Q3 2022 SiTime Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good afternoon, and welcome to the sides times third quarter 2022 financial results Conference call. At this time, all participants are in a listen only mode.
At the conclusion of today's conference call instructions will be given for the question and answer session.
As a reminder, this conference call is being recorded today Wednesday November two 2022.
I would now like to turn the call over to Brett Perry of Shelton Group Investor Relations Brett. Please go ahead.
Thank you Bella and good afternoon, welcome to <unk> third quarter 2022 financial results Conference call on today's call from side time, arbitrage vicious Chief 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 <unk>.
Expected future results, including financial position strategy and plans future operations, the timing market and other areas of discussion it's not possible for the company's 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. The company 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 company's expectations for.
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 company's subsequent filings with the SEC.
Also during this call, we'll refer to certain non-GAAP financial measures, which we consider to be an important measure of company performance.
non-GAAP financial measures are provided in addition to and not as a substitute for or superior to measures of financial performance prepared prepared in accordance with U S. GAAP. The only difference between GAAP and non-GAAP results of stock based compensation expense and related payroll taxes. Please refer to the company's press release issued this afternoon for a day.
Reconciliation between GAAP and non-GAAP financial results.
I'd now like to turn the call over to <unk> CEO Josh. Please go ahead.
Yeah.
Thank you Brad good afternoon.
First I would like to welcome new as well as existing investors to the <unk> Q3 2022 earnings call.
For those of you that are new to our business side time as the leader in a dynamic new product category called precision timing.
And electronics timing is ubiquitous and ensures Rhode Island functioning.
Cider and created precision timing to service the accelerating need for higher performance smaller lower power and more reliable timing chips for applications like automated driving <unk> and data centers.
We are early in our growth trajectory as we transform the $10 billion timing market we.
We have shipped 3 billion units of our precision timing chips to 20000 customers in 300 application across all electronics.
As many as you as many of you have heard from others in the semiconductor industry. The current market conditions, we are experiencing are unprecedented.
And 40 years of industry experience I have not seen the downturn as rapid or as deep as this one.
We see this as a result of multiple unusual and simultaneous macro events, making it more difficult to forecast than ever.
Last quarter, we saw a significant change in market conditions, which has reduced our expectations for the year.
While our Q3 revenue gross margin and EPS were all solidly within our guidance range, we have seen and customer demand slowing.
In consumer than in industrial markets and now in Comms data center for fourth quarter, 'twenty, two and first quarter 2023.
This is because while we continue to see normal inventory levels at distributors.
It appears that customers have built inventory at their contract manufacturers, we expect that in all segments of customers will need to spend the next two quarters working through this buildup.
Despite this our long term growth story, and precision timing and <unk> leadership remains intact.
I'd like to discuss four key points.
Design win growth.
Increasing asps or average selling price.
Increasing our single source business and higher quote activity, all of which give us confidence in the future.
First our funnel of design win continues to grow.
Design wins are central to the growth of our business when customers commit to our products. It gives us visibility into their deployment and thus our future revenues.
As we've stated before <unk> unique feature of Programmability allows us to give customers the exact function that they want.
In Q3, 2022, we doubled the number of design wins over the same period last year.
Not only has a number of design wins and dollar value significantly higher than in 2021, our focus segments automotive comms Aerospace defense constitute large majority of these design wins, we expect that these design wins, but it start generating revenue in 2023.
Beyond.
The second great indicator is asps.
Average selling prices <unk> precision timing products offer premium poor performance at a premium price.
And our products performance cannot be matched by legacy quartz based competitors.
This is reflected in the consistent increase of our average selling price.
Q3, 2022 was at eighth consecutive quarter of ASP increase. Additionally, asps have been rising consistently and significantly throughout 2022 and will be higher in Q1 2023 than a year ago.
Note that we have not seen any loss of business to competitors of business that we want.
Even though the availability of the competitors has increased lead times have shortened and quartz prices are lower.
