Q1 2022 Silicon Laboratories Inc Earnings Call
Thank you for joining silicon labs, first quarter, 2022 financial and business update.
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My name is Tom and I will be your conference operator today.
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I'll now turn the conference over to Giovanni Charlie Silicon Labs Senior director of Finance Giovanni. Please go ahead.
Thank you Tom we are recording this meeting and a replay will be available for weeks on the Investor Relations section of our website at <unk> Dot com forward slash investors.
Joining me today are Silicon labs, President and Chief Executive Officer, Matt Johnson, and Chief Financial Officer, John Hollister They.
They will discuss our first quarter financial performance and review recent business activities. This information along with accompanying financial tables in the earnings press release is available on our website.
We will take questions. After our prepared comments and our remarks today will include forward looking statements subject to risks and uncertainties. We basically as forward looking statements on information available to us as 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 a reconciliation of our GAAP to non-GAAP results is included in the Companys earnings press release and on the Investor Relations section of Silicon Labs' website.
I would now like to turn the call over to Silicon Labs', Chief Financial Officer, John Hollister John .
Thanks Giovanni.
Revenue for the first quarter established a new record and ended above the high end of our guidance range at $234 million.
This represents tremendous growth as a pure play Iot business of 48% versus the same period last year.
Well ahead of our long term operating model.
Our industrial and commercial business delivered revenue of $127 million in Q1 growing 61% year on year with strength across the diverse end markets of commercial infrastructure Smart city applications.
And then particular industrial applications, where we saw the strongest topline performance.
The whole home and life business also delivered strong growth in Q1, ending at $107 million up 35% year on year with smart home and home security applications driving strong momentum.
Distribution channel revenue in the quarter accounted for 82% of our total sales.
Our business is very broad and diverse serving tens of thousands of customers and thousands of applications.
Our largest customer represents only about 5% of revenue.
And our top 10 customers are less than 20% of Robyn.
Our business in Q1 grew year on year across all geographies with the strongest growth in the Americas, followed by Europe , then Asia Pacific.
The geographical mix of our business has evolved over time. It is now roughly balanced across the Americas, Europe and Asia Pac.
non-GAAP gross margin for the quarter was favorable to expectations ending at nearly 67%.
It is important to note. This gross margin was driven by an atypical quarter in which we sold out lower cost immature procured in fiscal 2021 while also seeing our manufacturing costs rise with price increases from our suppliers.
Gross margin also benefited from fewer than expected expedite charges in the quarter.
As noted we are experiencing manufacturing cost increases and expect gross margin to moderate over the coming quarters.
non-GAAP operating expenses increased to just under $100 million for the quarter with R&D expenses at $63 million and SG&A expenses at $36 million, a total increase of around $5 million from Q4.
The increase was due primarily to seasonal effects from payroll taxes and other benefits combined with additional personnel related costs.
We successfully initiated accelerated Iot opex investment in Q1, the project timing resulted in favorability in our Opex.
non-GAAP operating margin for Q1 was stronger than expected ending at 24% on the basis of strong topline performance superior gross margin and greater than expected leverage in opex.
Yeah.
As anticipated we faced a significant increase in our non-GAAP effective tax rate now up to around 26%.
We expect it to remain in that range for the full year due to required capitalization of R&D expenses.
Absent legislative changes, we expect the tax rate to decline a few hundred basis points per year as the amortization stock builds up over time.
Based on the strong performance I've just described we delivered non-GAAP earnings per share in the first quarter of $1 five.
Well ahead of our guidance for the quarter.
On a GAAP basis gross margin was just under 67%.
Operating expenses declined in the quarter to $122 million due to some significant one time expenses incurred in Q4.
GAAP R&D expenses were $78 million with SG&A expenses of $45 million.
Please note that accounting rules have updated and simplified the accounting treatment of convertible debt.
And accordingly, we no longer accrete, a noncash interest charge for our 2025 convertible notes.
Our GAAP earnings per share ended for Q1 at 58 with a 34% GAAP effective tax rate.
Yeah.
