Q3 2022 Silicon Laboratories Inc Earnings Call
To Silicon Labs' third quarter fiscal 'twenty two earnings conference call.
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At this time I'd like to turn the floor over to Giovanni for Kelly.
Silicon Labs' senior director of Finance Giovanni Please go ahead.
Thank you Jamie we are recording this meeting and a replay will be available for four weeks.
Mr Relations section of our website.
Dot com slash investors.
The press release and the accompanying financial tables are also available on our website.
Joining me today are Silicon labs, President and Chief Executive Officer, Matt to Austin, and Chief Financial Officer, John Hollister, and we'll discuss our third quarter financial performance and review recent business activity.
We will take questions. After our prepared remarks today will include forward looking statements subject to risks and uncertainties. We base. These forward looking statements on information available to us.
Date of this conference call.
<unk> 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 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, Jonathan Thanks Giovanni.
Revenue for the third quarter grew 46% year on year, ending at $270 million in line with expectations and well above our target model growth rate.
During the quarter, we saw sequential growth in both business units industrial and commercial and worldwide.
Areas of particular strength for the quarter were in smart home applications and commercial auto.
Geographically Q3 revenue growth was strongest in the Americas, followed by Europe and Asia Pacific.
All regions grew in the quarter.
Distribution sales were consistent with expectations of approximately 80% of total revenue, reflecting the broad diversity of our customer base.
Our largest customer in Q3 was mid single digits of our mix and our top 10 customers comprised around 20% of our revenue.
Our distribution inventory levels at the close of Q3 was slightly lower at 59 days we.
We continue to see a challenging operating environment in China due to ongoing Covid Lockdowns in fact.
Impacting our distributors' ability to shut the pls to end customers and resulting in higher than average to get all of them for it.
During the quarter, we experienced volatile booking paths with some weeks continuing to show above average strength, while in other leaves our bookings levels were relatively low.
Certain customers have indicated that they have a huge accumulated I think with inventory levels and while our cumulative backlog declined in the third quarter. It remains high by historical standards.
In Q3, even though we began to see signs of foundry capacity opening up on certain nodes. There continue to be lagging process nodes, where we have meaningful supply constraints.
So that lead times have come down closer to 26 weeks, which is still above normal levels.
non-GAAP gross margin for Q3 was favorable to expectations on products mix ending at 61, 5%.
Constant with the overall trend for fiscal 2022 Q3 gross margin was down about 90 basis points from Q2, reflecting ongoing second half input cost increases.
non-GAAP operating expenses were slightly favorable to expectations on reduced outside services spending ending at $112 million.
non-GAAP R&D expenses were $69 million and non-GAAP SG&A expenses were $43 million.
non-GAAP operating income was $54 million, representing operating margin of 21%, which is above our target model for profitability at this revenue level.
Our market, our non-GAAP effective tax rate for the quarter was 27% and non-GAAP earnings for the quarter ended at $1 21 per share.
This earnings result is approximately a 250% increase from the same period last year, a dramatic improvement following the <unk> divestiture.
On a GAAP basis gross margin for the third quarter was 61, 4% GAAP operating expenses were $135 million R&D expenses were 85 million and SG&A expenses were $51 million.
Stock based stock based compensation expenses were $16 million and amortization expenses for intangible assets were $8 million both in line with expectations.
GAAP operating income was $30 million, representing 11, 2% operating margin gap.
The GAAP effective tax rate was approximately 40%.
GAAP earnings were <unk> 60 per share.
Turning now to the balance sheet, we ended Q3 with cash and cash equivalents of $1 4 billion.
Operating cash flow for the year to date period, ending in September was $127 million.
During the quarter, we executed open market repurchases of our common stock, bringing our total year to date repurchases to nearly $700 million and the total completed since the announcement of our divestiture last year to more than one 8 billion.
Our fully diluted share count declined at the end of the quarter to $34 8 million shares.
Our accounts receivable balance in the quarter increased to $77 million with days sales outstanding at 26 days are.
Our inventory balance grew in the quarter to $88 million, representing four seven turns.
