Q2 2022 Silicon Laboratories Inc Earnings Call
Hello, My name is Sarah and I will be your conference operator today welcome to Silicon Labs second quarter fiscal 2022 earnings call.
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Please note this event is being recorded.
I would now like to turn the conference over to Giovanni Charlie Silicon Labs' Senior Director Finance Giovanni. Please go ahead.
Thank you Sarah we recording this meeting and a replay will be available for four weeks.
<unk> relations section of our website at <unk> Dot com forward slash investors joining.
Joining me today are Silicon labs, President and Chief Executive Officer, Matt Johnson.
<unk> financial Officer, John Hollister.
We'll discuss our second quarter financial performance and review recent business activities. This information along with the accompanying financial tables and 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.
We base. These forward looking statements on information available to US as of the date of this conference call and assume no obligation to update these statements in the future.
We encourage you to review, our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward looking statements. Additionally.
Additionally, during our call today, we will refer to certain non-GAAP financial information.
Conciliation of our GAAP to non-GAAP results is included in the company's earnings press release and on the Investor Relations section of Silicon Labs' website.
I'd now like to turn the call over to Silicon Labs', Chief Financial Officer, John Hollister, John Thanks Giovanni.
I am pleased to report the strong revenue performance for the second quarter set a new record at $263 million.
55% year on year and above the top end of our guidance range.
Our industrial and commercial business grew exceptionally well in Q2, ending at $144 million up 61% from the same period of fiscal 2021.
Yeah.
We saw significant year on year growth in Q2 across all major portions of the IMC business and industrial commercial and smart city applications.
The home and life business was also up strong for the quarter to $119 million, an increase of 49% year on year with particular strength in connected home applications.
In terms of our connectivity protocols revenue from our Bluetooth product lines more than doubled in the second quarter year on year.
We also saw mid to upper double digit growth rates across our other supportive protocols, such as Zigbee thread proprietary wireless Z wave and Wi Fi.
Looking at our revenue in Q2 geographically, we saw the strongest sequential growth in Q2 in the Americas region, followed by Europe .
The Pacific was down.
In Q2, the Covid lockdown situation in China does impact our customers distributors and suppliers. For example, two of our large regional distributors in China experienced increases in distribution inventory levels due to the Lockdowns and are primarily responsible for the increase in our inventory.
Distribution revenue for the second quarter was around 80% of total revenue.
Our business continues to be very diverse and our solutions are used in thousands of applications by tens of thousands of customers worldwide.
Our top 20 and customers represent around 30% of total sales and our single largest customer is 5% of cells.
The demand environment continues to be strong and our demand remains above our ability to fully supply it.
That said, we are seeing more volatility in our recent bookings patterns with more variation on a week to week basis, combined with higher levels of customer re schedules we.
We have not seen a large uptake in order cancellations.
We believe the broad based nature of our customer footprint combined with our significant industrial exposure offers greater stability to macro weakness weakness than more heavily consumer oriented semiconductor operations.
Yeah.
non-GAAP gross margin for the quarter exceeded expectations due to favorable product mix Q2 gross four gross margin was 62, 4%, which was a decline from first quarter as anticipated due to the significant price increase effects in Q1.
non-GAAP operating expenses were slightly elevated ending at $110 billion due to additional product development costs and higher variable costs on upside business performance and increased travel as we resume more normalized travel patterns in Q2 coming out of the pandemic.
R&D expenses were $68 million or 26% of revenue and SG&A expenses were $41 million or 16% of growth.
non-GAAP operating income was $55 million or 21% of sales exceeding expectations.
Our non-GAAP effective tax rate was slightly favorable at 24%.
non-GAAP earnings ended at $1 17 per share above the top end of our guidance range.
On a GAAP basis gross margin was 62, 3% GAAP.
GAAP operating expenses were $133 million with R&D expenses at $84 million and SG&A expenses of $49 million.
GAAP operating income was $31 million or 12% of sales.
Compensation expense for the quarter was $14 million and amortization of intangible assets was $9 million both in line with our expectations.
GAAP earnings were <unk> 60 per share above the high end of our guidance range.
Turning to the balance sheet cash and divestments ended up $1 5 billion.
Accounts receivable ended at $72 million, reflecting DSO of 25 days.