Next I'll cover the balance sheet and provide a capital deployment update.
We ended the quarter with cash and investments of $1 9 billion.
Our accounts receivable balance declined to $79 million in Q1 with DSO of around 30 days.
Our operations team executed very well during the first quarter by delivering on upside revenue performance and growing our inventory balance to $56 million.
Head of expected continued upside in the business later this year.
Channel inventory also recovered is expected to 57 days.
With strong operating results results, our operating cash flow in the quarter was $85 million.
Through the first four months of the year, we returned $250 million of capital to our shareholders through open market repurchases, bringing the cumulative total since we announced the divestiture to $1 4 billion.
Last week, our board of directors authorized an additional $350 million in share repurchases for the remainder of this year.
Sure.
I will now cover guidance for the second quarter of fiscal 2022.
We expect revenue to increase to a range of $245 million to $255 million.
With sequential growth expected in both the industrial and commercial and home <unk> categories.
We expect non-GAAP gross margin to decline to around 61% based on FY 'twenty two manufacturing cost increases already in place along with expected increases over the course of the year.
Even at the lower expected gross margin over the course of this year, we continue to deliver premium gross margin for the Iot space based on the differentiation differentiation of our platform.
We expect non-GAAP operating expenses to increase to around $107 million as our merit increases for FY 'twenty to take effect.
Iot investment expands and we continue to grow our team.
We expect our non-GAAP effective tax rate for the quarter to be 26% and non-GAAP earnings per share to be in the range of 85 to 95.
On a GAAP basis, we expect gross margin to be around 61%. We expect GAAP operating expenses increased to $129 million and GAAP earnings per share to be in the range of 37% to 47.
I will now turn the call over to Matt Matt.
Yeah.
Thank you John and good morning, everyone.
We're off to outstanding start in our first full year as the largest pure play Iot wireless company, we delivered record revenue for the seventh consecutive quarter and great operating results.
Demand continues to meaningfully outpace our supply even as we keep adding incremental supply.
We continue to focus on doing the right thing and strengthening our customer relationships as we navigate the supply challenges together.
Demand for our solutions is strong and growing our design win momentum is accelerating even faster than our revenue growing 79% in the first quarter over the same period last year.
This is a great leading indicator of future revenue growth.
Our opportunity pipeline also continues to grow now well over $14 billion as we gain visibility and identify new opportunities within our large and growing market.
Silicon Labs is now the largest pure play wireless Iot company in the World. Our platform based approach enables us to address an incredibly wide range of applications using a common hardware and software platform purpose built for the Iot.
Our platform allows us to efficiently scale, our technology to additional markets and applications and makes it easier for our customers to deliver products faster and accelerate wireless adoption.
In Q1, we saw strong revenue growth across all wireless protocols and end markets and.
In industrial and commercial we're seeing strong demand for electronic shelf labels and growth in industrial automation and asset monitoring.
Smart city deployments continue to expand beyond our traditional strength in smart metering into growing application areas, such as grid monitoring and distribution automation.
And home and life demand is strong across all end markets and we're particularly pleased with new wins in portable medical and smart appliances.
Anticipation is growing for the release of the new matter standard later this year and our solutions for quickly bringing matter enabled products to market have been well received.
For example in Q1, we announced and shipped initial samples of our X gene 24 family of wireless Soc.
Which support matter and bring AI ml acceleration to battery powered edge devices.
Initial customer response has been fantastic our Alpha program sold out with participants representing a wide range of smart home and industrial applications.
The <unk> 24 family is just the latest in an impressive lineup of solutions built on our series two platform.
With serious too we've been able to increase our R&D efficiency and deliver new products faster and market response has been fantastic. Our current demand is only reflective of the first few products on our series two platform with three to four times more on the way another great indicator of future demand.
We're also incredibly proud of the extra 24th performance on the important ml common machine learning and inference performance benchmark.
With integrated AI ml hardware acceleration the extra 24 wireless sse's provide up to four times faster processing with up to six times lower power consumption for machine learning workloads.