Our debt balance at the end of the third quarter is unchanged with the principal balance on our 2025 convertible notes at $535 million.
The company's balance sheet and liquidity position are very healthy and we have ample capacity to continue our capital deployment strategies.
Before I turn the call over to Matt I would cover guidance for the fourth quarter.
We expect revenue for Q4 to be in the range of $245 million to $255 million.
The industrial and commercial business to increase slightly on a sequential basis with continued tight supply on certain product lines.
We expect the home and life business to decline in Q4 due to a slowdown in customer demand all of certain programs.
We expect non-GAAP gross margin in Q4 to be approximately 60%.
We expect non-GAAP operating expenses for Q4 to decline to approximately $109 million.
We expect our non-GAAP effective tax rate to be approximately 25% and non-GAAP earnings to be between 93 cents to $1 <unk> per share.
On a GAAP basis, we expect gross margin to be 60%, we expect GAAP operating expenses to be approximately $132 million and GAAP EPS to be in the range of 35 to 45 sites.
I will now turn the call over to Matt.
Thanks, Tom and good morning, everyone.
The power of the macro environment Silicon Labs' delivered sequential and year over year growth in both revenue and EPS in the third quarter.
Sure.
As highlighted in the prior quarter design win momentum propelling, our new business pipeline as we gained share across all of our house.
Our revenue grew by 1%.
How are you.
The industrial commercial business, but in fact, the exact report on both a sequential and annual basis.
The commercial automation segments delivered strong results with revenue up four.
Perfect.
160% year over year.
Additionally, smart city applications continued to demonstrate robust any more upstream.
Year over year.
And if you're working in agriculture applications showed strong growth both sequentially and year over year as well.
This past quarter, we're pleased to be recognized as a supplier of the year by multiple customers and partners.
Good afternoon wanted to see.
In terms of a threat and being a trusted partner Crawford, who their customer base.
I'm afraid that we love.
The sound is working closely with our customers before getting stronger relationships.
We were honored to receive this emerging supplier of the year Award recognizing.
All of this was poor performance Eric.
Quality as long as we know.
Moving to Boston.
We were also selected by the acuity brands as a finalist for the acquired will be here alone.
In the library will be here when we're off the part of the year quite Schneider electric.
Very cooperative relationship problems. These awards recognize.
Martin.
As John mentioned within the home segment Smart home products were a bright spot LIBOR.
That's frankly been 40% year over year.
It's important to highlight the cardiomyopathy patients are not confined to a single band at home.
Smart solutions are also being incorporated in the large scale built environment, including in the neighborhood of an apartment complex.
As well as upgrades that improve salary narwhal.
We were thrilled with the turnout at our third annual orphan developer conference in September which grew more than 7000 graduates.
Over 800 companies signing up for over 57000 individuals.
The caliber of attendees and peanuts, which includes periods from Amazon and Google among others.
More of our leadership with an RMT or anything more within the industry.
What was the last really two part one.
Being broken.
Our disposition.
Pete.
32 represents the fourth generation of Silicon Labs' wireless technologies and incorporates all the learnings.
Here's the work in this space.
Wireless connectivity platform that is purpose built for the IR team.
Really security battery life.
Features like the industry's first both in hardware acceleration for machine learning it yet.
So it was the highest in nearly doubled at the IFC revenues. The last two years driven by the first few products on the spot.
Building on the strength of our iridium product cycle.
Gordon talked through the opening work with email that will help shape the future of the Iot.
Product is important technologies, such as matter Amazon sidewalk, Wifi and Wifi six.
We are now.
Now I'll turn the call them solution, providing support for a matter of a Wi Fi, but our older thread and Bluetooth low energy.
And that reduces the bolt EV and do it.
We also have the silicon that are appropriate for Amazon sidewalk Earth and any development platform.
Activity support for Amazon sidewalk.
Like them, we are now at 325.
Yeah Omar on the front end module kits at a new flagship S&P and our April Barbara Lifetime income together are designed to provide a sub gigahertz transmission range brief.
