SiTime Corporation

Good afternoon and welcome to SciTimes' third quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference call, please press star key followed by the zero on your touchtone phone. As a reminder, this conference call is being recorded today Wednesday, November 3, 2021. I would now like to turn the call over to Brett Perry of Shelton Group Investor Relations. Brett, please go ahead.

Good afternoon, and welcome to Sidetime's third quarter 2021 financial results conference call. On today's call from Sidetime are Rajesh Vishis, Chief Executive Officer, and Art Chadwick, Chief Financial Officer. Before we begin, I'd like to point out that during the course of this call, The company may make forward-looking statements regarding expected future results, including financial positions, strategy and plans, future operations, the timing market, and other areas of discussion. It's not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business or the extent to which any factors or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed during this call may not occur, and actual events could differ materially and adversely from those anticipated or implied. Neither the company nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform these statements to actual results or to change the company's expectations. For more detailed information on risk associated with the business, we refer you to the risk factors described in our 10-K filed on February 16, 2021, as well as the company's subsequent filings with the SEC. Also during this call, we will refer to certain non-GAAP financial measures, which we consider to be an important measure of company performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with U.S. GAAP. The only difference between GAAP and non-GAAP results is stock-based compensation expense. Please refer to the press release issued today for a detailed reconciliation between GAAP and non-GAAP financial results. With that, I'd now like to turn the call over to Rajesh for his opening remarks. Please go ahead.

