Q2 2019 Earnings Call
The market.
A couple of years and then within that 80% of Zigbee can you just give us the land the competitive landscape would be helpful. Thank you.
Silicon Labs is the is the leader in Zigbee, we've have got to a 15 year plus history developing mesh networking software and have have a dominant position in the zigbee market and Zigbee has been very successful in lighting one of the reasons is because in lighting applications you actually have to support very high temperatures and when you when you optimize the cost of the bulbs.
You want to run them as close to the to the limit as possible in our solutions have been one of the few that have have supported the requirements of lighting.
From a software standpoint, we've got the leading Zigbee stack and development environment and interoperability and have had a lot of success with the the leading consumer as well as commercial and industrial lighting manufacturers.
I think that.
The benefit of Zigbee is the robustness of the mesh network compared to Wi Fi applications, and the fact that it works without a mobile phone. So they typically use of a gateway you've seen the integration of those gateways into things like the Amazon Alexa and other control points. So that you can get rid of the gateway and you can you can talk to those and we see a growing trend to the integration of of zigbee into into gateways by the operators and echo system providers. So that provides a kind of an ease of installation.
We've also seen.
Pretty good traction with.
With.
The retailers in promoting these we've seen the cost curves come down on smart lighting and so we we anticipate that smart lighting in general in the end of the attach of smart lighting compared to just a regular bowl that percentage to go up over time. So we see this as a nice tailwind for us and we feel like we have a very strong competitive position to maintain our share.
Okay.
Our next question comes from Matt Ramsay.
Cowen. Please go ahead.
Thank you very much good morning.
Hi, I wanted to follow up a little bit on on planes question around.
Infrastructure and timing in particular, it sounds like you guys are calling for.
On the timing business to be down sequentially in the September and John This comment that you guys.
Included sort of a normal run rate quarter for Wawa. So maybe you could talk a little bit about the market overall or for your timing products and where there might be softness and what in particular, you think might be causing that of your shipments to walk away or resuming. Thanks.
Yes, Matt this is John so.
We see a good long term opportunity and the timing market and see.
Have a good design win traction and fiveg with customers around the world in that market.
The.
The opportunity at Wawa is is down from where it was previously based on the trade issues and.
While we've worked through that you know, it's a partial recovery of where we were previously related to that based on the export control designations as I talked about but longer term, we continue to see a very good opportunity in the timing market, but yes, you're right we did.
Highlight infrastructure as an overall category to be down in the third quarter sequentially I think I can add a little bit of color that you've got.
Wawa its inability to ship product because of the unavailability of some components that are required within their their solution. So.
We anticipate that that law way shipment shipments will be challenged in.
You look at what China is doing in terms of Capex and Fiveg rollout, they're going to they're going to pause a little bit and wait for wild way to catch up.
And so within China.
The anticipation is that there will be a bit of a slow down in deployments of fiveg infrastructure, which really drives a lot of the the overall capex within China. If you look globally you've got.
You know a lot of political pressures too.
To move out away from walk away and into other vendors and.
And so that tends to.
Move shipments around and also cause cause some.
Churn in terms of.
The share changes and things like that and that takes a little bit of time. So we think that is actually.
Favorable to non wawa, non China vendors of equipment.
We do see that there is a bit of.
The impact of that on the overall demand, but overall.
It will be a vendor shift and just if you look at our timing business in general we shipped to essentially everyone. All of the major vendors and telecom equipment both wired.
Really the majority of the revenue is still on on.
Traditional optical high speed networking wireline type communications applications, we have a growing opportunity in in in wireless in Fiveg and have four out of the top five vendors. There. So a share shifts change, we view that as kind of fairly neutral to our business but.
But overall, we see that the market is maybe.
A little bit challenged given given the you know the trade tensions and the ban on why would add Matt. This is John just one more comment and then you can follow up but the.
The macro continues to to apply some lingering pressure out there as well we're very pleased with our performance in the second quarter. Please to guide.