Three kilometers in dense urban environments, and then data.
Yeah.
Finally, we announced significant progress in expanding our capabilities.
And really with one time items first Wi Fi six and deal we'd absolutely fabulous.
It will be nominal.
Which is the industry's most power longest battery life Wifi for E Commerce solutions.
Another significant milestone in the quarter was inauguration of Silicon labs, and Goldman and how everybody gets it wrong.
For more than 500 employees.
If I just focus on being the leading Iot wireless development.
As part of this so at least the last the centralized and talking about launch India's birth pains acquired blocks on the network as it turned out like the powder River West Park City living abroad.
This network will support an innovative lighting application 30, both of network nodes the Nike campus.
Our remote monitoring and control.
In closing, we had a great quarter showcased the strength of our execution strategy.
You're uniquely positioned with our unmatched breadth depth and important in our space.
Our growth was supported wireless technology ecosystem applications in market with the largest in the world.
Our depth and domain expertise.
Wireless performance battery life security and ease of use for adoption for our products.
And 100% commitment.
Commitment on why a nominal growth in Iot wireless connectivity has enabled us to double our revenue over the last couple of years.
All right.
We're confident in our ability to navigate the current challenging environment.
And our Iot business.
Good morning.
Thank you Matt.
Can we open the call for Q&A I would like to announce our participation and the Stifel 2022 Midwest one on one growth conference on November 10 in Chicago.
We'll now open the call for questions to accommodate as many people as possible before the market opens I ask that you limit your time to one question with one follow up if needed.
Ladies and gentlemen at this time, we will begin the question and answer session to ask a question you May Press Star and then one if you are using a speaker phone. We do ask that you. Please pick up your handset prior to pressing the keys to ensure the best sound quality.
If at any time. Your question has been addressed and he would like to withdraw. Your question you May Press Star two.
Once again that is star and then one to join the question queue.
Our first question today comes from Matt Ramsay from Cowen. Please go ahead with your question.
Thank you very much and good morning, guys.
I guess for my first question, Matt If you just kind of go through the guidance as Jon laid it out and industrial and commercial.
In Q4 that means you're down home and life down I don't know mid to high teens something like that sequentially.
Just wondering if you could maybe provide some color on and walk us through what sort of order patterns, you're seeing I think in the commentary you guys mentioned some maybe some programs that were slowing it sounds like some customer inventory might've hilltop in some cases I'm just trying to get a feel for that home and life segment and what you guys are seeing in real time.
Sure No problem. So yeah Big picture. If you look at Q4, we're seeing you know that consumer lives, particularly consumer past farming in China softness.
And then in Europe than U S.
And in that space, there are still a demand for biogas.
But if you look at industrial and commercial you definitely see more things in that space, there's definitely pockets, where we've seen softness there as well, but nowhere near the thing with what we're seeing on the consumer side.
That's the commercial space the demand supply gap for me.
That's pretty substantial.
An easy way to think about it if we had.
The ability to close that gap with looking at good growth going from Q3 to Q4.
The other thing that is worth kind of mentioning that a little color.
Because of the diversity of business that we have across technologies markets applications.
We're seeing a little bit of everything honestly, we've seen some customers were still in demand strong growth and strong growth cycle seeing other people kind of just right and others that are over inventoried and not needing as much supply from op. So.
Pretty diverse.
What are the circumstances that we're seeing out there.
Being said.
We still expect our market space to outgrow the overall market and given the share gains you've seen over the last couple of years, we expect astellas to be able to outperform wherever this market ends up being.
No I appreciate all the color there, Matt it's definitely a dynamic environment I guess for my follow up question I wanted to ask sort of a bigger and bigger.
Bigger picture topic.
During the last I don't know 24 months or so when supply for your company and most of your competitors have been insanely tight.
Noticed many of your microcontroller competitors are really over indexing their allocations toward automotive and industrial and maybe much less so towards Iot customers and.
And you mentioned the share gains that your company is taken as a result.
I guess going forward from here over the next couple of years would you expect that sort of land and expand share gain story to continue for you in those customers that you guys service to be loyal or on the flip side is.
