Q1 2020 Earnings Call

Yes.

Good morning. My name is Chuck and I'll be your your conference operator for today at this time. I would like to welcome everyone to the Silicon Labs first quarter of fiscal 2020 earnings conference call and webcast off. All participants will be in a listen-only work. So do you need assistance, please signal conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 or your touch-tone phone to withdraw your question, please press star them to please note that this event is being recorded. I would now like to turn the conference over to Jillian Hoover director of investor relations wage in international finance Saleem, please go ahead.

Thank You Chuck and good morning everyone Tyson shuttle chief executive officer and John Hollister Chief Financial Officer are on today's call Tyson will provide a brief introduction before we discuss our financial performance and review our business activities for the first quarter after our prepared comments. We will take questions.

Our earnings press release and the accompanying Financial tables are available in the investor relations section of our website at ww.w. This call is also being broadcast and a replay will be available for four weeks. Our comments today will include forward-looking statements subject to risks and uncertainties. We base these forward-looking statements confirmation 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.

Certainly during our call today. We will refer to certain non-gaap financial information a Reconciliation of our gaap to non-gaap results is included in the company's earnings, press release and the investor relations section of silicon Labs website. I would now like to turn the call over to Silicon last chief executive officer Tyson title.

Thank you Jolene. So looking Labs is a global company with our headquarters and about half of our employees based in Austin. We have a substantial Global design and sales presence including design some trainers and sales offices in Europe. And Asia are international headquarters is in Singapore where we manage our operations and supply chain and engage in design and customer support.

As we Face the unprecedented covid-19 pandemic challenge the health and safety of our employees customers partners and communities remains a top priority today. Most often employees working world wide or working from home under local shelter-in-place mandates, and some with roles deemed essential to the business have on site access.

We're thankful to have the collaboration tools and remote working infrastructure in place to facilitate a relatively smooth transition as our Global teams Advanced toward weld established goals.

We are delighted to announce the close of our acquisition of Red Pine signals connectivity business yesterday, which we first announced in March. I credit the successful acquisition the hard work of everyone involved as well as our ability to collaborate on a global basis even in the face of a challenging environment brought on by the pandemic.

I'll talk more about our web client acquisition later in the call.

In addition to closing Red Pine our Global sales team serves as another great example of how we are leveraging technology and tools to maintain and even increase customer engagement is evidenced by strong attendance in our new home Live tech talks virtual training session design activity continues to be robust as we actively engage with customers enabling them to evaluate wait our products and Technologies with easy-to-use development kids and simplicity Studio software tools.

And finally to date we have committed approximately $300,000 to the Global covid-19 Response and continue to work with Community leaders to explore additional opportunities to help em all now turn the call over to John to discuss first-quarter financial performance in our second quarter Outlook and I will follow up with additional business highlights, John.

Thanks Tyson on March 12th. We hosted silicon Labs third analyst day at our Global Headquarters in Austin our first ever virtual analyst a attracted more than 250 attendees. It was a great opportunity for our leadership team to provide updates on our strategy and long-term growth potential.

If you were not able to join our virtual event, we encourage you to review the presentation and replay which are available in the investor relations section of silicon Labs website.

At our analyst day of the we announced our decision to revise our external reporting categories from 4 and 2 to the two categories are now the internet of things which is unchanged and infrastructure end Automotive, which combines the infrastructure broadcast and access product categories in to one.

The simpler approach reflects the evolution of our business with iot not representing more than half of Revenue as well as an increased focus on the growth drivers within our primary to reporting categories.

Moving on to first-quarter financial performance revenue and it's stronger than we expected at $215, which was about ten million dollars above our updated guidance range and too up for Thursday.

Iot Revenue ended at $118 down about 8% sequentially and up 11% year-on-year.

We saw sequential growth in 32-bit MC use Bluetooth and Z-Wave with other products down primarily related to softness and China through mid-quarter.

You're on your Revenue growth was led by followed by strength in 15. For wireless products for home automation security and lighting applications.

infrastructure and Automotive Revenue

ended at ninety seven million dollars exceeding expectations and up 6% sequentially with infrastructure and broadcast products delivering sequential gains and access down and they grew 19% year-on-year led by strength in sales of isolation products for industrial automotive and solar applications and ramps and TV and Automotive radio wage earner programs using our broadcast products.

By End Market Automotive. Revenue was up sequentially following a depressed Market in 2019.

Revenue from consumer was also up for the quarter.