Sequential growth overall for the company in third quarter, but we were just commenting on timing also for isolation. There is some some lingering headwinds related to the macro environment.
Got it got it. Thanks, Thanks, guys for all the color on just the.
Follow up and sort of related to the mix of the business.
Infrastructure versus Aiotv I was pleased to see the upside in gross margin.
Despite sort of the mix change and just looking back over a year ago I think the IP business is now seven points higher in your revenue mix.
Infrastructure is down yet gross margin is flat so John maybe you could talk through a little bit on on gross margins are there some upside leverage you're using within the IP business or some improvements with scale there.
And are some of these margin things maybe sustainable going forward. Thank you.
Yeah, I think it's a combination of those factors were pleased with the hard work from our operations team to to adjust some things on the supply chain to drive greater efficiencies on the model also the addition of Z wave into the mix has helped gross margins, we improved the Z wave the easy way of gross margins about 500 basis points from the time of the acquisition.
So so really good performance there looking ahead into the third quarter of course, it's a seasonally high.
Quarter four consumer applications led by broadcast video that tends to drag margins a little bit. So we are pleased with the execution there on a longer term basis, we're holding the 58% to 60% range and see the ability to really drive growth at somewhat lower gross margin may add some pressure, but we're definitely pleased with what we see right now.
Thank you very much.
Our next question comes from Gary No.
Wells Fargo Securities.
Go ahead.
Good morning, everyone. Thanks for taking my question.
A question about.
Opex your non-GAAP Opex has been running between 87 and $80 million for each of the past five quarters.
Essentially keeping the dog in the lease so to speak.
And as your revenue improved.
Look into the future and I guess, beginning in Q3 and perhaps into 2020.
Let the dog run free with respect to Opex or how should we think about.
The rate of increase in Opex as revenues begin to improve.
Yes, Gary so we.
We have controlled Opex a bit this year, but at the same time, we're keeping our eye longer term on the.
On the on the objectives to grow I, OTN infrastructure and broadcast automotive and want to continue investing in those areas.
We're going to be meeting with the management team and board of directors through the course of this fall and I think.
Heading into into 2020.
Early part of the year, we should be able to provide some more color on the expectation for for 2020 Alpha next but you know in light of the.
Industry decline in the first quarter, we did draw back a little bit and you are seeing the continuing benefits from that but yes, we will need to step up the investment level with continued growth in the business and that is what we intend to do.
Okay.
I want to clarify something on Wawa for the just reported in June quarter.
Hey, good late May you quantified potentially a 3 million dollar impact for the June quarter as it relates to the Bali shipment band was that in fact, the case for the quarter.
Yes, yes, that's that's that's roughly accurate we did pick up shipments right towards the end of the quarter, but that does accurate yes.
All right. Thank you guys.
Our next question comes from.
So.
Roth capital. Please go ahead.
Hi, guys. So.
You talked about inventory kind of returning to normal levels. I'm wondering if you expect to ship to consumption going forward or whether there would be further drawdown in a conservative macro environment and if the China, China eight bit 32 bit microcontrollers are kind of returning to normal growth levels ended second half 19 or the inventory.
But the fact that as well.
Yes, Suji. This is John so yeah, we view inventory at our company and at our distribution partners.
As being at a healthy level and.
I do not see that internal that saw creating a headwind in the business, it's hard to really read directly into the customers inventory levels themselves, but certainly for the distribution partners, we see that as normalized and positive.
On the eight and 32 bit MC you side on on China. There is some continuing weakness in that portion of the market relative to the Chinese economy, and we'll have to see how things play out of.
So PMI and manufacturing levels can pick up in China that should be good for our eight bit.
MC use in China, but we'll have to see how that shakes out.
Okay and another question to specific question I O T and the Smart energy program. The transition there and UK has does that create some sort of ordering a ramp up that might.
Mitigate and be lumpy or MPS as steady progress going forward with the transition transition expense program.
