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spk02: Good afternoon and welcome to CTIME's second quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. At the conclusion of today's call, instructions will be given for question and answer session. If anybody needs assistance during the conference call, please press the star key followed by the zero on your touchtone phone. As a reminder, this conference call is being recorded today, Wednesday, August 3rd, 2022. I would like to turn the call over to Brett Perry of Shelton Group Investor Relations. Brett, please go ahead.
spk00: Good afternoon, and welcome to Sidetime's second quarter 2022 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 factor 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 in actual results, could differ materially and adversely from those anticipated or implied. Neither the company nor any 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 the statements to actual results or to changes in the company's expectations. For more detailed information on risk associated with the business, we refer you to the risk and factors described in the 10-K filed on February 25, 2022, as well as the company's subsequent filings with the SEC. Also during this call, we'll 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 nor 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 and related payroll taxes. Please refer to the company's press release issued today for a detailed reconciliation between GAAP and non-GAAP financial results. With that, it's now my pleasure to turn the call over to Rajesh. Please go ahead.
spk04: Good afternoon, and thank you for joining us on today's tie-time call. While the focus of today's discussion is on Q2 results and Q3 forecast, I want to begin with the transformation of site time as a result of the acceleration in electronic macro trends, such as high bandwidth communications, cloud, EV, and IoT. Here, precision timing products are defined as high performance, small size, and far efficient under demanding environmental conditions such as vibration, shock, and temperature are becoming the solution of choice. While precision timing is used significantly in comms enterprise, their use is growing in automotive and certain mobile IoT consumer applications. As a creator of the category of precision timing, SciTime plays a central role in this transformation. As we transition from our legacy non-precision timing products and design wins into this transformation, Sitem will get significantly higher ASPs, more design and stickiness, and a discussion of architecture with our customers. On Q2, Sitem had a banner Q2. We delivered record revenues of $79.4 million, non-GAAP gross margins of 66.7%, and non-GAAP EPS of $1.11, all exceeding our previous guidance. This was our 11th consecutive quarter to do so. In Q2, we had the highest ASPs in the history of the company, 30% higher year on year and 10% higher quarter on quarter. This came from the role of greater precision timing products in our revenue. While multiple segments contributed to this growth, our comms enterprise business was a standout. It grew 60% over Q1 and was a segment with the highest growth rate. Multiple customers in this application, such as network interface cards or NICs, data center servers, and 5G wireless contributed to this growth, and we believe that the trend will continue in the second half. A common theme amongst these customers and applications was the use of our precision timing products to get a better system performance. As an example, one of these products, Elite, doubled in unit shipment from Q1 to Q2. And additionally, our precision timing opportunities have now grown to be 70% of our funnel. Automotive was the segment with the second largest growth, despite some customer push-outs due to industry-wide supply chain issues. Cytan's previous success in ADAS computers, domain controllers, and cameras continued, and we have begun to see volume ramping from newer applications as well, such as driver monitoring systems and LIDAR. As we know, the automobile is being transformed and new functionality in sensing, computing, and communications is continuously being added. Getting this functionality to work in the presence of vibration stock temperature extremes is a difficult challenge, but one that can be solved and is solved by precision timing products from Cytan. This is a natural place for Cytan to deliver value and grow, and we remain on track to deliver $100 million in annual automotive revenue in the next few years. In May, when we increased our guidance from 35% to 50% annual growth, we did not anticipate the subsequent conditions, financial downturn, supply chain disruptions, and political turmoil, all of which made it difficult for our customers to see the magnitude and the speed of decline in their own business. This is evident in our mobile IoT consumer segment, that is, those that place lower value on the benefits of precision timing. Excluding our largest customer, the mobile IoT consumer segment is expected to be down by more than 30% in the second half of 2022. Considering our end customer's visibility, We are therefore now comfortable with our earlier guidance