Q3 2024 Silicon Laboratories Inc Earnings Call
Michelle: My name is Michelle and I will be your conference operator today.
Michelle: Welcome to the Silicon Maab Third Quarter Physical 2020 for earnings call.
At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you would need press star, one one on your telephone. You would then hear an automation message advising your hand is raised.
Michelle: 2 withdrawal your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would know, like to turn the call over to Giovanni Pacelli, so I'll come to a senior director of finance.
Duke Bonnie please go ahead sir.
Giovanni Pacelli: Thank you Michelle and good afternoon everyone. We're recording this meeting and a replay will be available for four weeks on the investor relations section of our website at investor.silabs.com.
Giovanni Pacelli: 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, Dean Butler. They will discuss our third quarter financial performance and review recent business activities.
Michelle: We will take questions after our prepared comments and our remarks today will include forward-looking statements that are subject to risks and uncertainties.
We've basically forward looking statements on information available to us as of the day to this conference call and assume no obligation to update the statements in the future.
Michelle: 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.
Michelle: Additionally, during our call today, we will refer to certain non-gap financial information.
The reconciliation of our gap to non-gap results is included in the company's earnings first release and on the investor relations section of our website. I'd now like to turn the call over to Silicon Labs Chief Executive Officer, Matt Johnson.
Matt Johnson: Thanks to Giovanni and good afternoon everyone. Silicon Labs delivered solid third quarter results with revenue and earnings exceeding the midpoint of our guide.
Our surveys indicate that many of our customers' access inventory levels have now normalized. Robert there will remain outliers whose destocking will continue to take time.
Matt Johnson: Bookings patterns, bookings patterns, and distribution POS have modestly improved, but have not significantly accelerated, indicating to us that a demand recovery is likely to be more gradual than many of our customers are originally expected.
Broadly speaking, the majority of our customers remain positive looking forward to 2025.
Our current quarter outlook reflects near-term uncertainty around the timing of a more robust and market recovery. And importantly, does not assume any significant channel restocking.
Michelle: Looking ahead, our growth in the near to midterm is underpinned by design and ramps and the secular growth areas that we've previously discussed, including connected health, smart metering and commercial retail, as well as many other applications.
Michelle: We are currently ramping shipments to multiple customers and all of these in our continent. We are gaining share in these markets, giving us conviction in our growth opportunity moving forward.
Giovanni Pacelli: Over the last quarter, Silicon Labs works with developer conference was a huge success. We hosted over 500 unique existing and new customers in person for two days, as well as our ecosystem partners, including Amazon, Google, Samsung, and now in video.
Giovanni Pacelli: At Works with Anne at Embedded World North America, our CTO, Dean of Cule and I, delivered Keynote discussing how AI is rapidly becoming a growth catalyst that will enable the total number of IoT devices to reach over 100 billion over the next decade.
We also detailed the continued success of our industry leading series two platform and new to industry capabilities of our upcoming series three platform.
Simply said AI not only enables better use of existing IoT devices, it will also enable an accelerate even broader device deployments moving forward further expanding the Silicon Labs addressable market.
At the product level, we are currently shipping series two devices with integrated machine learning in front engines.
Giovanni Pacelli: This includes our XG24 family of SLCs
Giovanni Pacelli: A device with silicone labs was first to bring machine learning acceleration to wireless SSEs and still currently delivers more performance for unit of power consumption than any other wireless SSE based on a recently publicly available benchmark done by third parties.
Giovanni Pacelli: Also in the corner, we announced series two enablement of Bluetooth channel sounding on our XG24 enabling secure and precise dis-intenagement between Bluetooth devices.
Giovanni Pacelli: and opening the door for a new wave of proximity-based applications in home security, location tracking, geofencing, vehicle keyless entry and building access control.
Giovanni Pacelli: This capability is already driving another wave of customer interest in design wins on our series to platform at existing and new customers.
Giovanni Pacelli: At the same time, we are now sampling our first series through device to customers, which is purpose-built to extend our successful series to architecture to new into IoT levels of performance for the industry.
Giovanni Pacelli: For example, Series 3 will have dedicated hardware acceleration to create the world's most flexible IoT mode of.
Giovanni Pacelli: Dedicated Security Corps designed to enable post-gwondom level encryption and an advanced machine learning port designed to enable an order of magnitude increase in performance over our already industry-leading energy-per-enfranched benchmarks.
Giovanni Pacelli: We are excited with our progress on Series 3 and our Series 2 platform continues to build momentum with new existing exciting products and features.
Giovanni Pacelli: Growing Market Share and new use cases through its industry-leading power consumption, security, and multi-protocol wireless performance.
Giovanni Pacelli: This includes our first Wi-Fi 6 device, the 9117, which we expect to be in ramping it customers as early as Q1 of 2025. And can deliver up to two years of battery life on a single AAA battery.
Giovanni Pacelli: This equates to meaningfully better battery life versus any competing alternatives.
Giovanni Pacelli: Customer Gagiant with a 917 devices strong, and we are ramping our design with quickly across multiple application spaces.
Giovanni Pacelli: Our initial intent in Wi-Fi is to work with a broad existing customer base to identify opportunities for pull-through and applications where Wi-Fi is becoming more relevant and where power consumption and security are also key requirements.
Giovanni Pacelli: We've been investing significantly in Wi-Fi because of our firm belief in its relevance and growth potential within our IoT space.
Giovanni Pacelli: We're hyper focused on driving the same market, sheer expansion and Wi-Fi that we're currently achieving with our Bluetooth solutions after increasing our strategic focus in that technology grown five or six years ago.
