Q3 2023 Silicon Laboratories Inc Earnings Call

Hello.

My name is Lisa and I will be your conference operator today welcome to the Silicon.

Labs' third quarter fiscal 2023 earnings call.

I'll now turn the call over to Giovanni for Sally.

Silicon Labs' senior director of Finance Giovanni Please go ahead.

Thank you Lisa and good morning, everyone. We are recording this meeting and a replay will be available on.

On the Investor Relations section of our website.

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Our earnings 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 Johnson, and Chief Financial Officer, John Hollister.

Discuss our third quarter financial performance and review recent business.

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We will take questions. After our prepared comments and our remarks today will include forward looking statements that are subject to risks and uncertainties.

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, during our call today, we will refer to certain non-GAAP financial information.

Reconciliation of our GAAP to non-GAAP results is included in the Companys earnings press release and on the Investor Relations section of the Silicon Labs.

I'll now turn the call over to Silicon Labs', Chief Executive Officer, Matt Johnson, Matt.

Thanks, Giovanni and good morning, everyone in the third quarter, the Silicon labs team executed well in a challenging environment driving revenue and EPS, both exceeded the midpoint of our guidance.

Current market environment continues to be characterized by a difficult combination of weak demand and high inventory, specifically and customers carried to continue to carry inventory levels that are too high at the same time, our end customers' demand environment continues to be weaker than previously forecast.

In particular, we see weakness extending further into the broad industrial end market.

As a result of these factors our fourth quarter will be negatively impacted across both business units.

We have contained operating expenses, thus far in the second half of this year by focusing on temporary reductions in discretionary and flexible spending.

Given the duration and severity of this downturn, we are now proactively taken the difficult decision to make structural reductions in headcount and other spending effective immediately to manage our opex further while maintaining investments in our central R&D projects to drive future growth.

While the near term outlook is clearly challenging we're focused on managing what we can control and putting ourselves in a position to deliver strong growth and higher earnings power once it's difficult market cycle correct.

Our design win momentum has never been stronger and we are as confident as ever in our potential to underscore. This our industry leading series two platform continues to perform exceptionally well driving our design wins to an all time record level in Q3 and up 25% year over year.

Importantly, we are starting to see this design win momentum pay off with some exciting ramps that all share half of the year John.

Also in Q3, we announced our next generation platform called series III that will further position us to lead in this space.

All of the items I've mentioned strongly position us moving forward.

With that let me turn the call over to John to cover Q3 results and guidance.

Scott.

Thanks, Matt and good morning, everyone.

Third quarter revenue was $204 million above the midpoint of our guidance range and down 24% year on year.

Asps in the quarter declined declined sequentially, primarily due to product and customer mix.

Unit volume was down just slightly on a sequential basis.

Revenue was down year over year in both business units in the quarter.

Industrial and commercial business ended at $121 million down 17% the same period last year.

Lisa: Hello, my name is Lisa, and I will be your conference operator today. Welcome to Silicon Labs third quarter fiscal 2023 earnings call.

All three product groups and IMC declined in the quarter with the broad industrial category experiencing the largest decline.

Giovanni Pacelli: I will now turn the call over to Giovanni Pacelli, Silicon Labs Senior Director of Finance Giovanni, please go ahead. Thank you, Lisa, and good morning, everyone. We are recording this meeting and a replay will be available for four weeks on the investor relations section of our website and investor.filamps.com.

Within the IMT business our performance in Smart metering. However has continues to be an area of relative strength.

<unk> revenue of $83 million was down 33% year over year.

4% sequentially.

We continue to see strength in life applications, particularly in connected health devices.

Our earnings press release and the accompanying financial tables are also available on our website.

Geographically, we saw year over year decreases in all regions with APAC being down.

Giovanni Pacelli: Joining me today are Silicon Labs President and Chief Executive Officer Matt Johnson and Chief Financial Officer John Hollister. They will discuss our four quarter financial performance and review recent business activities. We'll take questions after I've prepared comments and our remarks today will include forward-looking statements that are subject to risk and uncertainties.

And the Americans.

APAC ex China was up year over year.

Distribution revenue was 81% for the third quarter up slightly from the second quarter.

Inventory in the channel was around 90 days.

Our largest end customer was under 5% of revenue in the quarter. Our top 10 customers were about 25% consistent with our historical trends.

We'll base these forward looking statements on information available to us as of the day of this conference called and assuming no obligation to update these statements in the future. We encourage you to review our SEC filings, which identify important risk factors that can 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-gap financial information. A reconciliation of our gap to non-gap results is included in the company's earnings press release and on the investor relations section of the Silicon Labs website.

non-GAAP gross margin is slightly lower than expected at 58, 5% due to product mix.

We continue to see a generally stable pricing and input cost environment with no significant changes expected in the next quarter.

non-GAAP operating expenses of $95 million was in line with our expectations as we executed focus spending reductions in the quarter, primarily related to variable compensation contractor spending and travel.

Matt Johnson: I'll now turn to Colin and Richie Silicon Labs Chief Executive Officer Matt Johnson. Matt. Thanks, Giovanni, and good morning, everyone. In the third quarter, the Silicon Labs team executed well in a challenging environment, driving revenue and EPS to both exceeded the midpoint of our guidance. Current market environment continues to be characterized by a difficult combination of weak demand and high inventory. Specifically, end customers carry to continue to carry inventory levels that are too high. At the same time, our end customers demand environment continues to be weaker than previously forecast. In particular, we see weakness extending further into the broad industrial end market.

non-GAAP operating income was $25 million or 12% of sales our non-GAAP tax rate.

Worse.

non-GAAP earnings of 62 was <unk> <unk> above the midpoint of our guidance primarily due to higher revenue.

On a GAAP basis gross margin ended at 58, 4% GAAP operating expenses were $107 million.

Which was better than expected.

$13 million below the midpoint of our guidance, primarily due to a change in stock compensation expense driven by expected lower achievement or performance based awards.

As a result of these factors, our fourth quarter will be negatively impacted across both business units. We have contained operating expenses thus far in the second half of this year by focusing on temporary reductions in discretionary and flexible spending.

Accordingly, GAAP earnings per share were <unk> 32 per quarter.

Turning to the balance sheet, we ended the quarter with cash and investments of $417 million.

Our accounts receivable balance grew in the quarter to 102 million with days sales outstanding 45 days.

Given the duration and severity of this downturn, we have now gradually taken difficult decision to make structural reductions in headcount and other spending effective immediately to manage our off-ex further while maintaining investments in essential R&D projects to drive future growth. While the near-term outlook is clearly challenging, we are focused on managing what we can control and putting ourselves in a position to deliver strong growth to higher earnings power once this difficult market cycle cracks.

Customers, including distributors have requested longer payment terms as the current market environment Accordingly.

Temporarily extended payment terms for certain customers from our standard 30 day terms.

We added about $22 million net inventory in the quarter to $168 million as we continue accumulating strategic debate based on the strong design win momentum we've seen over the past few years.

Our design movement momentum has never been stronger and we are as confident as ever in our potential. To underscore this, our industry-leading Series 2 platform continues to perform exceptionally well, driving our design movements to an all-time record level in Q3 and a 25% year-over-year. Importantly, we are starting to see this design momentum pay off with some exciting ramps that share an up-to-earth of jobs. Also in Q3 we announced our next generation platform called Series 3 that will further position us to read in this space. All of the items I've mentioned strongly positioned us moving forward.

Inventory turns into two types.

We repurchased approximately $16 million worth of shares in Q3 chartering approximately 100000 shares.

Our fully diluted shares outstanding in Q3 ended at 32 million shares.

In Q2, we drew $80 million from our revolving from our revolving credit facility.

We repaid $35 million the balance of Q3 have an outstanding amount.

Got it.

Overall, the balance sheet continues to be very healthy and remains well positioned to weather the current market environment and to execute on our strategy.

John Hollister: With that, let me turn the call over to John to cover Q3 results and guidance for the floor. Thanks Matt and good morning everyone. Third quarter revenue was $204 million, above the midpoint of our guidance range and down 24% year on year. As P's in the quarter declined sequentially, primarily due to product and customer next. Unit volume was down just slightly on a sequential basis. Revenue was down year over year in both business units in the quarter.

Before I turn the call back to Matt I'll cover guidance for the fourth quarter.

As Matt mentioned in his opening statement the current demand environment is still quite challenging.

As customers are focused on reducing their excess inventory.

Our bookings activity slowed significantly during Q3, we believe many of our customers still hold higher than normal inventory levels.

