Silicon Laboratories Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 11 speakers on the call.

Operator

Hello. My name is Tanya, and I'll be your conference operator today. Welcome to Silicon Labs' 2nd Quarter 20 24 Fiscal 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.

Operator

Please be advised that today's conference is being recorded. I would now like to turn the conference over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead.

Speaker 1

Thank you, Tanya, and good morning, 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 Q2 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 the Silicon Labs website. I'd now like to turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson. Matt?

Speaker 2

Thanks, Giovanni, and good morning, everyone. Silicon Labs delivered strong second quarter results with revenue reaching the top of our end of our forecast and earnings exceeding expectations. Many survey customers report that their excess inventory levels have normalized, although some significant outliers remain. Improved booking patterns in the first half of the year indicate a continued recovery in the second half, even though weekly bookings are still below our target levels. Our design win pipeline is well on track for the year with record design wins in industrial and commercial business unit with particular strength in the Smart Cities business.

Speaker 2

The home business also set a design win record in the quarter. We are also pleased to see numerous design wins ramping into production and shipping to customers, including insulin management devices, electronic shelf labels and smart meters. In insulin management, we've started shipping millions of units across multiple customers and regions. We expect this momentum to continue in the second half of the year and accelerate into 2025 as the market and our share for these products grow and large customers begin ramping new programs. In smart retail, global deployments in the electronic shelf label market are expanding and we have a clear leadership position in the space.

Speaker 2

We're working with 4 of the top 5 global ESL providers to support their rollout to retail customers. Lifetime, we have cumulatively shipped 300,000,000 units and ESL has become our fastest growing business. We are meaningfully ramping our ESL unit volume and see this growth continuing to accelerate into the next year as this application gains further traction. In smart metering, we are participating in all of the largest smart metering deployments globally outside of the China domestic market. We've secured designs with the major global metering suppliers positioning us to capture significant share in upcoming metering deployments in new and emerging markets like India, Central America, Southeast Asia, as well as to support next generation deployments in more established markets like the U.

Speaker 2

S. And Europe. We've also just secured a significant smart metering design win with a top utility provider in Japan. This win will enable us to support a majority of Japan smart meter market servicing both new and existing deployments with our multi protocol solutions, including our award winning Wi Fi 6 solution, the 917, and our best in class sub gigahertz solution, the FG25. Our first Wi Fi 6 product, the 917, has meaningfully lower power consumption than competing products in the market, and we believe it has the potential to drive share gains similar to our Series 2 Bluetooth solutions over the past several years.

Speaker 2

The 917 continues to generate significant market opportunities and we are now seeing those opportunities convert to dozens of design wins, including at one of the world's largest appliance manufacturers. As IoT devices proliferate, our Series 2 portfolio is well positioned to unlock new use cases through industry leading power consumption, security, multi protocol wireless performance and edge computing power. We were the 1st in our industry to integrate PSA Level 3 secondurity into our Series 2 products. We're seeing its importance and are now securing new business as a result. Similarly, our early integration of AIML into multiple Series 2 SoCs is also driving strong customer engagement as they seek to understand the potential use cases and applications for ML at the Edge in their product roadmaps.

Speaker 2

We continue to see strong momentum in adoption of our current generation Series 2 products, while at the same time we have started sampling the first product in our next generation Series 3 platform. The strength of our current generation and potential of our next generation platforms that Further, customers will be able to transition from Series 2 to Series 3 as needed through common code base, scalable memory architecture and significant advancements in our performance, power consumption and compute capability. We will be talking more about Series 3 at our upcoming Works With Developers Conference this September. Overall, I'm proud of the team's execution last quarter. As anticipated, the main driver of our recovery so far this year has been many of our end customers managing down their excess inventory.

Speaker 2

The steadily improving inventory backdrop combined with Design Wind Ranch and key focus areas such as insulin management, ESL and metering positions us to continue driving sequential growth in the second half. The 3rd driver of our future growth is an improvement in the end market demand, the timing of which remains hard to predict. That said, as bookings improve and shipments into our channel increase, we will benefit from this catalyst and the combination of all three of these profitability as quickly as possible and executing for our long term financial model. Now I'll hand it over to Dean for the financial update. Dean?

Speaker 2

Thanks, Matt. And it's great

Speaker 3

to be joining everyone this morning having officially stepped into the CFO role during Q2. Before discussing our results and outlook, I thought it'd be helpful to begin with some early observations. Those of you who know me know that I've long been an admirer of the Silicon Labs business and I'm thrilled to be the newest member of such a great team. Silicon Labs is the unique company in our semiconductor industry with its singular focus as a pure play for 1 of the fastest growing end markets for semiconductors, the IoT. The characteristics of this market offer many compelling financial attributes, such as a tremendously diverse customer base, long product life cycles, emerging new growth applications and the ability to command market leading pricing with highly valued technology central to the end market application needs.