A third indicator of our long term growth is the strength of our single sourced business.
80% of <unk> business is now single sourced that as customers buy only item solutions in that design and will buy only from US we see this as a unique position of trust.
And so it's a relationship that we value and spend a lot of time strengthening.
A point to note is that this single source position exists.
Exists.
Independent of segments excuse me.
That it exists across all types of customers, including for example, the consumer segment.
Our fourth and final positive indicator is the rise in our quote activity, which is another indicator of our future business potential.
We provide price quotes on our products based on the function and estimated annual usage to our customers.
Our quote dollar value in 2022 is an average of three times higher than 2021.
We believe that this is a consequence of highly differentiated and category, creating products that we launched in this period and a greater reach with larger number of customers.
While these positive indicators are indeed quite positive we're still striking a cautious tone with respect to near term sales results due to the challenges and headwinds we have seen we.
We believe that the inventory buildup at customers contract manufacturers for example will take a couple of quarters to return to normal.
As we have stated before to capture the tremendous opportunity and the timing market. We've set a target to expand our Sam our served market from 1 billion in 2000 $21 billion to $4 billion in 2024 with the introduction of new timing products.
We are on track for this.
With the changes in market conditions, we are still continuing to be prudent about our spending while ensuring that our product rollout remains on track.
By the end of 'twenty, two we will have introduced six new products, which will expand our Sam and automotive and comms in 2023, we expect to introduce at least five new products in both oscillators and.
And clocks with the same end market focus.
To summarize our continued strengths in design.
When final ASP growth single source business and increased quote activity gives me tremendous confidence in the future side down.
We are delivering strong value to our customers and there are significant opportunities ahead of us.
We are building at an even stronger and resilient organization and are committed to building a bright future for saipem.
I will now turn it over to art Chadwick our CFO .
Great. Thanks, Josh and good afternoon, everyone today, I'll discuss third quarter results and I'll provide guidance for Q4 and make some comments on 2023.
I'll focus my discussion on non-GAAP financial results and we 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.
Revenue in the third quarter was $73 $1 million up 16% from the third quarter of last year, but down 8% from Q2.
Sales into our mobile Iot and consumer segment were $24 2 million or 33% of sales down 10% from Q2.
Sales to our largest customer which is included in this segment were $18 $2 million or 25% of sales.
Excluding sales to our largest customer sales into this segment were 6.0 million down 62% from Q2.
Sales into our industrial automotive and aerospace segment were $25 1 million or 34% of sales down 22% sequentially.
Within this segment sales into auto were sequentially flat, but sales into broadband industrial were down more than 35%.
Sales into our communications and enterprise segment were $23 8 million or 33% of sales.
Up 17% sequentially.
non-GAAP gross margins were solid at 65, 2%.
non-GAAP operating expenses were $28.0 million as we held spending essentially flat with Q2 <unk>.
Expenses were $16 1 million in R&D and $11 9 million in SG&A.
non-GAAP operating margins were 26, 8%.
In addition, we earned $2 $5 million in interest income this quarter up substantially from prior quarters as integrate interest rates have recently increased.
non-GAAP net income was $21 $9 million or <unk> 97 per share.
On the balance sheet accounts receivables were $44 $9 million with Dsos at 55 days.
I'd now like to provide some financial guidance for Q4 and beyond.
The macro environment remains challenging and we all know the news inflation is high in both the U S and Europe interest rates continue to rise.
The war in Ukraine continues.
China is facing a number of economic challenges.
Energy prices are increasing in Europe , and so on.
These events are clearly, having some impact on semiconductor demand.
We first saw softening demand in the consumer markets does last summer and we talked about that on our last conference call.
We are now seeing a slowdown in broad base and industrial markets.
Looking forward, we see slowing sales in comms and data center.
We have gone from a semiconductor supply constrained world a year ago when over inventoried world today.