As a result, we expect a decline in revenue for the fourth quarter with our guided range of $70 million to $100 million.

John Hollister: The industrial and commercial business ended at $121 million down 17% in the same period last year. All three product groups in INC declined in the quarter with the broad industrial category experiencing the largest supply. Within the INC business, our performance at the smart metering however has continued to be an area of relative strength. Home and life revenue of $83 million was down 33% year over year and was up 4% supply. We continue to see strength and life applications particularly in connected health devices.

We anticipate both units business units to decline in Q4.

Due to the uncertainty in the market environment, we are widening the guidance range, plus or minus $15 million from a revenue midpoint this quarter.

We expect non-GAAP gross margin in the fourth quarter to be approximately 53%.

The lower gross margin for this quarter, primarily reflects the impact of certain fixed cost elements in our cost of goods sold.

Are being absorbed already significantly lower revenue levels.

We continue to maintain discipline over our operating expenses and the <unk>.

John Hollister: Geographically, we saw year over year decreases in all regions with APAC being down less at your revenue Americans. APAC X China was up year over year. Geigration revenue was 81% in the quarter quarter, up slightly from the second quarter. Inventory on the channel was around 90 days. Our largest INC customer was under 5% of revenue in the quarter and our top 10 in the customers were about 20% consistent with our historically trends.

Temporary reductions we discussed last quarter will remain in place for fourth quarter.

We expect non-GAAP operating expenses in the fourth quarter to be approximately $94 million.

We expect the non-GAAP effective tax rate to be approximately 3% in the fourth quarter.

Accordingly, our non-GAAP loss per share for Q4 is expected to be in the range of $1 22 to $1.66.

John Hollister: Non-GAP rose margin is slightly lower than expected at 58.5% due to product growth. We continue to see a generally stable pricing and input cost environment with no significant changes expected in the next quarter. Non-GAP operating expenses of $95 million was then aligned with our expectations as we executed focused spending revictions in the quarter primarily related to variable compensation, contract spending and travel. Non-GAP operating income was $25 million or 12% of sales and our non-GAPX tax rate was then aligned with the quarter at 24%.

On a GAAP basis, we expect gross margins to be 53%, we expect GAAP operating expenses to be approximately $123 million inclusive of an expected restructuring charge around $6 million in Q4.

We expect GAAP earnings per share to be a loss of between $1 95 to $2 39 per share.

I will now turn the call back over to Matt.

Thanks, John.

Spite the current economic challenges, we continue to execute on design win ramps and long term growth markets, such as smart cities in healthcare, which are driving significant deployments of devices with sizeable ramps in the coming year.

John Hollister: Non-GAP earnings of 62 cents was 3 cents above the point of our guidance primarily due to higher revenue. On a gap basis, gross margin ended at 58.4%, gap operating expenses were $107 million, which was better than expected, and was $13 million below the point of our guidance. Primarily due to a change in stock compensation expense driven by the expected lower achievement on performance based on works. Accordingly, gap earnings for share were 32 cents for the quarter.

And smart cities Silicon Labs has been wireless leader in smart metering market for many years.

Like the leadership role we played in the successful rollout of smart meters in the U K. We are now planning is similar and dominant role in India's rollout, where 250 million smart meters are expected to be deployed in the coming years with our production ramp starting early next year.

In addition, we were awarded new designs with lenders and gear, a leading provider of energy management solutions believes our series to ssds in its primary smart electric meter platform ramp ramping early next year.

Turning to the ballot sheet, we ended the quarter and cashed the investments of $417 million. Our Council's receivable balance grew in the quarter to $102 million per day, self outstanding 45 days. Customers, including distributors, have requested longer payment terms and thus current market environment. Importantly, we can temporarily be extended payment terms for certain customers from our standard 30-day terms. We added about $22 million in none in the store in the quarter to $168 million.

Also within our industrial business, we have been designed into multiple products at one of the top two <unk> providers in the world, which we expect to ramp over the next few quarters.

Turning to our life business the health care space continues to accelerate and offer exciting new growth opportunities that are a great fit for our platform. We're.

We're starting to see our multiyear focus on this market payoff, having secured multiple design globally.

As part of this we are excited to share our partnership with <unk> Com, which we will use our platform and it's continuous glucose monitors are cgm's moving forward.

As we continue to accumulate a strategic diving based on the strong design with momentum we've seen for the past few years, inventory terms ended at two times. We repurchased approximately $16 million worth of shares in Q3, firing approximately $100,000 shares. Our equivalent to limited shares outstanding in Q3 ended at $32 million shares. In Q2, we drew $80 million from our revolving credit facility. We repaid $35 million of that balance in Q3 to have an outstanding amount of the income we've got with the colors. Overall, the balance he continues to be very healthy and remains well positioned to whether the current market environment is to execute on our strategy.

Silicon labs' ability to offer customizable and highly secure solutions with our Bluetooth Sse's was key in solidifying this relationship and we expect these product ramps will begin contributing to our revenue early in 2024.

At our fourth annual works with conference in August, which attracted thousands of Iot developers I previewed Silicon labs fifth generation platform called series, three which is on track to sample early next year.

Series III bring three major new capability to the Iot.

First it brings new to industry performance through new levels of security wireless performance power consumption and multi band and multi protocol capabilities areas, we've always stood out.

John Hollister: Before I turn the call back to Matt, I will cover guidance for the fourth quarter. As Matt mentioned in his opening statement, the current demand environment is still quite challenging, as customers are focused on reducing their excess inventory. Our bookings activity slowed significantly during Q3, and we believe many of our end customers still hold higher than normal in its where it loves.

Second our new levels of compute series III can support more than 100 times the processing capability of our current generation series, two including integrated artificial intelligence and machine learning accelerators, and enabling the integration of system processing from Standalone <unk> into our wireless Soc chips.

As a result, we expect a decline in revenue to the fourth quarter with a guided range of $70 to $100 million. We anticipate both units' business units to decline in Q4 due to the uncertainty in the market environment we are widening the guides range plus minus 15 million from the revenue standpoint toward this quarter. We expect non-get gross margin in the fourth quarter to be approximately 53%. The lower gross margin for this quarter primarily reflects the impact certain fixed cost elements in our cost of goods sold, which are being absorbed or rate significantly lower revenue level.

And third the Iot has seen new to world volumes and applications because of this our series C platform will offer new levels of scalability with a multi radio platform and common code base that will serve over 30, new wireless Soc.

A two to three that has increased over the number of series two products.

As well as extendable and scalable memory architecture, including support for external flash.

As part of scalability series III is built on a supply chain that leverages multiple fabs and geographies to maximize the resilience and reliability of supply.

As part of the series three announcements Silicon Labs also announced the next version of its developer tool suite simplicity studio six which will allow developers to utilize the most preferred integrated development environment on the market, while giving them the latest tools to support their continued development on series two as well as series three.

We continue to maintain discipline over our operating expenses. The temporary reductions we discussed last quarter will remain in place in the fourth quarter. We expect non-get operating expenses in the fourth quarter to be approximately $90 million. We expect the non-get effect to tax rate to be approximately 3% in the fourth quarter. Accordingly, our non-get loss per share for Q4 is expected to be in the range of $1.22 to $1.66. On a gap basis, we expect gross margin to be 53%, we expect gap operating expenses to be approximately $123 million, including an expected restructure in charge of around 6 million in Q4.

As we told our developers and investment in our industry leading series. Two platform is also an investment in our series III platform.

Importantly series two will continue to grow and be supported with new silicon and software and will complement series III with both platforms coexisting for many years to come.

In closing I would like to acknowledge that despite the near term weakness in our end markets. Our team is dedicated to overcoming this market downturn without hampering, our long term strategic and financial goals.

We expect gap earnings per share to be a loss of between $1.95 to $2.39 per share.

The fundamentals of our story and the growth prospects for our end markets remains sound and our position in those markets has only become stronger based.

Matt Johnson: I will now turn the call back over to Matt. Thanks, John. Despite the current economic challenges, we continue to execute on design with ramps and long-term growth markets, such as smart cities and healthcare, which are driving significant deployments of devices with sizeable ramps in the coming year. In smart cities, Silicon Labs has been the wireless leader in smart metering market for many years. Like the leadership role we played in a successful role out of smart meters in the UK, we are now playing a similar endowment role in India's role out where 250 million smart meters are expected to be deployed in the coming years, with our production ramps starting early next year.

Based on everything we're seeing we believe Q4 will be our bottles and we expect to return to sequential growth in the first quarter of 2024.

I will now hand, it back over to Giovanni for Q&A Javan. Thank you, Matt before we open the call for Q&A I would like to announce our participation in three upcoming conferences.