Giovanni Pacelli: In addition, we are continuing our focus and growth in Bluetooth.
Giovanni Pacelli: Not only is it now our fastest growing technology by revenue, but it is now our largest opportunity pipeline by technology as well.
Giovanni Pacelli: Our early integration of new-to-industry capabilities like PSA Level 3 Security and benchmark-setting machine learning performance continues to generate strong engagement and grow.
Giovanni Pacelli: Lastly, our commitment to building matter infrastructure alongside our leadership and threat technology positions us well as trusted partners at ISPs, ecosystems and developers who are working to integrate matter into their solutions at support interoperability that's devices.
Giovanni Pacelli: Overall, in the near term, the timing of the end-market demand recovery remains uncertain.
Giovanni Pacelli: However, we expect the solid growth year in 2025 as the significant design wins we have driven over the last few years, begin ramping to production.
Giovanni Pacelli: We will continue to focus on solid technology innovation and execution, gaining markets here, and returning to our financial model as fast as possible.
Giovanni Pacelli: Now I'll hand it over to Dean for the financial update.
Dean Butler: Thanks, Matt and good afternoon, everyone. I'll first review the financial results for a recently completed quarter, followed by a discussion of our current outlook.
Dean Butler: Revenue for the September quarter was 166 million, up 14% sequentially and slightly ahead of the midpoint of our pride or guidance.
Dean Butler: Year over year, revenue was down 18%, as demand continued to be hampered by excess inventory absorption across distributors and in-customers.
Dean Butler: in our industrial and commercial business September quarter revenue was 96 million, up 10% sequentially, but down 20% year over year.
Dean Butler: The sequential increase was driven by a strength in applications such as smart building controls and smart meters.
Dean Butler: Home and Life September quarter revenue was 70 million, up 22% sequentially and down 16% year over year.
Dean Butler: As expected, home and life grew faster than industrial and commercial in the third quarter, which we believe is at least partially driven by consumer-oriented and markets being further along in their inventory correction, relative to the industrial and markets.
Dean Butler: Wearable related applications such as smart watches and fitness trackers, saw strength in the quarter contributing to the 22% sequential growth.
Dean Butler: Immentory in our Distribution Channel declined two days to end the September quarter at 53 days.
Dean Butler: We are monitoring our distribution inventory and allowing shipments into the channel to flow naturally to spite being lower than target level.
Dean Butler: Distributor PLS, continue to grow sequentially in Q3. As we believe many long-tail customers have now worked through the majority of their excess inventory, potentially paving the path to further recovery in 2025.
Dean Butler: Distribution made up of approximately 72% of our revenue mix for the September quarter, and increase from the prior quarter, but below our historical distribution burst direct channel sales mix of around 80%.
Dean Butler: For the September quarter, our GAP gross margin was 54.3%. Non-GAP gross margin was 54.5%, which was an improvement versus 53% in the prior quarter.
Dean Butler: Scap operating expenses were 120 million, which includes share-based compensation of 16 million, an intangible asset amortization of 5 million.
Dean Butler: Non-Gap operating expense of 99 million was below the low end of our prior guidance range as we manage expenses during times of more limited visibility.
Dean Butler: Gap operating loss was 30 million and non-gap operating loss was 8 million. Both of which were substantial improvements from the prior quarter, moving us in the right direction.
Dean Butler: During the quarter, we recorded a gap of tax expense of approximately 2 million. Our non-gap tax rate remained at 20%.
Dean Butler: Gap Loss, Perceir was 88 cents. Non-Gap Loss of 13 cents perceir was better than midpoint of our guidance range due to lower operating expenses.
Dean Butler: Training to the Balantcheat. We ended the quarter with 370 million of cash, cash equivalents, and short-term investments.
Dean Butler: Our days of sales outstanding was approximately 30 days.
Dean Butler: During the quarter, we further reduced our internal inventory by 27 million, ending the quarter at 139 million of net inventory.
Dean Butler: which contributed to our positive operating cash flow of 32 million for the September quarter, despite our operating losses.
Dean Butler: Days of inventory on hand improved to 165 days, a significant improvement from the 217 days at June quarter end.
Dean Butler: Now, let me turn to our December quarter outlook.
Dean Butler: While visibility remains limited due in part to shorter lead times, the rate of change in our customers' excess inventory de-stopping process has desalurated after having made rapid progress over the last few quarters.
Dean Butler: While distribution POS and our own bookings have improved, the pace of our recovery remains somewhat uncertain, due to the slower and market demand.
Dean Butler: Looking ahead to Q4, we anticipate revenue in the December quarter to be in the range of 161 million to 171 million, indicating a flat quarter on quarter comparison, which is likely better than seasonality.
Dean Butler: Considering the relatives and market ordering patterns, we would anticipate another quarter of outperformance by our home and life products in the December quarter.
Dean Butler: Being someone offset by a muted industrial and commercial and market, therefore resulting in our flat guidance expectations for Q4.
Dean Butler: It's worth noting that the midpoint of the guidance implies a 90% year-over-year growth rate versus the trough experienced in the December quarter of 2023.
Dean Butler: Additionally, as previously anticipated, we expect to begin our initial production shipments to continue as blood glucose monitoring customers and have line of sight to full scale customer ramps into 2025.
Dean Butler: We expect Gap across margin in the December quarter to be in the range of 54 to 55% We expect non-Gap across margin to also be in the range of 54 to 55%
Dean Butler: We expect gap operating expenses in the December quarter to be the range of 118 million to 122 million.
Dean Butler: We expect non-gap operating expenses in the range of 97 million to 99 million.