Revenue from Communications and Industrial markets was down.

Looking at sequential Revenue by geography results were mixed with first quarter a pack Revenue down sharply, whereas revenue and both the Americas and Europe were up.

Revenue from our top ten and customers was 21% of total revenue consistent with 2019.

Revenue from distribution was very strong at 76% of total revenue up from 74% in Q4.

Distribution inventory increased significantly in q1 with our approximate 20% sequential increase in units and ending within our target range at 54 days in the channel up from 38 days.

I got gross margin was favorable at 60.4% based primarily on strong infrastructure products mix.

Non-gaap.

Operating expenses ended about where we expected just over ninety six million dollars.

Igap R&D expenses were $55 million dollars up about 3 million sequentially and non-gaap sg&a expenses were forty 1 million dollars up about 2 million.

Primary drivers behind the effects increase our additional salary due to the extra week of the quarter along with the typical annual increase in first quarter payroll tax expenses, which wage actually offset by lower variable compensation and travel expenses.

Non-gaap operating margin for q1 was 15.4% which is up about fifty basis points from the same. In 2019 driven by Revenue outside and strong gross margin performance.

Our non-gaap effective tax rate ended at 10% Non-gaap earnings per share were $0.69 up 17% from q1 2019 and also above our revised guidance office.

On a gaap basis first quarter gross margin ended at 60.1% operating expenses were $125 million dollars up about $5 million from to 419 with R&D expenses at seventy 1 million and sg&a expenses at fifty-four million for the quarter few in stock compensation expenses were $15 or about 7% of rep and amortization of intangible assets was around ten million both as expected.

Yeah, burnings also ended above revised expectations for the quarter at $0.05 per share.

Turning now to the balance sheet. We ended the quarter with cash and Investments of one point 1 billion dollars first quarter cash flow from operations was robust at sixty million dollars up about 90,000 from the same. In 2019 resulting from strong Collections and effective working Capital Management.

Accounts receivable was down slightly from Q4 ending at seventy-five million dollars and representing 31 Day sales outstanding drug shipments in the second half of the quarter drove a 5 million digit decline in inventory ending at sixty-eight million dollars and representing inventory turns of five times, which is the upper end of our target range.

In q1, we executed $16 in our share repurchase program at last week's board meeting. We determined to suspend our buyback activity in light of ongoing coronavirus pandemic.

Toward the end of q1. We drew down three hundred three hundred and ten million dollars from our bank credit facility to fund the acquisition of Red Pine signals and also out of an abundance of caution uncertainties surrounding the current environment.

overall our balance sheet remains very healthy

We continue to be very well positioned in Target markets and we saw very strong design when activity in q1 surpassing recent quarters and on track with 20 20 goals Revenberg bookings accelerated in the latter part of the quarter allowing us to exceed revised expectations.

while it is

For calls to ascertain we acknowledge that some portion of first-quarter booking strength and upside Revenue performance may be due to customer uncertainty regarding the global supply chain.

Current macro environment is challenging with the depth and duration of the pandemic related downturn unknown and impacting our ability to predict our financial performance. We are taking steps to protect profitability including slowing the growth rate and operating expenses by prioritizing hiring virtually halting travel and participation and events worldwide off and judiciously evaluating discretionary projects and expenditures.

Based on these factors. We are expanding our guidance range to reflect increased Market volatility and greater uncertainties.

Expect near-term pressure on revenue and do see more downside risk than upside opportunity in our guidance.

I will now cover guidance for the second quarter which includes Red Pine signals connectivity business.

We expect Q4 Revenue to be in the range of 192 210 million dollars with iot and infrastructure and Automotive down.

We expect our non-gaap gross margins to be 61% and our non-gaap operating expenses to decline to approximately 92 and 1/2 million dollars.

Expect our non-gaap effective tax rate to be 10.5% and non-gaap earnings per share to be in the range of $45.68 on a gaap basis. We expect our gross margin to be 60.5% operating expenses declining to approximately $120 million dollars expect gaap earnings to to range between a $0.26 loss to a $0.03 loss per share.

As a reminder these guidance ranges include the acquired Red Pine signals connectivity business.

I will now turn the call back over to Tyson Tyson.

Thank you. John first-quarter. Revenue was considerably stronger than expected with sequential growth and infrastructure and Automotive Products driving the upside q1 Revenue wage up 14% year-on-year. We are pleased to have seen minimal disruption in our supply chain during the covid-19 pandemic with bookings and revenue strong late in the quarter.