Yes, so the transition is making good progress and I don't see a lot of Lumpiness. There I see steady recovery. There you know that was depressed more in 2018 and now that the smets to transition is ongoing and.
And.
Really a settling in on the market, that's creating more of a steady steady level of business there.
Okay. Thanks, guys.
Our next question comes from Ruben Roy Benchmark. Please go ahead.
Thank you.
Tyson.
First to follow up on previous question on Aiotv and.
Sort of.
Customer behavior, I think industrial it was a little weak back in Q1 and I'm just wondering how you would assess or characterize what you're hearing from customers in terms of.
The overall market environment are they still cautious would you say or.
I know that you talked about design activity continues to be strong, but I'm just wondering in terms of sort of the near to medium term trends on end demand, how you're feeling about aiotv, particularly.
Overall, we are feeling very bullish about aiotv.
If you look at at the deployment of I O T technologies broadly.
We see.
And this is really independent of any sort of macro commentary you see a growing proliferation of applications of use cases of really the need to integrate connectivity and.
T. functionality into a broad range of applications and every year, we're seeing a steady increase in the volumes in the opportunities and the number of customers the number of programs at each customer.
That is that is very encouraging and I think the fact that we have.
Really the leading.
Aiotv end node.
Platform that supports all of the different different various wireless standards that supports legacy standards, we mentioned in the call that we've got over.
50 customers stacks with proprietary protocols running on our solution you can run that at the same time as zigbee or Bluetooth connection to a phone.
And that flexibility to be able to remain compatible with legacy solutions, but also evolve into the future and the fact that we're committed long term.
Has.
Has really resonated well with with the customer base. So I would say that we're.
You look at the the opportunity funnel in I O T. We're at about $8 billion of opportunity.
And we've we've been able to drive substantial year on year. Our design wins are are on track or even ahead of track on about a 30% year on year increase.
For.
For increasing the design win.
Numbers, and so that portends well to the continued strength of of the IOTV markets and I think that if you look at our investments in our series two and in software and.
In.
The development tools and really simplifying the user experience. The big challenge is that the opportunity is just massive variety, but the biggest challenge is to be able to efficiently support all of those inefficiently.
Convert all of these these different applications. It's a very broad range of applications. There is tens of thousands of customers and you've got to rely on your channel partners and the fact that you can just make this stuff work easily and it's.
It's complicated technology. It takes time for customers to really get their arms around the apps in the cloud and the the business models, but every year we see.
Improvements and.
Progress in the markets in the technology and in the standards and we're really excited about where we are.
Hi, Thanks, Thanks for that Tyson I guess, just follow up obviously wireless is going well for you guys just been.
Bit of consolidation and wireless last connectivity assets over the last.
Several months and I'm just wondering on the one hand, it obviously validates the value of those assets an IP on the other hand I'm wondering if you have an early view on how the competitive environment might shape up over the next.
Several quarters or years.
Yes, so first I want to say that our I O T. Wireless is is really primarily command and control.
Making the deployment of sensors and.
Sensing applications, where it where it's actually very low data rate and very low duty cycle, but where you have to have very.
Very good energy efficiency and that's those are the markets, where we see that $8 billion of.
Opportunity, that's everything from Bluetooth to Z wave to Zigbee.
To a lot of the proprietary technologies that we've got in and that is really unrelated to what the consolidation that's been going on in the industry we've seen.
A lot of the legacy Wi Fi assets some of those going into access points and we've partnered with a lot of focus on making sure that these low data rate command and control I O two technologies get integrated into the gateways, especially with a lot of the ecosystem providers, but thats not a market that we're chasing or.
In terms of the Wi Fi.
For access points Thats Marvell had had a decent solution there you've got Qualcomm Broadcom and media tech playing in those areas.
And then a lot of the Wi Fi. The consolidation has also been around Wi Fi that has basically been the redeployment of cellphone technologies into some number of I O T applications, and Thats things like printers, and TV season, and video cameras things that are plugged into the wall.
Where you need a higher data rate and you need to have wireless connectivity similar to what you would have on a tablet or a phone or a PC and thats whats.