Dean Butler: Finally, Gap lost for shares expected to be in the range of 75 cents to $1.5.
Dean Butler: Non-Gap lost for share is expected to be the range of one cent loss to a loss of 21 cents.
Dean Butler: This wraps up our prepared remarks. I'd like to now hand the call over to the operator to start the Q&A session. Michelle?
Michelle: Thank you. As a reminder to ask a question, please press star one on your telephone and wait for your name to be announced. And to withdraw your question, please press star one on again, stand by while we compile the Q&A roster.
Michelle: The first question comes from Serini Pajuri with Raymond James. Your line is open.
Serini Pajuri: Thank you Matt, you talked about booking being somewhat uneven, maybe you could give us some color, additional color.
Serini Pajuri: on Witch and Marcus, I think you guys are guiding for...
Serini Pajuri: Commercial to be kind of flat-ish or muters seasonally and then home-on-life seems to be doing better. But within those, I guess, end-markets in any particular sub-segment or end-market, they're standing out in terms of weakness. Thank you.
Speaker Change: Sure, yeah, I think the broad bookings statement is that we have seen continue to prove that overall.
Speaker Change: but as we said in the prepared remarks not an acceleration that you'd want to see to say, you know, we're on the other side of this cycle that we're all in.
Speaker Change: In terms of the next level down, quick answer is more strength in home of life.
Speaker Change: and...
Dean Butler: and not as much strength in industrial and commercial, particularly in industrial, which
Dean Butler: I guess, you know, on one hand isn't surprising given that, you know, it's later into the cycle, but we'd like to see more strength from industrial them for now, seeing.
Speaker Change: Okay, got it, maybe a quick follow-up.
Speaker Change: You know, we hear a lot about AgI and obviously you have a very strong position in IOT.
Dean Butler: and you did talk about that as well. I'm just curious, I mean, when we look at this market we always tend to think in terms of units and ASPs.
Dean Butler: So maybe if it can help us understand as we see more and more AI functionality in these applications, what sort of ASB uplift are you, I guess, seeing and what should we expect as we, I guess, look out to the next couple of years. Thank you.
Speaker Change: Sure. So quick answer is it definitely I would lift ASP's first thing. It's important just for framing that there's multiple levels of this, right? We as we said in some of our key notes as well as in prepare remarks.
Speaker Change: We do see AI accelerating IoT and adoption ultimately, whether it's improving the usefulness of existing deployments or helping accelerate broader deployments.
Dean Butler: So that's exciting and encouraging to see. At the device level, you know, simply said it takes more cores, more compute, more silicon space, more performance.
Dean Butler: to bring in from City Edge.
Dean Butler: What we shared in the earlier remarks is we have production release devices that provide industry leading inference at the edge for machine learning for battery powered applications.
Dean Butler: and we see that.
Dean Butler: Increasing it as adoption.
Dean Butler: and for sure when customers use those, there's an ASP-lifto-associated with that.
Dean Butler: So, think of it as ASP left and I also had, you should also think of it as Sam expansion, because it opened the door to additional application and use cases for advice. So, net positive for us on product level and at end market adoption level.
Speaker Change: Got it. Thanks, Matt.
Speaker Change: The next question comes from Quinn Bolton with Needleman Company, your line is open.
Speaker Change: Yes, Nick Doyle on for Quinn, thanks for taking more questions.
Nick Doyle: You guys mentioned no channel restock next quarter. So I guess how are you thinking about the distributor mix overall? And to that mix get back to 80% in early 2021.
Speaker Change: Yeah, Nick, we're not assuming that there's a broad restocking into the channel. I would just remind everybody that our target channel, days of inventory is approximately 70, 75.
Speaker Change: We just end of the quarter, 53, the prior quarter was 55 and so really I think to see the channel restock is gonna take
Nick Doyle: Several quarters, I think, as POS continues to grow as confidence and customer forecast continued to grow, which they have been sequentially every quarter, you'll gradually see the distributors continue to take more and more stock and put them on the shelves as turns actually go up.
Nick Doyle: and that's one of the notable things that I think we've seen in the last quarter is to have shortly times turns orders coming in which of course is heavily dependent on the channel being able to support that.
Dean Butler: On terms of getting the channel back to closer to our historical mix of about 80% We're in no rush, I think, ultimately, that's where the company heads back to kind of our normal course of business.
Nick Doyle: But again, the channels made of the tens of thousands of customers.
Nick Doyle: and we're going to slowly continue to participate and support our customers.
Nick Doyle: As they continue to grow as they're destocking, you know, gets over with and they return back to normal consumption. And once you get back to that point, I would expect it to get back near to that 80%. But it didn't take a few quarters. You won't see that move in one quarter. You won't probably see it moving in two quarters.
Dean Butler: is just a little bit of a patience game I'd say next.
Speaker Change: Thanks, helpful.
Speaker Change: The second question on CGMs, you mentioned line of fate to fall ramps in 2025.
Speaker Change: Can you give us any more details on what that looks like in terms of units?
Speaker Change: I think you've talked about millions or tens of millions of an opportunity and I think on mine, I think CNBC was talking about 100 million units or more in terms of the overall market. So, any help there?
Dean Butler: and the United States. So as we've said in the past, and it's unchanged.
Dean Butler: He's doing a think a bit as a company essentially very little historic revenue and continues to focus on monitors and insulin management in general.
Dean Butler: of Wichair.
Dean Butler: to multiple design wins at multiple encustomers who have said more than a dozen.
Dean Butler: and we are starting to see those ramps and as we exit this year, so we expect that those would start contributing in a way they haven't been able to as we go into 2025.