of 35% annual growth for 2022. In line with that, we will manage our expenses prudently in the second half of this year. But our original thesis remains intact. We firmly believe that our longer term top line growth will be 30% or more driven by the SAM expansion to 4 billion, the greater need for precision timing, and fulfillment of those needs uniquely by side time. We also continue to see a long-term financial model of 65% gross margin and 30% net income as being intact. We continue to invest significantly in the development of new precision timing products. In 2022 itself, we will sample six of these oscillators and clocks. These address the macro trends that are referred to that are transforming electronics, high bandwidth communications, cloud, TV, and IoT. With these, we're confident in our ability to transform the electronics industry driven by greater adoption of these products. We expect that the stellar comms enterprise performance will continue into the second half with the volume ramping up of applications like 400G, 800G optical modules, and data center switches. In our last call, we talked about a clock family with 200 customers by the end of 22, and that strength continues. 60% of the cascade, the clock family, revenue in 22 and 23 will now come from NIC cards, 5G RRU, and backfall. Our investment in this segment is working. In 2022, comms enterprise is expected to grow to over 25% of our revenue, compared to 16% last year in 2021. For example, again, our elite product is expected to go three times in revenue over 2021. The value and uniqueness of SITEM products is also clearly on display at our largest customer, which is in the mobile IoT consumer segment. Our revenue here continues to grow strongly in the second half of 2022, and the design wind funnel continues to grow strongly as well in a previous call we've spoken about the strength of aero defense business we're now engaged with the top defense contractors worldwide and our funnel continues to grow as they discover the strength of our unique precision timing products the uniqueness of these site and products comes from the uniqueness of site and technology we've always maintained There are MEMS, analog circuits, and the systems putting it together to deliver a system solution is hard to do. In the past decade, we have not seen a credible competitor that is using similar technologies, and we don't see one on the horizon currently. A great advantage for Sideline during the turmoil of the past two years has been the flexibility and the solidity of our supply chains. We've made great inroads at customers because our supply chain has been proven to be superior to that of the existing suppliers in the market today. That strength continues due to the support of TSMC, Bosch, and our OSAT partners. Given that a majority of our customers are single sourced, our supply chain strength continues to be a competitive advantage for Cython. In conclusion, as a category creator of precision timing, SITEM is uniquely positioned to transform this industry. We believe that our long-term growth and market share gains will continue unabated in the future. With that, I'll now turn it over to Art Chadwick, our CFO.
spk03: Great. Thanks, Rajesh, and good afternoon, everyone. Today, I'll discuss second quarter results and provide some comments on Q3 and the year. 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 GAAP to non-GAAP results. So, as Rajesh mentioned, Q2 was a record revenue quarter for us. Revenue was $79.4 million, up 13% sequentially, and up 78% over the same quarter last year. with exceptional strength in our higher-end, higher-performance products. Sales into our mobile IoT and consumer segment, which consists of sales into mobile phones, wearable devices, and consumer products, were $27.0 million, or 34% of sales. Down 10% sequentially, but up 24% over the same quarter last year. Sales to our largest end customer, which are included in this segment, accounted for 14% of total sales. Sales into our industrial, automotive, and aerospace segment, which includes sales into automotive, industrial, medical, aerospace, military, and broad-based sales were $32.2 million, or 41% of sales, up 17% sequentially, and up 137% year-over-year. Sales into our communications and enterprise segment which consists of wireless infrastructure, 5G, data center and networking, were $20.2 million, or 25% of sales, up 60% sequentially, and up 120% over last year. Non-GAAP gross margins were strong at 66.7%, up 140 basis points from Q1, and up more than five points over the same quarter last year. Non-GAAP operating expenses were $28.3 million, a 15% sequential increase over Q1 as we expanded our workforce and increased investment in new product development. Expenses were $16.7 million in R&D and $11.5 million in SG&A. Non-GAAP operating margins were 31.1%. Non-GAAP net income was $25.3 million, or $1.11 per share. And this is up from $21.3 million, or $0.94 per share in Q1, and up from $9.6 million, or just $0.46 per share in the same quarter last year. Stock-based compensation expense decreased from $15.2 million in Q1 to $12.5 million in Q2. as we adjusted stock comp expenses related to some internally granted