<unk> 2023 Midwest one on one bright conference in Chicago on November nine.

Wells Fargo's seventh annual TMT summit on November 29 in Rancho Palos furnace and the Barclays Global Technology Conference in San Francisco on December seven.

We will now open up 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 and one follow up.

Matt Johnson: In addition, we were awarded new designs of Lenders and Gear, a leading provider of energy management solutions, who leaves our series to us with cities in its primary smart electric meter platform ramping early next year. Also, within our industrial business, we have been designed into multiple products at one of the top two EV providers in the world, which we expect to ramp over the next few quarters. Turning to our life business, the healthcare space continues to accelerate and offer exciting new growth opportunities that are a great fit for our platform.

Lisa.

Thank you.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

Our first question will be coming from Matt Ramsay of TD Cowen. Please go ahead.

Matt Johnson: We are starting to see our multi-year focus on this market payoff, having secured multiple designs globally. As part of this, we are excited to share our partnership with Dexcom, which will use our platform in its continuous glucose monitors or CGMs moving forward. Silicon Labs ability to offer customizable and highly secure solutions with our Bluetooth SSEs was key in solidifying this relationship. And we expect these product ramps will begin contributing to our revenue early in 2024.

Thank you very much good morning, everybody.

And hanging there guys in a tough environment.

Matt I wanted to start.

My question is just to kind of backup and <unk>.

Reassess things on kind of first principles about some of the assumptions we have in our model relative to what's going on here it sounds like.

Pricing stability.

Exciting things coming with series III still really strong design win traction.

Matt Johnson: At our fourth annual works with conference in August, which attracted thousands of IoT developers, I previewed Silicon Labs fifth generation platform called Series 3, which is on track to sample early next year. Series 3 brings three major new capability to the IoT. First, it brings new to industry performance through new levels of security, wireless performance, power consumption, and multi-band and multi-protocol capabilities. Areas we have always stood out in. Second are new levels of compute.

At first read the themes.

To me like an inventory correction on steroids a bit.

And I'd like to.

Did you respond to that and just think about.

As you think about the design wins going forward that you guys continue to accumulate are you concern that maybe the volumes and revenue going forward that underpin those design wins are just come down and the Tam for the business that youre looking at a smaller or is this just <unk>.

Matt Johnson: Series 3 can support more than 100 times the processing capability of our current generation series 2, including integrated artificial intelligence and machine learning accelerators, and enabling the integration of system processing from standalone to use into our wireless SSEs. And third, the IoT is seeing new to world volumes and applications. Because of this, our series T platform will offer new levels of scalability for the multi-radio platform and common code base that will serve over 30 new wireless SSEs, a 2-3X increase over the number of series 2 products.

Literally an inventory correction that we got to get through.

Before we get back on the bike I'm, just trying to think about given the level of falloff in revenue here. How are you guys thinking about reassessing the actual Tam for units and dollars relative to just the design wins.

Yep.

I understand thanks, Matt.

Yes.

Let me do my best to answer that just start with <unk>.

Before we get into the inventory and the demand it's important to point out that we.

We really essentially index to a couple of major end segments consumer which has been down.

Down for a year now pretty significantly and industrial which had been more resilient.

We've been seeing signs of that and that really came through as we were leaving in Q3 going into Q4.

Matt Johnson: As well as extendable and scalable memory architecture, including support for external flash. As part of scalability, Series 3 is built on a supply chain that leverages multiple fabs and geographies to maximize the resilience and reliability of supply. As part of the Series 3 announcement, Silicon Labs also announced the next version of its developer tool suite, Simplicity Studio 6, which will allow developers to utilize the most preferred integrated development environment on the market, on giving them the latest tools to support their continued development on Series 2 as well as Series 3.

Weakness in that space, but the and inventory is really important to talk about right. So we've.

Really when we sample our top 40 or 50 customers.

They're carrying more inventory than they normally do.

By at least a quarter I would say, it's an easy way to think about that and on top of that I think their expectations for demand and growth in spend was higher.

And when those two things converge in the demand loss in that inventory is high.

Matt Johnson: As we told our developers, an investment in our industry leading series 2 platform is also an investment in our series 3 platform. Importantly, series 2 will continue to grow and be supported with new Silicon and software and will complement series 3 with both platforms coexisting for many years to come.

The impact is profound and Thats what were seeing so that is the first piece of it and in terms of the second piece in terms of.

End markets in design wins in all of that a few things one is.

We don't see.

Share loss here, when we look at it on a socket by socket basis.

Matt Johnson: In closing, I would like to acknowledge that despite the near-term weakness in our end markets, our team is dedicated to overcoming this market downturn without tampering our long-term strategic and financial goals. The fundamentals of our story and the growth prospects for our end markets remain sound and our position in the markets has only become stronger. Based on everything we're seeing, we believe Q4 will be our bottom and we expect to return to sequential growth in the first quarter of 2024.

We see gains.

And that's reflected in our design win numbers and strength with a record.

Q3 that was I think up around 25% year over year, but what we do see is while some of those have ramped.

We see those ramps being impacted by the overall market.

Their volumes are less than they thought perhaps slightly pushed out as they work through inventory et cetera, but the big ramps.

Giovanni Pacelli: I will now hand it back over to Giovanni for Q&A. Thank you, Matt.

Our solid and there, although some might be delayed and so we shared some of those in the prepared remarks that our.

Giovanni Pacelli: Before we open the call for Q&A, I would like to announce our participation in three upcoming conferences. Stayful's 2023 Midwest 101 growth conference in Chicago on November 9th. Wells Fargo's 7th annual TMT Summit on November 29th in Rancho, Palo Sertes. And the Barclays Global Technology Conference in San Francisco on December 7th.

Pretty pretty substantial and coming very soon in Q1.

But I don't see anything on on share loss I want to be clear about that and your question about the Tam I mean, I think there is arguably made that when the market is down like that.

The size of the market is significantly less but the fundamentals in terms of the long term size of the market the growth of the market none of Thats changed at all so what we really see is that confluence of ending inventory and demand being much softer than expected coming together.

We'll now open up 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 and one follow-up. Lisa?

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.

And we've got to navigate that but the fundamentals havent changed and Thats, what gives us confidence moving forward.

Okay. Thank you for all that.

Perspective, Matt.

Really appreciate it.

John just as my follow up too.

Two things one.

It looked like you guys burn $50 million or something like that in cash and youre guiding to.

Matt Ramsay: Our first question will be coming from Matt Ramsey of TV, Colin. Please go ahead. Thank you very much.

Yeah.

A negative P&L for the December quarter, So I just wanted to do.

Matt Johnson: Good morning, everybody. And hang in there guys in the top environment. I think Matt, I wanted to start my question and just to kind of back up and reassess things. On kind of first principles about some of the assumptions we have in the model relative to what's going on here. It sounds like pricing, stability, exciting things coming with Series 3. Still really strong design win traction. And at first read, this seems to me like an inventory correction on steroids a bit.

Jack on cash balances liquidity, the revolver and stuff like that just to see how youre thinking about it and then you spent you've spent a little time on.

Some opex reductions in the script, maybe you could quantify how we should think about that for 2024.

Sure Matt.

On the cash balance we continue to have a strong cash balance our revolver. That's outstanding is really around optimizing between short term investments of interest etcetera to optimize a portion of our cash flow P&L. So.

Matt Johnson: And I'd like to give you a respond to that and just think about, as you think about the design win going forward that you guys continue to accumulate, are you concerned that maybe the volumes and revenue going forward that underpin those design wins have just come down and the Pam for the business that you're looking at a smaller or is this just literally an inventory correction that we got to get through before we get back on the bike. I'm just trying to think about, given the level of fall off and revenue here, how are you guys thinking about reassessing the actual Pam for units and dollars relative to just the design win thanks.

We're not concerned about the liquidity of the company, we continue to have robust cash balance.

In terms of the Opex actions remember that in the second half of 2023, we undertook temporary non sustainable opex containment actions such as travel contractor spending some of our bonus programs et cetera.

These things need to come back heading into next year.

Related to that Unfortunately, we are taking structural.

Matt Johnson: Yep, completely understand thanks Matt. Yeah, let me do my best answer that just start with, you know, before we get into the inventory and the demand, it's important to point out that, you know, we really essentially indexed a couple major enseignments consumer, which has been down for, you know, a year now, pretty significantly and industrial, which had been more resilient. But we've been seeing signs of that and that really came through as we were leaving to create going into or the weakness in that space, but the end inventory is really important to talk about right.

