch line is our confidence in the space is continues to be strong. We know we're gaining share and we see opportunities to grow through some of those trends like I mentioned for matter, Bluetooth growth, WiFi growth going forward.

Speaker 6

That's really helpful. I appreciate that, Matt. As my follow-up, so I know obviously There's a cyclical balance coming here. That's pretty obvious. But I know on top of that, you also have a lot of new design wins.

Speaker 6

You have some new secular business that are ramping. You talked about some of the glucose metering, smart metering, shelf labeling, then you got Wi Fi. So I guess the real question that I have here If you look at some of those newer businesses, any update there? And could these be really material to revenues for calendar 24, especially in light of perhaps some of the more cyclical business at such a low level?

Speaker 2

Yes, understood. Quick answer is yes. That is our expectation that we've been unwavering in our view that we're going through a Particularly vicious market cycle that has impacted demand, inventory destocking that's substantial. And we're trying to be clear, we're not calling the market bottom here. We're not out of the woods yet.

Speaker 2

It's clearly these cycles haven't worked fully through, but we are calling our model. And the reason we're comfortable doing that is, we're not calling the rate necessarily, but we do see The confluence of all those things that the inventory destocking is going in the right direction, we do see our position in the market is strong And those designs are starting to ramp. We just last earnings call, we called out a few that people were unaware of. We just called out a couple more on this call that people are unaware of and there's more. So these are intended to give some perspective that they're happening.

Speaker 2

Yes, there's a massive counterbalance with this market cycle. But at some point, those two things will the ramps are going to continue and normally get stronger and the market will work through its cycle. When those things come together, it looks like we'll be positioned for strong growth when those 2 happen.

Speaker 6

Great. Thank you very much.

Operator

Thank you. One moment for our next question. And Our next question comes from the line of Cody Acree from The Benchmark Company. Your question please.

Speaker 3

Yes, thank you for taking my question. Excuse me. Maybe you can talk about just your order linearity throughout the last 90 days. You mentioned that Orders are coming in with less than your typical turns request. Can you just talk about that pattern of orders And how

Speaker 6

that gives you visibility to the volume?

Speaker 2

Sure. So I'm trying I don't want to make a wise remark. It's hard for us right now because what is normal has really been disrupted over this entire cycle. So I'll start with that. But to answer your question directly, Last 90 days, what we've seen is a trend in an encouraging direction where they're increasing.

Speaker 2

Not increasing at the level that we'd like to see to say this is done, we're on the other side of it, but optimistic that they're going in the right direction, is always important. The visibility continues to be low because our lead times right now, let's just say, about a quarter roughly, a little over a quarter. And most of the behavior is customers and majority of the behavior is customers ordering well within that. So that gives you an indication of what we're seeing. It's also worth pointing out that Given where we think we're at in a cycle between, for lack of a better term, the consumer and industrial segments, probably seeing order patterns a little more indicative of Consumer and Home and Life in general being further through the cycle than industrial and commercial.

Speaker 2

But like I said earlier, we do expect both to grow from Q4 to Q1. So hopefully that helps give some context and perspective. Yes, simple headline going in the right direction, but still have further to go.

Speaker 6

Excellent. Thank you. And lastly,

Speaker 3

Last quarter, you talked pretty optimistically about Series 3. That has been a little absent this quarter. Can you just give us an update on how That platform has progressed this quarter.

Speaker 2

Yes, sure. Not absent by design, just in the middle of a lot of work. So quick way to think about it, Series 2, we continue to release products on Series 2, couldn't be happier With the impact it's having on the market, design wins, momentum has been excellent. It's been Everything you'd want to see and it's still in a very powerful spot in its lifecycle that is going to drive growth for us for a long time. Series 3, making progress there, on track to what we've said, what we've committed and the impact that we expect that that's have not only on us as a company, but on our industry.

