Q2 2022 SiTime Corp Earnings Call
Okay.
Good afternoon, and welcome to <unk> second quarter 2022 financial results Conference call.
At this time all participants are in a listen only mode at the conclusion of today's call instructions will be given for a question and answer session. If anybody needs assistance during the conference call. Please press the star key followed by the zero on your Touchtone phone.
As a reminder, this conference call is being recorded today Wednesday August three 2022, I would like to turn the call over to Brett Perry of Shelton Group Investor Relations. Please go ahead.
Good afternoon, and welcome to <unk> second quarter 2022 financial results conference call on today's call from <unk>.
<unk> Executive Officer, and Art Chadwick, Chief Financial Officer, before we begin I'd like to point out that during the course of this call. The company may make forward looking statements regarding expected future results, including financial position strategy and plans future operations, the timing market and other areas of discussion it is not possible for the comp.
These management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements in light of these risks uncertainties and assumptions the forward looking events discussed during this call.
May not occur and actual results could differ materially and adversely from those anticipated or implied neither the company nor any person assumes responsibility for the accuracy and completeness of the forward looking statements.
<unk> undertakes no obligation to publicly update forward looking statements for any reason after the date of this call to conform the statements to actual results or to changes in the companys expectations.
For more detailed information on risks associated with the business. We refer you to the risk factors described in the 10-K filed on February 25.
2022, as well as the Companys subsequent filings with the SEC also during this call we will refer to certain non-GAAP financial measures, which we consider to be an important measure of company performance. These non-GAAP financial measures are provided in addition to and not as a substitute north superior to measures of financial performance for <unk>.
In accordance with U S. GAAP, the only difference between GAAP and non-GAAP results is stock based compensation expense and related payroll taxes. Please refer to the company's press release issued today for a detailed reconciliation between GAAP and non-GAAP financial results with that it's now my pleasure to turn the call over to Rick <unk>. Please go ahead.
Good afternoon, and thank you for joining us on today's tight time Paul.
While the focus of today's discussion is on Q2 results and Q3 forecast I want to begin with the transformation of sidelined as a result of the acceleration in electronic make macro trends such as high bandwidth communications cloud and Iot.
Proficient timing products are defined as high performance small size and.
Efficient under demanding environmental conditions, such as vibration shop in temperature.
Becoming distribution of choice.
While precision timing is used significantly in comms enterprise.
<unk> is growing in automotive and certain mobile Iot and consumer applications.
As the creator of the category of precision timing <unk> plays a central role in this transformation.
As we transition from our legacy non proficient dining products and design wins into this transformation <unk> will get significantly higher ESP more design win stickiness and a discussion of architecture with our customers.
On Q2 site to another by banner Q2, we.
We delivered record revenues of $79 4 million non-GAAP gross margins of 66, 7% and non-GAAP EPS of $1 11, all exceeding our previous guidance.
This was our 11th consecutive portal to do so in Q2, we had the highest asps in the history of the company, 30% higher year on year, and 10% higher quarter on quarter.
This came from the role of greater precision timing products in our revenue.
While multiple segments contributed to this growth our comps enterprise business was a standout.
It grew 60% over Q1 and was a segment with the highest growth rate multiple customers. In this application such as network interface cards are mix data center servers, and <unk> wireless contributed to this growth and we believe that the trend will continue in the second half.
A common theme amongst these customers and applications for the use of our position dining products to get a better system performance. As an example, while these products elite doubled and unit shipment from Q1 to Q2.
And Additionally, our precision timing opportunities have now grown to be 70% of our funnel.
Automotive was the segment with the second largest growth despite some customer push outs due to industry wide supply chain issues.
<unk> previous success in Adas computers domain controllers and cameras continued and we have begun to see volume ramping from newer applications as well such as driver monitoring systems and Lidar.
As you know the automobile has been transformed and new functionality and sensing computing and communications is.
Is continuously being added.
Getting this functionality to work in the presence of hydration staff temperature extremes is a difficult challenge, but one that can be solved and installed by precision timing products from site and this is a natural place for sites and to deliver value and grow and we remain on track to deliver 100 million in annual <unk>.
Motive revenue in the next few years.