Dean Butler: of Interfession Directly, we believe that that end market represents hundreds of millions of units of opportunity.
Dean Butler: is not the statement in terms of the Sam or Service available market there. And we feel that we are doing a pretty good job at securing markets here there. And we expect that to continue moving forward.
Speaker Change: Thank you.
Speaker Change: The next question comes from Cody, a crew with the Bends Park Company, your line has opened.
Cody: Yeah, guys, thanks for taking my questions. Maybe if you can just talk about your in-consumption levels with revenue here in the back half, about flat, obviously after a strong sequential improvement in Q3, what do you think that that is saying about your in-consumption levels?
Speaker Change: Yeah, so because here from Dean as well, the quick answer is not at consumption yet coding, is the quick answer, machines and improvements.
Speaker Change: in the end customer, Excess Immittory, that the stocking has made a big impact in working those levels down. But as we've also said, it's not complete yet, and still has some more work to be.
Speaker Change: Had for that to be complete. So getting closer to consumption but not there yet.
Speaker Change: and just as a reminder, big picture, you know, the three big pieces we've been talking about, one is that end inventory.
Speaker Change: getting closer but not corrected yet.
Speaker Change: but definitely has gone in the right direction and we've made some big gains there. Second piece is end-market, end-market, you know, continues to be, you know, low invisibility and entropy in uncertain in terms of what to expect. And our customers, I think, just...
Speaker Change: are trying to navigate this environment and they're not sure either. I think it's the honest answer.
Speaker Change: and then the third piece is our design when we're next and as we've said
Speaker Change: We've benefited from significant design with levels over the last few years and those are now starting to ramp. And you know, that's giving us, you know, the confidence to say we see a path to continue growth here even with the uncertain market environment that we're all dealing with.
Speaker Change: Cody, maybe I'll just add just a couple of points. One, we made pretty rapid progress in the last three or four quarters to actually get, you know, majority of customers pass their knee stocking process.
Speaker Change: I think as we look in the Q4, what the dynamics are today is a little bit choppy in between different end markets, for example industrials seem like that.
Speaker Change: You know, sort of gotten a little bit weaker lately. I don't know if there's a sort of hesitancy on some of those customers. While some of the consumer, you know, based applications seem like they're largely half 30 stocking and they're forecast, continue to go up.
Speaker Change: So we're still sort of pockets of differentiation between some of the end applications.
Speaker Change: and more notably recently we've seen a lot more short order lead times, so that short order lead times makes it hard to give us visibility on, hey what is the next, you know, quarter, two, quarter, three, quarter, look like.
Speaker Change: as customer sort of sit on their end-to-man waiting till almost the last moment.
Speaker Change: So that is sort of caused a little bit of visibility, you know, gray area for us as we look forward. But largely I think people we are making progress and I think we're not quite fair yet on, you know, and market consumption level.
Speaker Change: but we're making progress every quarter and every quarter, you'll little bit of pockets, you know, change and you know, those customers move fast and it looks more and more you'll positive.
Speaker Change: Thanks for that color, very helpful. Maybe if you can just carry on that thought into the first quarter, any quick thoughts on normal seasonality or what your order rates are suggesting for the first half.
Speaker Change: Yeah, so for the first half I would say, you know, there is a lot more turns orders that we're starting to see, so it gives us a little less deli and what we might be able to see into a typical Q1.
Speaker Change: Q1 for a lot of our enapplications is you'll see clearly not their strong points.
Speaker Change: I think the balancing point for us in Q1 and Matt I think mentioned in some of his remarks.
Speaker Change: We're some of the design-win ramps that we see you're looking to go into mass production. We have some going here in Q4, we have some pretty good ones that looks like Q1 is going to be the right timing. So I think our focus largely is around these design-win ramps.
Speaker Change: Alright, thanks, guys. Thank you.
Speaker Change: As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. Our next question comes from Peter Ping with JP Morgan, your line is open.
Peter Ping: Good afternoon and thanks for taking my question. I want to follow up on the design, went, ran maybe if you can just kind of give us on how material this could be to revenue contributions for 2025 that would be helpful versus 2024.
Speaker Change: Yeah, other
Speaker Change: Not something that we provided more color on. I think the easiest way to say is, you know, right now in this Mark and environment, once the inventory of the stockings complete, you know, for all intense and purposes, we're assuming that the end consumption or demand environment is relatively flat.
Speaker Change: It's got to change at some point with that to see more strength there but we're not seeing it right now So we're assuming that you know the other side of that all the growth has come from the design win ranch
Speaker Change: and what we've shared is we see a path to solid growth moving forward based on the design and ramps in that flat-marking environment. That's the most color we can provide right now.
Speaker Change: Got it, okay. And then as we think about some of these new design when ramps, maybe you can talk about whether there's any margin implications, other to the upper down, as we think about 25.
Speaker Change: Yep, no meaningful changes. You know, we've remained committed to our overall gross margin model. We see a path to continuing, doing or meeting that model. So, you know, those ramps will definitely help our revenue, but won't meeting fully changing gross margin help.
Speaker Change: Hi, show no further questions at this time. I would like now to turn the call back over to Giovanni for closing remarks.
Giovanni Pacelli: Thank you, Michelle, and thank you all for joining us this afternoon. Before concluding today's call, I would like to announce our upcoming participation in Steve Wolf's 2024 Midwest Conference in Chicago on November 7th.
Speaker Change: is a good word today's call, thank you.
Michelle: This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: The End
Speaker Change: The New Year's Eve,
Michelle: My name is Michelle and I will be your conference operator today.