This means even ultra low power wireless Iot devices can now be enhanced with machine learning capabilities.
In early March we held our 2022 analyst day event in New York and Silicon Labs' executive team enjoyed ringing the opening bell at the NASDAQ to celebrate our 22 years as a public company and honor the achievements of our talented global workforce.
Silicon Labs' entered 2020 to a 100% focused on wireless connectivity for the Iot and we are determined to lead the industry.
We're excited by the impact of our solutions and technologies are having on the industry and in People's lives.
I couldnt be prouder of the team's execution and the future opportunity that we see.
Silicon labs is positioned to lead and scale in an Iot market expected to achieve tens of billions of units per year in the decade ahead.
We have the talent the technology and the trusted partnerships across every major ecosystem to be a driving force behind the success of the Iot and the market leader in this exciting segment of the semiconductor industry.
Thank you for your time this morning, I will now turn the call back to Giovanni.
Thank you, Matt and thank you for joining Silicon Labs, Q1, 2022 financial and business update I will now open the call for questions to accommodate as many people as possible before the market opened I ask that you limit your time to one question with one follow up inquiry if needed.
Yes.
We will now begin the question and answer session.
I'll ask a question press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing any keys.
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We will pause momentarily to assemble the roster.
Yeah.
And your first question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Good morning, everybody, let me extend my congratulations to a strong start to the fiscal year.
Alright.
At your analyst day on March one you endorsed perhaps 35% to 40% revenue growth in fiscal year 'twenty two.
And with such a strong start to the first half of the year are you still bracketing that growth rate or endorsing that growth rate or might we be at or above the high end of the range.
And as well.
200 miles to the east.
Is that another large chip company that was somewhat cautious with respect to different supply chain concerns specifically over in China and whatnot. So I'm curious to know to what extent does that second quarter guidance contemplate.
The macro and supply chain risks that we hear about day to day.
Yes, Gary This is John let me take the first part and then I'll kick it over to Matt for the second part but.
You know the.
Indication, we provided at analyst day was really relative to that event, we're guiding one quarter at a time.
We'll say we're quite encouraged by the strength, we continue to see in the business with.
Design win momentum up nearly 80% year on year for the first quarter and continue to enable more supply that's really the.
The phenomenon that's happening right now is to the extent that we can activate more supply we can deliver upside as we have demand that is in excess of our of our supply at the moment and I'll pass it to match the export.
Thanks, John Hi, Gary This is Matt in terms of.
I guess looking at the demand and supply.
You mentioned.
We definitely see some Warren lockdown push out out.
Out there and as soon as those happen, we're able to reallocate to other demand because the demand is meaningfully outpacing supply so that gives us flexibility.
On the supply side of all that we do see issues pop up and as John mentioned earlier the operations team has been able to.
Respond with alternatives or recover so definitely seeing both of those but also seeing the team being able to navigate both of those.
I appreciate the comments guys no with respect to gross margin I. Appreciate how you are outperforming your long term gross margin guide of mid 50 percents.
Given sort of the mismatch between price increases and supply chain increases.
But my question is do you still anticipate given all the different variables that perhaps by the time, we exit the fiscal year youll be subset.
Sub 60% gross margin.
Yes, Gary we definitely see trends ahead that lead to some conservatism and view that margins could moderate the full extent of that we'll have to see how it plays out but.
That is that as possible and we'll know more as we progress through the year here.
Alright, Thanks, John Thanks, everybody.
The next question comes from Blayne Curtis with Barclays. Please go ahead.
Again, I'll Echo my congrats as well very strong results.
And I appreciate the additional detail by segment.
And actually I was curious I mean, I know you're not going to guide by these segments. You said both would be up I'm, just thinking about the long term growth rate or even the growth rate. This year between these two segments, it looks like industrial and commercial and doing a bit better.
Any thoughts on kind of the relative growth rate between these segments at least this year or even long term.
Yes, I'll start.
Good I'll start Blaine.
If we just think about the Sam growth that we highlighted at the analyst day events.