Speaker 3

Having now joined and began to integrate into the organization, I'm pleased to share that the product depth and breadth are even more impressive than I originally understood. I'm happy to report that the sales funnel is extremely robust with a pipeline of customer engagement and design wins as diverse as the IoT itself, bolstering my belief in future growth for years to

Speaker 4

come.

Speaker 3

A key focus area for us will be ensuring that we convert this pipeline of design wins to measurable top line growth and importantly delivering that sales growth to the bottom line in the form of EPS expansion. We can do this by putting a renewed focus on our operational expenses and improving product margins, which will become clear as our revenue continues to recover and our newest products are released to market. Now moving forward to the June quarter results. Revenue was $145,000,000 up an impressive 37% sequentially and above the midpoint of our prior guidance as our recovery path takes hold. Year over year, revenue was down 41% as expected.

Speaker 3

In our industrial and commercial business, June quarter revenue was $88,000,000 up 35% sequentially and down 47% year over year. The sequential increase was driven by strength in applications such as smart meters, smart building controls and retail electronic shelf labels, all delivering double digit growth. Home and Life June quarter revenue was $57,000,000 up 39% sequentially and down 28% year over year. During the quarter, we saw strength in home automation and security. In the life business, we're seeing in connected health and fitness customers and have completed the qualification at several new continuous blood glucose monitoring customers and are now shipping products to multiple of these CGM customers globally.

Speaker 3

These medical and health centric applications are poised to deliver future growth for Silicon Labs as customers begin to ramp their production. We continue to focus on the level of inventory in our distribution channel, which has now declined to 55 days in the June quarter. Even more encouraging is the sequential growth in our distributor POS, which leads us to believe that some of the long tail customers are beginning to work past their excess inventory positions. Distribution made up approximately 9% of our revenue mix for the June quarter, an increase from the prior quarter, but still below our typical distribution versus direct sales channel mix. Overall, ASPs were down slightly compared to the prior quarter, but this is due to product and customer mix during the quarter, while unit volume was up significantly driving our strong sequential growth.

Speaker 3

Geographically, we saw sequential increases in all regions with APAC being up more than EMEA and the Americas during the quarter. For the June quarter, our GAAP gross margin was 53%. Non GAAP gross margin was also 53%, which was in line with our guidance range and reflected a mix tilted toward direct customers versus the channel as we previously discussed. GAAP operating expenses were $125,000,000 which includes share based compensation of $16,000,000 and intangible asset amortization of 6,000,000 dollars Non GAAP operating expense of $102,000,000 was in line with our guidance range. We continue our focus on diligent expense controls and converting our working capital back into cash while experiencing non GAAP operating losses.

Speaker 3

GAAP operating loss for the quarter was $48,000,000 and non GAAP operating loss was $25,000,000 During the quarter, we reported a GAAP tax expense of approximately $37,000,000 Our non GAAP tax rate remained at 20%. GAAP loss per share was $2.56 and non GAAP loss of $0.56 per share was better than our guidance range. Turning to the balance sheet, we ended the quarter with $339,000,000 of cash, cash equivalents and short term investments. Our days of sales outstanding was approximately 30 days. During the quarter, we depleted $32,000,000 of our internal inventory, which ended the quarter down to $166,000,000 of net inventory.

Speaker 3

Our days of inventory on hand improved to 217 days and we expect further to reduce our balance sheet inventory position in the subsequent quarters as sales levels improve. Now let me turn to our September quarter outlook. While visibility is somewhat limited, excess inventory at our customers is moving in the right direction and distribution POS and our bookings have gradually improved throughout the course of the year. Although the rate and pace of the recovery is still somewhat uncertain, we remain confident in our ability to continue to drive sequential growth in the second half of the year. We anticipate revenue in the September quarter to be in the range of $160,000,000 to 170,000,000 dollars We expect both the industrial and commercial as well as the home and life business units to be up sequentially in the September quarter with growth being led by the home and life, but also returning broadly across products and applications.