performance RSUs. Receivables were $38.7 million with DSOs of 44 days, and inventory was $34.4 million up from last quarter as we continued to increase wafer buffer stock. In regard to cash flow, we generated $15.3 million in positive cash flow from operations, invested $9.6 million in equipment and assets, and ended the quarter with $580 million in cash and no bank debt. I'd now like to provide some comments on Q3 and the year. First of all, we believe our long-term strategy of developing and selling higher performance products into markets that require ever more precision timing is strongly intact. However, the current macroeconomic environment is impacting sale of some of our products, and especially our lower-end products. At the beginning of this year, we thought 2022 revenue would increase by at least 35%, which we discussed on our conference call in early February. Three months later, we were more optimistic, and in early May, we voiced our opinion that 2022 revenue could increase by at least 50%, That view is based on then-current order rates and was supported by our internal forecast. However, the current economic environment now appears somewhat less certain, and order rates this summer have slowed, especially for our lower-end products. We have therefore modified our revenue expectations for the year and now believe 2022 revenue growth will be closer to our previous 35% estimate. As a result, sales in the second half of this year will be essentially flat with sales in the first half. However, product mix will improve significantly. We now expect sales in the second half of the year into consumer and IoT will be down 30% or more from the first half, not counting sales to our largest customer. Sales into broad-based industrial will also be down, but to a lesser extent. However, we expect those declines will be offset by increased sales to our largest customer and a 30% or more increase in sales in the comms and enterprise. For Q3, we expect sales will decline between 6% and 10% sequentially due primarily to lower consumer sales. At the midpoint, this would be approximately $73 million, or 16% higher than the same quarter last year. We expect Q3 gross margins will remain strong at about 65%, plus or minus a point. Q3 operating expenses would have increased due to the workforce additions in Q2, but we are aggressively managing discretionary costs to maintain Q3 OpEx at Q2 levels. or approximately $28.3 million plus or minus. Fully diluted share count will be approximately 23 million shares in Q3. So this guidance just provided should drive a non-GAAP EPS of between 80 cents and 90 cents per share in the third quarter. And on that note, I'd like to turn the call over to the operator so we can begin our hearing aid. Thank you.
spk02: Thank you. At this time, we'll conduct our question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster.
spk06: Okay, we have Tor Sivanberg.
spk05: Yes, thank you. First question is on your comment about order rates slowing. I think it's, there's no, no surprise that, you know, consumer and IOT is slowing. I'm a little bit surprised to hear the industrial and defense category seeing some, some lower orders. So can you just elaborate a little bit about what's going on there? You know, whether perhaps some inventory is built in the first half of the year. So yeah, any, any call you can share that there would be great.
spk04: Hi, Tori. Thanks. Yeah, I think, as you said, it's not a surprise that mobile IoT consumer were down. But in the industrial, I don't think automotive or aerospace has much changed. Aerospace and automotive continue strong. There have been some push-outs in automotive, but they were more than offset by growth from other customers. The industrial, you know, is our sort of catch-all phrase. It's our largest group of customers. And the distinction that I want to make is that it has less to do with the end customer and has more to do with those that are using precision timing products for the purpose that they were intended or not. So as an example, in the consumer space, our largest customer is using precision timing products for their very high-end products, and those very high-end products continue unabated as opposed to some of their competitors where we also sell where they have seen significant downturn. So the similar thing happened in some industrial customers where they probably found either a push out, which is more likely of their inventories because of higher inventories. We likely have not lost many design wins, but there have been push outs and there have been a smaller impact because of not being able to source other components And that would typically be the case with industrials because they typically tend to be smaller customers, not larger customers, and they would not be on the priority list for getting other components as well.
spk05: Fair enough. And I know you've been working on your sales strategy and certainly, you know, getting a wider reach with customers. And I know you announced the Sidetime Direct online store recently. Could you elaborate a little bit on that and, you know, when – when should we start to expect real contribution from that particular business model?