In may when we increased our guidance from 35% to 50% annual growth. We did not anticipate the subsequent conditions financial downturn supply chain disruptions and political turmoil.
All of which made it difficult for our customers to see the magnitude and the speed of decline in their own business.
This is evident in our mobile Iot and consumer segment that is those that place lower value on the benefits of precision timing.
Excluding our largest customer the mobile Iot consumer segment is expected to be down by more than 30% in the second half of 2022.
Considering our end customers visibility we are therefore now comfortable with our earlier guidance of 35% annual growth for 2022.
In line with that we will manage our expenses prudently in the second half of this year.
But our original thesis remains intact.
Firmly believes that our longer term top line growth will be 30% or more driven by the Sam expansion to $4 billion, the greater need for precision timing and fulfillment of those needs uniquely by pipeline.
We are also continuing to see a long term financial model of 65% gross margin at 30% net income has been intact.
We continue to invest significantly in the development of new precision timing products in 2022 itself. We will sample six of these often acres in blocks.
These address the macro trends that I referred to that are transforming electronics high bandwidth communications cloud TV and Iot with these we are confident in our ability to transform the electronics industry driven by greater adoption of these products.
We expect that the stellar comms enterprise performance will continue into the second half with the volume ramping up of applications like 400, G 800, G optical modules and data center switches.
In our last call, we talked about our cloud family with 200 customers by the end of 'twenty, two and that strength continues 60% of the Cascade. The clock family revenue in 'twenty, two and 'twenty three will now come from Nick parts <unk> and backhaul.
Our investment in the segment is working in 2022 comp to enterprise is expected to grow to over 25% of our revenue compared to 16% last year in 2021.
For example, again our lead product is expected to grow three times in revenue over 2021.
The value and uniqueness of site and products is also clearly on display at our largest customer which is in the mobile Iot and consumer segment. Our revenue will continues to grow strongly in the second half of 2022 and the design win funnel continues to grow strongly as well.
In the previous call we had spoken about the strength of Aero Defense business. We're now engaged with the top defense contractors worldwide and our funnel continues to grow as they discover the strength of our unique precision diamond products.
The uniqueness of these tightened products comes from the uniqueness of site and technology.
We've always maintained that our mens analog circuits.
And the systems, putting it together to deliver a system solution is hard to do.
In the past decade, we have not seen a credible competitor that is using similar technologies and we don't see one on the horizon currently.
A greater advantage for sideline during the turmoil of the past few years has been the flexibility and the solidity of our supply chain we.
We've made great inroads with customers because our supply chain has been proven to be superior to that of our existing set to that of the existing suppliers in the market today.
And that strength continues due to the support of TSMC Bosch and I'll also add partners.
Given that a majority of our customers are single sourced.
Apply chain strength continues to be a competitive advantage for saipem.
In conclusion as a category creator of precision timing <unk> is uniquely positioned to transform this industry. We believe that our long term growth and market share gains will continue unabated in the future.
With that I'll now turn it over to art Chadwick our CFO .
Thanks, Josh and good afternoon, everyone.
Today, I will discuss second quarter results and provide some comments on Q3 and the year.
I'll focus my discussion on non-GAAP financial results and refer you to today's press release for a detailed description of our GAAP results as well as a reconciliation of GAAP to non-GAAP results.
So as rich just mentioned Q2 was a record revenue quarter for us.
Revenue was $79 $4 million up 13% sequentially and up 78% over the same quarter last year with exceptional strength in our higher end higher performance products.
Sales into our mobile Iot and consumer segment, which consist of sales into mobile phones wearable devices and consumer products were 27 zero million dollars.
Our 34% of sales.
Down 10% sequentially, but up 24% over the same quarter last year.
Sales to our largest end customer which are included in this segment accounted for 14% of total sales.
Sales into our industrial automotive and aerospace segment, which includes sales into automotive industrial medical aerospace military and broad based sales were $32 2 million.
We're 41% of sales.
17% sequentially and up 137% year over year.
Sales into our communications enterprise segment, which consist of wireless infrastructure <unk> data center, and networking were $20 2 million or.
We're 25% of sales.