Do see stronger Sam growth out in time for the industry estimates for the industrial and commercial space given the very large and diverse market also see strong growth opportunity in home alive, but do see slightly higher growth.
Central from the Sam growth on the IFC side.
Okay.
Thanks.
Want to ask maybe it was just the.
Hi.
Awesome.
One off on the quarter, you said theres less expedited.
But then demand is still outstripping supply I was wondering if things are becoming more predictable in your supply chain or.
I guess, what's the root cause for last act.
In the quarter.
Yeah. Thanks, Blayne, John here I think I think it's fair to say it is a bit more predictable even though we are still constrained and we are undertaking multiple projects in the company to open up more but in the in the near term.
I think thats, a fair assessment that it is somewhat more predictable.
Alright. Thanks.
Okay.
The next question comes from Matt Ramsey with Cowen. Please go ahead.
Good morning, everybody and thank you.
John I think in the script you guys talked about the business and the design win momentum being fairly equal.
Equally split between the.
The Americas, and EMEA and Asia Pac.
And.
There's a lot of focus as you might.
And then on the Lockdowns in China. So is it true that.
The supply chain is.
Sort of split that way as well and the Fungibility of the products that Matt described in an earlier answer. It allows you guys collect navigate through this or is there are you guys sort of watching and and worried about some of these lockdowns in China and in certain pinch points in the supply chain for yourself as well I'm just trying to.
Results that you guys are putting up are I think quite a bit ahead of.
What we would have expected given the macro commentary that's out there. So I'm just trying to make sure that we're not missing anything.
Just behind the question.
Yes, let me take let me take a run at it.
Matt This is John so really the commentary on the geographical split of the business is oriented more around the demand.
Comments on our customer footprint globally, where we have roughly equal representation across the three major regions of the world.
The supply chain is heavily concentrated in Asia Pacific as you can imagine with a good amount of supply source in Taiwan.
Some in mainland, China, and South Korea.
So we've been able to navigate this so far of course, we're keeping an eye on it and mindful of what could happen out there with the lockdown, but so far we've been able to navigate that.
And given the platform broad based approach of our products and technologies, where we may have some push outs or lockdown issues with customers. So far we've been able to reroute available supply to other customers.
That is not the case.
Got it thanks, just as a follow up on.
You guys had maybe opex slightly under where a lot of us and modeled it for the for the fourth quarter for the first couple of quarters of the year, but revenue well above I just wondered if you might give us some commentary on expense levels for the rest of the year are you anticipating an acceleration with all the <unk>.
Demand funnel that's out there or are there things that are maybe holding you back on hiring or whatnot that arent, allowing expenses to grow as quickly as you might like.
Sure Matt.
Yes, we are expecting further acceleration through the course of this year at times we.
We were not quite able to execute as quickly as we might want to just from different project timing.
Actors at work, but yes, our goal is to continue acceleration through the course of this year.
Alright, thanks, guys Congrats again.
The next question comes from screening high jewelry with <unk> Nikko Securities. Please go ahead.
Hey, good morning, guys.
First on the gross margins.
John .
Obviously, you're guiding down.
For the next few quarters consistently.
Just trying to understand if the inventory.
In the lower cost inventory is pretty much flushed through the system or if you still have any any inventory left and similarly, you know in terms of the price increases have they been pretty much rolled out across the board or you do you still expect some.
Additional opportunities to raise prices in the second half of the year.
Yes, <unk>. So the first the first response is yes.
The legacy cost of inventory from last year is fully flushed out.
Our and have been incurring new cash costs to build new inventory at the 'twenty two.
<unk> points, which are meaningfully higher than the 21 cost points.
So thats, what youre seeing affect us here in the second quarter and we expect those trends to continue in the third and fourth quarter. There are some additional manufacturing cost increases forthcoming in the second half, but we are already aware of.
No immediate plan on price increases kit can never rule it out but as of right now we've taken steps to.
Two to recover what we're experiencing ourselves at the moment.
Got it.
And then in terms of visibility I mean, youre, saying that demand is still outpacing supply by a significant margin, but any change in terms of visibility compared to a quarter or two ago, given all the supply chain noise and then in terms of your channel inventory is well it went up a little bit.