These higher than normal inventory levels, coupled with lower demand is leading to a classic semiconductor down cycle and we are not immune.
As a result, our revenue expectations for the year have come down we've called it the way we see it but the world has changed.
We now expect sales in the fourth quarter will be down between 15, and 20% sequentially, which would be approximately $60 million at the midpoint.
Gross margins will be impacted by the lower sales and will likely be around 63% plus or minus a point.
We are maintaining our level of investment in new process and product development, and thus will hold operating expenses relatively flat.
In addition, we expect to earn at least $3 million a quarter in interest income.
Diluted share count will be approximately 23 million shares and the resulting Q4 non-GAAP EPS should therefore be somewhere between 50.
<unk> 60.
For sure.
So we don't normally provide guidance two quarters out we believe we have enough visibility to provide a few comments about Q1.
We currently believe sales in Q1 will likely be down 20% to 25% from Q4.
For two primary reasons.
First we expect the usual seasonal slowdown with our largest customer.
And second.
We see a coming lull in comms and enterprise sales as our customers in that space work through higher than normal inventory.
Since Q1 is still more than a quarter out sales could obviously be higher or lower than that but thats, how we see it right now.
At these lower sales levels gross margins will also decline and will likely be in the low sixty's.
We do however, believe Q1 will be the low quarter next year and the sales increased sequentially each following quarter.
So having said all of that as <unk> mentioned, we firmly believe our long term growth story is intact.
Our process and product development continues as planned and we expect to introduce more than five significant new product platforms next year.
Each will spawn numerous derivative products.
This will continue to expand our Sam from about $1 billion last year to about $4 billion.
$1 billion by 2024.
Design win activity has been strong as <unk> mentioned and that coupled with new product introductions and expanding Sam should lead to continued long term growth for the company once we get through this semiconductor downturn.
And with that I'd like to turn the call back to the operator for Q&A. Thank you everyone.
And I'll just ask a question at this time he will need to press star one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from the line of Alexandra <unk> with William Blair. Your line is now open.
Hi, guys. Thanks for the candor on the environment and what you're seeing I guess, just one question just circle back is what is it that youre hearing from your customers that are giving you the confidence.
And that inventory levels will be worked out in Q1 and that you can start to grow from there kind of what are the puts and takes we should be looking out for.
Sure.
Right.
Thanks, Alex.
Obviously with the caveat that we don't know exactly what's going to happen we see that.
The <unk>.
Inventory and demand out of course correlated quite a bit right. The lower demand. There is the lesser inventory comes through I think what we see.
Yes.
The inventory buildup has been somewhat.
Unusual place in the contract manufacturers, which typically not the case, we see the demand at comms and enterprise, which is one of the larger decline.
That continuing albeit at a slower pace and while we factor in the reduced demand.
And the reviews and the inventory that they have to work through that as what we begin to hear.
In many cases I think.
Some of them are significantly over inventoried some of them are very lightly over inventoried, but given the breadth of our customers I think the broad view is that the next two quarters Q.
Q4, and Q1 are going to definitely be needed for that to come through so that's what we've done. We've also learned that in talking to are looking at at the channel, including the CMS.
NBC.
We see that in many many cases that can be true.
Okay that was really helpful and if I could do one follow up just on your commentary about.
The ASP growth over over the last eight quarters and see Asp's up even in Q1 of 23.
How much of that is a function of the decline in consumer versus a function.
The newer products gaining traction versus a function.
On.
Okay.
ASP increases on an apples to apples basis on some of the legacy products.
Yes, so the ASP increases on the legacy product is probably the least component of it.
I would say that our.
Mix is probably the most influential piece.
We are selling more than comps more than automotive.
More in high end industrial.
And finally, I think the introduction of the new products is having an impact.
As you know in many cases, the new product introduction takes a little while to come through for revenue from design wins, but in this case I think there has been a significant growth of new products in particular, the aetna product line.
And the elite product line, which has contributed significantly to it.
