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spk09: Hello, my name is Sarah and I will be your conference operator today. Welcome to Silicon Lab's second quarter fiscal 2023 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 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I will now turn the call over to Giovanni Pacelli, Silicon Labs, Senior Director of Finance. Giovanni, please go ahead.
spk02: Thank you, Sarah, and good morning, everyone. We are recording this meeting, and a replay will be available for four weeks on investors. Our earnings 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 second quarter financial performance and review recent business activities. We'll 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 A representation 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'll now turn the call over to Silicon Labs Chief Executive Officer, Matt Johnson. Matt?
spk01: Thanks, Giovanni, and good morning, everyone. Despite a challenging market environment, Silicon Labs' team delivered solid second quarter revenue and non-GAAP earnings per share in line with our guidance. However, during the quarter, we saw further market erosion, Broad demand weakness and elevated customer inventory continue impacting both of our business units, although our industrial and commercial business showed resilience, achieving record revenue in the quarter. This demonstrates the strength of our position and the favorable impact of our strong design momentum. So far, in the first half of 2023, our design wind pipeline is up 23% year over year. Looking ahead, we've continued design and production ramps in the second half of the year that will offset the ongoing market headwinds at some level. However, how much is difficult to call given the dynamic market environment? It's important to note that even with these short-term market challenges, we're confident in our mid- and long-term revenue growth potential, and we are excited by the continued strong design and growth and an expanding opportunity funnel, which now stands at over $18 billion, up 17 percent over the same time last year. I'll now hand it over to John to cover the financials.
spk03: Thanks, Matt, and good morning. Second quarter revenue was $245 million, above the midpoint of our guidance range and down 7% year-on-year. ASPs in the quarter declined slightly on a sequential basis. Unit volume was up sequentially. During the quarter, we saw strength in the industrial and commercial business units. which ended at $165 million, up 15% from the same period of last year. All three segments of our INC business performed well. In the industrial segment, the connected equipment category was strong. In the commercial and retail space, we had a strong quarter in electronic shelf labels and in smart cities, we saw strength in smart metering. The home and life business unit declined 33% year over year to end at $80 million. High levels of customer inventory continue to impact shipments for home and life. Geographically, during Q2, we saw the greatest strength in Europe, which was up 14 percent year on year. Revenue for APAC and the Americas was down year on year. Distribution revenue was 77 percent for the second quarter. That mix is down from the first quarter due to stronger shipments in Q2 to direct customers. DSI was stable in Q2 at 79 days. Our largest customer was under 4 percent of revenue in the quarter, and our top 10 customers were about 24 percent of revenue historical results. Non-GAAP gross margin ended lower than expected at 58.9% on product mix. There were no price increases in the quarter, and we experienced no major changes in manufacturing input costs. The sequential decline in gross margin from the first quarter is largely due to the one-time effect of price increases at the beginning of this year combined with product mix. Non-GAAP operating expenses were lower than we expected for the quarter, ending at $104 million. This was primarily due to lower variable costs based on our expectations for the year, combined with specific favorable items such as lower fringe expenses in the quarter in the United States. Non-GAAP operating income was $40 million, or 16.3 percent of sales. Our non-GAAP effective tax rate was slightly higher than we expected, The requirement to capitalize research and development costs for tax purposes continues to have an inflationary impact on our tax rate. We estimate that a normalized, long-term, non-GAAP-effective tax rate without the effect of the R&D capitalization requirement would be in the high teens. Earnings per share on a non-GAAP basis ended on the upside in revenue and favorability in OpEx. On a GAAP basis, gross margin ended at 58.7%. GAAP operating expenses were $127 million. Our GAAP pre-tax income was favorable to the midpoint of our guidance range by around $3 million. However, due to the capitalization of R&D expenses and the timing of forecasted income for the year, our GAAP tax expense was unfavorable by about $5 million. Accordingly, GAAP earnings per share were 33 cents for the quarter, slightly below our guidance range. Turning out the balance sheet, we ended the quarter with cash and investments of $506 million. Our accounts receivable balance grew in the quarter to 98 