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spk00: My name is Sarah, and I will be your conference operator today. Welcome to Silicon Labs' second quarter fiscal 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw from the question queue, please press start and two. Please note this event is being recorded. I would now like to turn the conference over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.
spk06: Thank you, Sarah. We are recording this meeting, and a replay will be available for four weeks on the investor relations section of our website at thilabs.com forward slash investors. Joining me today are Silicon Labs President and Chief Executive Officer Matt Johnson and Chief Financial Officer John Hollister. They will discuss our second quarter financial performance and review recent business activities. This information, along with accompanying financial tables and earnings press release, is available on our website. We will take questions after our prepared comments, and our remarks today will include forward-looking statements subject to risk and uncertainties. We base these forward-looking statements on information available to us as of the day of this conference call and assume no obligation to update these statements in the future. We encourage you to review RSEC filings, which identify important risk factors that cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will refer to certain non-GAAP financial information. 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 the Silicon Labs website. I would now like to turn the call over to Silicon Labs Chief Financial Officer, John Hollister. John?
spk07: Thanks, dear buddy. I'm pleased to report that strong revenue performance for the second quarter set a new record at $263 million, up 55% year-on-year and above the top end of our guidance range. Our industrial and commercial business grew exceptionally well in Q2, ending at $144 million, up 61% from the same period of fiscal 2021. We saw significant year-on-year growth in Q2 across all major portions of the INC business in industrial, commercial, and smart city applications. The home and life business was also up strong for the quarter, to $119 million, an increase of 49% year-on-year, with particular strength in connected home applications. In terms of our connectivity protocols, revenue from our Bluetooth product lines more than doubled in the second quarter year-on-year, We also saw mid to upper double-digit growth rates across our other supported protocols, such as ZigBee Thread, proprietary wireless, Z-Wave, and Wi-Fi. Looking at our revenue in Q2 geographically, we saw the strongest sequential growth in Q2 in the Americas region, followed by Europe. Asia Pacific was down. In Q2, the COVID lockdown situation in China did impact our customers, distributors, and suppliers. For example, two of our large regional distributors in China experienced increases in distribution inventory levels due to the lockdowns and are primarily responsible for the increase in our inventory. Distribution revenue for the second quarter was around 80% of total revenue. Our business continues to be very diverse and our solutions are used in thousands of applications by tens of thousands of customers worldwide. Our top 20 end customers represent around 30% of total sales, and our single largest customer is 5% of sales. The demand environment continues to be strong, and our demand remains above our ability to fully supply it. That said, we are seeing more volatility in our recent bookings patterns with more variation on a week-to-week basis, combined with higher levels of customer reschedules. We have not seen a large uptick in order cancellations. We believe the broad-based nature of our customer footprint combined with our significant industrial exposure offers greater stability to macro weakness than more heavily consumer-oriented semiconductor operations. Non-GAAP gross margin for the quarter exceeded expectations due to favorable product mix. Q2 gross margin was 62.4%. Non-GAAP operating expenses were slightly elevated, ending at $110 billion due to additional product development costs, higher variable costs on upside business performance, and increased travel as we resumed more normalized travel patterns in Q2 coming out of the pandemic. R&D expenses were $68 million, or operating income was $55 million, or 21% of sales, exceeding expectations. Our non-GAAP effective tax rate was slightly favorable at 24%. Non-GAAP earnings ended at $1.17 per share, above the top end of our guidance range. On a GAAP basis, gross margin was 62.3%. GAAP operating expenses were $133 million, with R&D expenses at $84 million and SG&A expenses at $49 million. GAAP operating income was $31 million, or 12% of sales. Stock compensation expense for the quarter was $14 million, and amortization of tangible assets was $9 million, both in line with our expectations. GAAP earnings were $0.60 per share, above the high end of our guidance range. Turning to the balance sheet, cash and investments ended at $1.5 billion. Accounts receivable ended at $72 million, Net inventory increased in the quarter to 74 million up from Q1 and ending at 5.4 turns. We also invested working capital into our supply chain in Q2 to secure future capacity. Our distributor inventory increased slightly to 60 days. So far this year, we have returned $600 million to shareholders through our stock repurchase program. Since we announced the divestiture just over a year ago, we have returned a cumulative $1.75 billion, retiring 11 million shares, or 25% of our pre-divestiture share count. Our share repurchase activities will provide a durable long-term benefit to our earnings power going forward, and we intend to continue to return capital to shareholders. Over this month, our Board of Directors approved an additional open market repurchase program of $250 million through the end of fiscal 2023. Next, I'll cover guidance for the third quarter. We expect our revenue for Q3 to be in the range of $265 to $275 million. We expect our non-GAAP gross margin for Q3 around $113 million, with the increase from the Q2 level primarily in R&D based on continued investment in new products. Due to our strong cash position and rising interest rate environment, we expect our other income and expenses line items to increase to around $4 million for Q3. Our convertible notes have a fixed interest rate. We expect our non-GAAP effective tax rate for Q3 to be 26 percent, and please note that by a couple hundred basis points next year as the amortization stack on R&D deductions accumulates. We expect our non-GAAP earnings to be in the range of $1.08 to $1.18 per share. We expect GAAP gross margin to be about 60%, GAAP operating expenses to be approximately $137 million, and GAAP earnings to be in the range I will now turn the call over to Matt for the business update. Matt?