Reductions in the business.

From a quantification perspective, there Matt the way to think about that is first quarter Opex. We see is roughly flat to the second half run rate.

As these two things basically offset each other and then we will monitor this as we move through the rest of it next year based on the rate pace of revenue improvements, which we do anticipate happening through the course of next year, we just need to see.

How strong the recovery is based on the ramps and recovery of the general market.

Okay very clear thanks, guys see you next week.

Matt Johnson: So we've really, when we sample our top 40 or 50 customers, they're carrying more inventory than they normally do. By at least a quarter, I'd say it's an easy way to think about that. And on top of that, I think their expectation for demand and growth and strength was higher. And when those two things converge and the demand lasts and that inventory is high, the impact is profound and that's what we're seeing.

Thank you one moment for the next question.

Yeah.

And our next question will be coming from tore.

Sandburg of Stifel. Your line is open.

Yes. Thank you I wanted to zoom in on your comment about Q4, being a bottom and seeing some growth sequentially in Q1.

Sounds like you have some design wins ramping.

Matt Johnson: So that is the first piece of it. And in terms of the second piece, in terms of, you know, in markets and design wins and all that, a few things. One is, you know, we don't see share loss here. When we look at it on a socket by socket basis, we see gains and that's reflected in our design when numbers and strength with a record. You know, Q three that was I think up around 25% year over the year.

That's pretty clear, but can you also talk about the inventory correction.

Obviously, given the size of the Q4 guidance down here, obviously, one would think that that is clearing out of inventories, but any more color and visibility you have on the.

The inventory situation that you go into 2024 that'd be helpful.

Sure Yes.

Yes.

This is Matt a few things on that.

We are definitely not calling the market bottom.

Matt Johnson: But what we do see is, you know, while some of those have ramped, we see those ramps being impacted by the overall market. Maybe they're going to less than they thought ramps might be pushed out as they work through inventory, et cetera, but the big ramps are solid and there, although some might be delayed. And so, you know, we shared some of those that prepared remarks that are, you know, pretty, pretty substantial and coming very soon in Q one.

Want to be clear about that.

It should be clear that is also headwinds right.

Unclear how much more of a correction industrial has as an end segment. So there is some.

Some headwinds there.

And on end customer inventory.

That would be awesome, if it was super clean on our quarter boundary, but it isn't it's not uniform across our customers, we talked to as I said, our top 40 or 50, they're carrying more than they should some less some more.

Matt Johnson: But I don't see anything on, on share loss, want to be clear about that. And your question about the tamp, I mean, I think there's an argument made that when the markets down like the size of the market is significantly less, but the fundamentals in terms of the long term size of the market, the growth of the market. Now that that's changed at all. So what we really see is that confluence of end inventory and demand being much softer than expected coming together.

Some extending into Q1 and Q2.

Some okay now, but if you average it all out it's really the biggest.

Impacted it's about a quarter that they they have they're carrying more than they typically should or would.

So that's important so we're not saying the inventory headwind will go away, but the biggest piece of it should hopefully be addressed so thats one.

Matt Johnson: And we got to navigate that, but the fundamentals haven't changed and that's what gives us confidence moving forward. Thank you for all that perspective, Matt. I really appreciate it. John, just as my follow-up, two things. One, look like you guys burn 50 million or something like that in cash and you're gotten to obviously a negative P&L for the December quarter. So I just wanted to do a check on cash balances, liquidity, the revolver, stuff like that, just to see how you're thinking about it and then you spent a little time on some some op-ex reductions in the script.

And so you have those headwinds for sure but that should be working its way through and inventory and then.

Tailwind would be honestly starting from.

Remarkably low revenue number moving forward.

And that inventory working down at our customers and the design win strength.

Matt Johnson: Maybe you could quantify how we should think about that for 2024. Thanks. Sure, Matt. So on the cash balance, you know, we continue to have strong cash balance. Our revolver, that's outstanding, is really around optimizing between each retirement balance and interest, et cetera, to optimize that portion of our cash flow P&L. We're not concerned about the liquidity of the company. We continue to have a little best cash balance. In terms of the op-ex actions, remember that in the second half of 2023, we undertook temporary, non-sustainable op-ex containment actions, such as travel, contractor spending, some of our bonus programs, et cetera.

Matt Johnson: These things need to come back heading in the next year, and it's because, you know, related to that, but fortunately we are taking structural reductions in the business. From a classification perspective, we're mad the way to think about that is first quarter op-ex, we see as roughly class, see the second half run rate as these two things basically offset each other and then we'll monitor this as we move through the rest of next year based on the rate pace of revenue improvement, improvements, which we do anticipate happening. For the course next year, we just need to see how strong the recovery is based on the wraps and recovery of the general market. Very clear. Thanks, guys.

Right now it is clear.

But you know clearly we do need to take some action rubbed our <unk>.

Reacting in executing the birth.

Sounds good thank you.

Thank you one moment, while we pick me up to the next question.

Our next question will be coming from Gary Mobley Wells Fargo. Your line is open.

[noise] Hey, guys. Thanks for taking my question.

I wanted to make sure I have the impact of the inventory reduction squared away in my head. So you talked about $200 million worth of perhaps excess inventory or said differently.

See you next week. Thank you. One moment for the next question.

<unk> worth of revenue.

And your guiding the fourth quarter revenue down $120 million sequentially roughly so.

Matt Johnson: And our next question will be coming from TORR. Sandberg of diesel. Your line is open. Yes, thank you. I wanted to zoom in on your comment about Q4 being a bottom and seeing some growth sequential Q1. It sounds like you have some designments ramping. That's pretty clear, but can you also talk about the inventory correction? I mean, obviously given the size of the Q4 guidance down here, obviously, one would think that that's clearing out of inventory.

That is what roughly 60% of it being digested in the fourth quarter, and then maybe 40% digested into the into the first quarter and to what extent does this you know 85 million revenue guide.

<unk> lowered turns assumption just given the lack of visibility as your lead times have shortened.

Yeah, Gary you know, we're we're working through this and.

Matt Johnson: But any more color of visibility you have on the inventory situation as you go into 2024, that would be helpful. Sure. Yeah, TORR. This is Matt. A few things on that. You know, we're definitely not calling the market bottom and want to be clear about that. And it should be clear. There's also headwinds, right? It's unclear how much more of a correction industrial has as an end segment. So there's some headwinds there.

You know.

As best we can to navigate the number three situation that our customers.

I guess.

On your question lanterns, Okay. So we definitely have a very low charts.

That's really.

Yeah.

Turns.

Quite low or multiple leaks.

That is really underpinning the weakness in our guidance and it is exactly that that we look to earth as the first indicator of a recovery merging as customers Clarence.

Matt Johnson: And on end customer inventory, that would be awesome if it was super clean on a quarter boundary, but it isn't. It's not uniform across our customers. We talked to, as I said, our top 40 or 50, they're carrying more than they should. Some less, some more. Some extending into Q1 and Q2. Some okay now. But if you average it all out, it's really the biggest impact is it's about a quarter that they have there carrying more than they typically should or would.

Yeah It was requirements.

We should see turns approved.

I hope that the answering your question is kind of the best I have for you right now.

Okay Fair.

No.

Alright, and and so I wanted to ask about the flexibility to buy back I think you have listed in your Powerpoint deck on your on your investors sexually website $100 million left in the buyback.

How much flexibility to have to ramp that up considering the cash in the balance sheet, the learning capability and whatnot and to what extent are you willing to to borrow at today's interest rate environment to to buy back stock at these levels.

Matt Johnson: So that's important. So we're not saying inventory headwind will go away, but the biggest piece of it should hopefully be addressed. So that's that's one. And so you have those headwinds for sure, but that should be working quite through an end inventory. And then, you know, this tailwind would be, you know, honestly, starting from, you know, a remarkably low revenue number moving forward. And that inventory working down at our customers and the design and strength that we have. As I said earlier, none of those pockets are gone. We can continue to accumulate them. And some of the bigger ones are right around the corner.

Yeah, we do have flexibility of Abdel Gary has to the point of being opportunistic on it but also being mindful of our overall liquidity. These are all factors at work as we comprehend the best way to approach that.

We're not locked up so to speak we do have flexibility.

Alright, Thank you guys.

[noise]. Thank you one moment, while we prepare for the next question.

So it's a conference of those things, stories that is the, you know, confidence, say, you know, based on what we're seeing, what we believe is this will be our bottom and we can drive sequential growth from here. Yeah, that's very helpful. And as my follow-up, I know this is always a very tricky question given sick locality and inventory management and sort of so forth. But, you know, your revenue is peak that 270 you got into 85 at the midpoint.