Up 60% sequentially and up 120% over last year.
non-GAAP gross margins were strong at 66, 7% up 140 basis points from Q1 and up more than five points over the same quarter last year.
non-GAAP operating expenses were $28 3 million, a 15% sequential increase over Q1, as we expanded our workforce and increased investment in new product development.
Expenses were $16 $7 million in R&D, and $11 5 million in SG&A.
non-GAAP operating margins were 31, 1%.
Yeah.
non-GAAP net income was $25 $3 million or $1 11 per share and this is up from $21 3 million or <unk> 94 per share in tier one and up from $9 6 million or just <unk> 46 per share in the same quarter last year.
Stock based compensation expense decreased from $15 2 million in Q1 to $12 5 million in Q2, as we adjusted stock comp expenses related to some internally granted performance Rs use.
Receivables were $38 7 million with Dsos of 44 days and inventory was $34 $4 million up from last quarter as we continued to increase wafer buffer stock.
In regard to cash flow, we generated $15 $3 million in positive cash flow from operations.
<unk> $9 $6 million in equipment and assets.
And ended the quarter with $580 million in cash and no bank debt.
I'd now like to provide some comments on Q3 in the year.
First of all.
We believe our long term strategy of developing and selling higher performance products into markets that require ever more precision timing is strongly intact.
However, the current macro economic environment is impacting sale of some of our products and especially our lower end products.
At the beginning of this year, we thought 2022 revenue would increase by at least 35%, which we discussed on our conference call in early February .
Three months later, we were more optimistic and in early May we voiced our opinion that 2022 revenue could increase by at least 50%.
That view is based on then current order rates and was supported by our internal forecast.
However, the current economic environment now appears somewhat less certain and order rates. This summer have slowed, especially from our lower end products.
We are therefore modified our revenue expectations for the year and now believe 2020.
I think 2022 revenue growth will be closer to our previous 35% estimate.
As a result sales in the second half of this year will be essentially flat with sales in the first half.
However product mix will improve significantly.
We now expect sales in the second half of the year into consumer and Iot will be down 30% or more from the first half not counting sales to our largest customer.
Sales into broad based industrial will also be down but to a lesser extent.
However, we expect those declines will be offset by increased sales to our largest customer.
And a 30% or more increase in sales in the comms and enterprise.
For Q3.
<unk> sales will decline between 6% and 10% sequentially due primarily to lower consumer sales.
At the midpoint this would be approximately $73 million or 16% higher than the same quarter last year.
We expect Q3 gross margins will remain strong at about 65% plus or minus a point.
Q3 operating expenses would have increased due to the workforce additions in Q2, but.
But we are aggressively managing discretionary costs to maintain Q3, opex at Q2 levels or approximately $28 $3 million plus or minus.
Fully diluted share count will be approximately 23 million shares in Q3.
So this guidance just provided should drive a non-GAAP EPS of.
Between 80 and 90 cents.
Per share in the third quarter.
And on that note I'd like to turn the call over to the operator. So we can begin our Q&A. Thank you.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to powerhouse star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay, we have tore svanberg.
Yes. Thank you.
First question is on your comment about order rates slowing.
I think it's no surprise that consumer and Iot is slowing.
A little bit surprised to hear the industrial.
In defense category is seeing some some lower orders. So can you just elaborate a little bit about what's going on there with the perhaps some inventories built in the first half of the year.
Any color you can share there would be great.
Hi, Thanks.
Yes, I think as you said, it's not a surprise that mobile Iot consumer were down but in the industrial I don't think automotive or aerospace as much change aerospace and automotive continues strong there have been some push outs in automotive but.
But they were more than offset by growth from other customers.
The industrial.
<unk> is our sort of catch all phrase, it's our largest group of customers.
<unk>.
The distinction that I wanted to make is that it has less to do with the.
The end customer and as most do with those that are using precision timing products for the purpose that they were intended or not.
So as an example in the consumer space, our largest customer is using precision timing products for their very high end products in those very high end products continue unabated as opposed to some of their competitors, where we also sell where they have seen significant downturn. So the similar thing happened in some industrial customers.
Customers, where they probably found either push out which is more more likely off their inventories because of heightened with fees.
We likely have not lost many design wins.