million with day sales outstanding of 36 days. We added about 12 million in net inventory in the quarter to a total of 146 million as we continue to leverage the softer market to accumulate strategic die bank based on the strong design wind momentum we've seen for the past few years. Inventory turns ended at 2.8 times. During the second quarter, we finalized the redemption process on our 2025 convertible notes. As expected, we funded the par value of the notes, which was $535 million in cash. We settled in the money component with shares. The total shares issued around 900,000. We were also active in the buyback market in Q2, executing about $184 million and retiring around 1.3 million shares. The net result of these activities in the quarter was a reduction of our share count, and our fully diluted shares outstanding in Q2 ended at just under 33 million shares, which is an all-time low share count since our IPO. On July 20th, the Board of Directors authorized an incremental $100 million for the purchase of the company's common stock, bringing the total amount authorized through the end of 2023 to $116 million. At this point in time, we have fully deployed the excess capital of the company. and we are in a normalized pattern for capital deployment. To partially fund these various cash outlays in Q2, we drew $80 million from our revolving credit facility, and we also renewed the facility with the existing banking syndicate for a new five-year term. Overall, the balance sheet remains very healthy, and we have ample financial capacity to execute the business stretch. Before I turn the call back over to Matt, I will cover guidance for the third quarter As Matt indicated in his opening comments, over the past several weeks, we have experienced very low levels of bookings. This has impacted both of our business units. Accordingly, we are guiding revenue for the third quarter in the range of $190 to $210 million, and we expect both business units to decline in Q3. Given the uncertainty in this market environment, we are temporarily expanding the range to plus minus $10 million from the midpoint. We expect non-GAAP gross margin to be slightly higher in the third quarter at 59%. We are taking additional interim steps to control our OPEX in the third quarter. Accordingly, we are expecting non-GAAP operating expenses in the third quarter to decline to $95 million. We expect the non-GAAP effective tax rate to be approximately 23% in the third quarter. The lower tax rate includes a one-time discrete benefit of approximately $3 million related to a pronouncement from the IRS last favorable rules related to foreign tax credits. Our non-GAAP earnings per share is expected to be in the range of 45 cents to 73 cents. On a GAAP basis, we expect the gross margin to be 59 percent. We expect GAAP operating expenses to be approximately 120 million, and we expect GAAP earnings per share to be between a loss of 8 cents and 20 cents income per share. I will now turn the call back over to Matt.
spk01: Thanks, John. Discipline execution remains a top priority as we navigate the current environment. As John mentioned, we've taken deliberate but temporary actions to appropriately manage expenses in a way that doesn't impact our mid- or long-term potential or ability to service all the new business we've been securing. We are confident that our Series 2 portfolio of products is capturing market share, and we have invested in securing strategic inventory ahead of our expectation for market recovery. In the second quarter, we continue to expand our industry-leading Series 2 portfolio products. We announced a new dual-band FG28 SoC, which addresses key customer needs for developing and deploying low-power wide-area networks. The FG28's dual-band capabilities allow for multiple protocols on a single design, including radios for Bluetooth low energy and sub-gigahertz, which supports device communications over one month and enables new edge applications and growth segments like smart agriculture, smart cities, and neighborhood networks like Amazon Sidewalk. The FG20's built-in AIML hardware accelerator is the industry's first in a sub-gigahertz SOC, bringing artificial intelligence and machine learning to the edge. The FG28 also offers energy efficiency ideal for battery-powered M nodes, as well as Silicon Labs secure vault support, allowing designers to choose the level of security they need for their applications. Within our product portfolio, a standout feature is our industry-leading security, and our PSA Level 3 certification serves as an advantage for Silicon Labs. The recent announcement from the Biden administration about the development of a cybersecurity certification and labeling program, coupled with the commitment of numerous device manufacturers and retailers to enhance cybersecurity in their products, positions us favorably to offer the most secure connectivity solutions in the market. We've already seen customers proactively adopting higher levels of security for their products, and we anticipate a growing trend of more customers following suit. Also in the quarter, we opened registration for our fourth annual Works With Conference, which attracts over 8,000 IoT developers every year. A virtual conference will be