Speaker Change: Welcome to the Silicon Maab 3rd quarter fiscal 2020 for earnings call.
Speaker Change: At this time, all participants are in all of this and only moved. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would need to press star, one-one on your telephone. You would then hear an automated message of icing your hand as raised.
Speaker Change: 2 withdrawal your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would know, like to turn the call over to Giovanni Pacelli, so I'll come and I have senior director of fine-nance.
Speaker Change: Duke Bonnie, please go ahead sir.
Giovanni Pacelli: Thank you Michelle and good afternoon everyone. We're recording this meeting and a replay will be available for four weeks on the investor relations section of our website at investor.silabs.com.
Giovanni Pacelli: Our earnings press release and the accompanying financial tables are also available on our website.
Speaker Change: Joining me today are Silicon Labs President and Chief Executive Officer Matt Johnson and Chief Financial Officer Dean Butler. They will discuss our third quarter financial performance and review recent business activities.
Speaker Change: We will take questions after our prepared comments and our remarks today will include forward-looking statements that are subject to risks and uncertainties.
Speaker Change: We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future.
Speaker Change: 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.
Speaker Change: Additionally, during our call today, we will refer to certain non-GAAP financial information.
Speaker Change: 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 our website. I'd now like to turn the call over to Silicon Lab's Chief Executive Officer, Matt Johnson.
Matt Johnson: Thank you. Thank you.
Matt Johnson: Thanks, Giovanni, and good afternoon, everyone. Silicon Labs delivered solid third quarter results with revenue and earnings exceeding the midpoint of our guidance.
Speaker Change: Our surveys indicate that many of our customers' excess inventory levels have now normalized. However, there remain outliers whose destocking will continue to take time.
Speaker Change: Bookings patterns and distribution POS have modestly improved, but have not significantly accelerated, indicating to us that a demand recovery is likely to be more gradual than many of our customers originally expected.
Speaker Change: Broadly speaking, the majority of our customers remain positive looking forward into 2025.
Speaker Change: Our current quarter outlook reflects near-term uncertainty around the timing of a more robust end-market recovery and, importantly, does not assume any significant channel restocking.
Speaker Change: and many others. Thank you. Thank you.
Speaker Change: Looking ahead, our growth in the near to midterm is underpinned by design-limb ramps in the secular growth areas that we have previously discussed, including connected health, smart metering, and commercial retail, as well as many other applications. We are currently ramping shipments to multiple customers in all of these and are confident we are gaining share in these markets, giving us conviction and our growth opportunity moving forward.
Speaker Change: Over the last quarter, Silicon Labs' Works With Developer Conference was a huge success. We hosted over 500 unique existing and new customers in person for two days, as well as our ecosystem partners including Amazon, Google, Samsung, and now NVIDIA.
Speaker Change: At Works With and at Embedded World North America, our CTO Daniel Cooley and I delivered keynotes discussing how AI is rapidly becoming a growth catalyst that will enable the total number of IoT devices to reach over 100 billion over the next decade.
Speaker Change: We also detailed the continued success of our industry-leading Series 2 platform and new to industry capabilities of our upcoming Series 3 platform.
Speaker Change: Simply said, AI not only enables better use of existing IoT devices, it will also enable and accelerate even broader device deployments moving forward, further expanding the Silicon Labs addressable market.
Speaker Change: At the product level, we are currently shipping Series 2 devices with integrated machine learning inference engines.
Speaker Change: This includes our XG24 family of SoCs, a device where Silicon Labs was first to bring machine learning acceleration to wireless SoCs and still currently delivers more performance per unit of power consumption than any other wireless SoC based on a recently publicly available benchmark done by a third party.
Speaker Change: Also in the quarter, we announced Series 2 enablement of Bluetooth channel sounding on our XG24, enabling secure and precise distant measurement between Bluetooth devices.
Speaker Change: In opening the door for a new wave of proximity-based applications in home security, location tracking, geofencing, vehicle keyless entry, and building access control.
Speaker Change: This capability is already driving another wave of customer interest and design wins on our Series 2 platform at existing and new customers.
Speaker Change: At the same time, we are now sampling our first Series 3 device to customers, which is purpose-built to extend our successful Series 2 architecture to new-to-IoT levels of performance for the industry.
Speaker Change: For example, Series 3 will have dedicated hardware acceleration to create the world's most flexible IoT modem.
Speaker Change: Dedicated security cores designed to enable post-quantum level encryption and an advanced machine learning core designed to enable an order-of-magnitude increase in performance over our already industry-leading energy per inference benchmarks.
Speaker Change: We are excited with our progress on Series 3, and our Series 2 platform continues to build momentum with new exciting products and features.
Speaker Change: Growing market share and new use cases through its industry-leading power consumption, security, and multi-protocol wireless performance.
Speaker Change: This includes our first Wi-Fi 6 device, the 917, which we expect to begin ramping at customers as early as Q1 of 2025.
Speaker Change: and can deliver up to two years of battery life on a single AAA battery. This equates to meaningfully better battery life versus any competing alternatives.
Speaker Change: Customer engagement with our 9-1-7 device is strong, and we are ramping our design wins quickly across multiple application spaces.
Speaker Change: Our initial intent in Wi-Fi is to work with our broad existing customer base to identify opportunities for pull-through and applications where Wi-Fi is becoming more relevant and where power consumption and security are also key requirements.
Speaker Change: We've been investing significantly in Wi-Fi because of our firm belief in its relevance and growth potential within our IoT space.