The tightness eases for your competitors are they diving back into Iot and and that becoming a focus just how how is that dynamic playing out with customers as maybe supply opens up for some of your competition. Thanks.
Yeah understood. Yeah, a quick quick answer is yeah, we definitely saw that dynamic where you know as things became extremely tight.
A lot of competitors retrench to what their therefore.
Which was fantastic for us because our quotas with this space and so we definitely know that we gained share a result of that.
I think a few things we haven't seen that dynamic shift yet.
So things definitely has not opened up in a way that we've seen competition coming back with those sockets, yet I think it's too early for that I do think it will happen.
Supplying through people will be out there looking for socket.
Two things I'd say, one is our customer and remember this stuff.
I think a mess.
Memories are pretty deep and the supply chain prices has even strengthened relationships per weekend relationships and I'm proud to say that I think a lot of our relationship with a vast majority of them have improved in the cycle. So I think that will serve us well as we go into the next few years.
The other thing Thats really critical to understand we are in a incredibly strong period product cycle.
It's in our series two platform. So you know.
As I said in my prepared comments, we've literally.
<unk> doubled the size of our revenue in the last couple of years on the FERC two products coming out of that thoughtful and there. We just announced four more and we have a lot more coming in development. So that strength of platform, where we're at in the cycle positions us really well going into whatever it is.
In defence that we've improved our customer relationships and we have a strong product pipeline.
The competition, but I think we're pretty well positioned going in.
Thanks, Matt I appreciate the context.
Our next question comes from Gary Mobley from Wells Fargo Securities. Please go ahead with your question.
Hey, everyone. Thanks for taking my question I wanted to ask.
Yeah.
Ask about what Matt mentioned in his prior questioning perhaps in a little more direct fashion.
Given the trends that youre seeing in your in your bookings on a week to week basis or month to month basis do you feel like your fourth quarter revenue guidance is reflective of the trend or is this just a note on the way down and against that do you think you can grow your top line in calendar.
23.
Yeah. This is John .
That's a good question, it's a hard one to answer based on everything we see we see outstanding design win momentum in the company. We are at 90% of our annual goal towards environment achievement through the first three quarters of the year, that's a tremendously positive statement.
We are not immune from a macroeconomic effects no company really is at the end of the day.
So we'll see we'll see what the fed comes out with next week, and where where you know where the capitulation cycle may begin to kick in on et cetera, but over as well positioned as we could be as Matt just articulated it very well to grow the business and putting aside macro conditions, we see fundamental drivers in the business that indicates you.
Yes, we expect the business to grow in fiscal 'twenty three.
And we are not changing our long term CAGR or growth of 20%.
Oh, better answers, but happy to follow up with a big player no no. It <unk>.
It it's quite helpful. John I appreciate the comments.
So if I'm not mistaken you have some some China based fab partners.
I'm curious to know.
The backdrop of tightening U S export restrictions targeting China have you begun the process of trying to reshuffle your fab partner excuse me fat partner footprint.
Tried to mitigate the risk associated with these restrictions.
Yes. This is Bob.
So Gary so.
Big Big picture of the company, we have relatively low percentage of our overall business in China.
13, 14% and <unk>.
Even smaller percentage of our supply coming out of China from a foundry perspective and.
We do not have any of our.
Think of it as our next generation R series to our growth products.
Sole sourced anywhere anytime so we believe that we're relatively well positioned.
To be clear disparity, there's a lot of uncertainty.
Notably the throne.
But we're not a sole sourced on any of our future growth or next generation products there.
That's helpful. Thank you Matt.
And our next question comes from Blayne Curtis from Barclays. Please go ahead with your question.
Hey, guys. Thanks for taking my question I just want to go back to Matts first question on the guidance because you did mention some certain programs and then I think your answer was more kind of.
Geography, so I'm just trying to understand is it quite a sharp decline in December that kind of like a one time thing I mean, I know you're still saying demand.
Client supply issue, but you did also mention some programs if you could just elaborate on that.
Yes sure.