Speaker 3

We expect our GAAP gross margin in the September quarter to be in the range of 54% to 56%. We expect our non GAAP gross margin to also be in the range of 54% to 56%, both of which mark strong sequential improvements from the prior quarter. As revenue further recovers towards a more normal run rate, our distribution mix improves and we wouldn't expect gross margins to continue to increase. We expect GAAP operating expenses in the September quarter to be in the range of $123,000,000 to $125,000,000 We expect non GAAP operating expenses to be in the range of $101,000,000 to 103,000,000 dollars And finally, we expect GAAP loss per share to be in the range of $0.95 to $1.25 loss and we expect non GAAP loss per share is expected to be in the range of $0.10 to $0.30 loss. I'll now hand the call back over to Giovanni for the Q and A session.

Speaker 3

Giovanni?

Speaker 1

Thank you, Dean. Before we open up the call for Q and A, I'd like to announce our participation in KeyBanc Capital Markets Technology Leadership Forum in VAIL on August 5, Jefferies Semiconductor IT Hardware and Communications Technology Conference in Chicago in late August, and Evercore ISI's 2024 Semiconductor IP Hardware Networking Conference also in Chicago in late August. We'll now open up the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question and one follow-up. Tanya?

Operator

And one moment for our first question, Which will come from Matt Ramsay of TD Cowen. Your line is open.

Speaker 4

Thank you very much. Good morning, guys, and Dean, welcome to the show here. I guess for my first question, Matt, I wanted to dig into a couple of the end markets. I think we're all obviously following the cyclical recovery for your company, but there's some new drivers out of the back of this that I wanted to dig into a little bit. And the first one is on the electronic shelf labeling market.

Speaker 4

Maybe you could spend a couple of minutes on the size of the market, the growth trajectory of the market, unit economics and then just a little bit about how that market works for a company like you guys. Do you go through an intermediary? Do you go to the retailer directly? Do you see retailers once they make the decision to go electronic roll things out super fast? Do they do it regionally?

Speaker 4

Just trying to get my head around the growth dynamics and some of the unit economics of that market as it takes off. Thanks.

Speaker 2

Yes, sure, Matt. Good morning. So maybe just starting at the top with electronic or digital shelf labels. Like a lot of areas that we focus on, these things don't happen overnight. So this has been a multiyear investment and multiyear partnership with a lot of customers out there.

Speaker 2

So to answer some of those questions, first is we do work directly with our customers being the shelf label supplier. So they would actually make the shelf label and then they would work with the retailers on the strategy deployment and kind of rollout of those products and technologies. Shelf labels are not new as the technology. They've been around for a long time. But we've seen a real increase in the adoption of those technologies, really led by a few dynamics.

Speaker 2

One is, I think the technology maturity is now there in terms of the robustness, the interoperability, reliability. Another key factor that we've seen is battery life, where the battery life of these labels is enough that the retailers don't have to worry about going around and replacing those. They can last years depending on how they're being used. And then the software reliability is also critical. And then I think the key key here is the returns.

Speaker 2

Our retailers are seeing returns that are really attractive to them. And as a result of those things coming together, we're seeing the adoption of retailers globally really accelerate. And this is not a phenomenon that's unique to 1 retailer or 1 geo. We're seeing this as a broad trend. And as we've said, we see ourselves as very well positioned in that space and as a leading supplier because of 1, our underlying technology.

Speaker 2

A lot of our customers deploy a proprietary implementations, which is one of the many areas we thrive in the IoT. We know how to develop products that last a long time. From a battery life perspective, they're secure, they're reliable, they work well, they work well together. All things that are critical in a retail environment where consumers are actually going to be seeing these things and experiencing these products. So I think even though we've started shipping over the last few years a lot of unit volume, I still think we're early days in this market.

Speaker 2

And I'd also add that in terms of ways to think about these deployments, most of our customers in retail is they'll prototype, right? They'll prototype stores, they'll try different configuration, they'll see what's happening and then they'll expand those within a region, within a geo and they'll keep going. So again, still early days, but we like the progress we see. We think this is a durable trend and it's really because of, 1, the maturity of the technology and the returns and our position here is strong. So we're excited about this.

Speaker 4

Thank you, Matt, for all the details there. I think it's an important point on the returns for the customer. I guess as my second question, sort of similar, but on the smart metering market, you guys had a lot of success in the UK in some of their programs a few years ago. And it seems like there's some developments in different countries. You mentioned Japan in your prepared script, Matt.

Speaker 4

Maybe you could just kind of level set us on the different programs that your customers have in flight now in the different regions and what we should expect from that market in the next, I don't know, 24 months?

Speaker 2

Sure. Maybe to compare and contrast the DSL a little, more mature market in the grand scheme of things. Market dynamics are very different in terms of the rate and pace at which it moves. These things can be out there for 10 or 15 years in terms of life cycles. But big picture, again, very well positioned market leader.