We remain in close communication with our Global suppliers who continue to report strong demand.

Year-to-date design win lifetime revenue and our opportunity funnel. We're up approximately 10% year-on-year in q1 highlighting the resilience of our portfolio.

Silicon Labs has maintained a fabulous model since our Inception this enables us to adjust the upsides and downsides and demand and ride out challenging Economic Times without impacting our gross margin compared to peers with large fixed costs due to internal manufacturing operation.

Believe our strategy targeting large high-quality and diverse growth drivers in the iot communications infrastructure and electrification combined with the energy industry leading Technologies. We bring to bear Pub will continue to drive long-term growth and improved profitability as we scale our business.

Moving on to product category updates in iot we believe the demand for connectivity and intelligence and in node products will increase during our q1 analyst Day event. We announced the acquisition of wage and signals Wi-Fi and Bluetooth Business Development Center in India and extensive patent portfolio, which closed yesterday. We are very excited about this acquisition, which is highly complementary to our iot strategies and will expand our leadership and wireless iot technology.

Red Pines low-power Wi-Fi products and intellectual property provide an important technology for iot connectivity Wi-Fi 6 or 8:02. The latest evolution of the Wi-Fi standard is tailored for iot application and will become a key Wireless technology to meet the low-power performance security and interoperability requirements needed and environments with hundreds of thousands of connected devices Red Pine has been developing Wi-Fi including my Mo and ofdm Technologies for the past two decades and has a class-leading solution with a number of important design wage.

The integration of these Technologies and to Silicon Labs Wireless platform will substantially accelerate our roadmap. We expect the addition of the acquired products and Technologies into our worldwide sales and distribution network will drive further momentum and smart home Industrial and Commercial Market.

Yeah position also includes Bluetooth classic IP for audio applications including wearables terrible voice assistance and smart speakers.

In addition to gaining high-quality connectivity Technologies, the Red Pine acquisition brings a culturally aligned team of about two hundred employees in Hyderabad, which is one of the most talent-rich locations in India as we shift our Focus to Simplicity and scale and slab 4.0 silicon Labs next Evolution. We expect to leverage this development site to more efficient wage scale our R&D efforts across the board from Silicon and software to the cloud.

Fundamentally Simplicity underline silicon Labs values and strategy from our company culture to how our teams work together in the way. We develop products and platforms to drive R&D efficiency Simplicity applies to creating an out-of-the-box experience collaborating with customers and partners and scaling sg&a and sales efforts to drive additional growth achieving Simplicity and scale wage Drive incremental profitability and growth over time.

Device security is gaining the attention of end users and Regulators alike becoming a must-have Foundation to enable the iot to reach its growth potential to address this need down the corridor. We announced Secure Vault technology for our wireless gecko series to platform Secure Vault combines Advanced security software features with physically unclothed function Hardware technology delivering the most comprehensive Suite of security capabilities for connected iot products in the market.

Providing a combination of hardware and software features Secure Vault makes it easier for product manufacturers to protect their brands product designs and customer data.

Integrating security within the wireless SOC helps designers simplify development while making it possible to securely update connected devices over-the-air throughout the product life cycle.

These new security features are ideal for companies working to address emerging regulatory measures such as gdpr in Europe and SD 327 in California.

Secure Vault provides a number of important features for iot products including secure key and management storage and advanced tamper protection.

Secure device identity address is post-deployment authentication. One of the biggest challenges for connected devices silicon Labs Factory based trust provisioning provisioning service provides a secure identity certificate during I see manufacturing analogous to a birth certificate for each individual silicon died enabling post-deployment security authenticity and attestation based off checks.

The device certificate guarantees the authenticity of of the chip for its lifetime our wireless tax leverage secure vaults key storage to provide the complete set of configurable directors and responses protecting encrypted Keys against tampering.

During the quarter. We announced two families of Wireless gecko series to system-on-chip devices designed for power and sized constrained iot products our new combination of ultra-low transmission receive and deep sleep mode power delivers exceptional Energy Efficiency.

Additional low power on chip features such as r s cents which wakes the SSC in the presence of RF energy further extend the operating life of battery-powered iot products.

Silicon Labs new mg 22s OCS Target eco-friendly iot products deployed and 15.4 mesh networks optimized for Ziggy green power applications the m g 22 families ideal choice for zigbee devices powered by coin cell batteries or energy harvesting sources Target applications include smart home sensors lighting controls and building and Industrial log.