So this is a long term transition of site time.
Last time I commented on how our ESP had grown 30% year on year Q2, 'twenty one to Q2 'twenty two.
And I anticipated that Asp's would be flattish I think ASP growth has exceeded my expectations and I think it continues to be higher now it may come down.
In Q1, a little bit.
Over current <unk>.
<unk> because of lesser.
Lesser on the mix side.
But it would still be higher than what it used to be a year before that.
And Alex I'll add just a few.
I'll add just a few comments, we've always talked about our strategy being developing much higher performance higher ASP products.
And Thats, what Youre seeing here are newer products again higher performance higher asps.
Generally higher gross margins and that's exactly what we're seeing here.
Okay perfect that was very.
Helpful with that I'll go back into queue. Thank you.
Your next question comes from the line of <unk> Desilva with Roth Roth Capital. Your line is open hi.
Josh Hi, Art can you give us some sense of what the different segments might look like in <unk> and I was curious, particularly about automotive is flat is that we're going to hold up better than the others given the design win ramps.
<unk>.
Yes, I think automotive is going to hold up pretty nicely from Q3 to Q4 and well into next year. When we look at our forecast for automotive that's definitely a growth segment for us our consumer sales will be relatively flat from Q3 to Q4, starting with our largest customer.
Our largest customer was 25% of sales in Q3, and it's probably going to be pretty similar to that in Q4, but we are going to see a decline in comms and enterprise again for the most part it's because they are over inventoried and that was my comment also on Q1, we're really going.
See a lull in new shipments to our comms and enterprise customers in Q1, so that trend will continue until they work through some of that inventory. Then we think we get back on a growth path.
And art industrials that bottoming, given the sharp fall off or not.
It should flatten out yes, okay. Good and the other question I had is with the inventories on the balance sheet now that you built up some buffer stock.
Can we return to more positive working capital and do you feel like you've built sufficient buffer stock their inventory.
Yes, I mean, we had a pretty good step up from Q2 to Q3 as I mentioned in my commentary that was a very conscious decision.
All of last year people were kind of hand to mouth on wafers and of course, we procure wafers from both Bosch for our Mems wafers and TSMC for our Cmos wafers and both of those are sole source. So just to provide some cushion in there we increased our buffer stock.
I expect our inventory levels remain kind of at this level for the next couple of quarters.
Okay, Alright, thanks, Ken <unk> I think you're right.
As buffer stock because that's how we're seeing it increasingly in.
In our continuing uncertain world.
Site end of supply of bulk Cmos and analog chips and men's chips.
Think it's prudent for us.
To have significant.
Inventory to support our customers, who as I mentioned are in fact significantly single source beside that so I think it's very important we are also moving into some areas like automotive and aerospace where it becomes even more critical to our customers to have these.
Got it thanks.
Thanks Rajiv.
Your next question comes from the line of Quinn Bolton with Needham <unk> Company. Your line is now open.
Alright, Jason Art I guess for just the first question.
Last quarter.
You talked about sort of the <unk>.
Split between precision timing and non precision timing and as you look into the second half of the year I am wondering if could you give us some sense how much of the portfolio either in Q3 or maybe for the Q4 guide would be from your higher end precision timing parts and how much of the business would still be more legacy non precision.
Timing, where.
Courts might be much more competitive.
Yeah. So.
What we have found more and more is that.
More.
Most there is very little business of ours, which is so called multi source in other words, where we can be easily substituted because our customers either don't want the performance or going for the supply chain benefits of the quality benefits of <unk> and where they can substitute readily I think that portion of our business.
<unk> has declined significantly through this year and when we exit the year large portion of it will be that 80% single source that we talked about so it's an interesting idea where.
We can have a customer in the consumer segment.
<unk> is.
Also single sourced and also <unk>.
Not going to be substituting court space Crystal easily.
Most of our single source of course goes in automobiles. It goes in industrial and it goes in columns enterprise and Thats, a significant portion of our business.