Speaker 2

That market leadership is a function of having all the requisite technologies our customers need. It's not just one technology, it's multiple technologies that we have to bring together across sub gigahertz and Bluetooth, Wi Fi all coming together as we mentioned in the prepared remarks. And the way it started, as you mentioned, rollouts like we saw in the UK, but a couple of phenomenons. One is the rollouts you'd expect, it takes years for these deployments to happen and then you'd expect kind of a peak and then the business to roll off. What we're seeing is it's much more resilient and durable because once the rollout kind of gets to its saturation, if you will, they start renewing the meters on the back end of that.

Speaker 2

So we're seeing a lot more license stability in each deployment than I think would have been originally expected. And you only know that as this technology becomes more mature and you get to see it. And then we're also seeing new deployments go out globally. And that's important, right? So across new geos, new applications, and this is brought, this is gas, water and electric.

Speaker 2

And you can really just see again that combination of the maturity of the technology, the reliability, the robustness and the returns for those customers. Putting that intelligence inside of meters gives returns for those deployments. And it can be different depending on the GEO and their care abouts and what they're trying to accomplish. But the point is, they see the returns and they see the technology maturity and we have a leadership position there. So we think that's a very long term robust and reliable space for us.

Speaker 2

And we don't take that for granted and we're not doing a victory lap in the sense that this is done. It's still early days, but we're well positioned to continue bringing new technology to the space and continuing that leadership with what we have in Series 2 and what's coming with Series 3.

Speaker 4

Really appreciate the thoughts. Best of luck as we get through the cyclicality here and back to the growth vectors. Thanks guys.

Speaker 3

Thanks Matt.

Operator

And our next question will be coming from Thomas O'Malley of Barclays. Thomas, your line is open.

Speaker 5

Hey, guys. Thanks for taking my question and welcome, Dean. My first one was just on pricing over the last couple of quarters. It's really held in a lot better than some would have imagined kind of on the upswing. Could you guys talk about when you look at September just kind of taking the assumption of just a little bit of pricing decrease, the midpoint of your guidance assumes another robust step up in units.

Speaker 5

Is that how we should be thinking about the next couple of quarters on the revenue upswing? Is it largely driven by units? Or should we be seeing any sort of ASP tailwind as we get some of the upgrades to your newer products?

Speaker 3

Yes, Tom, good question. This is Dean. Thanks for the warm welcome. On the ASP front, largely what we saw in the June quarter and then now what we look into the September quarter guidance is primarily a function of mix. In the June quarter, actually, we ended up shipping quite a bit more direct customers than we typically would.

Speaker 3

What we find is that the mix of products and the ASPs between direct versus channel is just a little bit different in the nature of long tail versus large consolidated customers. So I wouldn't read into that too much. Pricing continues to be relatively stable. There hasn't been a whole lot of change in the last couple of quarters from what I can ascertain. And as I look forward into probably the next couple of quarters, at least what we can see on the visibility front, I don't think you'll see much change at all from a sort of like to like, so customer on customer ASP change, if that helps, Tom.

Speaker 6

Yes. That's super helpful.

Speaker 2

Go ahead. I'll just add to that. Exactly. And easy way to think about it is no big change in the pricing environment out there. And what we're seeing right now is, as we've said, really a function of our mix.

Speaker 2

So as revenue goes up and that mix continues to change, you'll see the gross margin improve and that's what we're guiding from Q2 to Q3, which is really important for people to understand.

Speaker 5

Yes. And I think like the second part of that is obviously the mix back to disti. So you said disti was 55 days. If you look over the last three quarters, similarly, it's gone from like 63% to 66% to 69% of revenue. Can you just talk about like the cadence there?

Speaker 5

Like do you think 55 days is a place where you're going to start to see some of these guys being more aggressive? Like what's the right target for disti? And like in terms of how quickly you can get back to what was the norm, which is low 80s by my math, like how long do you think that takes? Thank you, guys.

Speaker 3

Yes, that's right. I think that replenishment is probably, I'll call it like roughly 2 quarters to sort of keep moving. Look, we've deliberately been shipping left into the channel to try to continue to burn down inventory as the channels and customers also look to burn down inventory. What has happened is that's gotten lower than we typically expect. Typically, Tom, we would probably look at 70, 75 days as kind of the healthy sort of channel inventory mix.