Our new f g 22 s s. He's delivering an optimal combination of features to allow industrial and consumer customers to address proprietary protocols in the 2.4 gigahertz band wage, including Advanced security class-leading Energy Efficiency and easy-to-use software tools Target applications include electronic shelf labels building security automation sensors and lighting module.

Turning out of infrastructure in automotive. We saw robust design win activity for our timing products in q1, the covid-19 pandemic has underscored the internet's foundational importance for people and businesses everywhere driving a substantial increase in the demand for bandwidth, for example at the end of March Verizon reported a 25% increase in network traffic since large same scale social distancing measures were first put into place in the US the critical need for internet connectivity combined with government surplus stimulus. And in China will expand demand wage Communications and Optical infrastructure where we are well-positioned. We continue to expand our infrastructure in automotive portfolios to address new markets and application needs off during the quarter. We introduced a comprehensive power-over-ethernet portfolio that reduces the cost and complexity of adding to power sourcing equipment such as Enterprise switches and powered devices off.

Is 5G small cells are IEEE standard compliant portfolio more than doubles conventional performance while expanding the capabilities of wireless access points in iot Gateway helping to make p o e powered 5G small cells and digital buildings the Practical reality spanning both ends of the ethernet cable from 15 watts to 90 Watts off our new p o e portfolio gives developers flexible options for a wide range of applications.

Isolation achieved record Revenue in q1 with strength and strength and sales for industrial automotive and solar application our isolation products continue to replace traditional optic couplers and outperform competing digital isolators enabling Superior search performance greater reliability higher integration and best-in-class safety for system designs requiring protection from high voltages.

We have established ourselves as the leading provider of digital isolation technology for the cloud Telecom solar and electric vehicle Market.

Since silicon Labs Inception we've delivered on our vision of being a leading provider of silicon software and solutions for a smarter more connected world. The Technologies were developing are connecting people everywhere driving supply-chain efficiencies producing energy consumption and ultimately making the world a better safer place.

Our focus on this Vision permeates our culture and our strategy. We believe the covid-19 pandemic is creating a new reality for how people work and live in an increasingly connected World. We're more certain than ever that we are developing the right Technologies and are competing in the right markets enabling silicon labs to exit this pandemic in a stronger position.

Thank you for your time and attention before we take your questions. I'd like to take a minute to thank Jolene for her many years of service and outstanding contributions to Silicon labs and I wish her the best in her life or career Endeavors. I'd also like to welcome George Lane who will be taking over for Jolene.

So Julie now, I'd like to turn the last call back over to you. Thank you. Thank you. Tyson is a very special place made so and large part by the amazing people throughout the life the company. I'm very proud to have been a part of silicon Labs success over the past 17 years and happy to pass the torch to George.

before we open the

Call for the question and answer session. I would like to announce our participation in callan's technology media and Telecom conference on May 29th, and seagulls cross-sector Insight conference on June 8th. Both using virtual platforms.

We would now like to open the call for your questions to accommodate as many people as possible before the Market opens. We ask that you please limit your questions to one with one follow-up check off. Thank you to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at anytime your question has been addressed and you would like to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

And our first question will come from Blaine Curtis with Barclays, please go ahead you see my question is kind of curious just talk about getting some kind of five million shipments the end of the quarter. It sounded like things are getting a bit better. You've seen some recovery in China. Then I think you made a comment that as you look at the guidance. There's maybe more risk of dog then outside. Can I just walk you through how orders event in April and any perspective on if you're seeing recovery in China, and then I guess, you know kind of put the two together that the outside the end of month to your by a slower looking for

Yeah playing this is John. I'll take a crack at this and then Tyson can can add something but you know bookings have been volatile. We saw pressure Club through mid first quarter with the shutdown in China where we saw, you know, a lot of companies and suppliers under pressure and in China due to the pandemic off that began to stabilize later in the quarter and we saw an uptick in bookings to round out the to round out the quarters. So, you know, we revised our guidance around the time of our analysts Day event and then ended up actually outperforming that given the the later strength and the and the bookings to round out the quarter, you know, there's there is uncertainty out there I guess is the best way to say it uncertainty and volatility that uh has us indicating probably a little more risk in the systems than has been the case before birth.

But we were pleased to see the upside in first quarter.