Our next question will be coming from Quinn Bolton of need on your line is open.

Hey, guys. Thanks for taking my question just wanted to follow up on Gary's question. There you know he he kind of went through the math of the inventory clearance you know maybe a clear 50, 60% of it in Q1, sorry, Q for it would seem that the Q1, while you're guiding it up it's it's still going to have a significant inventory effect and then hopefully by the end.

Where do you think the true consumption is of your business, you know, whether on a quarterly or an annual basis? Just so sort of we get a sense for, you know, where you will eventually go back to, you know, as we get to this inventory, I just been very, thank you. Yeah, Tore, this is John. Yeah, it is a hard question to answer given the lack of visibility we have into inventory level and how that relates to our revenue run rate as per seeing the effect of that right now.

Q1, maybe you've cleared most of that and and you start to get back to better sequential growth rates. Just just wondering if I'm thinking about the shape that it should <unk> should directory right or if you would think it's a different you know you know trajectory off the bottom.

Yeah I'm fine. Thank you. This is Matt I not sure about that trajectory you know if we step back I think just looking at a picture to be clear our internal inventory. We are definitely rolling that by design intentionally strategically in support of the future business.

But, you know, suffice to say we think it's speeding higher than where we're running, guiding right now, that is clear. But, you know, clearly we do need to take some action around our op-ex and we're reacting and executing the report. Don't go. Thank you. One moment while we prepare for the next question.

<unk> secured and.

It's important for our customers wear our sole source on you know a majority of our products. The primary silicon on a lot of our products.

And our customers are just been through you know this this whole supply chain mask that.

We we have to make sure that we are ready to support. This this business that we keep secure so that's that's one piece the distribution or a channel peace is you know obviously separate and in that case you know that's I think it's around 90, DSI, so higher but at the end of the day, we're caring about a quarter.

Gary Mobley: Our next question will be coming from Gary Mobile of Wells Fargo. Your line is open. Hey guys, thanks for taking my question. I wanted to make sure I have the impact of the inventory reduction squared away in my head. So, you talked about $200 million worth of perhaps access inventory or said differently. Roughly a course worth of revenue. And you're guiding the fourth quarter revenue down $120 million sequentially roughly.

<unk> at <unk>.

Suppressed revenue levels. So as I said you know.

And the last few quarters, it's higher than our historical but not alarming to us and definitely manageable as we look forward and with what we know that's coming down the road I think our biggest challenge is our end customers and what they are caring and they're you know lines and supply.

So, that is what, roughly 60% of it being digested in the fourth quarter and then maybe 40% digested into the, into the first quarter and to what extent does this, you know, 85 million revenue guide reflect lower terms assumption just given the lack of visibility as your lead times have shortened. Yeah, Gary, you know, we're working through this in, you know, as best we can to navigate the inventory situation at our customers.

Change and being able to that high higher than it has historically been and at the same time you know they thought their demand was gonna be much stronger and the compounding her confidence those two things coming together is is extremely impact and that's what we're seeing in queue for yeah.

This is John but let me try to address what I think you are you're both asking.

Save us we are not saying that all in this room will be clearer.

I guess on your question about terms, you know, okay, so we definitely have seen very low terms in the business. That's really a growth roots of what is going on here. Turns have been quite low for multiple weeks and that that is really underpinning the weakness in our guidance. And it is exactly that that we look to first as the first indicator of a recovery emerging as customers clear inventory. As the inventory clearance happens, we should see terms improve. I hope that answers your question.

Oh no.

Indicated that <unk>.

That's kind of the best I have for you right now. Okay, fair enough. All right.

I've got a mixed with customers.

Based on the best we have and it is very imperfect information.

Do you see some of them with inventory levels that would require more time to clear.

First were some even beyond first work so as I'm trying to respond to what you in Europe.

That's.

Yeah, I guess, that's where I was writing to drive it was it was it feels like you know obviously, a a low guy for the fourth quarter.

It doesn't look like you're clearing all of that you know quarter's worth of inventory customers and so I'm kind of assuming that the March quarter, I know, you're not guiding but.

John Hollister: And so I wanted to ask about the flexibility of the buyback. I think you have listed in your PowerPoint deck on your, on your investor's section website, $100 million left in the buyback. How much flexibility do you have to ramp that up, considering the cash and the balance sheet of lending capability and what not and to what extent are you willing to borrow a today's interest rate environment to buy back stock at these levels?

[noise] quarter, probably isn't all that different from.

From the December levels, and and then hopefully by the end of March you will have gotten through most maybe not all but most of that inventory buildup of customers and then we'll just have to see sort of wear and demand is and how quickly you know that the consumption rates recover I guess is the way I'm I'm thinking about it.

Yeah, I'm Gonna reiterate what I understand the comment question now I think the easiest way to frame. It is is is what we've said is one definitely not saying well, we'll get through all of it and very imperfect right. This is a there's no reports for this is just a lot of discussions with customer.

John Hollister: Yeah, we do have flexibility up and down here into the point of being opportunistic on it, but also being mindful of our overall liquidity of these raw factors that work as the. We'll be covering in the best way to approach that, but we're not locked in so to speak, we do have flexibility. All right, thank you, guys. Thank you.

It was on the phone and I'm trying to get a feel for you know what that level is and they're moving in target, but we believe that thank you for based on their expectations. Their a levels will get through you know easy way to think of it as a majority of that but they're still going to be some for work.

Quinn Bolton: One moment while we prepare for the next question, our next question will be coming from Quinn Bolton of Needham, your line of hope. Hey, guys, thanks for taking my question. Just wanted to follow up on Gary's question there, you know, he kind of went through the math of the inventory clearance, you know, maybe a clear 50, 60% of it in Q1, sorry, Q4, it would seem that the Q1 while you're guiding it up is still going to have a significant inventory effect.

And that's what gives us the confidence and saying.

We see that as our bottom.

And you know, it's not only the inventory, but it's a big factor moving forward. It's also those ramps on the other side of it that are helping as well, but you know it's.

It's a massive massive hit in queue for and and that inventories is.

And then hopefully by the end of Q1, maybe you've cleared most of that and any start to get back to better sequential growth rates, just just wonder if I'm thinking about the shape of the should direct trajectory right or if you would think it's a different, you know, trajectory off the bottom. Yeah, Quinn, thank you. This is Matt. I'm not sure about that trajectory, you know, if we step back, I think just looking at a big picture to be clear, our internal inventory, we are definitely growing that by design intentionally strategically in support of the future business and ramps who secured and it's important for our customers.

Two six of that so it's important that we're clear about that but you know the.

The data says that it'll work through a big chunk of it.

Got it got it and then just on the on the split it the business I I assume that you're probably seen a bigger hit to the industrial and commercial trust is.

You know that business seemed to be much stronger you know through the second quarter of this year and I could certainly see more inventory, having accumulated there versus home in life, which has been under pressure for you know about a year now.

Yeah, It's it's <unk>, yes, I think that you know really in the second half of this year. The industrial impact has really been significant where it had been you know.

We are sole source on, you know, majority of our products, the primary silicon and a lot of our products and our customers have just been through, you know, this whole supply chain mass that, you know, we have to make sure that we're ready to support this business that we keep securing. So that's one piece, the distribution or channel piece is, you know, obviously separate. And in that case, you know, that's I think it's around 90 DSI so higher, but at the end of the day, we're carrying, you know, about a quarters worth at, you know, suppressed revenue levels.

So much more resilient durable prior to that consumer been hit all along over the last year and significantly but also.

Also worth pointing out both are down in queue for not not only an industrial so new low levels for both of those two three Q for.

Got it thank you.

Thank you for your question one moment, while we could cancel the next questions.

[noise]. Our next question will be coming from Cody Acree.

So as we said, you know, in the last few quarters, it's higher than our historical, but not alarming to us and definitely manageable as we look forward and with what we know that's coming down the road. I think our biggest challenge is our end customers and what they are carrying in their, you know, lines and supply chain and being able to, you know, that's high. Higher than it's historically been and at the same time, you know, they thought their demand was going to be much stronger. And the compounding or confidence of those two things coming together is, is extremely impactful. And that's what we're seeing in Q4.

Benchmark company your line is open.

Yeah. Thanks, guys for taking my questions I guess.

John Mad if you could maybe speak to your order linearity over the last quarter of the last few months and maybe how are you looking at your forecasting methodology.

Just adjusting how you're expecting to predict going forward.

Sure I'll I'll start.