Net inventory increased in the quarter to 74 million up from Q1 and ending at five four turns we also.
So invested working capital into our supply chain in Q2 to secure future capacity.
Our distributor inventory increased slightly to 60 days.
So far this year, we have returned $600 million to shareholders through our stock repurchase program.
Since we announced the divestiture just over a year ago, we have returned a cumulative 175 billion.
Retiring 11 million shares or 25% of our accretive bus switchers share.
Share count.
Our share repurchase activities will provide a durable long term benefit to our earnings power going forward and we intend to continue to return capital to shareholders.
Earlier this month, our board of directors approved an additional open market repurchase program of $250 million through the end of fiscal 2023.
Next I'll cover guidance for the third quarter.
We expect our revenue for Q3 to be in the range of $265 million to $275 million.
We expect our non-GAAP gross margin for Q3 to be between 60 and 61%.
We expect non-GAAP operating expenses to increase to around $113 billion with the increase from the Q2 levels primarily in R&D based on continued investment in new products.
Due to our strong cash position and a rising interest rate environment. We expect our other income and expenses line item to increase to around $4 million for Q3.
Our convertible notes have a fixed interest rate.
We expect our non-GAAP effective tax rate for Q3 to be 26% and please note that absent any legislative changes. We expect we continue to expect the tax rate to decline by a couple of hundred basis points next year as the Amyris amortization stack on R&D deductions accumulates.
We expect our non-GAAP earnings to be in the range of $1 80 to $1 18 per share.
We expect GAAP gross margin to be about 60% GAAP operating expenses to be approximately $137 million and GAAP earnings to be in the range of 49 to 59 per share.
I will now turn the call over to Matt for the business of it Matt.
Thank you John and good morning, everyone.
Silicon labs continues to execute well in a challenging macro environment posting record revenue and EPS during the June quarter.
<unk> seen volatility in the market and as John mentioned, increasing variability in our bookings patterns.
That said, we are driving solid execution strong design win momentum and notable share gain broad experiencing continued strength of our diverse end markets.
Demand continues to meaningfully exceed our ability to supply and we are focused on meeting our customer requirements.
Our second quarter results were driven by double digit growth across all our major product groups in end markets highlighting the diversity within our business.
Our opportunity pipeline continues to expand and now sits at $15 5 billion up 54% year over year.
We continue to see significant design win momentum as well and our year to date total already approaching our 2021 full year levels.
This gives us confidence in our expectations for continued outperformance in the market.
In Q2, we saw strong growth across all wireless protocols are Bluetooth solutions were notable sorts of strike, reflecting our broad market share.
Revenue related to our Bluetooth portfolio grew at an exceptional pace up 52% sequentially and 114% year over year.
And our Bluetooth design win momentum as a seller.
In the industrial and commercial business, we saw solid revenue growth record design wins, and a strong demand environment.
We also secured a major design wins with leading global electronic shelf label customers, including to the top three providers.
And home and life, we saw solid revenue growth again, this quarter as well as record level design wins led by the Smart home segment specifically.
While we recognize the market volatility, including some consumer weakness in market softening in the quarter. We note our ongoing design win momentum.
For example, we continue to expand our smart home position with the xylem to take advantage of a matter of connectivity standards, it's important and our recently launched <unk> four product.
Customers are showing strong interest amount and we continue to support the connectivity standards Alliance and matter of protocol development to help developers create the worlds best matter based solutions.
We are highly focused on the competitive landscape for recruiting and retaining talented employees.
We have built a strong early talent pipeline and have over 350, interns and new college graduates joining this year.
45% of our global intern class this year come from historically underrepresented Townsend.
Our new College graduate hiring also continues at an accelerated pace further enhancing our ability to scale and build a sustainable talent base.
We are investing in our employee experience through a variety of training programs resource groups and other initiatives to ensure that we retain and attract the critical talent that drives our business.
As we announced earlier this morning, Bob Conrad has been appointed to our board of directors.
Bob is nearly 40 years of experience in the semiconductor industry, most recently with Freescale and NXP before retiring in 2019.
He brings a strategic mindset and deep industry experience, which will be invaluable as we continue to scale and grow the economy.
We also announced that billable and as shared his intention not to stand for reelection to our board of directors.