Yeah blame like maybe it's the this is Tyson. You know we've got there are the volatility is really around. There are a number of customers where plants are shut down in in different geographies and they are pushing out orders and we have an equal number of customers pulling in orders. We see China as rebounding strongly. We also are encouraged by the the fiscal stimulus activity in particular around some of the communications infrastructure side, and that will also bleed over onto the county side as well. So there's there are puts and takes but you know, and then we also have have, you know slowed down in the automotive Market, you know, we see a number of plants shutting down there. So there's there's kind of an equal number of of push-outs and pull-ins but it is it is more highly volatile than we see and and I think that as you look at the you know the wage

Economy and the and the the European economy out of an abundance of caution. It's it's not that it's seen.

You know we've seen that clearly in our booking patterns. The bookings have remained fairly strong as we as we go through the earnings call here in April, but the the the way through of that and that's that's the the reason for the abundance of cost that we have in our comments around the downside risk versus the upside list.

Thanks, and maybe a follow-up you kind of answered part of the Tyson, but in in terms of the supply constraints you're talking about. Is there any Supply constraints that are still open Labs related and then I guess Downstream autism kind of curious where else do you think about Supply constraints? They could add to this kind of order of its ability and upset.

Yeah from from our perspective our supply chain is is performing very very well. We we are able to to meet customer demand and you know within a month or lead times and and are not really seeing major impacts due to anything within our supply chain. So we we continue to operate virtually month. We've got a a work-from-home posture and we've been able to transition to to that very effectively. What I'm really talking about is that our end customers and then their customers our faith in you know, there are a number of of factories, you know, for instance, you know auto makers in the US and Europe have had have had shutdowns and and you've got some factories that are that are rolling through Thursdays is Coronavirus, you know related challenges and and so those are you know, having an impact on the ordering and there are other customers that are dead.

Accelerating orders, you know to to meet demand. So it's it's really a a mixed bag right now, but overall if you just look at the you know, the end markets and what we're looking at here in the US and Europe wage, we believe that that is going to to begin to flow through here at some point not just from the factory closures, but also the the decline in consumer demand and so we are being a process in our in our posture both from an object's perspective and from a guidance perspective relative to to those concerns. Yeah, just a quick add on there. You all have seen the news about restrictions and in Malaysia and the Philippines. We have a very limited production in those regions. We do have some products but it's fairly small volume. Most of our production is in Taiwan and Taiwan has dealt with the pandemic challenge exceptionally. Well, so as Tyson said we're we're doing well in that area.

great results in this backdrop

and our next question will come from Gary Mobley with Wells Fargo Securities, please go ahead.

Good morning, everybody. Thanks for taking my question wanted to start up, you know under the you know, acknowledging the the the fact that things are very fluid and and things are probably changing week-by-week for you guys and and us the twenty million dollar guidance range for Q2. So so I'm wondering if you can share some additional details with us regarding the difference between hitting the high end and and the low end of the guidance range maybe focusing specifically on you know was assumed interns business as we conclude with the the balance of the quarter.

Yeah Gary, this is John.

And you know, it's really going to going to depend on how our bookings role in I think we see opportunities in Communications and isolation as I clearly areas where we have upside opportunity Automotive is a part of the market that is logically going to be underneath her this year on the other hand. We have some new platforms that we have been designed into which are beginning to ramp into volume. So that is serving as a a countervailing effect on the the overall Automotive pressure that we believe is likely to materialize later this year and then, you know just in the broad industrial part of the world, you know, you'll have to see how things play out with businesses opening back up and factories coming back online as a swing factor. And the final point I'll make is China China has come back strong.

To round out q1 and begin Q2 and we'll see how that plays out as well. So those are some of the some of the factors. Okay Gary, I would also under that the month that we we have come into the quarter with with solid bookings and and and our well our bookings, you know, we're we're we're ahead of where we would typically be during the quarter. I think that's an evidence that folks are are ordering ahead a little bit and makes things a little bit hard to to predict and those bookings have remained strong with come into the quarter. There's just, you know, there's a lot of churn underneath the the covers there in terms of customers pushing out and pulling in and that's the reason for that that exceeds that guidance range. But but where we sit right now things are looking pretty solid but, you know given the level of volatility. We felt like we needed to open up that guidance range to give us a little bit of breathing dead.