Speaker Change: We're hyper-focused on driving the same market share expansion in Wi-Fi that we're currently achieving with our Bluetooth solutions after increasing our strategic focus in that technology around five or six years ago.
Speaker Change: In addition, we are continuing our focus and growth in Bluetooth.
Speaker Change: Not only is it now our fastest growing technology by revenue, but it is now our largest opportunity pipeline by technology as well.
Speaker Change: Our early integration of new-to-industry capabilities like PSA Level 3 security and benchmark-setting machine learning performance continues to generate strong engagement and growth.
Speaker Change: Lastly, our commitment to building matter infrastructure alongside our leadership and thread technology positions us well as trusted partner to ISPs, ecosystems, and developers who are working to integrate matter into their solutions and support interoperability of edge devices.
Speaker Change: Overall, in the near term, the timing of the end market demand recovery remains uncertain.
Speaker Change: However, we expect a solid growth year in 2025 as the significant design wins we have driven over the last few years begin ramping to production.
Speaker Change: We will continue to focus on solid technology innovation and execution, gaining market share, and returning to our financial model as fast as possible.
Speaker Change: Now, I'll hand it over to Dean for the financial update. Dean?
Dean Butler: Thanks Matt and good afternoon to everyone. I'll first review the financial results for a recently completed quarter followed by a discussion of our current outlook.
Dean Butler: Revenue for the September quarter was $166 million, up 14% sequentially, and slightly ahead of the midpoint of our prior guidance.
Dean Butler: Year-over-year, revenue was down 18%, as demand continued to be hampered by excess inventory absorption across distributors and end customers.
Dean Butler: In our industrial and commercial business, September quarter revenue was $96 million, up 10% sequentially, but down 20% year over year.
Dean Butler: The sequential increase was driven by a strength in applications such as smart building controls and smart meters.
Dean Butler: Home and Life September quarter revenue was $70 million, up 22% sequentially, and down 16% year-over-year.
Dean Butler: As expected, home and life grew faster than industrial and commercial in the third quarter, which we believe is at least partially driven by consumer-oriented end markets being further along in their inventory correction relative to the industrial end markets.
Dean Butler: Wearable related applications such as smart watches and fitness trackers saw strength in the quarter contributing to the 22% sequential growth.
Dean Butler: Inventory in our distribution channel declined two days to end the September quarter at 53 days.
Dean Butler: We are monitoring our distribution inventory and allowing shipments into the channel to flow naturally despite being lower than target level.
Dean Butler: Distributor POS continued to grow sequentially in Q3, as we believe many long-tail customers have now worked through the majority of their excess inventory, potentially paving the path to further recovery in 2025.
Dean Butler: Distribution made up approximately 72% of our revenue mix for the September quarter, an increase from the prior quarter, but below our historical distribution versus direct channel sales mix of around 80%.
Dean Butler: For the September quarter, our GAAP gross margin was 54.3%. Non-GAAP gross margin was 54.5%, which was an improvement versus 53% in the prior quarter.
Dean Butler: SCAP operating expenses were $120 million, which includes share-based compensation of $16 million and intangible asset amortization of $5 million.
Dean Butler: Non-GAAP operating expense of $99 million was below the low end of our prior guidance range as we manage expenses during times of more limited visibility.
Dean Butler: Gap operating loss was $30 million and non-gap operating loss was $8 million, both of which were substantial improvements from the prior quarter moving us in the right direction.
Dean Butler: During the quarter, we recorded a gap tax expense of approximately $2 million. Our non-gap tax rate remained at 20%.
Dean Butler: Gap loss per share was 88 cents. Non-gap loss of 13 cents per share was better than the midpoint of our guidance range due to lower operating expenses.
Dean Butler: Turning to the balance sheet.
Dean Butler: We ended the quarter with $370 million of cash, cash equivalents, and short-term investments.
Dean Butler: Our days of sales outstanding was approximately 30 days.
Dean Butler: During the quarter, we further reduced our internal inventory by $27 million, ending the quarter at $139 million of net inventory, which contributed to our positive operating cash flow of $32 million for the September quarter, despite our operating losses.
Dean Butler: Days of inventory on hand improved to 165 days, a significant improvement from the 217 days at June quarter end.
Dean Butler: Now, let me turn to our December quarter outlook.
Dean Butler: While visibility remains limited due in part to shorter lead times, the rate of change in our customers' excess inventory de-stocking process has decelerated after having made rapid progress over the last few quarters.
Dean Butler: While distribution POS and our own bookings have improved, the pace of our recovery remains somewhat uncertain due to the slower end market demand.
Dean Butler: Looking ahead to Q4, we anticipate revenue in the December quarter to be in the range of $161 million to $171 million, indicating a flat quarter-on-quarter comparison, which is likely better than seasonality.
Dean Butler: Considering the relative and market ordering patterns, we would anticipate another quarter of outperformance by our home and life products in the December quarter.
Dean Butler: being somewhat offset by a muted industrial and commercial end market, therefore resulting in our flat guidance expectations for Q4.
Dean Butler: It's worth noting that the midpoint of this guidance implies a 90% year-over-year growth rate versus the trough experienced in the December quarter of 2023.
Dean Butler: Additionally, as previously anticipated, we expect to begin our initial production shipments to continuous blood glucose monitoring customers and have line of sight to full scale customer ramps into 2025.
Dean Butler: We expect GAAP gross margin in the December quarter to be in the range of 54% to 55%. We expect non-GAAP gross margin to also be in the range of 54% to 55%.
Dean Butler: We expect GAAP operating expenses in the December quarter to be in the range of $118 million to $122 million.