I guess your target is 45 to 55 and how should we think about your channel inventory levels as we go through the rest of the year.
This is Matt I'll answer the first part of that and hand, it over to John I think in terms of visibility in the entire environment.
Our bookings have remained consistent and within that our demand continues to meaningfully outpace our supply.
Which as John said earlier gives us flexibility as things shift to respond and reallocate.
Within that we continue to increase our supply and that's important that's a statement for the coming quarters and for 2023.
At the same time, our design wins are accelerating.
Even faster than our revenue.
Which is really important to us because that's one of the stronger leading indicators, we have of future demand moving forward. So that combination in sequence is really important and John ill hand, it over to you for the second piece.
Yeah training. So we were pleased with the ability to reload the distribution channel back into our target range, our goal would be to hold that.
Which would be an absolute increase in units as the business continues to grow here, but.
It's tight supply.
As a bit of a challenge for the team, but that is our goal is to continue to hold as best we can at the level currently out.
Hey, John just a follow up to that I mean, given what we saw in the last couple of years in terms of the supply constraints are you hearing or seeing any evidence that your customers going forward, maybe you know what.
Willing to kind of hang onto a bit more inventory on a structural basis, either distribute distribution channel or direct customers because that seems to make logical sense just given what happened in the last couple of years. So just just want to hear your thoughts on what you're hearing from your customers.
Yes.
Alright.
Yes.
Really I think it's we haven't gotten normalized well enough to really understand the longer term strategies for companies I think your your presumption is logical but I think we'd go with some more time pass and good things will normalize to really know.
Yes.
And I would just add to that.
One we're definitely not in those types of discussions right now right.
Still spending a lot of time on supply alternatives for our customers working through.
Their demand gaps in trying to help them navigate and bridge.
Every quarter as we keep incremented up supply that.
That being said I do think the.
Given what the industry has just been through.
And going through that.
The interest in <unk>.
Mechanisms for reliability of supply long term will be much higher and.
Inventory can be a component of the of that for sure as well as supply alternatives multiple sources for Fabs and back end et cetera. So I think all of those will be on the table.
But we need some time and thats quite a distance between here and there given the.
Size of the demand supply gap that we're still experiencing.
Makes sense, thanks, guys Congrats again.
The next question comes from Rajiv Gill with Needham <unk> Company. Please go ahead.
Yes, thank you and congrats as well on a really strong growth in a tumultuous market just to follow up on a question around around price price increases I know in the past last year.
Strong Iot growth was driven primarily by by unit increases this year split between unit price increases is a little bit more.
More balanced.
So I just wanted to get a sense in terms of when Youre looking out into 2023 and when you're talking about.
New customers and new design wins as Matt talked about how do we think about.
Pricing.
As it relates to kind of a longer and longer term growth in as well he negotiate some of these new contracts.
Sure.
No.
The easiest measuring stick that I can provide is the design win momentum we talked about earlier and our philosophy and approach to those design wins is to provide competitive market pricing for those solutions and <unk>.
Windows.
Not at <unk>.
How would you say not at a transient or temporary price, but what we would expect the price to be for the <unk>.
<unk> of that business and so that's the way we've been operating in that's the way we've been winning those design wins, so I think.
So far we're seeing good progress on that and we expect that to continue.
Sure.
Optimistic about the design win progress and the momentum we have for the rest of the year.
Thank you and just for my follow up in terms of capacity you mentioned.
Yes.
To the extent that you can activate supply you will generate more upside because of the demand picture.
I'm wondering if you can maybe describe.
The overall capacity conditions.
With your kind of foundry partner partners.
How are they looking at adding new capacity for 40 nanometer 28 nanometer products for your series two or.
Three products.
So just wanted to get a sense in terms of the capacity conditions and those dynamics throughout this year and kind of how you're thinking about it next year because as you know there is a strong <unk>.
Investor concern about over over capital and over in <unk>.
Supply industry.
Leading to kind of a.