Speaker 3

Like you said, we're at 55 today. Look, I think customers and distributors, they're all sort of watching it and nobody's in a hurry to sort of replenish quickly and we're not pushing for that just to be clear about it. I do think we ended the quarter at about 69% of our revenue coming from channel. Typically, like you said, we are 80% kind of channel based and about 20% direct. So I do think as channel inventory comes down, starts to replenish those long tails end customers burn through their final excess inventory and start coming back into a normal run rate, we'll keep moving up towards that more normal distribution versus direct set of business.

Speaker 3

And then hopefully over the course of the next couple of quarters, distributors are comfortable holding a more normal inventory level. And we'd like to see that back to the 70, 75 days. But like I said, I would just reiterate, we're not pushing for that. And that is not something that we're contemplating in the September guide as we talked today.

Speaker 5

Thank you, guys.

Operator

And one moment for our next question. Our next question will be coming from Quinn Bolton of Needham. Your line is open, Quinn.

Speaker 7

Hey, guys, and welcome. Dean, I guess just a quick clarification on your answer to Tom's question there. Dean, it sounds like you're sort of saying or implying that the distemix does normalize. I think you said over a couple of quarters, but I'm hoping to try to pin you down a little bit more. Do you think it normalizes by the end of this year?

Speaker 7

Or do you think the disti mix takes into calendar 2025 before you get back to that more typical 80% of sales level?

Speaker 3

Yes, I don't have a perfect crystal ball, Quinn. But if I were a betting person, I really would sort of put highest odds on early 2025 rather than getting all the way there back to normal by the end of this calendar year. So that's for what I can see on backlog and the way customers are behaving, it's probably early 20 25 rather than a end of 2024.

Speaker 7

Got it. And then I guess my first question is kind of knowing that mix towards disty is helping somewhat, but you're not fully there in the September quarter that the roughly 200 basis point margin improvement in September feels like some of that probably is it's not entirely all distemix. And so can you just kind of walk us through what are the biggest drivers of the gross margin improvement in the September quarter beyond the mix back towards disti?

Speaker 8

Yes. I mean there's channel,

Speaker 3

there's product specific and then there's absorption of overhead. So I think all three contribute to differing levels. In the move from June quarter 50 3 to now guiding September quarter 55, that 200 basis points, it's largely around channel and product mix. So if I look at it, it looks like better margin products are likely to ship into September quarter. Channel will continue to probably make some progress as an overall mix of the revenue.

Speaker 3

And then to a lesser degree, but certainly contributing factor in growing the revenue by $20,000,000 sequentially, that has an overhead absorption contribution as well. And when I think about September quarter 200 basis points and then going forward for there, I think about September is 55% is sort of back into kind of the normal range. And then as we sort of sequentially grow from there, okay, channel sort of contributing and then overhead absorption contributing and probably less so than a specific set of products or a specific set of customers as being probably 3rd on the list as I look forward over the next few quarters.

Speaker 7

Got it. Thanks, Steve. And then I guess just obviously continuing to digest inventory albeit at a lower rate into the second half of the year. Any updated thoughts on when you think you'll largely be back to shipping in line with consumption? Is that something you think happens by year end?

Speaker 7

Could you see some customers continue into early 2025? Just any updated thoughts on when you think you're largely back to shipping in line with consumption?

Speaker 3

Thank you. It's actually it's a tough question. I know a lot of people have that on the top of their list. When do we get back to sort of regular consumption. Look, for us, it's difficult to tell.

Speaker 3

I don't think anybody has any great precision on this one. Look, we're looking at trends. Are things trending in the right direction? Are bookings coming up? Is POS coming back?

Speaker 3

Our inventory on the customers that we survey coming down and therefore sort of the excess is bleeding off. Those indicators are all going the right direction. When we're back to full sort of call it regular normalized consumption rate, I don't know. I don't have a great prediction. Think it's also clouded by a number of new designs that are now starting to hit production as well that are contributing that also mask it to some degree.

Speaker 3

And you have to imagine a company like Silicon Labs with thousands of customers, there's no one generic answer that's going to be a great fit for everything. So long story short, don't think we're quite there yet, but really tough to call when and what level that kind of normal consumption rate is. I don't know, Matt, if you wanted to add anything.

Speaker 2

No. I think that's 100% it. Maybe the only thing to add is clearly Q2 is not at our consumption levels and neither is our Q3 guide. And as Dean said, I think the 3 kind of pillars we've talked about are to drive growth, the inventory destocking going in the right direction, but not done yet. Design win ramps, that's encouraging that we've been on an incredible design win pace over the last few years.

Speaker 2

We've been driving design win growth annually throughout this cycle, which is remarkable. And we're finally starting to see those designs ramp. It's early days, but they're ramping. So that's going to give us some lift moving forward in addition to the destocking as that starts to wind down at some point. And then the 3rd pillar is the end market, which is obviously the most difficult to call.