So to be clear that this is.
More broad and consumer so it's a complex situation, where we're definitely changed consumer softness right. We're not seeing order cancellations were seeing order push outs and at the same time, we still have more demand than supply so matching those up.
Increasingly difficult.
Given that volatility that we're seeing out there.
This is less in Q4 about one or two customer program ramps or anything like that and this is more of a market statement about what we're seeing in consumer.
<unk> really like I said earlier, our strongest and most acute in China.
But then some consumer softness in Europe as well so think of it that we're.
We're seeing broad softening.
In the consumer space.
Still some demand supply gas, but this isn't about one or two brands or new customers or products or anything like that.
It's also important to reference you know relative to the last year.
It's definitely weaker than what we've seen but if you step back and looked at this previously I think prices.
Our backlog and outlook would be stronger than ever going into a quarter or going into a year. So it's the context matters.
And I just wanted to ask on pricing you kind of took the position of raising wants and not having to go back to customers, but it has been the primary driver of growth. This year. So just your thoughts if things soften and.
Capacity becomes available elsewhere your ability to hold pricing.
<unk> had this year into next.
Sure.
We're not seeing.
Any indications of supplier pricing soften yes. In fact, we're still seeing some increases in expectations increase, especially as you know theres still some pretty sharp demand supply gap, particularly in the nodes that we trade into the company, but the industry is considered more of a mature process node.
So that's been important to realize that not all of those are the same in the semiconductor space.
So that's the first thing second is we do believe that we are well positioned to navigate not getting stuck in the bill for lack of better terms as a company.
It's actually given the way, we manage customer relationships and the strength of that product cycle I mentioned earlier so.
We mentioned consistently over the course of the last year or so.
Our goal in this but it does not change our model raise their model but to passive.
After the prices along and not get stuck in the middle and I think we're still in a very good position to continue to do that.
And John if I just had a couple of quick points.
ASP dynamics were also driven by product mix, where at times from selling higher value added products such as higher prices.
Point is giving us for Q3 were up double digits year on year.
Yeah.
Thank you Don.
Our next question comes from Rajiv Gill from Needham <unk> Company. Please go ahead with your question.
Yeah. Thank you for taking my question just to follow up again on the.
The home and life.
A fairly steep deceleration in terms of year over year growth.
The growth is decelerating to about 11% year over year and on a sequential basis for Q4, its down about 17%.
And so when we when we're thinking about going into the first half of 2023.
If there is kind of continued softness in the consumer market.
It is mainly driven due to order push outs and then trying to match the demand supply is there.
They are concerned that those order push outs are going to lead to kind of order cancellations.
And we have more of a pronounced.
Even more pronounced decline in the in the home and life I'm, just trying to get a sense of that.
The steep decline on a quarter over quarter basis.
You're attributing it to order push outs and matching demand supply, yet, but not necessarily straight out.
Order cancellations, so I'm trying to reconcile those two ideas.
Sure I think.
This is Matt I'll comment on that and I think it'd be good to hear from John as well.
Things are dynamic right now in Mexico, what we're giving you the best picture that we have sitting sitting here right now.
When we look customer by customer and go through this as I said earlier that as part of the mix of what we're seeing right.
Customers are still going strong summer just right and some have more inventory than they should and they're also see demand soften so they're trying to work through that so.
Go forward.
Definitely know that Q4 will be working through inventory the customer path, which is good.
And I think that's what you want to see going into next year.
I think what you'll see next year.
Pretty wide range of things that we mentioned earlier, we're going to see some customers that still need to burn off some inventory and are seeing also demand softness overall, but we also see.
Customers presenting a lot of time consumer and.
And we also know we can have those share gains.
Those sockets and applications. So the top ones are those.
Okay.
Good confidence going into 2023 that we're going to be able to do better than wherever that space ends up being.
And Jon Filbert out yes.
Just add that in terms of cancellations, we really have not seen that.
Cancel but really it's more of a push out.
Understanding your point around you, but so far we have not seen meaningful cancellations.