Yeah, I I would not say, there's any linearity would be the starting point on that.

Somewhat remarkable that.

You know what I'm seeing bookings decline and then you'll see a pause maybe a little bit of calm and then they'll declined some more same thing on turns turns continued to draw. So it's been extremely challenging as we try to forecast this and remember the forecast is a.

Matt Johnson: Yeah, when this is John, but let me try to address what I think you and Gary are both asking and say this. We are not saying that all industry will be clear to the court board. You know, no bad indicated that. We've got to make the cuts. First and based on the best we have and it's very him perfect information. Do you see some of them with imagery levels that would require more time to clear and you know, in the first floor, some even beyond first floor.

You know we have.

Tens of thousands of data points and customers and our forecast is really a.

Tempted bottom up accumulation of their views, but I think the biggest challenges when the market is changing so quickly so volatile the visibilities as low as it is our customers are struggling to forecast, though as well and that accumulation is very challenging so.

Matt Johnson: So I'm trying to respond to what you've heard about that. Yeah, I guess that's sort of starting to drive at was it was it feels like, you know, obviously a low guide for the fourth quarter, but it doesn't look like you're clearing all of that, you know, quarters worth of inventory customers. And so I'm kind of assuming that the March quarter, I know you're not guiding, but the March quarter probably isn't all that different from from the December levels and then hopefully by the end of March, you will have gotten through most, maybe not all, but most of that inventory build of the customers.

Obviously.

As we go through these corners and see that we're trying to do our best to reflect that communicate that'd be transparent about that and you know I think I'd say it feels each time, a little more conservative I don't know how to.

Matt Johnson: And then we'll just have to see sort of where end demand is and you know, how quickly, you know, that the consumption rate recover, I guess is the way I'm thinking about it. Yeah, I'm going to reiterate what I understand that the comment question now. I think the easiest way to frame it is is what we've said is one, definitely not saying what we'll get through all of it. And very imperfect, right?

Given what we're experiencing until until we see a really strong signs on the other side of that of the market recovery, which we're not saying yet.

Thanks.

And then John if you could maybe give us any better picture of your Opex budget for next year.

<unk> some of these cost reductions in the model.

Yeah, like I said [noise].

Matt Johnson: This is a there's no reports for this. This is just a lot of discussions with customers on the phone and trying to get a feel for, you know, what that level is and they're moving in target. But we believe that in Q4 based on, you know, their expectations, their levels will get through, you know, easy way to think of it as a majority of that, but there's still going to be something to work.

First quarter, we expect to be [noise].

Roughly flat to the second half run right in the mid nineties based on the best available.

Available information, we have as of yet and beyond that Cody, we just have to monitor this and see how the recovery goes.

Our our model remains our compass Oh, we want to operate the company. That's what we would seek to get back to you as soon as we can so we're going to maintain flexibility on off X as we head into the second quarter. The second half of next year will be all thank you try it.

Matt Johnson: And that's what gives us the confidence and saying, you know, we see that at our bottom. And you know, it's not only the inventory, but it's a big factor moving forward. It's also those ramps on the other side of it that are helping as well. But, you know, it's a massive, massive hit in Q4 and that inventory is a huge piece of that. So it's important that we're clear about that. But, you know, the data says that it'll work through a big chunk of it.

Okay, great. Thank you guys.

[noise]. Thank you one moment, while we could cancel the next question.

Our next question is coming from so many <unk>.

Raymond James Your line is open.

Matt Johnson: Got it, got it. And then just on the split of the business, I assume you're probably seeing a bigger hit to the industrial commercial, just as, you know, that business seemed to be much stronger through the second quarter this year. And I could certainly see more inventory having accumulated there versus home and life, which has been under pressure for, you know, about a year now. Yeah, it's tough. Yes. I think that, you know, really in the second half of this year, the industrial impact is really been significant where it has been, you know, so much more resilient, durable prior to that.

Thank you good morning, guys John on the inventory, especially the display inventory I think he said roughly 90 days I'm I'm guessing that's about 200 million.

So as we go through I guess you know.

The next quarter exiting December heading into March.

I'm just trying to understand how we should think about the absolute inventory how much of that Disney inventory already hoping to draw down and and you know if you could maybe give us some color when and where I think it normalizes I guess you know what is what is a normal level for you in this in the morning.

Matt Johnson: Consumer have been hit all along, you know, over the last year and significantly, but, you know, also we're pointing out both are down in Q4, not only industrial. So new low levels for both of those Q3 and Q4. Got it. Thank you. Thank you for your question. One moment while we prepare for the next question.

Yeah, It's really sure yeah. So 90 DSI at the end of the third quarter as in the in the neighborhood of more like a $100 million value roughly two.

200 million okay.

Yeah, and we do expect that moderate a decline in the fourth quarter.

Based on what we're seeing I mean, that's part part of part of the challenge here is a very weak appeal or sell through demand is.

Our next question will be coming from Cody Acre, of the benchmark company. Your line is open. Yeah, thanks guys for taking my questions.

You know at the at the root of what's behind our our guidance here.

Overtime.

Cody Acree: I guess John, Matt, if you can maybe speak to your orderly nearity, you'll get the last quarter, the last few months. And maybe how are you looking at your forecasting methodology, just adjusting how you're expecting to predict going forward? Sure, I'll start. Yeah, I would not say there's any linearity, would be the starting point on that. You know, it's been somewhat remarkable that, you know, seen bookings decline and then you'll see a pause, maybe a little bit of calm and then they'll decline some more.

I think we can see some further production of that with the market recovery.

But you know landing in the 60 70 days GSI as normal that would be fine you know from a operating precycle as we look ahead.

Got it got it thanks.

Thanks for that and then Matt.

Your comment obviously in the N. One man does not great. We've heard similar comments from some of your peers, but the magnitude of your outlook is is definitely worse than what we have heard so far from from your peers. So I'm just trying to understand as to why there is such a discrepancy I guess it could be just you know.

Cody Acree: Same thing on terms, terms continue to draw up. So it's been extremely challenging, as we try to forecast this. And remember, the forecast is a, you know, we have, you know, tens of thousands of data points and customers. And, you know, our forecast is really an attempted bottom-off accumulation of their views. But I think the biggest challenge is when the market is changing so quickly, so volatile, the visibility is as well as it is, our customers are struggling to forecast that as well.

Conservatism or it's it's possible that so much of our customers have a little bit more inventory and and some of your components or maybe you know constrained a bit more that caused inventories to go up a bit more than horses. You know what your peers are seeing so just trying to reconfirm that as to why you would be you know.

Cody Acree: And that accumulation is very challenging. So obviously, you know, as we go through these corners and see this, we're, you know, trying to do our best to reflect that, communicate that, be transparent about that. And, you know, I think I'd say it feels, you know, each time a little more conservative, I don't know how to say it, given what we're experiencing until, until we see, you know, really strong signs on the other side of that of the market recovery, which we're not seeing yet.

I guess much worse than some of your peers here given your comments that you're not losing any sure.

Yeah sure makes total sense, so multiple things right. One is R percent of our industrial and commercial businesses pretty high as a percentage of our total revenue going into the second half of this year and that's getting hit pretty hard right. Now. So we're that's that's one element.

We've already seen the consumer peace industrial commercials really you need for the second half of this year, because we talked about the mankey Sue and our customers and inventory I think you know we had a lot of customers are expected you know a lot of ramps Lotto strong <unk> and we're carrying inventory as such.

And I think that that was coming together the way. They have is hit us really hard and you know like I said before we have all these designers that I think some of those have been delayed some are not the level of our customers expected.

Thanks, Pat. And then, John, if you can maybe give us any better picture of the OPEX budget for next year, as you fork some of these cost reductions in the model? Yeah, Cody. Like I said, you know, first quarter, we expect to be roughly flat to the second half run rate in the mid-90s, based on the best available information we have as of yet. And beyond that, Cody, you know, we just have to monitor this and see how the recovery goes.

All of that I think is unique to us given that we've been accumulating designers a sensor past bass level over the last few years. So the.

Predictability of being able to forecast for our customers, even the timing of those ramps magnitude of those ramps I think is challenging and then there's this other pieces that are more difficult to know in her a speculative bright but we definitely have you know as I said earlier, we are sole source of a lot of our sarcous almost.

And our, you know, our model remains our compass. How we want to operate the company, and that's what we would seek to get back to as soon as we can. So, we're going to maintain flexibility on OPEX as we head into the second quarter, second half, and next year, based on how we interact.

Okay, great. Thank you, guys. Thank you. One moment while we prepare for the next question.