spk05: Thank you, John, and good morning, everyone. Silicon Labs continues to execute well in a challenging macro environment, posting record revenue in EPS during the June quarter. We are seeing volatility in the market, and as John mentioned, increasing variability in our bookings patterns. That said, we are driving solid execution, strong design and momentum, and notable share gain while experiencing continued strength in our diverse end markets. Demand continues to meaningfully exceed our ability to supply, and we are focused on meeting our customers' requirements. Our second quarter results were driven by double-digit growth across all our major product groups and end markets, highlighting the diversity within our business. Our opportunity pipeline continues to expand and now sits at $15.5 billion, up 54% year-over-year. We continue to see significant design momentum as well, and our year-to-date total already approaching our 2021 full-year levels. This gives us confidence in our expectations for continued outperformance in the market. In Q2, we saw strong growth across all wireless protocols. Our Bluetooth solutions were a notable source of strength, reflecting our growing market share. Revenue related to our Bluetooth portfolio grew at an exceptional pace, up 52% sequentially and 114% year-over-year. And our Bluetooth design momentum has accelerated. In the industrial and commercial business, we saw solid revenue growth, record design wins, and a strong demand environment. We also steered major design wins with leading global electronic shelf label customers, including two of the top three providers. In home and life, we saw solid revenue growth again this quarter, as well as record-level design wins, led by the smart home segment specifically. While we recognize the market volatility, including some consumer weakness and market softening in the quarter, we note our ongoing design new momentum For example, we continue to expand our smart home position with design ones that take advantage of the Matter Connectivity Standard supported in our recently launched MG24 product. Customers are showing strong interest in Matter, and we continue to support the Connectivity Standards Alliance and Matter Protocol Development to help developers create the world's best Matter-based solutions. We are highly focused on the competitive landscape for recruiting and retaining talented employees. We have built a strong early talent pipeline and have over 350 interns and new college graduates joining this year. 45% of our global intern class this year comes from historically underrepresented talent groups. Our new college graduate hiring also continues at an accelerated pace, further enhancing our ability to scale and build a sustainable talent base. We are investing in our employee experience through a variety of training programs, resource groups, and other initiatives to ensure that we retain and attract the critical talent that drives our business. As we announced earlier this morning, Bob Conrad has been appointed to our Board of Directors. Bob has nearly 40 years of experience in the semiconductor industry, most recently with Freescale and NFP, before retiring in 2019. He brings a strategic mindset and deep industry experience, which will be invaluable as we continue to scale and grow the company. We also announced that Bill Wood has shared his intention not to stand for re-election to our board of directors. He will retire effective as of the date of our 2023 annual stockholders meeting. Bill has served on the Silicon Lab board of directors since the beginning of the company, and we're grateful for his leadership over the years. We're also looking forward to our upcoming Workswith Developer Conference being held September 13th to the 15th. In its third year, Workswith is the premier developer conference for building the skills to create impactful connected devices. We bring the industry together to continue simplifying and accelerating wireless adoption globally. In summary, despite the changing landscape in the broader market, our team executed well across the board. In the one year since Silicon Labs became a pure-play IoT company, we have delivered record revenue growth and increased earnings power while returning significant capital to our shareholders. The IoT wireless market is showing remarkable resilience, and we are more confident than ever in our ability to lead and scale in this large and growing market.