Speaker 2

And easy way to think about it, Series 3 takes that platform that is So pervasive, which is Series 2 and gives people the ability to lever that and push even further on All the dimensions that we are industry leading on, whether it's the wireless performance, whether it's the scalability, flexibility, Whether it's the compute that our customers want, including AIML or as I said, industry leading security, even being quantum ready. So the combination of those things have our customers excited. But what I don't want to do and why you probably noticed this is not the call, We are that will be work for us for years to come. And we're well into it. We're very comfortable where we're at in that cycle.

Speaker 2

But we'll be talking about Series 2 for years still and we'll be talking about Series 3 for years to come and both will kind of coincide or be parallel to each other for at least the next 5 to 10 years. So it's important to have that perspective As we talked about both of those, one is not going away and the other is not replacing it, but very encouraged by Series 3 where it's at in the market customer Great. Thank you, guys.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham and Company. Your question please.

Speaker 7

Hey guys, thanks for taking my question. I guess I just wanted to you've talked about starting to see some more encouraging orders in Home and Life And you've also said it's sort of further through the inventory correction. Just wondering if you could specifically talk more about what you're seeing on the industrial commercial side. If home and life is sort of 4 to 5 quarters in, would you expect industrial and commercial to kind of have same 4 to 5 quarter under pressure before you kind of get back to more normalized run rates?

Speaker 2

Yes, I understand the question. Quick and honest answer is we don't know for sure. There's Some really interesting behavior out there in the marketplace. For us, we saw industrial Enter the start of a decline much later than consumer. For us, I think it was around Q2 where we really started seeing The signs are softened.

Speaker 2

What was remarkable for us is usually and I think historically, physically, usually it's much more Measured and not as abrupt. But across thousands of customers, we really did see that segment just really slowed down big time, really going from Q3 to Q4 and that was reflected in our guidance. So the reason I explained that is, Yes. So we're a few quarters into the cycle correction as we see it, but it also hasn't been a typical 1, in the sense of how severe. So we're assuming it's going to continue for the next few quarters.

Speaker 2

And even with that being said, we still see this as our trough or bottom and able to drive sequential growth from here. But I wouldn't call the markets done and we believe industrial still has some time to go. But with the caveat, we also haven't seen it go down as abruptly as we did in this current cycle.

Speaker 7

Got it. No, that's helpful. And then just a question on the Dixie inventory. You guys said it came down to 79 days, obviously down A ton in terms of dollars given the lower revenue level. Do you guys have a target that you're shooting For that disti, I mean, I imagine as revenue starts to recover, if you just kind of hold disti inventory flat that the days in disty is going to come down, still pretty nicely.

Speaker 7

So just any thoughts you can give us how we should be thinking about where that where you want to try to get just the inventory? Thank you.

Speaker 2

Yes, understood. Yes, I think we've said over the last few quarters, In normal times, whenever those happen, we'd be somewhere in the 60 to 70 day range as a target, not an absolute or a hard target, but something in that range. But right now, it's obviously higher than that, but on a much lower revenue level. And as you pointed out, That could spike very quickly as things start to ramp back up. But you have to counterbalance it with The whole industry is spooked by inventory right now, right?

Speaker 2

Everyone is trying to work down inventory, and that's what you see out there. So Distributors are trying to work it down, customers are trying to work it down. So if we're honest about it, as an industry, we'll probably swing the pendulum a little too far. Maybe this will be one of the times that it doesn't happen, but it's possible that you'll see those inventory levels go down and then there'll be a bounce on the other side that's faster than anticipated because we take it too far as an industry. We're trying to watch that.

Speaker 2

We're trying to be responsible and do our best to manage it. But the real focus for us in problem child is end customer inventory, which is going in the right direction, which is encouraging, but not done.

Speaker 4

Got it. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Gary Mobley from Wells Fargo Securities. Your question please.

Speaker 8

Good morning guys. Thanks for taking my question. Matt, you briefly covered this in your prepared remarks, But I missed it to be honest. I was hoping that you could share with us more metrics on design wins in retrospect, Specifically the 2023, what the growth in lifetime value was for the design wins captured in the period And as well whether or not there was a particular emphasis on any one wireless standard or module generation, I would presume the majority of it is on Series 2. Any color would be helpful.