He will retire effective as of the date of our 2023 annual stockholder meeting.
Bill has served on the Silicon Labs' board of directors since the beginning of the company and we are grateful for his leadership over the years.
We're also looking forward to our upcoming work with developer conference being held September 13th 15th in its third year worked with in the Premier developer Crawford from building the scale to create impactful connected device.
We bring the industry together to continue simplifying and accelerating wireless adoption globally.
In summary, despite the changing landscape in the broader market our team executed well across the board.
And the one year from Silicon Labs became a pure play Iot company, we have delivered record revenue growth and increased earnings power, while returning significant capital to our shareholders.
Iot wireless market has shown remarkable resilience and we are more confident than ever in our ability to lead and scale in this large and growing market.
Giovanni.
Thanks, Matt.
When we open the call for Q&A I would like to announce our participation in two upcoming conferences Keybanc capital markets annual technology leadership Forum in Vail on honestly and.
So these 2022 global Technology Conference in New York in early September .
We will now open the call for questions to accommodate as many people as possible before the market opens I ask you limit your time to one question with one follow up inquiries if needed.
We will now begin the question and answer session.
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Our first question comes from Rajeev <unk> with Needham <unk> Company. Please go ahead.
Yes. Thank you for taking my questions and congrats on all the good momentum.
Just wanted to get a little more insight on your commentary around seeing more volatility and variability in the order book and customer scheduling Wonder if you could clarify.
Did you say that you have not seen.
An uptick in.
Customer cancellations or have you haven't seen a large uptick in order cancellations I'm just trying to get clarity on that language and also.
If you could elaborate a little bit further on on when you when you say youre seeing variability in the order books, what does that what does that mean.
And is there a specific job yes, let.
Let me start Roger.
Yes, we are.
No in the supply crunch over the last period of time and just given the strength of our demand in the secular drivers that we have it's been a period of really sustained strong bookings for several quarters.
We have begun to see more variability there and the week to week booking patterns with some weeks continuing to be very strong some weeks or more light.
And with regard to new bookings, although the cumulative backlog remains high and significantly above our ability to fully service that backhaul.
In terms of the push outs and cancellations yet we've seen a few cancellations rajeev, but not none of the major trends or sort of broad based in nature.
What we are seeing more frequently our customer requests to reschedule deliveries further out in time as they continue to assess their own demand profile.
Thank you for that that's helpful.
My follow up if you look at your revenue growth.
Youre on track to kind of exceed your your annual guidance of 35.
To 40% and last year you grew also 40, 40%.
So wondering if you could talk about the.
The contrast between pricing and unit growth.
If I recall last year.
Much of the growth a majority of the revenue growth was attributed to our unit growth than maybe 10% of the growth was attributed to ASP increases.
This year it seems like it's going to be more even so double digit price increases versus say double digit unit increases.
So wanted to get your thoughts on on the pricing environment.
Are you continuing to kind of pass on input costs to.
To your customers how long do you think that pricing power or the price increases is going to sustain itself, especially as we go into next year, where there could be a deceleration in demand. Thank you.
Let me start and then I'll pass it to Matt Roger This is John again, So you are right.
You're sort of summary assessment there is a good way to frame that with double digit contributions this year from both a pricing and unit output.
And we saw more unit output contribution in the second quarter than the first quarter and as we progress through the year, you'll see more of a stable pricing environment just as another data point to highlight that the ASP that we generated in Q2 were essentially flat to Q1, so sequentially the growth in the business.
<unk> was fully driven by unit output.
As far as the pricing power and how long that will sustain let me, let me turn it to Matt to comment longer term, yes sure other than I think two two quick comments one is it's important to recognize that.
We have been implementing up our supply which is extremely important and important for our customers and we expect that to continue.
On the pricing piece, we took a little bit different approach than some others and we did a an increase one time.
Got it.
Telling our customers, we're trying to not nibbling into depth on this we're trying to reflect what we think is going to happen over the course of the year based on what we were being communicated by our suppliers as well as some estimates.
Pretty well.
We're seeing that that worked well for our customers that allows them to plan and navigate through the year in terms of the durability of that right now we don't see any indicating indications of supplier pricing change right and that's that seems to be relatively durable and in fact I think.