That's been the primary.
Driver of the Iot market, you've seen what Cyprus.
Acquired from Broadcom, and now Thats going over to Infinity on.
But those are really a different class of applications where than where we have competed we we have introduced our first of Wi Fi solution. It's a NATO to not 11 and optimized for ultra low power and so that is actually able to scale Wi Fi a bit down into.
Battery powered applications things like a few smart locks and and a few of lighting applications, but.
Overall, the cost in the power consumption of Wi Fi has kept it from really being able to compete in these like.
More mainstream syncing aiotv applications, I would say that going forward the.
Why Fi will continue to see improvements in power consumption was consenting doing too.
To monitor the evolution of standards as we as they deploy Wi Fi Sixone and 11, A.X. and so that's a very interesting technology, but our growth in Aiotv is is not really impacted by the consolidation that we're seeing right now and our opportunity remains in areas outside of.
Outside of why we see a big opportunity on the Bluetooth side to gain team to gain market share. There. We've got a multibillion dollar funnel on Bluetooth and a leading stack on Bluetooth mash and that's an exciting.
Trend as well.
And we continue to invest aggressively there and see a lot of opportunity, especially actually in China.
Very helpful. Thanks Tyson.
Our next question comes from.
Stifel. Please go ahead.
Yes. Thank you.
And congratulations on the results.
So first of all.
Key revenue is back to the 500 million run rate.
And you kind of lost 19 million during Q4, and Q1 and you made it all back here last quarter.
Is there a way you could talk about how much of that was sort of the supply chain catching back up versus new business.
Is there any way to look at it that way.
Yes Tori.
Looking at it I don't have precise breakdowns on those dimensions, but.
What we see here is strong secular growth coming from.
The new the new areas, the new applications that we've been talking about.
Very good traction on the smart home and security.
Home automation on home security market with a good uptick in business there.
Lighting is more of a new application, where we have very good market share and lighting design wins and applications and are seeing those ramp now.
Whereas.
That was a few quarters.
Omnicam and this is really performing well now metering has recovered.
And I would probably put that in more on the in the supply chain recovery.
Side of what you were describing but by and large the growth we're seeing is secular and driven by.
Emerging aiotv applications and.
Across the range of connectivity across Zigbee, and Bluetooth and Z wave and proprietary wireless these are where we are seeing good traction on the market.
I think I actually if you look within Aiotv, we've got a microcontroller piece and then we've got the wireless piece. The microcontroller piece has been impacted by macro I mean, if you look at Microcontrollers overall year on year, they're down about 15% within that Aiotv number wireless on the other hand has been growing.
It was it was up over 20% in the last quarter, and that's really driven by that design win funnel and all the new applications and new customers that we're bringing online and we were guiding.
I would tee up here into the into the third quarter and so the growth that we're seeing on wireless is really from the growth in the markets and also the the traction that we've got with customers, but over you know you still have a macro component of this that that is still working through.
In terms and that's that's primarily impacting the microcontroller you can think of that possibly impacting you know some amount of the wireless, but I think that the design win traction in the growth areas swapping that out.
That's very helpful and as a follow up and maybe back to the whole connectivity.
Consolidation thats been happening.
Just kind of like your prospective Tyson.
I mean do you think this is happening now because customers are basically telling all finished the company's hey, you know you have to have connectivity in your portfolio. If you. If you wanted to be a significant player now and and.
If that's the case, how does how does that really position silicon labs visa the some of your main competitors.
Yes, so we.
We believe that we have leader position leadership positions in all of the low speed connectivity, the and the and the.
Lower data rate is really appropriate for us.
The majority of these I O T applications, where you've got.
You are sensing and you're having to deploy low cost sensors.
Around and and the cost points and the robustness that you get with mesh networking or are very important so that is really unrelated to.
We've been seeing a lot of the legacy.
Why Fi and Bluetooth connectivity combos for phones.
That was part of the.