Speaker 2

Yes, sure. So yes, I think in the prepared remarks and I think we said, we did deliver to our target and I'll mention in a second why that's remarkable. And we saw That has a big deal because as we entered this year sorry, as we entered last year 2023, We knew it wouldn't be a great market environment, but we didn't anticipate it would be as bad as it was. But we set our design win target in a different environment. And usually when you see the market drop like it did and as volatile as it has been, usually you see that convey an impact to your design and performance.

Speaker 2

And the reasons are multiple. Like think about it in real terms right now, we have customers that are working through inventory that are trying to work A lot of customers are doing R and D reduction, so they're impacting schedules and projects that way. All those things come into play. But we're certainly not happy with our revenue performance in 2023, but the team was able to secure and deliver a design and performance that was on that original plan, which is outstanding. And the reason to be very direct is Series 2, Right.

Speaker 2

We're still not in the Series 3 design phase yet. That still ways away. But In Series 2, as I said earlier, it's knocking it out of the park and that's the engine that's driving design wins. The easy way to think about it is right now That drives the growth of our funnel, opportunity funnel that drives the design win growth and that will be the major driver of revenue growth. And that's why we're so excited about Series 3 because now that we have that position in the market, we can leverage that with software compatibility and portability What our customers are starting to realize is investment in Series 2 is also an investment in Series 3, which is off.

Speaker 2

So we're starting to get critical mass and position with our platform in the industry that will serve us well. In terms of the other questions, it was pretty broad honestly in terms of All our geos saw good progress. All our wireless technologies saw good progress and all our focused End market segments saw good progress as well. If you wanted to call out some big ones, it would be what you expected. Areas where we're just really seeing great progress in cleaning up, those secular growth areas that we were talking about with Tore earlier, definitely having a big impact.

Speaker 2

And then take an area like we've been consistent in Bluetooth where We see strength in all of our wireless areas, but Bluetooth, we've really just seen that often grow from a design and we see ourselves continuing to take share there. So that's one that you could probably call out as a standout. And as we've been saying, I expect as we just released the soft launch 917 for Wi Fi, you're going to start seeing the same in Wi Fi as we bring industry leading capabilities there as well. So those are the drivers, Gary. Hopefully that gives you some perspective, but No one thing aside from definitely some strength in Bluetooth, but all the focus areas performed very well and we hit our mark.

Speaker 8

Thanks, Matt. Your main boundary partner is basically calling for a pretty good rebound year, some pretty good growth. And I realize a lot of that rebound is leading edge lithographies, maybe not where you're at. But To put this in the form of a question, are you potentially going to see maybe higher founder quotes and as well related Some expanding lead times, could we possibly see lead times more than 13 weeks at some point in the year?

Speaker 2

Sure. Don't understand the question, don't know for sure. I think that we've been very deliberate about our 1 strategic inventory build internally, our die bank to smooth this out. Going into the supply crisis, We were carrying a much lower level. So our intent by having that is to try to smooth the response and not have it be as abrupt and lumpy.

Speaker 2

And we have a great relationship with our all our foundry partners, including our largest. So we feel just to be very blunt, we were able to navigate the supply crisis with our relationships and partnerships. I definitely believe we'll be able to navigate the other side of this downturn that we're in. And I think we're much better prepared. We've learned a lot.

Speaker 2

We're carrying different dive in. We've learned a lot about forecasting, watching customer inventories, etcetera. So I think the confluence of all those will position us well. And I do believe we're from a supply perspective, Very well positioned to navigate it, all things considered.

Operator

Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Giovanni Pacelli for any further remarks.

Speaker 1

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

Operator

Thank you, ladies and gentlemen, for your participation in today's conference.

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Earnings Conference Call
Silicon Laboratories Q4 2023
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