Speaker 2

But like the progress on destocking, like the progress on design wins, still watching the end market because still a fair amount of uncertainty out

Speaker 6

there. Got

Speaker 7

it. Thanks, Matt. Thanks, Dean.

Operator

And our next question will be coming from Srini Pajjuri of Raymond. Your line is open.

Speaker 6

Yes, good morning guys. Maybe first one for Matt. Matt, you talked about design win momentum being pretty strong. Maybe you can give us an update in particular on the Wi Fi market. I know you talked about some progress on the smart metering.

Speaker 6

Just curious as to what end market I mean, obviously, this is a very large market when we talk about Wi Fi. Metering, what are your target markets with this product? And how much of the overall SAM do you think you're addressing? And how should we kind of think about revenue contribution from Wi Fi as we think about the next 12 to 18 months?

Speaker 2

Got it. I was just taking a lot of notes there. See if I can answer as much of that as possible. First, we are early days in WiFi. As we've said, we're introducing our first product of many in the space.

Speaker 2

What is exciting is that first product is getting a great market reception. We've shared that the opportunity funnel was record as we for us as a company, as we introduced that product. Shared in the prepared remarks, we're starting to convert those opportunities to design wins, which is really awesome to see. Once you have design wins, it's going to take depending on the product application customer, geo, etcetera, you're going to see a year or 2 to start to see those ring. So the quick answer is, I would expect to see WiFi growth continuing and if not accelerating going into 2025 and 2026.

Speaker 2

In terms of the SAN, the products, those types of questions, we are focused right now on, for lack of better term, our backyard. And our backyard is 1 by 1 Wi Fi 6 or IoT applications at the edge. And what we're bringing there is, as I've said a few times, is the world's leading power consumption, which brings new to Wi Fi battery life to those applications. So where we're seeing designs, we're seeing designs where someone needs longer battery life that's meaningful. And we're also seeing a lot of design wins in markets where there's pull through with our existing customers.

Speaker 2

Because of our large base of customers and we serve a lot of other wireless technologies in those spaces, we see almost instant opportunity and interest in having one supplier put all these things together for those customers. So that's kind of the quick answer of the where and that. And important way to think of it is, as you said, this is a big market and these things take time. So first product, like what we're seeing out of the gate, it's a lot of work, but it's going in the right direction and you should expect to see multiple products coming as we move forward that continue to build out that position, expand the SAM and increase the capability and offering that we offer the customers in those markets.

Speaker 6

Got it. Thanks, Matt. Very helpful. And then, I have a question on competition, in particular, in China. You talked about smart metering.

Speaker 6

It sounded like you're not participating in the China smart metering market. Just wondering if there's any reason for that. And in general, we've been hearing about increased competition from domestic suppliers. So if you could talk about what you're seeing in that market, that would be very helpful.

Speaker 2

Yes, sure. So the quick answer is why not China in terms of the local market there. The quick answer is it's not for lack of competitive solutions. We have full stop the world's leading solutions for intelligent metering. That's one that you can imagine that they do not want a foreign supplier providing the technology behind their infrastructure.

Speaker 2

That's the fastest way to answer that question. We do see opportunities in China for export of meters that would go outside of China, but not for ones to be consumed inside of China. So I don't think that should be surprising to anyone. It's a pretty common dynamic and similar to what we see in other geos, including U. S.

Speaker 2

And Europe, where I don't think the Chinese supplier would be considered for smart metering infrastructure. In terms of kind of the next clips on that, nothing new. In China, you only win if you have a solution that there's no alternative to and local suppliers are favored. That's not new. It's probably amplified over the last few years.

Speaker 2

What we're seeing right now is still strong design win momentum in China. But in terms of strength of the end market, it's still relatively weak, although we have seen some improvement, it's gone up for us, but nothing that we're banking on or building into our forecast or numbers. So hopefully that's helpful.

Speaker 6

Yes. Thanks, Matt, and welcome, Dean.

Speaker 3

Thank you.

Operator

And our next question will be coming from Kyle Smith of Stifel. Kyle, your line is

Speaker 9

open. Good morning, everyone. Kyle Smith on for Tore Svanberg at Stifel. First off, congrats on the continued sequential growth and the record design wins in multiple end markets this past quarter. Maybe I could start there.

Speaker 9

So maybe I know we've commentary on pricing trends you're seeing within these new revenue streams, that would be great.