Yeah, I appreciate that insight and just for my follow up on the gross margin.
Gross margins, even though they've been trending down off kind of a high base are still.
No quite healthy relative to your long term target, 60% for Q4 guide.
If we're entering into a period, where there could be volatility around the home and life business.
I'm just curious how are we thinking about gross.
Gross margins.
As we trend into into next year and why have the margin has been relatively healthy.
Given kind of the mismatch that you saw with price and cost is it a mix shift towards industrial commercial that's helped.
Just curious on kind of the dynamics of margin in Q4, and then how are we how should we be thinking about the margin trends next year at a high level. Thanks, a lot guys sure, yes, you're right John .
<unk>.
<unk> well in this area this year.
As we look at the guide for Q4.
Near under model indication of high <unk> gross margin.
Given the current situation in.
No real change to the overall messaging on gross margins, we continue to allow for some some potential.
Potential compression narrow over time due to the factors we've talked about previously.
Growth and standards based technologies growth in certain volume customers et cetera, but we're going to try to continue to outperform and things that we do that that's a win so really no major change in our messaging.
Okay.
And our next question comes from Tory Swanberg from Stifel. Nicholas. Please go ahead with your question.
Yes. Good morning, this is actually Jeremy calling for Tory.
Maybe if I could ask firstly on.
Is there is there a way to get a sense of.
Maybe where your lead times are at.
In terms of what you may be quoting to your customers and also what you may be getting from your suppliers and has that shifted in the last.
You know a quarter or so.
Sure. So this is John .
We've seen lead times come in that they were running in.
26% to 52 weeks, depending on the product more averaging now about 26 weeks. So it has come in some.
That does that continue to be well in excess of where we have traditionally operated.
As we ran with roughly seven to eight weeks of lead time I think those days are over going forward will systemically now have longer lead times more likely in the roughly about a quarter worth of lead times. So we're still roughly about <unk>. Our expected long term lead times are not permanent.
Great. Thank you.
Turning to the design wins I think you mentioned.
Youre at 90% of your initial target.
And.
That's about three quarters of the way through the year can you give us a little bit more color in terms of.
Is there a way to quantify that opportunity maybe potential pipeline or lifetime revenue.
Or also maybe in comparison to the design wins.
You achieved last year, how does that compare.
Sure.
Just a few.
Q <unk> that will help maybe frame that to give some context so.
We've seen.
Honestly, just a remarkable progress on our design win we share that in our opportunity funnel.
It's grown to over $16 billion.
The lifetime revenue, which is I think.
50% more than about.
Same time last year, which is amazing progress.
It doesn't matter if you have your opinion unless you don't.
Yes.
So the team has been hyper focused on winning business.
In this supply constrained cycle and.
Not just that desire we have.
That product cycle, that's incredibly strong I mentioned right. So you have the strength of the product cycle, which gives our sales team.
The often in best combination you could hope for.
They have strong products to go win business with they have.
<unk> ability and relationships that are improving and the cycle is.
The best combination needs to help for and maybe another way to think about it I am just kind of core.
Quantified for you we set our targets.
Two others always win as much as you can but at a minimum we got to win at least as much to drive our model, which is a 20% compound annual growth rate revenue growth. So it's always the floor on that is always out because we always want to grow that much faster. So right now we're trending well.
Well above that.
Which is a few things since we know that positions us really well for the future.
And we know we're gaining share in these designer so.
We fully recognize the uncertainty that's out there right now in the semiconductor space and the overall economy, but we do believe that whatever that ends up being because of those share gains in that strong product cycle.
We're going to gain share and outperform just like we have.
When things went wrong.
When things are uncertain, we think we're going to outperform there as well so.
The best way I think I can frame part of the design win momentum and hopefully that answers your question.
That's very helpful. Thank you.
Yeah.
Yes.
And with that ladies and gentlemen, we will conclude today's question and answer session.
To turn the floor back over to Giovanni <unk> for any closing remarks.
Yes, Thank you Jamie and thank you all for joining this morning. This concludes today's call.
And with that ladies and gentlemen, we will conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.