All of our sockets and the primary silicon and a lot of those we're on mature nose with customers worry about supply and thank the you know while our gross margins are strong the asp's are lower and we have customers that are planning on this ranch so.

Maybe they they did accumulate more in anticipation of those but that sounds clear and difficult to know because it's hard to compare and customer inventory level, what we know is or <unk> <unk>.

Srinivas Pajjuri: Our next question is coming from Serenny Paduri of Raymond James. Your line is open. Thank you.

Matt Johnson: Good morning, guys. John, on the inventory, especially the distinct inventory, I think you said, roughly 90 days. I'm guessing that's about 200 million. So, as we go through, I guess, you know, the next quarter, exiting December, heading into March, I'm just trying to understand how we should think about the absolute inventory. How much of that distinct inventory are you hoping to draw down? And, you know, if it could maybe give us some color when and where I think it normalizes, I guess, you know, what is a normal level for you in this Yeah, Srinivas Pajjuri.

And designers and we have confidence in those the variabilities on the timing and we know that our customers are carrying more than they want and they're working that now, but that's you know temporary temporary so that's what gives us the confidence on the other side, but I really think the cough once of all those things I mentioned or what's hitting.

And you need to us and thank you for and in the second half in general, but all those things can be true and don't change the fundamental of peace and on the other side.

The growth potential market physician share gains you know.

Matt Johnson: Yeah, so 90 GSI at the end of third quarter is in the neighborhood of more like a hundred million dollars of value, roughly not 200 billion. Yeah, and we do expect that to moderate and decline in the fourth quarter based on what we're seeing. I mean, that's part of part of part of the challenge here is the very weak PLA or cell group demand is you know, at the end of the route of what's behind our guidance here.

The potential there is still just as strong. So we just have to navigate this this environment responsibly that far we're doing what we're doing in opex and position ourselves to capture all this opportunity business has been secured on the other side of it.

Thanks Man makes sense.

Thank you.

One moment, while we prepare for the next question.

Our next question will be coming some blame Curtis how Barclays. Your line is open.

Matt Johnson: Over time, you know, I think we can see some further reduction of that with the market recovery. But, you know, landing in the 60 70 days, GSI is normal, that would be fine, you know, from the operating perspective as we look ahead. Got it. Thanks for that. And then Matt, you know, your comment, obviously, the environment is not great. We've heard similar comments from some of your peers, but the magnitude of your, you know, outlook is definitely worse than what we've heard so far from from your peers.

Hey, good morning. Thanks, I have two questions I, just kind of curious for December quarter 85 million between the two seconds I'm, just having a hard time the order of magnitude. So large of the correction when you actually felt a little growth in consumer. So I think the the view was go into that that maybe you kind of get in three things and then you are seeing a decline so.

Curious what you think the trigger was I mean was it lead times coming in or just you know the customers just turned off and what was the trigger for that and then just of that $85 million can you help us between the two seven it's a little bit more sounds like industrials worse, but just.

Matt Johnson: So I'm just trying to understand as to why there is such a discrepancy. I guess it could be just, you know, your conservatism or it's possible that some of your customers have a little bit more inventory and some of your components or maybe, you know, constrained a bit more that caused inventories to go up a bit more than versus, you know, what your peers are seeing. So just trying to reconcile that as to why you would be, you know, I guess much worse than some of your peers here given your comments that you're not losing any share.

Any kind of like broad strokes would be helpful between us with like.

Yeah, I made a quick answers industrial is definitely the bigger challenge because we're seeing that that hit harder right now consumer has been hit all along but you're absolutely right that we've seen a little bit of [laughter], let's just call us stability in Q3 a consumer.

And that's going down again to through the queue or you know the <unk>.

Matt Johnson: Yeah, sure makes a total sense. So multiple things, right. One is, you know, our percent of our industrial and commercial businesses pretty high as a percentage of our total revenue going into the second half of this year. And that's getting hit pretty hard right now. So we're that's one element that, you know, we've already seen the consumer piece industrial commercial is really unique for the second half of this year. Because we talked about the man piece to and our customers and inventory.

The team believes that seasonally consumer is stronger in Q3 in anticipation of you know holiday builds in that cycle and you know we saw some benefit from that but those levels, obviously aren't aren't stable and holding going to three in the queue for so.

That that could be impacting the consumer side of it but we're not sure we need need a a few more clicks before we can say for certain.

That's it and then I want to ask the gross margin I'm in I'm, assuming there's some fixed costs absorption that's not happening here.

Matt Johnson: I think, you know, we had a lot of customers who expected, you know, a lot of ramps, a lot of strong growth and we're carrying inventory as such. And I think that those coming together, the way they have is hit us really hard. And, you know, like I said before, we have all these design ones that I think, you know, some of those have been delayed. Some are not the level of our customers expected.

I'm wondering if there's any written off the inventory and then if you can help us on the recovery of gross margin next year.

Yeah blame it it's really two effects in the fourth quarter does not an unusual amount.

And the lessons of write offs are contemplated we are seeing both with the sharp reduction and revenue in two or a oversized concentration effective.

Matt Johnson: All of that, I think, you know, is unique to us given that we've been accumulating design to such a fast, fast level over the last few years. So they, you know, predictability of being able to forecast for our customers even the timing of those ramps magnitude of those ramps, I think is challenging. And then there's, there's other pieces that are, you know, more difficult to know in her speculative right, but we definitely have, you know, as I said earlier, we are sole source and a lot of our sockets almost all of our sockets and the primary silicon and a lot of those.

Customer of product mix on the downside, that's one <unk>, but the the thing I mentioned you. What you mentioned is also big pieces that we just have six that is being a sword.

Smaller revenue days, we do anticipate this recovery in the market that gross margins would revert back to what we experience.

Third quarter.

As we move in the first quarter and second out to my 24. We think this is what we're seeing in the fourth quarter is please.

Thanks.

Matt Johnson: We're on mature nodes of customers worry about supply. I think the, you know, while our growth margins are strong, they have peas are lower and we have customers that are planning on these ramps. So, you know, maybe they did accumulate more and anticipation of those, but that's unclear and difficult to know because it's hard to compare and customer inventory level. So, what we know is our ramps and design is we have confidence in those, the very abilities on the timing, and we know that our customers are carrying more than they want and they're working that down, but that's, you know, temporary or temporary.

Thank you one moment for the next question.

Our next question will be coming from Joe more of Morgan Stanley. Your line is open.

Great. Thank you I wondered if you guys could address like for like pricing.

You saw the prices go up to the last couple of years when kind of requests coming up are you seeing any change there and and if you're not I guess to the extent that you're thinking about next generation design wins, you're building your pipeline do you see more price competition for those new sockets.

Matt Johnson: So, that's what gives us the confidence and the other side, but I really think the confluence of all those things I mentioned or what's, you know, hitting us and unique to us in Q4 in the second half in general, but all those things can be true and don't change the fundamental piece on the other side that the growth potential market position, share gains, you know, the potential there is still just as strong. So, we just have to navigate this, this environment responsibly that's why we're doing what we're doing in Offix and position ourselves to capture all this opportunity business that's been secured on the other side. Thanks Matt, makes sense.

Yeah.

<unk>.

Couple of comments show. This is Matt Yeah, what we've seen is the market kind of return to pricing behavior that is typical for this type of market and and really you know I'm gonna call. It typical of pre pandemic and now you know kind of post pandemic.

So you know an easier way to think about it is the price pressure is really on design wins more than anything as you pointed out not on our existing business that existing business tends to.

Thank you.

<unk> customers tends to run as it does and where are we see kind of the leading edge of price pressures on those designs switch as I said are at record levels. You know last few years, including this year, including two three and what we're seeing there is is price pressure.

One moment while we prepare for the next question. Our next question will be coming from Blayne Curtis of Barclays. Your line is open.

That is typical not a novelist and we are still waiting F. A an accelerating pace.

Blayne Curtis: Hey, good morning. Thanks to two questions. I just kind of curious for the December quarter 85 million between the two segments. I'm just having a hard time to order magnitudes to large of the correction. I mean, you actually saw little growth in consumers. So I think the view was going to this that maybe you're kind of getting through things and then you're seeing a decline. So I guess curious what you think the trigger was.

That's helpful. Thank you.

Thank you.

One moment for the next question.

[noise] [noise] [noise] and we have a follow up question coming from Terry <unk> birth of Stifel. Your line is open.