But there have been push outs and they have been a smaller impact because of not being a being able to source.
Other components and that would typically be the case with industrials because they typically tend to be smaller customers not larger customers and they would not be in the priority list for getting other components as well.
Sure.
Fair enough and I know you've been working on your sales strategy and certainly getting a wider reach with customers.
I know you announced these high time direct online store recently could you elaborate a little bit on that and when.
When should we start to expect.
Broken distribution from from that particular business model.
Yes, so we should be able to start expecting that starting this year I think youll see greater and greater traction for that for 2023 and onwards.
Just really begun this e-commerce strategy right now.
It's very much in its nascent stages.
And we think that part of the task of high time is to grow from 14 to 15000 customers to about $30 $40 50000 customers in the coming years.
And the E Commerce strategy has a lot to do with it it's part of our broad based strategy. It is part of expanding our customer base one of the things we fine jewelry is that the more we dig the more refined we find that some of these customers.
Extreme need for these precision timing products and typically there are smaller customers that don't have enough help in designing these are products make it easier for them to get the job done.
As you know we sell at a premium but they are willing to pay that premium. So I fully expect that that strategy will lead to higher than corporate gross margins.
And much greater stickiness, because we solve a significant problem for the customer so stay tuned for more on that as we go forward.
Great just one last one for art.
Gross margin of 65% why wouldn't it be higher given the favorable mix for the second half of the year, especially with the mobile consumer being a much lower percentage of the business yes.
Yes.
My question. So there is potential upside to that but you also have to remember with a lower topline revenue. Our many are manufacturing overhead becomes a larger percentage of sales so that kind of counteract that to a certain extent and sales to our largest customer will increase and the SEC.
Half over the first half, including Q3, and I don't want to go into specific margins, but that also could have some impact on our gross margins.
Great. Thank you so much.
Great. Thanks Jory.
Next we have Alessandra vecchi from William and Blair.
Hi, guys just a follow up on inventories question, maybe taking it from a slightly different angle.
Again, I think we all understand the weakness in mobile consumer but can you can you help clarify what point.
You really start you start to see that sort of nose dive off.
Was it later in the month of June that it really started with great.
And then similarly, if my math is correct it looks like with the Q3 consumer number.
Is the lowest number.
The first half of 2020, so how much of that is not precision timing kind of a code word for.
Some of the supply chain wins, you might have won during the Covid time frame and how we should think about the levels recovering in 2023 from here.
Yeah. So in terms of the timeframe is.
As really this summer, we've seen order rates drop rather surprisingly and substantially.
Kind of very end of Q2, certainly in the month of July .
And I think it surprised a lot of folks including us.
But again, it's really our lower end consumer products and it does not impact our largest customer in that segment sales to our largest customer in that segment and of course, our largest customer as a company. We expect will increase actually nicely from the first half to the second half of the year.
I'd like to add to that I would say that what was also surprising.
While we were in touch very close communications with our top customers all across the world.
Many of them were not able to.
To understand the magnitude of some of this buildup not just in the consumer but in some of the other markets as well.
And I think that we are early in our ability to foresee.
That debt.
This downturn.
Has put some particular.
Influence in Q3, so I think that that's an important piece here to note that we were kind of surprised by the surprise that the customers had.
And their inability to read.
Okay, and then as an extension of that.
Inventory.
Creep up.
Again makes sense given some of them maneuver.
You've done and in securing capacity.
But given the.
LOE down to revenue growth in the back half how should we think about.
Inventory levels from here or are you going to work them down or are they still below target levels.
Yes, so I did mention that our inventory went up it.
Went up about $4 million from Q1 to Q2 that is a very conscious decision I think most folks realize that the entire semiconductor industry with and very tight supply, including us we always had enough to ship.
The demand that we had but we've made a conscious strategic decision to build some buffer stock, especially with wafers.
In case, there are any disruptions in the supply chain a lot of things can happen in the world that could impact the supply of wafers, we wanted to make sure we've got.
Sufficient supply to to handle any.
Intermittent disruption so I expect that inventory will go up more not substantially but it will go up more we will increase our buffer stock between now and the end of the year and I think thats. The right prudent thing to do we have a lot of cash in the bank, we earn a little bit of money on it wafers do not go bad So building a little more inventory I think.