Dean Butler: We expect non-GAAP operating expenses in the range of $97 million to $99 million.
Dean Butler: Finally, GAAP loss per share is expected to be in the range of $0.75 to $1.05 loss.
Dean Butler: Non-GAAP loss per share is expected to be the range of one cent loss to a loss of 21 cents.
Dean Butler: This wraps up our prepared remarks. I'd like to now hand the call over to the operator to start the Q&A session. Michelle?
Michelle: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. And to withdraw your question, please press star 11 again. Standby while we compile the Q&A roster.
Speaker Change: The first question comes from Serena Pajuri with Raymond James. Your line is open.
Serena Pajuri: Thank you. Matt, you talked about bookings being somewhat uneven. Maybe you could give us some color, additional color.
Serena Pajuri: on which end markets I think, you know, you guys are guiding for.
Dean Butler: commercial to be kind of flattish or muter seasonally, and then home and life seems to be doing better. But within those, I guess, end markets, you know, any particular subsegments or end markets are standing out in terms of weakness. Thank you.
Speaker Change: Thank you.
Speaker Change: Sure, yeah, I think the broad bookings statement is that, you know, we have seen continued improvement overall, but as we said in the prepared remarks, not an acceleration that you'd want to see to say, you know, we're on the other side of this cycle that we're all in.
Speaker Change: In terms of the next level down, quick answer is more strength in home and life.
Dean Butler: I guess you know on one hand isn't surprising given that you know it's later into the cycle but we'd like to see more strength from industrial than we're now seeing.
Speaker Change: Okay, got it. Maybe a quick follow up.
Speaker Change: And you did talk about that as well. I'm just curious. I mean, when we look at these markets, we always tend to think in terms of units and ASPs.
Speaker Change: So, maybe, you know, if you can help us understand, you know, as AI, as we see more and more AI functionality in, you know, these applications, what sort of ASP uplift are you, I guess, seeing and what should we expect as we, I guess, look out to the next couple of years? Thank you.
Speaker Change: Sure. So quick answer is it definitely would lift ASPs. That's the first thing. It's important just for framing that there's multiple levels of this, right? We, as we've said in some of our keynotes, as well as the prepared remarks,
Speaker Change: We do see AI accelerating IoT edge adoption ultimately, whether it's, you know, improving the usefulness of existing deployments or helping accelerate broader deployments.
Speaker Change: So that's exciting and encouraging to see. At the device level, simply said, it takes more cores, more compute, more silicon space, more performance.
Speaker Change: to bring inference at the edge.
Speaker Change: What we shared in the earlier remarks is we have production release devices that provide industry-leading inference at the edge for machine learning for battery-powered applications.
Dean Butler: And we see that.
Speaker Change: Increasing in its adoption?
Dean Butler: And for sure, when customers use those, there's an ASP lift associated with that.
Dean Butler: So think of it as ASPLift, and I'd also add, you should also think of it as SAM Extension, because it opens the door to additional application and use cases for our devices. So, net positive for us on product level and market adoption level.
Speaker Change: Got it. Thanks, Matt.
Dean Butler: and Mark Mauldin. Thank you.
Speaker Change: The next question comes from Quinn Bolton with Needham & Company. Your line is open.
Speaker Change: Hey guys, Nick Doyle, I'm for Quinn. Thanks for taking our questions. You guys mentioned no channel restock next quarter, so I guess how are you thinking about the distributor mix overall and can that mix get back to 80% in early 2025? Thanks.
Speaker Change: Yeah Nick, we're not assuming that there's a broad restocking into the channel. I would just remind everybody that our target channel days of inventory is approximately 70 to 75.
Speaker Change: We just ended the quarter at 53, the prior quarter was 55, and so really I think to see the channel restock is going to take
Speaker Change: Several quarters, I think as POS continues to grow, as confidence and customer forecasts continue to grow, which they have been sequentially every quarter, you'll gradually see distributors continue to take more and more stock and put them on the shelves as turns actually go up.
Speaker Change: And that's one of the notable things that I think we've seen in the last quarter is to have short lead times turns orders coming in, which of course is heavily dependent on the channel being able to support that.
Speaker Change: In terms of getting the channel back to closer to our historical mix of about 80%, we're in no rush. I think ultimately that's where the company heads back to kind of our normal course of business.
Speaker Change: But again, the channel is made up of tens of thousands of customers.
Speaker Change: And we're going to just slowly, you know, continue to participate and support our customers.
Speaker Change: as they continue to grow, as their de-stocking gets over with and they return back to normal consumption. And once you get back to that point, I would expect it to get back nearer to that 80%, but it didn't take a few quarters. You won't see that move in one quarter. You won't probably see it move in two quarters.
Speaker Change: It's just a little bit of a patience game, I'd say, Nick.
Nick Doyle: Thanks, helpful. The second question on CGMs, you mentioned line of sight to full ramps in 2025. Can you give us any more details on what that looks like in terms of units?
Nick Doyle: I think you've talked about millions or tens of millions of an opportunity, and I think online, I think CNBC was talking about 100 million units or more in terms of the overall market. So, any help there?
Speaker Change: So, as we've said in the past, and it's unchanged, an easy way to think of it is, as a company, essentially, you know, very little historical revenue and continuous glucose monitors and insulin management in general.
Nick Doyle: We've shared.
Nick Doyle: multiple design wins at multiple end customers. We've said more than a dozen.
Nick Doyle: and we are starting to see those ramp and you know as we exit this year so we'd expect that those would start contributing in a way they haven't been able to as we go into 2025. To answer your question directly, we believe that that end market represents hundreds of millions of units of opportunity.