Okay, thanks for that what the move on to gross? Margin you're guiding Q2 gross margin at the high end of of your long-term guidance range, and I'm just curious to know, you know, what's what's contributed that I'm assuming large chunk of that is is mixed related. But is it it all affected by the the acquisition or red team? Is it all is it all impacted by maybe some better cost structures from from your supply chain and whatnot. Yeah Gary, this is John. So, you know, it really is largely mixed driven with more of communications and Industrial mix in the numbers a bit less consumer mix there and the Red Pine business though, not a large factor in queue to give it a partial quarter, but the gross margins from the acquired Red Pine business our complimentary with our with our gross margin profile so that that helps a little bit.

Thank you guys.

And our next question will come from Tori vanberg with stifel please go ahead.

Yes, thank you. And thank you to Jolene wishing you all. The best first question is on the red paint contribution. I think you have talked about this being a 20 million thoughts run with business. So should we assume the contribution is is about 5 million then for the June quarter.

Yeah, Tori. So so we've just announced the final closing. We estimate the contribution to be at about half of that level for the partial quarter. So that's roughly 2 to 3 million dollars of contribution this quarter.

Great. Thanks. And as my follow-up to tisin tisin this year supposed to be the year of Bluetooth for you guys. You had some pretty big announcements at the beginning of the year. Can you just talk a little about how the design activity is going there? And you know, where do you expect to gain the most traction with your new Bluetooth products throughout the year what what types of applications Thursday? We are very excited about our our new bg22 device that we we announced last quarter and we continue to engage in a variety of power and cost in size constrained applications within the Bluetooth Market, you know, you've got got lots of consumer and Industrial and medical applications. Actually. There's a lot of really exciting stuff going on with you know, given the pandemic around personal medical and and connect the devices. Basically these devices connect up to your mobile phone and and we are doing this wage.

The device that has just extremely low energy consumption in a very high level of features at a very attractive cost point. So we've continued to engage and get kicked out into the market and development developer tools and we're holding a number of seminars and virtual training sessions and and I would say that, you know, the the activity there is very very high this also the Bluetooth Market represents a substantial portion of our funnel. We've got about three billion dollars of Lifetime Revenue opportunity in the funnel and we continue to engage strongly across the globe with these these new Bluetooth products as well as the new m g 22 and F G 22 that I talked about in the in the call. So those those those other products that we developed are also on the 15th on some of the proprietary products as well. So we continue to drive Innovation on the hardware side and on the software side with Bluetooth being just a great opportunity for share game and dead.

And and growth and i o t as we move forward.

Great. Thank you.

Our next question will come from Winnie put you r e s n b c Nico, please. Go ahead.

Good morning, guys. Thank you for taking my question John. I want to go back to the bookings, I think you said this the inventory went up from 38 days to 54 days. Just curious of what your expectation for this quarter is, you know the statement or whether it's whether you expect that to go up or stay flat assure come down.

Yeah sure any this John? So we we did see Distributors build some inventory, which is good that that is in line with our expectations. We have that inventory levels somewhat depressed in the second half of 2019. So where we see them now is is normal in the mid-fifties on days. We expect it to hold them. You know, of course the absolute amount will depend on the underlying commercial activity but mid-fifties is a reasonable range and that is that is where we expect that to hold.

Got it, and then maybe for Tyson a couple of areas one isolation. Looks like that's you know track and well, I'm just trying to understand what's driving this trend there, and then click on the communication side. There has been a lot of talk about, you know, 5G built in China. If you could give us some color as to how much exposure you have there now, you know, what's the content because I, you know, we're hearing about almost half-a-million base stations being rolled out this year. Just trying to understand how that might impact your business. Thank you.

That's really the the the infrastructure and Automotive business in particular around isolation incomes is is doing very very well right now, you know, the the communication infrastructure Parts the timing Parts, uh We've we've had a multi-year effort to to engage with the Telecommunications equipment providers. We have it were designed to default of the top five including the top two in China with our with our clock and and off later products and that includes into the new 5G base station. So there's a there's a there's a good attach rate to those uh, and and content per base station in that business, you know, just trying to specific in terms of the stimulus and and is going to suck demand. I also think that if you just look at in Internet demand around the world as core networks are are upgraded, you know in data centers are upgraded off.

Connectivity there where we have uh, you know, a lot of historical strength is going to continue to bode well for our for our timing products, so we saw your on your spring if we've had very good design wins off traction, but the devices that are you know out there in production today, we've got very good share. So I'm bullish on the on the communication market in terms of isolation. We had a had a record quarter in q1 and and that was really driven by strength and across-the-board isolation is a very broad product line for us in terms of number of different applications. And the number of customers. There's a lot of industrial, uh, you know, uh for for Motors and power supplies and and monitoring and I just a whole bunch of different applications within industrial you certainly have electric vehicles and I think that within the automotive Market electric vehicles and are leading share there and penetration with the the Leading Edge.