Speaker 2

Okay. So I'm just trying to let me try to answer the design win piece. So the quick answer is, we've talked quite a bit about the trend of our design wins. We haven't shared the magnitude, but the way to think about the magnitude is we always look at our design win targets in the sense of what levels of design wins do we need, all things considered to make sure we're driving the financial model that we talked about, which you're well aware is that 20% compounded revenue growth over time. So we have been successfully securing those amount of design wins on an annual basis, if not more.

Speaker 2

And we've seen that continue to grow annually throughout this entire market cycle and over the last few years, which is really incredible when you consider that normally you do see as you go through a trough or any part of the cycle, you usually see design wins somewhat correlate to revenue and go down. We're not seeing that. We've seen design wins growth and strength. So that's been exciting. That's encouraging.

Speaker 2

That's what we want. I think the piece that's been maybe disappointing and discouraging is a lot of those design wins have at ramped when we wanted them to or when they were expected to, we expected a lot of design wins at ramped last year. And that didn't happen for various reasons, supply constraints, product strategies, etcetera, not lost, not going away, but for the most part delayed. But as we're sharing today, we are starting to see those ramp. And that's really exciting.

Speaker 2

We're not talking one customer, one geo. We're starting to see as the market works through this last few years, we're starting to see a lot of those start. And the durations can vary, right? Some last for a decade, some last for 2 or 3 years, but those are starting to ramp. And as we've shared, it's brought across multiple applications.

Speaker 2

So early days, but we like the trend that we're seeing and I think that's what gives us the confidence to say we can continue to drive sequential growth from here.

Speaker 9

Great. Thank you. And for my follow-up, I would ask, I know you mentioned that both business segments are expected to grow in the September quarter, with growth being led a little bit more by Home and Life. Maybe if you could add any additional color there on how you see that revenue split, both in September and exiting the year, that'd be great.

Speaker 3

Yes. We don't Kyle give specific quantified split between the 2 different areas when we guide going forward. But a couple of observations that we've seen as we look into the September quarter and sort of guiding up, we do see as the Home and Life is likely to grow a little bit faster in the upcoming quarter than the industrial commercial. A couple of factors, one, look home and life actually went into the down cycle earlier than the industrial commercial. So we're starting to see that emerge just a tad quicker from at least what we can see.

Speaker 3

Even though June quarter, both of those businesses grew pretty much in line, 39% growth, 35% growth, so pretty consistent across the 2. Home and life though specifically has some new product ramps that are starting to take foot in the September quarter that we can see. And I think that is sort of pulled just the sequential growth between the 2 just to be a little bit more in favor of home and life rather than industrial commercial. Although in our prepared remarks, like we said, both are growing and both are growing across multiple of their end applications.

Speaker 9

Great. Thank you.

Speaker 3

Yes. Thanks, Kyle.

Operator

Thank you. And our next question will be coming from Cody Acree of The Benchmark Company. Your line is open, Cody.

Speaker 10

Yes. Thanks guys for taking my questions and welcome Dean. I guess you've taken a stab at when you start shipping back the consumption, but any color on what that consumption level is currently or expected to be in September?

Speaker 2

Yes. I think the quick answer that I mentioned earlier is Q2 levels are not a consumption and the Q3 guide is not a consumption. So that's as far as we've gone and trying to articulate that. I think the other piece is the end customer inventory, which is improving. But as we said in the prepared remarks, we still while we see improvement in the number of customers getting to right levels of excess inventory or right levels of inventory, we still have some big customers out there who are carrying more than they should.

Speaker 2

So we got to see all those factors play out, but not there yet in Q2 or Q3.

Speaker 10

And I guess, with your guidance, your $20,000,000 sequential increase, that's obviously a very good number, but it is somewhat of a deceleration from your Q2 growth. Anything to make of that deceleration? And what does that say about your December outlook?

Speaker 3

Cody, I would just take it as

Speaker 8

on a sequential basis, it's still probably one

Speaker 3

of the strongest sort of growth numbers. Probably you'll see across most of the semiconductor peers. We're early in the earnings cycle, so we'll see where everybody sort of shakes out for the September quarter. But I do think it's probably strong relative to probably many of the peers that you'll see probably in the coming quarter. The other thing I would say is, look, given that the downturn was very rapid in Q4 of last year, I think the teams made really good fast progress and had sort of pretty big uptick in the March quarter and the June quarter.

Speaker 3

And I think you would logically see at some point, you just don't see such big jumps. And what we're starting to see is we're working out sort of the finer details. So the jumps will actually be probably smaller from here rather than continuing every quarter sort of a $40,000,000 increase would be sort of my expectation. We would just normally see this.