Design wins and consumers are also as we look out into the new year are also at a lower level than design wins in all of these other markets that we've spoken about so I see that trend continuing.
We're.
Single source of <unk> products and also don't forget that we are introducing six new products this year, which will likely be single sourced with customers and we're going to introduce five new products next year, which will be.
Also significantly single source next year, so that trend as a long term trend of high times because of essentially a functionality and our quality and reliability.
And I'll try to.
Sorry go ahead.
Oh No go ahead art.
I was going to just quantify this just a little bit if you recall on our conference call a quarter ago, we estimated that about 70% of our business was precision, 30% non precision timing and a bulk of the non precision timing business was in our consumer space not our largest customer but.
The remaining.
Consumer business and if you recall my remarks, a few moments ago that piece of the business declined 62% from Q2 to Q3, so that piece of the market is getting squeezed out pretty quickly here.
Yes, I was going to say it sounds like it's it's.
80% or north of 80% is sort of precision timing and 80% is sole sourced or single sourced and it sounds like that percentage you would expect goes higher.
<unk>.
As you introduce new products into 2023.
Yes, absolutely.
Got it perfect and then just a clarification on your comment about the largest customer you said would be flat quarter to quarter wasn't sure. If you meant flat on a dollar basis or flat on a percentage basis.
Yes excellent question, it's going to be flattish on a dollar basis.
Perfect. Thank you witnessed which is kind of what we expect with them.
Yes, no it makes sense.
Hey, Ken.
Ask a question. Please press star one on your telephone.
That is one one on your telephone.
Your next question comes from the line of.
Sorry, Dave and Rick with Stifel. Your line is now open.
Yes. Good afternoon. This is Jeremy calling for Tori.
Just a question first on the Comms data center weakness here.
Is there anything to call out within like any sub segments.
Any insight you have weather.
Comms or the data center versus the enterprise segment is particularly.
Yes, Thank you yes.
Yes, Hi, Jeremy.
Yes, I think the particular areas. If you were to look at it would probably be in the datacenter and enterprise I think in general those have been.
Hot markets.
And I think those are the ones that have been.
Muting slightly as we go forward based on the over an over inventory situation, we talked about.
Got it thank you.
Can you give us any color.
Color on the on your lead times.
It seems like you guys have been pretty consistent.
<unk> low relative to the rest of the industry.
Can you talk about.
How thats compared.
Maybe anything any changes in the last 90 days or so and how you see this going forwards.
Yes, we don't see yes.
Yes.
Yep.
So if you recall in prior conference calls, we talked about lead times going out two quarters or so.
Lead times have definitely come in from that.
The last number of months so to answer your question without quantifying it lead times are absolutely coming in.
Coming down.
Okay.
Got it thank you and maybe just one last question.
Looking at the focus segments can you rank order some of that for us like how you see it playing out in 2023 Hasnt recovery happens.
Which of these segments do you expect to kind of drive.
The near term.
Let me turn to growth. Thank you.
So I'm not sure I want to call out any particular segment, but I think the segments that we have always talked about being strategically important to us our comms and enterprise as we mentioned that is somewhat soft.
Today.
But what's really declining in that area is the fact that they are over inventoried. So we've got to work through the inventory in that area. If you look at our new product introductions again higher performance higher Asps higher gross margins, that's generally in comms enterprise and for US Aerospace most definitely and auto is going to be strong.
So those are really the key growth drivers that we see long term.
Very good subsequent launches.
Next our largest customer I don't think its going to be consumer we don't.
<unk> largest customer I don't think it would be consumer that'd be leading it. So that's on the other side of that story.
Understood. Thank you very much guys.
Thanks, Jeremy.
Okay.
And we have no further questions at the queue I will now turn the call back to the management for closing remarks.
In that case, we want to thank everybody for joining us on today's call and I hope everybody has a great afternoon. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yes.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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