spk06: Do you mind? Thanks, Matt. Before we open the call for Q&A, I would like to announce our participation in two upcoming conferences, KeyBank Capital Markets Annual Technology Leadership Forum in Vail on August 8th and Citi's 2022 Global Technology Conference in New York in early September. We'll now open the call for questions. To accommodate as many people as possible before the market opens, I ask you limit your time to one question with one follow-up inquiry if needed.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. Our first question comes from Raji Gill with Needham and Company. Please go ahead.
spk04: Yes, thank you for taking my questions and congrats on all the good momentum. I just wanted to get a little more insight on your commentary around seeing more volatility and variability in the order books and customer scheduling. I wonder if you could clarify, did you say that you have not seen an uptick in customer cancellations or have you haven't seen a large uptick in order cancellations? I'm just trying to get a clarity on that language and also If you could elaborate a little bit further on when you say you're seeing variability in the order books, what does that mean? And is there a specific?
spk07: Yeah, sure thing. Let me start, Roger. You know, as we all know, in the supply crunch over the last period of time, and just given the strength of our demand and the secular drivers that we have, it's been a period of really sustained, strong bookings for several quarters. We have begun to see more variability there in the week-to-week booking patterns, with some weeks continuing to be very strong. Some weeks are more light in the regard of new bookings, although the cumulative backlog remains high and, you know, significantly above our ability to fully service that backlog. In terms of the push-outs and cancellations, yeah, we've seen a few cancellations, Raji, but not as a major trend or sort of broad-based in nature. But what we are seeing more frequently are customer requests to reschedule deliveries further out in time as they continue to assess their own demand profile.
spk04: Thank you for that. That's helpful. Just for my follow-up, if you look at your revenue growth, you're on track to kind of exceed your annual guidance of 35% to 40%. And last year you grew also 40% or so. Wondering if you could talk about the contrast between pricing and unit growth. If I recall, last year much of the growth, a majority of the revenue growth was attributed to unit growth and maybe 10% of the growth was attributed to ASP increases. This year, it seems like it's going to be more even. So, double-digit price increases versus, say, double-digit unit increases. So, I wanted to get your thoughts on the pricing environment. Are you continuing to kind of pass on input cost to your customers? How long do you think that pricing power or the price increases is going to sustain itself, especially as we go into next year where there could be a deceleration in demand. Thank you.
spk07: Let me start, and then I'll pass it to Matt. Roger, this is John again. So, you're right. Your sort of summary assessment there is a good way to frame that with double-digit contributions this year from both pricing and unit output. And we saw more unit output contribution And as we progress through the year, you'll see more of a stable pricing environment, just as another data point. To highlight that, the ASPs that we generated in Q2 were essentially flat to Q1. So sequentially, the growth in the business was fully driven by unit output. As far as the pricing power and how long that will sustain, let me turn.
spk05: I think two quick comments. One is it's important to recognize that we have been incrementing up our supply, which is extremely important for our customers, and we expect that to continue. On the pricing piece, we took a little bit different approach than some others, and we did an increase one time that – We're telling our customers, you know, we're trying to not nibble you to death on this. We're trying to reflect what we think is going to happen over the course of the year based on what we're being communicated by our suppliers as well as some estimates. And that's worked pretty well. I think that we're seeing that that's worked well for our customers. It allows them to plan. and navigate the year. In terms of the durability of that, right now we don't see any indications of supplier pricing changes, right? And that seems to be relatively durable. And in fact, I think the expectation for most suppliers is that they're going to continue to increase their price So we feel good about how we've approached it, and right now indications are those prices will continue to increase in small amounts from suppliers, and that's what we've baked into our plans. So we feel good about it.
spk04: Thank you. If I could just squeeze in one more, and I'll back up in the queue. Just can you remind us, John, what your lead times are? Thank you.