spk04: Yeah, so we should be able to start expecting that starting this year. I think you'll see greater and greater traction for that for 2023 and onwards. We've just really begun this e-commerce strategy right now. It's very much in its nascent stages, and we think that Part of the task of SciTime is to grow from 14,000, 15,000 customers to about 30,000, 40,000, 50,000 customers in the coming years. And the e-commerce strategy has a lot to do with it. It's part of our broad-based strategy. It is part of expanding our customer base. One of the things we find, Tori, is that the more we dig, the more we find. We find that some of these customers... have an extreme need for these precision timing products. And typically, they're smaller customers that don't have enough help in designing these. Our products make it easier for them to get the job done. And as you know, we sell at a premium, but they're willing to pay that premium. So I fully expect that that strategy will lead to higher than corporate gross margins and much greater stickiness because we solved a significant problem for the customer. So stay tuned for more on that as we go forward.
spk05: Great. Just one last one for Art. Gross margin, you know, 65%. Why wouldn't it be higher given the favorable mix for the second half of the year, especially with the mobile consumer being a much lower percentage of the business?
spk03: Yeah, excellent question. So there is potential upside to that, but you also have to remember with the lower top line revenue, our manufacturing overhead becomes a larger percentage of sales. So that kind of counteracts that to a certain extent. And sales to our largest customer will increase in the second half over the first half, including Q3. And I don't want to go into specific margins, but that also can have some impact on our gross margins. Great. Thank you so much. Great. Thanks, Torrey.
spk06: Next we have Alessandra Vecchi from William and Blair.
spk01: Hi, guys. Just to follow up on Tori's question, maybe taking it from a slightly different angle, again, I think we all understand the weakness in mobile consumer. But can you help clarify, you know, at what point you really start to see that sort of nosedive off? Was it later in the month of June that it really started to deteriorate? And then similarly, if my math is correct, it looks like the Q3 consumer number is the lowest number since the first half of 2020. So how much of that is not precision timing kind of a code word for some of the supply chain wins you might have won during the COVID timeframe and how we should think about the levels recovering in 2023 from here?
spk03: Yeah. So in terms of the timeframe, you know, is really this summer where we've seen the order rates drop rather surprisingly and substantially. You know, kind of very end of Q2, certainly in the month of July. And I think it surprised a lot of folks, including us. But again, it's really our lower-end consumer products. And it did not impact our largest customer in that segment. Sales to our largest customer in that segment, and of course our largest customer as a company, we expect will increase actually nicely from the first half to the second half of the year.
spk04: And to add to that, I would say that what was also surprising was that while we were in touch, very close communications with our top customers all across the world, many of them were not able to understand the magnitude of some of this buildup, not just in the consumer, but in some of the other markets as well. And I think that we are early in our ability to foresee that the downturn has some particular influence on Q3. So I think that that's an important piece here to note, that we were kind of surprised by the surprise that the customers had and their inability to read.
spk01: Okay, and then as an extension of that, on the inventory dollar creep up, you know, again, makes sense given some of the maneuvers you've done in securing capacity. But given the slowdown to revenue growth in the back half, how should we think about inventory levels from here? Are you going to work them down? Are they still below target levels?
spk03: Yeah, so I did mention that our inventory went up a little bit. went up about $4 million from Q1 to Q2. That is a very conscious decision. I think most folks realize that the entire semiconductor industry was in very tight supply, including us. We always had enough to ship the demand that we had, but we've made a conscious and strategic decision to build some buffer stock, especially with wafers. In case there are any disruptions in the supply chain, A lot of things can happen in the world that could impact supply of wafers. We want to make sure we've got sufficient supply to handle any intermittent disruption. So I expect that inventory will go up more, not substantially, but it will go up more. We will increase our buffer stock between now and the end of the year. And I think that's the right prudent thing to do. We have a lot of cash in the bank. We earn a little bit of money on it. Wafers do not go bad. So building a little more inventory, I think, is actually a very smart business on our part because we have the ability to do that both on a cash basis and because of the relationship we have with our wafer fabs.
spk04: Alex, it goes back to the single source. Given that such a large portion of a business is single source, it's prudent for us to secure particularly wafers and build wafer inventory because remember that a product is programmable. So the programmability gives us a significant amount of flexibility in our supply chain.
spk01: Understood. With that, I'll go back in queue. Thank you so much.
spk03: Great.
spk06: Thanks, Alice. Our next question comes from Suji De Silva from Roth Capital.
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