Silicon Laboratories, Inc.

Good day, everyone. My name is Jamie, and I will be your conference operator today. Welcome to Silicon Labs' third quarter fiscal 22 earnings conference call. All participants will be in a 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 and then one on your touchtone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.

Thank you, Jamie. We are recording this meeting, and a replay will be available for four weeks on the investor relations section of our website at scilabs.com slash investors. Our orange press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs President and Chief Executive Officer Matt Johnson and Chief Financial Officer John Hollister. They will discuss our third quarter financial performance and review recent business activities. We will take questions after our prepared comments, and our remarks today will include forward-looking statements subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future. We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will refer to certain non-GAAP financial information. 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? Thanks, Giovanni. Revenue for the third quarter grew 46% year-on-year, ending at $270 million, in line with expectations and well above our target model growth rate. During the quarter, we saw sequential growth in both business units, industrial and commercial, and home and life. Areas of particular strength for the quarter were in smart home applications and commercial automation. Geographically, Q3 revenue growth was strongest in the Americas, followed by Europe, then Asia Pacific. All regions grew in the quarter. Distribution sales were consistent with expectations at approximately 80% of total revenue, reflecting the broad diversity of our customer base. Our largest customer in Q3 was mid-single digits of our mix, and our top 10 customers comprised around 20% of our revenue. Our distribution inventory level at the close of Q3 was slightly lower at 59 days. We continue to see a challenging operating environment in China due to ongoing COVID lockdowns impacting our distributors' ability to shift POS to end customers and resulting in higher-than-average channel inventory. During the quarter, we experienced volatile booking patterns, with some weeks continuing to show above-average strength, while in other weeks, our bookings levels were relatively low. Certain customers have indicated that they have accumulated adequate inventory levels, and while our cumulative backlog declined in the third quarter, it remains high by historical standards. In Q3, even though we began to see signs of foundry capacity opening up on certain nodes, there continue to be lagging process nodes where we have meaningful supply constraints. That said, lead times have come down closer to 26 weeks, which is still above normal levels. Non-GAAP gross margin for Q3 was favorable to expectations on product mix, ending at 61.5%. Consistent with the overall trend for fiscal 2022, Q3 gross margin was down about 90 basis points from Q2, reflecting ongoing second half input cost increases. Non-GAAP operating expenses were slightly favorable to expectations on reduced outside services spending, ending at $112 million. Non-GAAP RMV expenses were $69 million, and non-GAAP SG&A expenses were $43 million. Non-GAAP operating income was $54 million, representing operating margin of 20.1%, which is above our target model for profitability at this revenue level. Our non-GAAP effective tax rate for the quarter was 27%, and non-GAAP earnings for the quarter ended at $1.21 per share. This earnings result is approximately a 250% increase from the same period last year, a dramatic improvement following the I&A divestiture. On a GAAP basis, gross margin for the third quarter was 61.4%. GAAP operating expenses were $135 million. R&D expenses Stock-based compensation expenses were $16 million, and amortization expenses for intangible assets were $8 million, both in line with expectations. GAAP operating income was $30 million, representing 11.2% operating margin. The GAAP effective tax rate was approximately 40%, and GAAP earnings were $0.60 per share. Turning now to the balance sheet, we ended Q3 with cash and cash equivalents of $1.4 billion. Operating cash flow for the year-to-date period ending in September was $127 million. During the quarter, we executed open market repurchases of our common stock, bringing our total year-to-date repurchases to nearly $700 million, and the total completed since the announcement of our divestiture last year to more than $1.8 billion. Our fully diluted share cap declined again in the quarter to 34.8 million shares. Our accounts receivable balance in the quarter increased to $77 million, with day sales outstanding at 26 days. Our inventory balance grew in the quarter to $88 million, representing 4.7 turns. Our debt balance as of the end of the third quarter is unchanged with the principal balance on our 2025 convertible notes at $535 million. The company's balance sheet and liquidity position are very healthy, and we have ample capacity to continue our capital deployment strategies. Before I turn the call over to Matt, I will cover guidance for the fourth quarter. We expect revenue for Q4 to be in the range of $245 to $255 million. We expect the industrial and commercial business to increase slightly on a sequential basis with continued tax supply on certain product lines. We expect the home and life business to decline in Q4 due to a slowdown in customer demand on certain programs. We expect non-GAAP gross margin in Q4 to be approximately 60% We expect non-GAAP operating expenses for Q4 to decline to approximately $109 million. We expect our non-GAAP effective tax rate to be approximately 25%, and non-GAAP earnings to be between 93 cents to $1.03 per share. On a GAAP basis, we expect course margin to be 60%. We expect GAAP operating expenses to be approximately 132%. 