The Marvell asset that's that's what the Cypress asset is and then you have got there is a lot of.
Why Fi and connectivity in automotive.
I think that was a big part of NXP pulling in the.
That wireless asset and then you've got access points unit for instance, Quantenna was was the.
They were playing and access points literally have have much else to put around that.
And and competing with the big guys like Qualcomm and Broadcom and Mediatech and you had marvell in there a little bit so you've got access you've got automotive and then you have got I O T applications and then you've got the emergence of new standards and investments required to be able to.
To address those so I think that.
But a lot of the microcontroller companies I guess on you've got Infinity on you've got.
NXP looking to pick up these aiotv.
The Wi Fi legacy Wi Fi assets, but we Didnt I don't see those as.
Essential to the growth in the markets that we're trying to address all that we do see convergence longer term and that's why we've been investing in our own organic Wi Fi efforts as those applications start to proliferate.
Very helpful. Thank you.
Our next question comes from.
Gill of Needham and company. Please go ahead.
Yes. Thank you for taking my questions I appreciate it.
Question Tyler on your commentary around.
In China slowing down.
Just trying to reconcile that with some of the recent developments going on in China, where China is releasing spectrum at a much much sooner than expected and allow the Chinese telecoms are tendering for base stations much faster than expected.
So just wanted to kind of reconcile your commentary about potential.
A slowdown in deployment of China Chinese Fiveg.
Base stations, given the fact that there seem to be some commentary going in the other direction.
Yes, Mike My commentary on on the China slowdown was relative to.
Before the export controls were placed on to walk away. There was a rapid rollout of Fiveg in China.
When we were on our last call, we talked a lot about about the opportunity.
Around fiveg in a lot of that was being driven by China, we see that because of the export controls and and.
The inability for wawa to procure all the components required for all their equipment that they are.
You know there has been a lot of commentary around this and the.
In the analyst community.
About the the pace of Fiveg rollout in China, taking a pause and waiting for a way to be able to protect to catch back up so it's really relative to that accelerated pace that I commented on before.
Okay, that's very clear and for my follow up on this is more kind of long term question, but when you look at connectivity for Aiotv.
How do you think about Fiveg.
For two applications.
It seems one of the main purposes of Fiveg is to enable machine to machine communications.
So how do you look at.
How do you think about getting sell your capability, if that's even needed to support some of the next generation I would you applications that might be on sale here versus.
Jimmy technologies.
Yes, I think you have to really break the connectivity technologies down into into.
In the classifications, you've got personal area networks that essentially talk too.
Essentially are talking to your phone. So you can you can think about.
Bluetooth and Bluetooth low energy talking.
From your phone to a device and that's kind of a point to point.
You do have some expansion of that into the Bluetooth mesh, but really your access to the network is through a mobile device then you've got a local area network, which connects to the internet through through an access point or something like that.
And that's.
Application of Wi Fi is in that category, you've got Zigbee, you've got Z wave.
And those types of standards, and that's where we're really playing isn't that personal area network and local area network, where this is free spectrum.
You can deploy at will you or not depending on a carrier you don't have to go get a subscription as long as you've got to Internet access those work and so for a lot of industrial applications. They want to they want to know the networks there they want to have control.
Within your home you've got.
Your.
Your Internet service in China actually they use a lot of a lot of times using the mobile phones as some of the personal area network technologies are are more prevalent.
Over in some of the Asian markets.
And then you've got the wide area network stuff, which has traditionally been MDM I mean, we've seen cellular modems for everything from street lighting to parking meters to asset tracking.
Where where you have to be untethered from a location so you're.
It can roam you know if you try to to track your dog or track your luggage or track your shipment.
Or or a scooter or you know a lot of these applications. Typically that also involves location technology. So you have to have GPS GNSS technology, along with that and that's traditionally had a higher power consumption and a.
Higher cost point, we've seen with the deployment of things like Laura which again is kind of a mix that's kind of a more.
It's unlicensed spectrum and you've got to deploy your own network. We've seen seen the deployment of that but this is really going for like wider area networks.