spk07: Yeah, they're quite extended. You know, we're looking – it depends on the product –
spk03: Thank you.
spk00: Our next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
spk03: Hey, guys. Thanks for taking my question. I want to start out by saying I appreciate the fact that you guys have been exceeding your long-term financial targets so far this year, and congratulations on that. But as I look at the low end of your long-term financial target, you know, as you present at your annual stay, you know, that's roughly $1.25 billion in revenue, 55% gross margin. However, if I simply extrapolate out your $113 million non-GAAP OpEx guide that you're putting out there for the third quarter, it looks like you might be a little below that long-term 20% margin target. Maybe it's called high teens percent. So my question is, you know, what can give to allow fruition of that low end of the financial target? Is it gross margin? Is it maybe some more op-ex discipline? Hey, Gary. This is John.
spk07: I understand the point, and yeah, we are pleased to be outperforming our long-term targets this year. As we look ahead, we've got a ways to go to that point, and we have no change to report. That's the first thing to say, no change in the long-term model. We do have puts and takes between gross margin and OPEX, as you indicated. That's one point to make, and Second point is, you know, we have introduced a bit more variability and flex into our spending profile that provides more optionality to the management team here.
spk03: Thanks, John. As my follow-up, can you remind us what you have remaining for capital return? I believe that your long-term is to keep maybe a billion dollars in cash for optionality, so to speak. Does that mean there's roughly $500 million left to return?
spk07: Yeah. You know, just suffice to say, Gary, that we expect to continue to return capital to shareholders and don't really have a view that there's a, you know, terminal point around this. Yes, we would like to maintain some dry powder for M&A optionality. quite pleased with how this has gone so far and would like to continue with that program and happy that the board has authorized another 250. That would top up to the full $2 billion we talked about when we did the deal, but that doesn't mean that's the end of the road as well, for our sake. All right. Thanks, John. Appreciate it.
spk00: Our next question comes from Matt Ramsey with Cowan. Please go ahead.
spk01: Thank you very much. Good morning, everybody. I guess for my first question, John, you mentioned in your script that distribution inventory had gone up, and I think that was you called out due to a couple of the big disties in China having some COVID shutdown stuff that happened during the quarter, and I guess that's understandable. Maybe if you give a little bit more color on how much that's gone up, and have you been tracking sell-through from those disties and seen that inventory start to come back down? Thanks.
spk07: Yeah, a bit. On the second question, you know, we're seeing the China market open up better than where it was in the second quarter, for sure. And, you know, suffice to say that the two areas where we saw accumulation are above the average, clearly. And our, you know, composite goal for this remains to be in the, you know, 45 to 55 days category. So we're a little ahead. But, you know, on some distributors, they're below target, actually. So, you know, we expect to continue to normalize this and create more fill and also relieve some of the accumulation that's taking place in China.
spk01: Thanks, John. I guess stepping back a little bit bigger picture for my follow-up, I guess the observation is that this you and your peer companies, the results are really good. ASP's margins are really strong right now, and there's kind of the juxtaposition of the investor fears of what's coming down the pipe with the economy. I think to that end, Matt, maybe you could spend a little bit of time on the design win momentum, how you're seeing different end markets behave from a design in and design win perspective, what ASPs are being sort of contemplated and some of the new wins that you're getting, just trends like that that might – I guess, help us talk to investors about the fact that these trends that you're seeing now are sustainable and maybe defensible if the economy does get a little more hairy. Thanks.
spk05: Sure. Yeah, so this is Matt. And focusing on that, I think it's a really important point because there's a lot of uncertainty out there in terms of what the market's going to look like in the coming quarters. And one of the things that we can do that makes a massive impact and the most meaningful to insulate us from whatever happens is our share beans and design momentum. It's one of the strongest indicators that we have of what the future is going to look like. So you see our current performance and what I mentioned earlier is year to date, we have secured design wins that are approaching the level of our entire year in 2021. And 2021 was a strong design win year for us. So that gives us, you know, the most momentum and confidence that, you know, however this ends up playing out, we'll be well positioned, gaining share and outperforming. That being said, you asked about ASPs as well. We win on competitive ASPs in the sockets.
spk00: So these design wins are priced at competitive ASPs.