35 to 45 cents. I will now turn the call over to Matt. Matt? Thanks, John, and good morning, everyone. Despite a challenging macro environment, Silicon Labs delivered sequential and year-over-year growth in both revenue and EPS in the third quarter. As highlighted in prior quarters, design and momentum is propelling our new business pipeline as we gain share across all of our applications, including Bluetooth, where revenue grew by almost 60% year-over-year. The industrial and commercial business saw eight consecutive record quarters, growing on both a sequential and annual basis. The commercial automation segment delivered strong results with revenue up 12% sequentially and 116% year-over-year. Additionally, smart city applications continued to demonstrate robust annual growth, up 60% year-over-year. Energy conversion and agriculture applications showed strong growth rates both sequentially and year-over-year as well. This past quarter, we were pleased to be recognized as a Supplier of the Year by multiple customers with whom we have partnered to increase industrial adoption by IT. A key tenet of our strategy is being a trusted partner across our diverse customer base. We've demonstrated this throughout the recent supply chain challenges, working closely with our customers to forge even stronger relationships. We were honored to receive Cisco's Emerging Supplier of the Year award, which recognizes Silicon Labs in all of Cisco's core performance areas. including quality, technology, flexibility, and productivity. We were also selected by QE Brand as a finalist for the Supplier of the Year Award, and named Collaborator of the Year and a Top Supplier of the Year by Schneider Electric. We're grateful for those close relationships and proud of these awards, which recognize the significant efforts of our team. As John mentioned, within the home segment, smart home products were a bright spot in the board, up 6% sequentially and 40% year-over-year. It's important to highlight that smart home applications are not confined to single-family homes. Smart solutions are also being incorporated into large-scale building projects, including new neighborhoods and apartment complexes, as well as upgrades that improve value in ROI. We were thrilled with the turnout at our third annual Horsford Developer Conference in September, which drew more than 7,000 registrants from over 1,600 companies, signing up for over 67,000 individual sessions. The caliber of attendees and keynotes, which included speakers from Amazon and Google, among others, underscored our leadership within IoT and our increasing role within the industry. Silicon Labs' Series 2 platform continues to be a growth engine as we extend our leadership position within IoT. Series 2 represents the fourth generation of Silicon Labs' wireless technology and incorporates all the learning from nearly 15 years of work in this space. It's a wireless connectivity platform that's purpose-built for the IoT, with industry-leading security, battery life, and advanced features like the industry's first built-in hardware acceleration for machine learning at the edge. GoTEM IOS has nearly doubled its IoT revenue in the last two years, driven by the first few products on this platform. Building on the strength of our series two product cycle, we announced four new products during the opening work with keynote that will help shape the future of the IOP, including products that support technology such as Matter, Amazon Sidewalk, Wi-Fi, and Wi-Fi 6. We announced a complete Matter development solution providing support for Matter over Wi-Fi, Matter over grid, and Bluetooth low energy. and matter bridges to both levy and delay. We also announced the Silicon MAPS Pro Kit for Amazon Sidewall, the first end-to-end development platform with complete connectivity support for Amazon Sidewall. For YSON, we announced the FT25 SoC and GFF01 front-end module chipset. A new flagship SoC and power amplifier for YSON, which when used together, are designed to provide a sub-gigahertz transmission range up to three kilometers in dense urban environments with no data loss. Finally, we announced significant progress in expanding our capabilities in Wi-Fi and DOE with Silicon Labs' first Wi-Fi 6 and DOE SoC family, called the X907, which is the industry's lowest power, longest battery life Wi-Fi 6 and DOE combo solution. Another significant milestone was the inauguration of Silicon Labs' development center in Hyderabad, India, which has grown to more than 500 employees. The site is focused on being the leading IoT wireless development site on the region. As part of this, SiliconLabs and IIIT Hybrabad launched India's first campus-wide Wi-Fi network as the IIIT Hybrabad Smart City Living Box. This network will support an innovative street lighting application with 30 built-in network nodes connecting to campus street lamps for remote monitoring and control. From closing, we had a great quarter that showcased the strength of our execution and strategy. We are uniquely positioned with our unmatched breadth, depth, and focus in our space. Our breadth of supported wireless technologies, ecosystems, applications, and markets is the largest in the world. Our depth and domain expertise is driving leading wireless performance, battery life, security, and ease of use for adoption of our products. And 100% focus and commitment on driving phenomenal growth in IoT wireless connectivity has enabled us to double our revenue over the last couple of years in the middle of a supply chain crisis. We're confident in our ability to navigate the current challenging environment and continue to extend our IoT leadership. Thank you, Mike. Thank you, Matt. Before we open the call for Q&A, I would like to announce our participation in the Steeple 2022 Midwest One-on-One Growth Conference on November 10th in Chicago. We'll now open the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question with one follow-up if needed.

Ladies and gentlemen, at this time, we will begin that question and answer session. To ask a question, you may press star and then 1. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. If at any time your question has been addressed and you would like to withdraw your questions, you may press star and 2. Once again, that is star and then 1 to join the question queue. Our first question today comes from Matt Ramsey from Cowan. Please go ahead with your question.