Thank you, Brett. Good afternoon and thank you for joining us on today's call. I'm pleased to say that CITAN continues to achieve tremendous growth with Q3 revenue up 42% sequentially and up 93% year over year. Additionally, in every quarter for the past six quarters, we've consistently grown revenue and margins year over year. It's clear to me now that we are in a new phase of sustained high growth and that side time is in the early innings of a long game. This is the market of our choice, of high performance, high availability timing, driven by adoption in new applications across multiple end markets, such as communications, enterprise, automotive, industrial, and medical. As a result, we are focused on taking advantage of this unique opportunity through an aggressive customer acquisition strategy. we're continuing to seize the initiative by accelerating development of new high-value solutions that customers need. While we never underestimate competition, as of now, a credible competitive timing threat is not visible. We believe CyTime will continue driving high growth rate for years to come. Looking back at the COVID-driven disruptions over the last 18 months, we were challenged by the changes in our business and the overall market dynamics. We now see this as a crisis. We now see this crisis as a trigger for a long-term change in end markets, one that is driving rapid adoption of new higher performance technologies that need precision timing. The automotive and data center enterprise markets are great examples of this trend, and we believe they could each become a $100 million business for SciTime over the next few years. Particularly the automotive market has recently latched on to the value proposition of our products due to the increased popularity of EV, electrical vehicles, which use more electronics than the average car. Highlighting that strength in this market is the fact that our largest automotive customer is expected to emerge as our number two customer in 2022. In data center, Data Center continues to be a fast-growing end market for us. A few years ago, we started winning designs in server storage cards at Tier 1 Data Center customers. Since then, we have won designs at 10 customers in eight high-value applications like servers, high-speed interconnects, smart NICs, and acceleration cards. Additionally, the density of side-time design wins, that is the number of design wins per unit system unit, in data centers is increasing. Previously, I had referenced our companion approach, where we are designed in with one anchor Sitem product, such as an elite SuperTCXO, and then we get to sell additional products in the system that are companionships to that SuperTCXO. With this approach, we believe that the customer gets a better solution, and we increase, of course, the Sitem dollar content by sometimes up to three times or 3X. Today, we have seven customers in the data center market, each using a combination of two to four devices from SciTime, such as Super-TCXOs, clocks, differential oscillators, and so on. The opportunities of these customers are already worth $30 million in annualized revenue using this approach. With our newer, higher-value products, we are accelerating our market penetration and the SciTime N9501 differential oscillator is an example of this. We announced this product a year ago and have gained excellent traction in data center, optical, and networking customers. Where we initially expected to have 15 design wins, for example, we now have 30 with an additional 50 opportunities. This together makes up a funnel of over 50 million in annualized revenue far exceeding our expectations when we launched the product. Our 2022 forecast on this product has grown four times, or 4X, from the beginning of 2021 as we continue to grow the opportunity pipeline in these markets. We also see an emerging trend where technologies and products developed for one market are being adopted in others, which opens up, of course, additional opportunities for us. For example, The data center architecture is now being used in CU, or centralized units, and DUs, or distributed units, in the ORAN infrastructure, in the open radio access network structure. This creates incremental demand for our high-precision oscillators and clocks. And another example is the adoption of Ethernet connectivity or Ethernet-based connectivity in cars, which in turn generates incremental demand for our automotive-grade differential oscillators, which were not used previously in this application. SciTime is a product innovation company, and with these innovations, we're increasing the rate of our new product introductions, again, to accelerate customer traction. In 2020, we introduced three new major products. In 2022, we will double the introduction rate with six major products. Our innovation rate will continue to grow in subsequent years, and this will drive to a higher customer adoption across multiple segments and applications. Regarding the supply chain environment, we expect current supply constraints to continue through 2022. Citan has been very successful at navigating this tight situation with our close partnerships with WaferFabs and our multi-source supply chain. While this has increased product costs and these will increase over time, our product value has helped to sustain higher prices, which has, of course, favorably benefited our gross margins. The need for customers to secure supply along with the advantages offered by our supply chain compared to the alternative technology using quartz has continued to provide a favorable environment for SciTime to negotiate longer-term customer contracts. In summary, the world of timing is enormous. There are many pieces that CITAN today doesn't yet touch or compete in. Given the strong competitive moat of our precision timing solutions, we're acting now strongly to take advantage of this unique opportunity. This includes investing in further expansion of our product portfolio and an aggressive customer acquisition strategy. I look forward to many years of growth at CITAN. With that, I will now turn it over to our Chadwick, our CFO. Great. Thanks, Rajesh, and good afternoon, everyone. Today, I'll discuss third quarter 2021 financial results and provide some guidance for the fourth quarter of 2021. I'll focus my discussion on non-GAAP financial results and refer you to today's press release for a detailed description of our GAAP results. as well as a reconciliation of our GAAP to non-GAAP results, which exclude stock-based compensation and related payroll taxes. Well, first of all, we had another great quarter on multiple fronts. We had strong revenue growth and significant increases in gross margins, operating margins, net income, and cash flow. Revenue for the quarter was $63 million, 42% sequentially and up 93% year-over-year. Sales into our mobile IoT and consumer segment, which consists of sales into mobile phones, wearable devices, and consumer products, were $31.9 million, or 51% of sales. This was up 47% sequentially and up 53% over the same quarter last year. Sales into our industrial, automotive, and aerospace segment, which includes sales into automotive, industrial, medical, aerospace, military, and broad-based sales, were $20.9 million, or 33% of sales. This was up 54% sequentially and up 227% year over year. Sales into our communications and enterprise segment, which consists of wireless infrastructure, including 5G, data center and networking, were $10.2 million, or 16% of sales. This was up 11% sequentially and up 90% over last year. Sales to our largest end customer accounted for 20% of sales this quarter. And of that business, more than 90% was non-phone. We had another step function increase in gross margins this quarter. Non-GAAP gross margins were 66.9%, up 560 basis points sequentially, and up 1,480 basis points year over year. Gross margins were up due to a strong pricing environment, some high margin turns business, and increased leverage on our manufacturing overhead. Non-GAAP operating expenses were $20.1 million, comprised of $9.9 million in R&D and $10.2 million in SG&A. Non-GAAP net income was $21.9 million, or 35% of sales, with earnings of $1.03 per share. This was more than double Q2 non-GAAP net income of $9.6 million and EPS of $0.46 a share. Stock-based compensation expense and related payroll taxes were $8 million. Receivables were $32.5 million with DSOs of 47 days, down from 52 days last quarter. And inventory was $19.6 million, up slightly from $18.5 million last quarter. We generated $24 million in positive cash flow from operations and invested $10.5 million in CapEx. As a result, we increased our cash balance by $13.5 million and ended the quarter with $267 million in cash and no bank debt. I'd now like to provide some guidance for the fourth quarter of 2021. The positive trends we have been experiencing will drive further growth in Q4, with sales increasing between 10 and 15% sequentially. At the midpoint, this would be approximately $71 million. And we expect sales to our largest customer will be about 20% of sales. We expect Q4 gross margins will be between 64% and 66%, down slightly from Q3 due to seasonally higher consumer sales. Operating expenses will increase as we expand our workforce and invest in customer acquisition and new product development. We expect Q4 non-GAAP operating expenses will increase between 10% and 15% sequentially, which at the midpoint would be approximately $22.5 million. The basic share count in Q4 will be approximately 19.4 million shares. The diluted effect of employee RSUs will add approximately 2.1 million shares, taking the total expected diluted share count to approximately 21.5 million shares. Based on this guidance, we expect fourth quarter non-GAAP EPS will be between $1.05 and $1.15 per share. Though we're not getting formal guidance for next year, I would like to offer a few comments. We believe the strong trends we're experiencing this year will continue. We plan to aggressively invest in customer acquisition, product innovation, and expanding our markets. We are well positioned for significant growth and believe we can grow revenue next year by at least 30 percent. We will continue to execute on expanding those margins, but there will be some material cost headwinds. Wafer and back-end manufacturing costs are going up. For example, TSMC has publicly stated they are raising prices by 20 percent or more. We also expect increasing assembly and test costs. These higher manufacturing costs will likely depress gross margins by up to two to three points, all else being equal. Over the last two years, we've managed OpEx growth at about half the rate of top-line growth, which helped expand our operating margins. Now that margins are closer to our target range, we will likely manage OpEx growth at a rate closer to our top-line growth. This will allow us to invest aggressively while still maintaining healthy operating margins. I'd also like to make a comment about CapEx. One of the impacts of the pandemic is that it has limited manufacturing capacity at some of our assembly and test subcontractors. In response, we have been purchasing some of our own manufacturing equipment, which we locate at our subcontractors, to add dedicated capacity and to lower costs. We plan to add additional capacity next year, increasing our capex budget from approximately $30 million this year to approximately $40 million next year. So in summary, we are having a great year. Our customers are clearly recognizing our value proposition. Our product portfolio continues to expand with differentiated products that address large and growing markets. We have an enviable list of Tier 1 customers, a strong balance sheet, and expect further growth in Q4 and beyond. And with that, I'd like to turn the call back to the operator for Q&A. Thank you.