The expectation for most suppliers is that theyre going to continue to increase their price.
So we feel good about how we've approached it and we are right.
Right now all indications are those prices will continue to increase and a small amount from suppliers and thats, what we baked into our plan. So we feel good about it.
Thank you and if I could just squeeze in one more and I'll back up in the queue. Just can you remind us John what your lead times are.
Thank you.
Yes, theyre quite extended we're looking at it depends on the product line, but interested in sort of aggregate terms between six and 12 months of lead time at this point.
Thank you.
Our next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hey, guys. Thanks for taking my question.
I want to start by saying I. Appreciate the fact that you guys have been exceeding your long term financial targets.
So far this year and congratulations on that.
But as I look at the low end of your long term financial targets.
But as you presented at your analyst day.
That's roughly $1 5 billion of revenue, 55% gross margin. However, if I simply extrapolate out your $113 million non-GAAP Opex guide.
As you are putting out there for the third quarter. It looks like you might be a little below that long term, 20% op margin target maybe call it high teens percent.
My question is what can give that allow you allow for <unk> of that low end of the financial target gross margin is it maybe some more opex discipline.
Hey, Gary This is John I understand the point and yes, we are pleased to be outperforming our long term targets this year.
As we look ahead, we've got we've got a ways to go to that point and we have no change to report that the first thing to say no change in the long term model.
We do have puts and takes between gross margin and Opex as you indicated that's one point to make and second point is we have introduced a bit more variability and flex into our spending profile that provides more optionality to the management team here.
Thanks, John .
My follow up can you remind us.
What you have remaining for capital return I believe that your return long term as it is to keep maybe a $1 billion in cash war, where optionality so to speak.
I mean, there's roughly 500 million left to return.
Yes.
Just suffice to say Gary that we expect to continue to return capital to shareholders.
Don't really have a.
View that others are.
Terminal points around this yes, we would like to maintain some dry powder for M&A optionality quickly.
Quite pleased with how this has gone so far.
Like to continue with that program. After the board has authorized another 250 that would pop up to the full $2 billion, we talked about when we did the deal but that doesn't mean, that's the end of the roads, what I'm trying to say.
Alright, Thanks, Chuck I appreciate it.
Our next question comes from Matt Ramsey with Cowen. Please go ahead.
Thank you very much good morning, everybody.
I guess for Mike first question, Jon You mentioned in your script.
Distribution inventory had gone up and I think that was you called out due to a couple of the big just even China, having some some COVID-19 shutdown stuff that happened during the quarter and I guess, that's understandable. Okay. Maybe you could give a little bit more color on how much that's gone up.
And have you.
Tracking sell through from those bid season see inventory start to come back down.
Okay.
Yes, a bit so on the second question.
We're seeing the China market open up better than where it was in the second quarter for sure.
Suffice to say that.
The two the two areas, where we saw accumulation are above the average for literally.
And our.
Composites goal for this remains to be in the 45 to 55 days category. So we're a little ahead, but.
On some distributors they are below target actually so we expect to continue to normalize this.
Create more fill in also relieve some of the some of the accumulation that's taking place in China.
Thanks, John I guess stepping back a little bit bigger picture for my follow up.
I guess the observation.
Thank you.
You and your peer companies. The results are really good asps and margins really strong right now and there is kind of the juxtaposition of the investor fears of what's coming down the pipe with the economy.
I think to that end, Matt maybe you could spend a little bit of time on the design win momentum how youre seeing different end markets behaved from a design in and design win perspective, what what asps are being sort of contemplated in some of the new wins that you're getting just trends like that that might I guess help us.
Talk to investors about the fact that these trends that youre seeing now are sustainable and maybe defensible if the economy does get a little more Harry thanks.
Sure Yes.
So this is Matt.
Focusing on that I think it's a really important point because.
There's a lot of uncertainty out there in terms of.
What the market's going to look like in the coming quarters and the.
One of the things that we can do that.
That makes a massive impact in the most meaningful to insulate us from whatever happens is our share gains in design win momentum.
One of the strongest indicators that we have of what the future is going to look like so you see our current performance and what I mentioned earlier is.
Year to date.
We have secured design wins that are approaching the level of our entire here in 2021.
And 2021 of the strong design win year for us So that gives US you know.