Speaker 2

And it's important to remember that while we're trying to be very clear and consistent that we're seeing encouraging signs and the trends are in the right direction, between those three pillars of the inventory destocking, design win ramps and then the end market itself, it's difficult to call the rate. So and of course that would be helpful if we had a perfect crystal ball there, but the trend is right and encouraging, which I think is the most important.

Speaker 10

Great. Thanks guys.

Operator

And our next question will be coming from Peter Pang of JPMorgan. Peter, your line is open.

Speaker 8

Hey, guys. Good morning. Welcome, Dean. I just want to follow-up on the China point. We heard from a few of your peers that China market is rebounding, but it seems like you guys are not seeing yet.

Speaker 8

Last quarter, it was like 13% of sales. Maybe if you could just talk about what your expectations are for this market longer

Speaker 2

term? Sure. Yes. I think the quick answer is we are seeing some improvement there, but we're not banking on it for our future is the quick answer. I think at our lowest, it was China was probably 10% of revenue going up to 13% going up to 15%.

Speaker 2

So and our total revenue is growing as well. So we're seeing some improvement there, but I think it's really important that we set expectations accordingly. There's still a lot of uncertainty in that end market. There's still a lot of geopolitical challenges and headwinds. We talked about that earlier around favoring local supplier.

Speaker 2

So we will opportunistically do anything and everything we can to get design wins there and we're seeing progress, but we're not banking on it for our future and we don't need it to deliver the numbers that we talk about. So hopefully that helps frame it.

Speaker 3

Great. Thank you.

Speaker 8

And then in your prepared remarks, you talked about some integration of AIML into your Series T2 platform. And maybe you could spend some few minutes talking about what are the use cases and so forth for it that you're seeing from your customers?

Speaker 2

Yes, sure. So as I said in the prepared remarks and hopefully that was helpful for people to understand, what we're seeing there parallels what we've seen in a lot of other technology areas that we've brought to market. So think of this recurring dynamic where we bring something to market that is ahead of the customer need and over time the customer need moves into what that portfolio offers. Security is a great example. When we introduced security levels that we had like the first to have PSA level 3 on Series 2, people are like, that's overkill.

Speaker 2

Now we're winning design after design because of it. And we've seen the same multi protocol. The levels of multi protocol and coexistence performance we brought to the market. A lot of people said, how many applications will need all those different wireless technologies? They do.

Speaker 2

That's happening now. We're winning designs because of it. We see AIML as the exact same thing. We've brought multiple solutions to market that are in production that are AI, well specifically the machine learning cores or accelerators that we have built to allow machine learning inference at the edge on battery powered applications. And we've really taken our expertise in ultra low power to bear and brought that to this space.

Speaker 2

So I'd still call it early days to be direct in terms of the customer adoption, but it will be what we see in these other areas. Customer interest is high because of the strength of our offering. We get right in the front in terms of the engagement and we're seeing customers work through how can they deploy machine learning in their applications and we see that accelerating and the rate is increasing over the last year or 2. So I think you're going to see that continue and we like the trend that we're seeing there. And as we've already announced in our Series 3, that will bring a whole new level of machine learning capability to the IoT, which is also very exciting.

Speaker 2

But we already have the industry leading solutions on an ML perspective and they're in production today.

Operator

I'll now hand the call back to Giovanni Pacelli.

Speaker 3

Thank you, Tanya, and thank

Speaker 1

you all for joining this morning. This concludes today's call.

Powered by Quartr

Key Takeaways

  • Silicon Labs delivered strong Q2 results with revenue of $145 million, up 37% sequentially and above guidance, while non-GAAP EPS of –$0.56 beat expectations.
  • Customer inventory levels continued to normalize—distribution channel days of inventory fell to 55 days—but remain below the company’s 70–75-day target, with a full return to normal expected by early 2025.
  • The design-win pipeline hit records in both Industrial & Commercial (notably Smart Cities) and Home & Life segments, with key production ramps in insulin management, electronic shelf labels (cumulative 300 million units shipped) and global smart-meter deployments including a major win in Japan.
  • New product momentum includes the ultra-low-power Wi-Fi 6 917 solution, industry-leading PSA Level 3 security and on-chip AI/ML in Series 2 SoCs, and the first samples of the next-generation Series 3 platform.
  • For Q3, management guided sequential revenue growth to $160–170 million, non-GAAP gross margin of 54–56%, non-GAAP operating expenses of $101–103 million, and a narrowed non-GAAP loss per share of $0.10–0.30.
AI Generated. May Contain Errors.
Earnings Conference Call
Silicon Laboratories Q2 2024
00:00 / 00:00