Fighters longer-term, although we see, you know, potentially, uh,

You know the automotive markets slowing a bit, but but overall, I think that electric vehicles are going to be a very important driver for isolation growth going forward given our content that we have in each car off. Then you've got things, you know in green energy applications like solar and wind and you know, a lot of things anytime you're connecting to the electric, uh-huh. Grid you need iPhone know and that's where these products come in and we have a number of you know, Innovative features, uh around that and and we also have a a good position in isolation with with data center power supplies. So within data centers, the power system is is one of the critical areas and with in isolation. We have a particularly strong business in that so it is kind of across-the-board on isolation. I'm you know, those sets of applications, you know, I think net-net are going to going to benefit from you know, some of the longer-term trends that we're seeing the covid-19. Thank you.

Our next question will come from Revenge Gil with Needham & Company, please go ahead. Yeah. Thank you and congratulations on a good momentum in this tough environment Palm Tysons disregarding the the iot traction that you're saying. Do you see any any risk in regarding installation of of home automation equipment or or smart Lighting systems or or Smart Energy Systems because of covid-19 cuz of the the situation regarding the the infectiousness of the of the disease is that slowing down any of the installation of this type of equipment using your chips? Yeah, you know, it's it's really a a little bit of a month. If you take the home automation space you've got, you know a number of of customers within the us and this would relate to our our Z-Wave and zigbee products, you know, so you've got off

And security installers that are installing, you know home automation and security systems using our devices and you know, they're down there is an impact of on those in terms of their ability to access homes and in in in some of that so we are you know, that's a mix you've also got there's strong, you know retail Channel and do it yourself and you know, everyone says the house try to figure out something to do and so there's there's demand from that, you know, quite a bit of online ordering you also have some of the the Reeds channel in terms of stores that that are going to see a little bit of a hit. So the on the home automation front, you know, there's a component of that that that's consumer there's a component to that that's that's more industrial installer type based in both of those are going to see, you know, some impact as we as we will forward here offset a little bit off.

the you know, I'm speaking mostly about the US and Europe and then you've got you know, I think China in terms of some of

The the applications for iot and these connectivity products. We see actually increased very urgent of you know engagement on design when activity and not demand out of China. So I think there's going to be you know, some puts and takes their as this all flows through, you know, I'm also very excited about the, you know, read find signals off acquisition get with Bluetooth and adding that protocol in and that's you know, more of a longer-term, uh, comment there but, you know in terms of having now all of them and see if the technology is really driving a as a home automation in the opportunities around that longer-term. I'm very very positive in terms of deployment of these Technologies in our ability to compete in games here.

And and next question for me in Tyson, you talked about, you know volatility around a number of your customers some who are pushing out order some that are pulling in orders. Can you take a break further in terms of what End Market you're seeing that and what's the the nature of the decision making?

Yeah, well, it's it's it's not really isolated to a particular part of the business. You know, we've seen we've seen this affecting industrial customers. We've seen it affecting Automotive customers. I will say Communications appears more steadily strong in contrast and on the consumer side durable goods or or you know likely under some additional pressure as well to looking ahead but it's you know, it's it's spotty and not really isolated to a particular area.

Okay, thank you so much. I can give you an example of one of the things that's pulling in. We have a a number of customers in the in the portable medical area that provide parts for you know ventilators or or or thermometers or or other connected devices that you know, or or or you know, the microcontrollers and the sensors, you know number of different things and we've got a number of customers in there. We actually elevated those customers up the priority list in terms of shipments and in terms of support to be to expedite, you know activity in in that area. So so that's an example of something that has an increased level of urgency, you know, whereas, you know Factory shut down and they don't need parts, you know, that's getting you know pushed out, you know, for instance in the automotive area or or in in some of the some of our customers cases. So you've got you've got a real mix them.

That is going to shake out over time, but it definitely increases the level of volatility overall.

Again, if you have a question, please press * then 1 hour. Next question will come from Matt Ramsey, please go ahead.