And not really competing with the technologies that we're in and then you've got all the narrowband Iot T. LTE Cat M, which is a cellular standard you've got to go through an operator and those markets are still very very early you've seen a number of companies invest there and the number of applications.
Starting to pick up but we haven't really seen the high volume applications in that area, it's more industrial and.
And thats, not you're not going to deploy it the 100 sensors in your house, each with a cellular connection and each with a.
Talking to an operator that is going to be a long time coming so we're being very cautious in our we're monitoring this market we're understanding the technology.
But also are cognizant of the fact that theres multiple obstacles to the deployment of that both in terms of the availability of solutions the operators and just the overall market applications, where that's more.
Appropriate compared to the land and Pan technology.
Okay. Good thank you.
Our next question comes from Alessandro Becky.
William Blair. Please go ahead.
Hi, guys just continuing on the acquisition front, you've always talked about.
The potential for future tuck win tuck in acquisitions.
Do you see like the recent environment of things getting bought raising valuations or how are you currently viewing.
The environment for additive.
Acquisitions for you guys.
Yes, Alex this is John .
So acquisitions have been an important part of our strategy over the last several years as we have.
Built out our software team in particular and added some good complimentary adjacent technology and revenue sources.
Into the story and.
Thats worked well for us with Z wave acquisition.
Last year as has has gone well we continue to survey the landscape and look for additional acquisition opportunities of which could include tuck ins for sure.
And also could could involve some larger scale targets, but really looking to add to the organic story to the company as the primary strategy that we have.
Yes, I would I would also just reiterate that we we have talked in the past you know most of these are all the acquisitions that we've done since 2012 have been related to aiotv, adding an additional.
Capabilities to the team as we built out the portfolio and the technology stack around Aiotv. We have indicated that we are we would consider an acquisition on the on the infrastructure side, we have.
Very strong pillars within our timing.
Business and within our isolation business and those would not be off limits in terms of a tuck in acquisition.
As well so while as we have been primarily focused on I O T and we remain optimistic about.
A number of different opportunities. There we would also consider something on the infrastructure side to scale that business as well.
That makes sense and then just one last question on the timing side of the business.
John I think last quarter, you had sort of implied that the wireless side of timing with double year on year.
No way, probably changes that a tiny smudge, but in general do you view that as tracking this year.
Yes, Alex we see the opportunity to grow the wireless business doubling it.
As as less likely now, but do do we do continue to see the opportunity to grow that business in 2019.
Thanks, that's it for me.
Our next question comes from Cody Acree Abbott Lew.
Capital. Please go ahead.
Yes, thanks for taking my question.
No back to China, and the infrastructure business.
I understand that the macro and trade concerns but.
As you are seeing.
That is a fairly recent event do you believe that your customers still have any inventory that they are still working through or is this simply a matter of tracking end demand and then how does that compare to.
The rest of your infrastructure business globally.
Yeah, Cody I think again, it's hard to read directly to end customers. It certainly from the distribution channel perspective, I think the inventory is relatively healthy and we should be tracking closer to end market demand and don't really see a wide geographical difference in that right.
Metric.
And John just to follow up then.
So gross margin.
Nice step up this quarter stepped back towards September .
The.
Tea business is growing in both those cases infrastructures declined in both those cases.
You mentioned that one of the drivers that was starting to get some better efficient or maybe better leverage any better gross margin products in that mix. So I'm curious with similar trends in the end markets.
Are you seeing some seasonal shifts within Io tier one maybe is driving that at one point decline.
Yes, you know, it's it's primarily the seasonal uptick in consumer which is more led by broadcast. So we continue to have very strong market position and the video market that business is picking up in the third quarter as we head into the Christmas build season.
But that uptick does come at a bit lower gross margin.
Okay. Thank you.
This concludes our question and answer session I would like to hand, the call back over to Jalene Hoover.
Thank you Nicole and thank you all for joining US. This morning. This concludes today's call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.