It is actually a very smart business move on our part because we have the ability to do that both from a cash basis and because of the relationship we have with our wafer fabs Alex that goes back to the single source given that's such a large portion of our business single source, it's prudent for us to secure particularly wafers.
And bill wafer inventory, because remember that our product is programmable so.
Programmability gives us a significant amount of flexibility in our supply chain.
Understood.
That will go back in queue. Thank you so much.
Great. Thanks Alice.
Our next question comes from <unk> Silva from Roth capital.
So it's harder to tell there's everything in there there's some medical in there which is clearly precision timing. There's some high end industrial in there, which is clearly precision timing.
Aerospace auto yes, so all of those it's just that I think that there are mitigating of customers, maybe perhaps more based in China.
<unk> had some impact in that market.
And again.
We haven't lost.
Anything because of design win losses, or because for that matter of ESP losses either.
Even though even though the competitive solution is much more easily available right now than it was three four months ago.
But still we haven't lost anything there.
I guess I was going to be my next question was just is.
As <unk> seen sort of customers at the lower end slowing orders to adjust inventories can you give us a sense. How many of those sockets are truly sole source by site time, and you're sort of confident that when that inventory purge is complete you will see the orders rebound versus sockets, which may be.
Dual sourced and so there might be a risk that <unk>.
After the inventory purge they could come back and just an overall lower level of demand given increased supply from competitors, where the mix might move back to more of a dual sourcing strategy is there.
There any way to try to quantify that.
Yes, well, let me take a stab at some of it anyway and that is that even when a customer has a second source.
When we dig we sometimes find that that's quote unquote more of a theoretical thing.
Really it takes them still three months to six months to do a qualification typically that incentive is low.
What happens more is.
Has it happened at one customer where we were on a particular design win and it was an older design win and they just decided that what with the slowdown that they were facing windup, we end of life. This product.
And so they just end of life and they move customers over to.
A different product that they had so I think it will.
When the supply chain has been hyper type like it has been and then when it opens up like it is mostly opening up customers start to look at that and say wait a minute.
What should <unk> do different as far as the socket itself I think our single source sockets are generally pretty solid.
I don't see them getting away from us based on I'm, just going to swap somebody else for a few cents. We don't see we havent seen too much of that are in fact, I haven't personally seen any of that I've seen motor on push outs and have seen certainly some in automotive and in the very high end industrial where people have not been able to get.
Sure.
Other products to build out and so they are just they're just sort of sitting there and saying we're just wait. This has happened in for example in in batteries in electric Motors. Many of these customers are relatively smaller customers in size, they're not the big multibillion dollar companies and so.
They are almost always the last ones to get all the other components as well.
I don't know if thats helpful.
No. That's very helpful. Maybe if I could summarize just just to hopefully.
<unk>.
I have the right picture, if I think about precision timing it sounds like Thats at least 60, maybe as high as 70% of the Unionist demand there has been pretty solid for the lower end you are seeing what you think is mostly just sort of inventory adjustments leading to lower order rates, but you havent seen significant moves for.
Even at the low end, it's just a traditional inventory purge and maybe it takes a quarter maybe it takes two but you are pretty confident of.
Keeping even those low end sockets as demand comes back post or a clearing got it okay exactly as Scott and the other side. The other side of that is it gives an acceleration to our precision timing products, because now theyre starting to become greater and greater portion of our revenue and certainly a much greater portion of.
Our funnel, which is exactly what we talked about a couple of years ago that this is the direction we want to go in.
Sort of accelerating into that with the current with the current trend.
Got it thank you.
Great. Thanks, Glenn.
Sorry did you have another question.
Okay.
Operator are there any other questions.
Okay.
Hello, operator.
There are no additional questions at this time.
Okay.
So at this time im going to turn it over to the speakers for any closing remarks.
Alright, well, we want to thank everybody for joining us today, we apologize for the interruption in the call. We're not sure exactly what happened, but we'll go figure that out and hope everybody has a great day. Thank you so much.
Yeah.
Thank you for the participation in today's conference. This does conclude the program and you may disconnect now.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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