Thank you very much. Good morning, John. I'm you guys guided effects for for June and you've always been good with cost controls and I assume that includes a couple of months of the acquisition. If you could just confirm how much of of the effects is incremental from from the business that you're you're requiring and then just how you're thinking about giving all moving Parts here with demand managing op-ex through the back half of the year would be helpful thing. Yeah, Matt sure. So the effects incremental for the balance of Q2 is approximately two million dollars. And that's for a partial quarter, you know back in the January call. We talked about a 6% estimate for the year wage position and that would that was on an organic basis. So with the acquisition that would naturally come up we are taking steps to control cost in in light of everything that's going on.

And our objective at this point would be to hold the prior view of approximately 6% increase in including the acquisition maybe a little north of that but we'll have to see how it plays out as well. You know, it's going to be dynamic as we monitor bookings and watch profitability through the course of this year, but that's about the best to you. I can give you right now.

No, that would also just add to that that you know, we talked about our manufacturing model where we've got, you know, our gross margins hold because I am yeah, we're we're a fabulous company and and uh, you know, so we don't have the fixed cost on our manufacturing. We also have a variable cost model on on our op-ex so long, you know the the, you know bonuses and and a number of of things to the extent that we we get a downside hit would naturally push the effects level down over over time. So, you know, we're we're in those comments. We're not assuming that the things would go down but I think that we are we are very well prepared birth in terms of our posture the actions that were taking and the variable costs and uh, you know structure of the variable op-ex structure that we we have is a company wage.

To be able to uh to whether you know a downturn situation, I would also mention we don't uh, you know from from our our debt situation we are in in good shape in terms of our fact sheet, uh, you know, we don't have a a huge debt load and you know John maybe you want to make a few comments on that but you know from a from a capital standpoint. We also feel like we have a very robust situation sure, you know on a on a gross debt basis. We are about 3 and 1/2 x levered now with the credit facility long drawn, we have ample cash to to refund that we're just monitoring conditions around the optimal time to to repay that and then of course the convertible bonds are outstanding with about a two-year Horizon on those. So we feel comfortable with the level level of Leverage even in a downside scenario and we have done some scenario analysis to plan for you. No contingencies around that.

Got it guys. Thanks. Thanks for the color. They're just as a follow-up sort of.

Question Tyson, I mean you talked extensively on this call about some pull-ins of orders and maybe some push out the borders depending on different customers and the really near-term but as you talk within the customer base about engagements on long-term i o t programs around things like efficiencies and automation et cetera are those sort of tempered given what may come in the economy over the next four or five six quarters or whatever it is or or or the momentum to getting efficiencies out of iot down payments are those accelerating its kind of an interesting balance and and just love to hear some high-level thoughts their. Thanks very much.

Yeah mail, thank you for that the the amount of activity that we have and I would say in particular around iot has gone up dramatically off in terms of the the engagement of customers of you know in you we have Tech talks that we're doing virtually we've got record numbers of people that are that are attending these, you know, we're supporting customers virtually and it seems that the pace of excitement and Adoption of these iot Technologies, whether it's you know for improving supply-chain, but you know for just we are living in a more connected world now there is a new reality that is accelerating the pace of changes due to technology in our economy is in our companies in our lives. You've got people working from home not everybody is going to go back to the office. You know, we're we're hosting our you know, our earnings wage.

Call here remotely, you know we are going to have to monitor and sense things and connect things up. And so the you know, I think that you know both within the company. I think there's there's there's a tremendous amount of you know, focus and uh, you know drive to to get these Technologies implemented into accelerating our product developments, but I also think that within our customer base the the level of activity that we have in terms of, you know, being able to get these products. I bought aftermarket get them designed in, you know, move to the next Generation Technologies and push the envelope. I think that that's going to continue and and going to accelerate and that's that's what we are. Are, you know just laser-focused on in terms of our products, you know, very excited about, you know, being able to get the red pine team and the those products into the portfolio page.

You look at our position and home automation with Bluetooth with Z-Wave zigbee and in the broader industrial space and we I think overall we see an increased level of customer engagement and and you know, the that's specifically specifically referring to your kind of long-term big picture, you know, is this going to be a more important part of the semiconductor industry in a more important part of the economy longer-term and I think the answer is an unequivocal. Yes.

Thanks.

Appreciate the thoughts of the best. This concludes our question-and-answer session. I would now like to hand the call back over to Jillian Hoover, please. Go ahead.

It's over your line may be muted. She may be muted. I'm going to thank everybody for for for the call today, and this concludes today's call. Thank you.

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