Blayne Curtis: I mean, was it lead times coming in or just, you know, the customer just turned off and what was the trigger for that? And then just of that 85 million, can you help us between the two segments? A little bit more something industrial is worse, but just any kind of like broad strokes would be helpful between the two segments. Yeah, I mean, quick answers. Industrial is definitely the bigger challenge out because we're seeing that that hit harder right now.

Yes. Thank you I just had a two week two quick follow ups first of all and back to the run rate. So if we go back to Q1 of 21 before you had obviously very strong growth through the pandemic ears.

Revenue run rate was around 158, malian, if I'm not mistaken.

Blayne Curtis: Consumer has been hit all along, but you're absolutely right that you know, we've seen a little bit of let's call stability Q3 on consumer. And that's going down again, Q3 to Q4, you know, the team believes that, you know, seasonally consumer is stronger in Q3 and anticipation of, you know, holiday builds in that cycle. And, you know, we saw some benefit from that, but those levels obviously aren't stable and holding going Q3 and a Q4. So that could be impacting the consumer side of it, but we're not sure we need a few more clicks before we can say for certain.

I understand you know sell through is deteriorating I understand their cyclicality would've been transferred and so forth.

It would just seeing that a.

Number around that that level is is probably you know where where the consumption is of your business. Just just wondering if you have any comment if if you think that that is completely off or or could that it should be in the ballpark.

The only thing I I understand Tori this is Matt the the logic and the approach the only thing I'd add or <unk> and is the bank of the design when momentum and share gains Oh.

Over that time frame. So you know even if you consider the entire pandemic as as a bill or inventory, which we don't believe that that's all it was even if you did there's games and stronger business underpinning that exiting then enter it so that's an important.

And then I want to ask the growth margin. I'm assuming there's some six cost absorption that's not happening here is wondering if there's any written off inventory and then if you can help us on the recovery of growth margin next year. Yeah, Blaine, and it's really two effects in the fourth quarter. There's not an unusual amount of obsolescence or write offs or contemplated, but we are seeing both with the sharp reduction and revenue into for a oversized concentration effect of customer product mix on the downside.

Component to add to your question.

That that's great perspective, and the second question is and you know maybe moving away from some of the near term challenges here in the past I've talked about some some new product cycles. Obviously, you mentioned serious three but you know there's also smart retail there's your Wifi business.

That's one light of it. But the thing I mentioned to what you mentioned is also big piece of it that we just have fixed that is being installed for a smaller revenue base. We do anticipate with recovery market that growth margins would refer back to what we experienced in third quarter. And as we move into first quarter and second half. We think this is an almost what we're seeing in the fourth quarter.

Thanks. Thank you.

You know you did talk a little bit about the India smart meter business, but could you give us an update on any somebody's newer businesses that are supposed to start ranting.

Yeah sure Yeah Wifi you know so let me step back you know Big picture, we talked about you know an increased focus in blue too no change there were incredibly happy and excited with the progress we're making there we are gaining share and Bluetooth and that continues.

Joe Moore: One moment for the next question. Our next question will be coming from Joe Moore of Morgan Stanley. Your line is open. Great. Thank you. One of you guys could address like for like pricing. You know, you saw the prices go up the last couple of years when Henry cost went up. Are you seeing any change there? And if you're not, I guess, to the extent that you're thinking about next generation design wins, you're building your pipeline. Do you see more price competition for those new socket.

Hi Fi earlier on in that investment in that initiative, but one of our fastest growing areas. This year and moving forward. So that's exciting progress as well when you look at it by <unk>, We talked about you know digital retail shelf labels continues.

Secret progress there. We just you know in our prepared remarks mentioned the metering space, which we've always had you know an incredibly strong position and I've gotten stronger.

And there's a lot of Rollouts and tenders there that are gonna give us some list not just starting next year, but also for quite a few years, we've talked about health care life as an increased focus and we've made a lot of progress there some of that which we just share in the <unk>.

Yeah, a couple of comments show this is Matt. Yeah, what we've seen is the market kind of return to pricing behavior that is typical for this type of market and really, you know, I'm going to call it typical a free pandemic and now, you know, kind of post pandemic. So, you know, an easy way to think about it is the price pressure is really on design wins more than anything. As you pointed out, not on our existing business, that existing business tends to cross thousands of designs and customers tends to run as it does.

And where we see kind of the leading edge of price pressures is on those designs, which, as I said, are at record levels, you know, last few years, including this year, including Q3. And what we're seeing there is his price pressure that is typical, not a novelist and, you know, we are still winning at an accelerating pace. Thank you. One moment for the next question.

Paired remarks, but <unk>, which were excited about.

And you know.

Another area that hasn't come up but it is worth mentioning our position and matter in the progress of matters as exciting.

Doing well also and simply said you know for those who aren't familiar one of our and historically strong positions has been or 15 four <unk> four is getting pulled into the mainstream <unk>. That's why you know over 80% of the <unk> Ah certifications and matter are coming.

From Silicon Labs, and you are seeing matter get pulled into the mainstream. These saw the iPhone latest iPhone 50, Max supporting thread, which is great and that will help Paul matter more into the mainstream N. N products were were incredibly strong so all of those.

And markets and trends are are going favorable we just have an ugly and market environment and inventory situation that we've got to work through to see all the goodness of those other areas coming through going forward.

Tore Svanberg: And we have a follow up question coming from Torrey, San Berk of people, your line is open. Yes, thank you. I just had two quick follow ups.

Great respect it thank you.

Thank you. This concludes Q&A sensor for today I would like to turn the call back over to Giovanni for closing remarks. Please go ahead.

First of all, I'm back to the run rate. So, if we go back to Q1 of 21 before you had obviously very strong growth through the pandemic years, the revenue run rate was around 158 million. If I'm not mistaken. Again, I understand, you know, sell through the tier rating, I understand the secret calendar, but even for instance, so forth, but it would just seem that, you know, a number around that level is probably, you know, where the consumption is of your business. Just just wondering if you have any comment, if you think that, you know, that is completely off or, or, you know, could that potentially be in the ballpark.

Thank you Lisa and thank you all for joining this morning. This concludes today's call.

Thank you all for joining <unk> disconnect.

Mmm Mmm [music].

The only thing I understand Torrey, this is math, the logic and the approach, the only thing I add or say, and is the think of the design win momentum and share gains over that time frame. So, you know, even if you consider the entire, you know, pandemic as a bill, the inventory, which we don't believe that that's all it was. Even if you did, there's gains in stronger business underpinning that exiting than entering. So that's an important component to add to your question. That that's great perspective.

Matt Johnson: And the second question is, and you know, maybe moving away from some of the near term challenges here in the past talked about some new product cycles. Obviously, you mentioned series three, but you know, there's also smart retail. There's your Wi-Fi business. You know, you did talk a little bit about the India smart media business, but you know, can you give us an update on some of these newer businesses that are supposed to start landing.

Yeah, sure. Yeah, Wi-Fi, you know, so let me step back. You know, big picture we talked about, you know, an increased focus in Bluetooth, no change there. We're, you know, incredibly happy and excited with the progress we're making there. We are gaining share in Bluetooth and that continues, forward. So that's exciting progress as well. You know, when you look at it by segments, you know, we talked about, you know, digital retail, shelf labels, continuously good progress there.

We just, you know, in our prepared remarks, mentioned the metering space, which we've always had, you know, in a fairly strong position and that's gotten stronger. And there's a lot of rollouts and tenders there that, you know, are going to give us some lift, not just starting next year, but also for quite a few years.

We've talked about healthcare, life as an increased focus. And we've made a lot of progress there, some of that, which we just shared in the prepared remarks, the desktop, which we're excited about. And, you know, you know, another area that hasn't come up, but it's worth mentioning our position in matters in the progress and matters is exciting and going well also. And simply said, you know, for those who aren't familiar, one of our historically strong positions has been at 54 and 54 is getting pulled into the mainstream with Matt.

That's why, you know, over 80% of the certs and certifications in matter are coming from Silicon Labs. And you're seeing matter get pulled into the mainstream. You know, you saw the iPhone, latest iPhone 50 max supporting thread, which is great. And that will help pull matter born to the mainstream and end products, where we're incredibly strong. So all those fundamental, you know, end markets and trends are going favorable. We just have an ugly end market environment and inventory situation that we got to work through to see all the goodness of those other areas coming through going forward.

Great perspective. Thank you.

Giovanni Pacelli: This concludes the Q&A session for today.

I would like to turn the call back over to Giovanni for closing remarks. Please go ahead. Thank you, Lisa. And thank you all for joining this morning.

Giovanni Pacelli: This concludes today's call. Thank you all for joining. You anyway all disconnect. Thank you all for joining us. Thank you.