A disconnect between demand and demand accelerates and more supply comes online. So there is a lot of concerns about that mismatch that could occur.
Perhaps next year, so any thoughts there would be helpful. Thank you.
Sure understood.
Yes.
Given the the.
Meaningfully.
Meaningful gap I think that we have between demand and supply right now.
It.
Seems a long ways away or if that would be.
The issue, but understand the question completely.
I think we definitely leave it for our supply prior comment on their overall.
Capacity and supply plans.
Going forward, but what I can say, specifically is our ability to work with our suppliers and partners to secure more supply.
<unk> has been effect.
Not only.
Short term midterm and long term as well so we see a path that we like.
Going into the second half of this year and into 2023.
Which is very important because that's also a major component when we're working with our customers on design wins that we can give them that.
That visibility bill too.
Those new designs as they come online.
I think one of the thing.
Mentioning that.
<unk>.
Helpful and powerful in these discussions too as we work on allocation and supply is being an Iot pure play company.
Thank our suppliers all walk a.
So long term our portfolio position that includes Iot and that exposure and given that that's all we do and that we have incredibly.
Diverse presence there that makes us attractive from that perspective, so we've seen not just with one but literally across our supply base a strong response to that and I think thats, helping us navigate this as well.
Yeah.
Again, if you'd like to ask a question press Star then one to join the queue and the next question comes from tore Svanberg with Stifel. Nicolaus. Please go ahead.
Yes. Good morning, this is Jeremy calling for Tori and let me add my congrats on the.
Especially on the 24% operating margin.
Just a follow up on the geographic question can you.
Give us a sense of where you expect most of that.
Andy if you can rank order the growth in terms of the three geographies.
And how does that compare to historically.
Yes, Jeremy this is John .
It's pretty pretty pretty consistent.
It's fair to say for the wireless applications at least initially in the rollout of Internet of things applications, you have seen more strength in North America and Europe .
There are some good opportunities in Asia Pac and expect that to further develop over time here.
We do have significant MCU business and Asia Pac as well, but overall, it's reasonably balance we believe going forward here.
Okay.
Great.
And I guess, maybe stepping back a bit looking more at the long term drivers or <unk>.
Technology, you mentioned that as being an important one.
Are there other things on the horizon that you see maybe.
Any anything that you may have wanted to fill out.
Portfolio or even on the service.
Complete platform side of thing.
But you're investing more heavily in.
At the moment.
Yes, sure I'll make some.
Yeah.
Quick comment first on.
The matter in general we see is an incredibly positive development for our industry and.
We're less concerned about the delays than most because we don't see this as a short term opportunity and we think it's important that the industry gets this right and if we get this right this will drive.
A very.
Positive net benefit from this space. So we're encouraged by that.
In terms of big catalyst.
To be clear, we're seeing strong growth across all our applications and technologies, but I mentioned earlier the series two platform and X gene two four it's worth calling that out that.
That's.
Just indicative of why we see this longer term demand that we know the end market is growing strongly but our ability to service that market continues to improve that.
That platform approach that we're taking allows us to keep driving more parks that are very differentiated for our customer base.
And those parts keep getting a tremendous response from the market as I said earlier when you think about the demand environment. We're seeing that's really only based on.
Historical solutions and the first two or three products coming off the series two platform.
And then you look and see that there's a continued march of more and more products accelerating off that platform.
Three to four X what we've already released that makes us really excited about the future demand potential.
That we see coming down the road and the best examples of what I mentioned the extra 24, that's the latest product that no. One supports matter supports machine learning and a very efficient way for battery powered applications.
And as I mentioned, we sold out of that right out of the gate in terms of the Alpha program and our response from customers has been fantastic. So that if you step back and say whats.
One of many reasons to be excited about the future.
The platform effect that we're seeing and have yet to see moving forward.
Great. Thank you and congrats again.
There are no further questions. So this concludes our question and answer session I will now hand, the call back over to Giovanni Vitale.
Thank you for joining the Silicon Labs Q1 earnings call. Tom You May now conclude the call. Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.