Nick Doyle: and that's a statement in terms of the, you know, SAM or service available market there and we feel that we are doing a pretty good job at securing market share there and we expect that to continue moving forward.
Speaker Change: Thank you.
Speaker Change: The next question comes from Cody Acree with the Benchmark Company. Your line is open.
Cody Acree: Yeah, guys, thanks for taking my questions. Maybe if you can just talk about your in-consumption levels with revenue here in the back half about flat, obviously after a strong sequential improvement in Q3. What do you think that that is saying about your in-consumption levels?
Speaker Change: Yeah, so it'd be good to hear from Dean as well. The quick answer is not at consumption yet, Cody, is the quick answer. We've seen an improvement.
Nick Doyle: in the end customer excess inventory that the stocking has made a big impact in working those levels down. But as we've also said, it's not complete yet and still has some more work to be had for that to be complete. So getting closer to consumption, but not there yet.
Nick Doyle: And, you know, just as a reminder, big, big picture, you know, the three big pieces we've been talking about, one is that in inventory.
Speaker Change: It's getting closer, but not corrected yet.
Speaker Change: but definitely has gone in the right direction, and we've made some big gains there. Second piece is end market.
Speaker Change: And market, you know, continues to be, you know, low in visibility and choppy and uncertain.
Speaker Change: in terms of what to expect. And our customers, I think, just...
Speaker Change: are trying to navigate this environment and they're not sure either, I think is the honest answer.
Speaker Change: And then the third piece is our design and wraps. And as we've said.
Speaker Change: We've benefited from significant design wind levels over the last few years, and those are now starting to ramp. And, you know, that's giving us the confidence to say we see a path to continued growth here, even with the uncertain market environment that we're all dealing with.
Speaker Change: Cody, maybe I'll just add just a couple of points. One, we've made pretty rapid progress in the last three or four quarters to actually get, you know, majority of customers past their destocking process.
Speaker Change: I think as we look into Q4, what the dynamics are today is a little bit choppy in between different end markets. For example, industrials seem like that's
Speaker Change: have sort of gotten a little bit weaker lately. I don't know if there's a sort of hesitancy on some of those customers. While some of the consumer-based applications seem like they're largely past their destocking and their forecasts continue to go up.
Speaker Change: So we're still see sort of pockets of differentiation between some of the end applications
Speaker Change: And more notably, recently, we've seen a lot more short order lead times, so that short order lead times makes it hard to give us visibility on, hey, what does the next, you know, quarter, two quarters, three quarters look like?
Speaker Change: as customers sort of sit on their end demand, waiting till almost the last moment.
Speaker Change: So that is sort of caused a little bit of visibility, you know, gray area for us as we look forward. But largely, I think, people, we are making progress, and I think we're not quite there yet on, you know, an end market consumption level.
Speaker Change: but we're making progress every quarter and every quarter, you know, a little bit of pockets, you know, change and, you know, those customers move past and it looks more and more, you know, positive.
Speaker Change: Thanks for that color, it's very helpful. Maybe if you can just carry on that thought into the first quarter, any quick thoughts on normal seasonality or what your order rates are suggesting for the first half?
Speaker Change: Yeah so for the first half I would say you know there is a lot more turns orders that we're starting to see so it gives us a little flexibility of what we might be able to see into you know a typical Q1.
Speaker Change: Q1 for a lot of our end applications is usually not their strong point.
Speaker Change: I think the balancing point for us in Q1, and Matt, I think, mentioned in some of his remarks,
Speaker Change: were some of the design wind ramps that we see looking to go into mass production. We have some going here in Q4. We have some pretty good ones that looks like Q1 is going to be the right timing. So I think our focus largely is around these design wind ramps.
Speaker Change: All right, thank you guys. Thank you.
Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. Our next question comes from Peter Ping with JPMorgan. Your line is open.
Peter Ping: Good afternoon and thanks for taking my question. I want to follow up on the design WintRamp. Maybe if you can just kind of give us on how material this could be to revenue contribution for 2025 that would be helpful versus 2024.
Speaker Change: Yeah, that's not something that we've provided more color on. I think the easiest way to say it is, you know, right now in this market environment, once the inventory of the stocking is complete, you know, for all intents and purposes, we're assuming that the end consumption or demand environment is relatively flat.
Speaker Change: It's got to change at some point. We've got to see more strength there, but we're not seeing it right now. So we're assuming that, you know, the other side of that, all the growth is coming from design with ramps.
Speaker Change: and you know what we've shared is we see a path to solid growth moving forward based on those design ramps in that flat market environment. That's that's the the most color we can provide right now.
Speaker Change: Got it. Okay. And then as we think about some of these new design wind ramps, maybe you can talk about whether there's any margin implications either to the up or down as we think about 2025.
Speaker Change: Yeah, no, no meaningful changes. You know, we've remained committed to our overall gross margin model. We see a path to continuing doing or meeting that model. So, you know, those ramps will definitely help our revenue, but won't meaningfully change the gross margin outlook.
Speaker Change: Great, thank you guys.
Speaker Change: I show no further questions at this time. I would like now to turn the call back over to Giovanni for closing remarks.
Giovanni Pacelli: Thank you, Michelle. And thank you all for joining us this afternoon. Before concluding today's call, I would like to announce our upcoming participation in Steeples 2024 Midwest Conference in Chicago on November 7th.
Giovanni Pacelli: This concludes today's call. Thank you.
Michelle: This concludes today's conference call. Thank you for participating. You may now disconnect.
Giovanni Pacelli: and many others. Thank you. Thank you.