The the most momentum and confidence that you know however that ends up playing out we'll be well positioned gaining share and outperforming.
That being said you asked about asps as well.
When a competitive asps and the sockets. So these design wins are priced at competitive AFC if theres not.
Any assumption in there.
Long term change it's honestly, it's one customer at a time one application at a time one socket at a time and those have to be competitive when we wind up so that's how it's reflected when we recognize the design win so an important topic and we are very proud of the team's moment.
There and our goal is to not only continue that but accelerated to the maximum extent, we can moving forward.
Thanks, Matt really appreciate the color.
Our next question comes from tore Svanberg.
Great.
Please go ahead.
Yes.
<unk> on the strong results our record quarter.
First for John John .
In the previous call you talked about some some potential gross margin pressures as we move throughout the year. It does sound or seem like gross margin is holding up quite a bit better.
Can you talk more about the dynamics there beyond the guidance that you gave for the September quarter.
Yes sure Tori.
We are seeing some downward shifts here we saw the.
Somewhat anomalous Q1 due to the asynchronous effects of price and cost that come down in Q2 again forecasting.
Sure.
Down in Q3 really is back to what Matt was talking about earlier in the call, where we we implemented price.
Dynamics.
Some of the cost increases that are coming were coming in.
Now we're seeing some of that so we had some additional cost increases.
Materializing in the second half we have talked about that before.
Looking ahead, we will continue to monitor this and see how the market progresses as our supply chain may open up.
Capacity open up over time.
So really no no major changes in our messaging around those points. This morning.
Great great good still civil.
Several several hundred basis points I think higher than.
What we had.
Perhaps suggested before.
Second question is for you, Matt I think you called out the electronic shelf labels market, where you are now working with two of the largest players there could you just elaborate a little bit on that it seems like we're still a very early innings of that becoming potentially.
A huge market in the next few years.
Yes, absolutely.
Thanks, Brian This is Matt.
First of all that that's a market that.
As you said early days, just beginning I think it has substantial growth potential in this space.
Thank you.
Global adoption of that type of technology is relatively low, but the use cases and needs and accelerated in the pandemic.
And I think we're seeing what I would start or define it.
Early signs of very broad adoption being planned by a lot of stores not just in the U S, but globally as well.
It's interesting to point out this is not a new phenomenon for us internally, we've actually been focused on this space now for about seven or eight years.
And we're starting to see.
The impact of that and we're really excited about so early days, well positioned and I think a substantial potential moving forward.
Great. Congratulations again, thank you.
So again, if you'd like to ask a question. Please press Star then one our next question comes from Blayne Curtis with Barclays. Please go ahead.
Hey, Thanks for taking my question you mentioned in the script that you saw some weakness in home and life. Just curious when you saw that weakness and you were able to offset it with a design win and actually grew quite nicely just kind of curious as you look to September any color on that consumer weakness within that September guide and with at home.
It can still grow.
Yeah Blayne.
We have seen some some of the push outs.
That part of the business a bit more fair to say that.
And yes, we'll see how the trends evolve over the course of the quarter, but it is possible that business could grow.
Yes. This is Matt I'd, just add to what John saying.
It's important.
Understand that dynamic that demand continues to meaningfully exceed supply.
Across all of those markets and applications. So we are seeing some of those push outs and some of that volatility.
Which creates some challenges to schedule as those things happen, but we definitely see the ability to continue growing in that space and our priority is to <unk>.
By the way to close the gap for our customers on demand versus supply.
We still have a lot of a lot of.
<unk> customers out there we want to close those gaps so there is definitely opportunity for growth.
Got you and then just a follow up.
In terms of the increase in inventory.
I mean, it's not that much on an overall basis, what is the big sequential increase so was that product.
You had hoped to ship and just couldn't given all these moving pieces.
Yes, essentially thats right and its also.
Speaks to our work on supply chain and what we've done there as well.
We are.
We're making some progress here, but I'm not really at our goal or target inventory turns level, which is more in the three to four times neighborhoods. So we remain.
Couple of terms above above.
Above our targeted return levels.
Patrick Thanks.
Sure.
I will now hand, the call back to Giovanni and Charlie.
Thank you Sarah and thank you all for joining this morning. This concludes today's call.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.