spk05: There's not any assumption in there of long-term change. Honestly, it's one customer at a time, one application at a time, one socket at a time. And those have to be competitive when we win them. So that's how it's reflected when we recognize the design wins. It's an important topic, and we are very proud of the team's momentum there. And our goal is to not only continue that, but accelerate it to the maximum extent we can moving forward.
spk01: Thanks, Matt. Really appreciate the call.
spk00: Our next question comes from Tori Swanberg with Google. Please go ahead.
spk08: Yes, congratulations on the strong results record quarter. First of all, for John, John, in the previous call, you talked about some potential gross margin pressures as we move throughout the year. It does sound or seem like gross margin is holding up quite a bit better. Can you talk more about the dynamics there beyond the guidance that you gave for the September quarter?
spk07: Yeah, sure, Tori. You know, we are seeing some downward shifts here. We saw the somewhat anomalous Q1 due to the asynchronous effect of pricing costs that come down in Q2. Again, forecasting a bit more down in Q3. And really expected what Matt was talking about earlier in the call, where we implemented price dynamics ahead coming and now we're seeing some of that so we had some additional cost increases materializing in the second half we have talked about that before and you know looking ahead we will continue to monitor this and see how the market progresses as the supply chain may open up and you know capacity open up over time so really no no major changes in our messaging relevance points this morning
spk08: Right. Very good. Yeah. And I still met several, several hundred basis points, I think higher than what we had, or perhaps suggested before. Second question is for you, Matt, I think you called out the electronic shelf label market where you're now working with two of the largest players there. Could you just elaborate a little bit on that? It seems like we're still in the very early innings of that becoming potentially a huge market of the next few years.
spk05: Thanks, Troy. This is Matt. You know, first of all, that's a market that, as you said, early days, just beginning, I think it has substantial growth potential as a space. You know, I think they... global adoption of that type of technology is relatively low, but the use cases and needs accelerated in the pandemic. And I think we're seeing what I would start to define as, you know, early signs of very broad adoption being planned by a lot of stores, not just in the U.S., but globally as well. It's interesting to point out this is not a new phenomenon for us internally. We've actually been focused on this space now for about seven or eight years, and we're starting to see the impact of that, and we're really excited about it. So early days, well-positioned, and I think substantial potential moving forward.
spk08: Great. Congratulations again. Thank you.
spk00: Again, if you'd like to ask a question, please press star, then 1. Our next question comes from Blaine Curtis with Barclays. Please go ahead.
spk02: Hey, thanks for taking my question. You mentioned in the script that you saw some weakness in home and life. Just curious when you saw that weakness. And, you know, you were able to offset it with design wins and actually grew quite nicely. Just kind of curious, if you look to September, any color on that consumer weakness within that September guide and whether home and life can still grow?
spk07: Yeah, Blaine, you know, we have seen some of the push-outs affecting that part of the business a bit more. Fair to say that. And, yeah, we'll see how the trends evolve over the course of the quarter, but it is possible that that business could grow.
spk05: Yeah, this is Matt. I just add to what John's saying. You know, it's important to – understand that dynamic that demand continues to meaningfully exceed supply across all those markets and applications so you know we are seeing some of those push outs and some of that volatility which creates some challenges to schedule as those things happen but we definitely see the ability to continue growing in that space and our priority is to find a way to close the gap for our customers on demand versus supply because we still have a lot of hurting customers out there, and we want to fill those gaps. So there's definitely opportunity for growth.
spk02: Gotcha. And then just to follow up, on terms of the increase in inventory, I mean, it's not that much on an overall basis, but it is a big sequential increase. So was that product that you had hoped to ship and just couldn't given all these moving pieces?
spk07: Yeah, essentially, that's right. And, you know, it's also – um you know speaks to our work on supply chain and what we've done there as well but you know we're we we're you know we're making some progress here but i'm you know not really at our goal i mean our target inventory turns level is more in the three to four times neighborhood so we remain a couple of terms above uh above our target inventory turn level pleasure thankful sure
spk00: I will now hand the call back to Giovanni Pacelli.
spk06: Thank you, Sarah, and thank you all for joining this morning. This concludes today's call.
spk00: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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