held in August 22nd and 23rd, and will feature more than 40 in-depth technical sessions covering every major IoT protocol and ecosystem. The conference is incredibly popular with our developer community, who come away with practical knowledge and skills to accelerate their product development. In my opening keynote at the conference, I'll share a preview of Silicon Labs' next-generation Series 3 platform. The Series 3 platform represents a major leap forward for the IoT and our already industry-leading Series 2 platform. The developer conference will also feature a keynote from our CTO, Daniel Cooley, who will address what is needed to achieve the full potential of cloud-connected embedded computing and the challenges that lie ahead. Silicon Labs Senior Vice President Manish Kothari will also showcase real-world examples of the IoT being harnessed for the greater good, such as caring for the planet, caring for our health, and other novel use cases that we never would have imagined a decade ago. In May, we hosted a highly successful grand opening event for our connectivity lab at our Boston site, bringing together a wide range of important customers and industry partners. Our connectivity lab serves as a cutting-edge simulation of a modern smart home, showcasing a diverse array of IoT devices, applications, ecosystems, and networks. With the aim of assisting developers in expediting the launch of their matter products, the lab offers an ideal testing environment and allows them to assess prototypes within real-world scenarios, accommodating a wide range of protocols and device variants. This invaluable resource empowers developers to refine their products efficiently, ensuring seamless integration into the market. In closing, we are focused on maximizing the significant mid- and long-term growth potential ahead of us, despite the current industry challenges. Our strong market positioning and incredible product portfolio allow us to capture this opportunity while maintaining profitability. Despite short-term headwinds, we are confident in our ability to outperform the market through the effective execution of our long-term strategic plan. I'll now hand it back over to Giovanni for Q&A.
spk02: Thank you, Matt. Before we open the call for Q&A, I'd like to announce our participation in two upcoming conferences, KeyBank Capital Markets Annual Technology Leadership Forum and Bail on August 7th, and Citi's 2023 Global Technology Conference in New York City in early September. 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 and one follow-up if needed. Sarah?
spk09: Thank you. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matt Ramsey with TD Callen. Please go ahead.
spk04: Thank you very much, guys. Good morning. I guess for my first question, I'm just trying to – I guess first, I know you guys usually don't guide specifically by segment, but just given the delta and the outlook, John, if you could maybe share the two segments and what you're embedding in the guide. And I guess the real part of the question is the home and life segment got up to $125 million a quarter, give or take, at the peak, and it's pretty clear now in retrospect that was maybe overshipping a bit. and you're going to be undershipping, I assume, sell-through for a bit here to try to get all this inventory cleared out. So if you just kind of assess the end markets that you're serving in that home and life segment, any sense as to what sort of a steady state sell-through for your end markets looks like in that segment, a normalized revenue once all these perturbations on the inventory get sort of back to normal? Thanks.
spk03: Yeah, Matt, I understand. It's, you know, it's hard to call it sitting where we are right now. We do think there's excessive inventory in the channel, as you indicated. And I think the market is in a period of digesting that and clearing it out. You know, suffice to say, over the mid and long term, as we indicated, we feel good about the business. bigger as the goal that we have for ourselves and see that as a very realistic outcome. As we talked about in the past, you know, the industrial and commercial business has a market that in and of itself is growing slightly higher than the home and life business over time. And we expect that trend to persist, but we do have, you know, some very exciting new wins and applications in the life business in particular. applications as well.
spk04: Just to follow up there, John, anything on the guidance split between the segments?
spk03: It's roughly split, Matt, in terms of what we're seeing sequentially for third quarter. Got it.
spk01: The only addition I'd add to that, Matt, and to what John said is, you know, as we've been saying, we're not immune to macro and definitely seeing that here, but we do expect that over time it will definitely perform better in And that's what we're seeing in industrial and commercial. And, you know, that's what we saw in Q2. But we're definitely seeing each of those end segments have their own unique experience. Home definitely most impacted with that consumer exposure. Life showing itself to be, I think, you know, more resilient. And then within industrial and commercial, overall performing stronger than home and life. But still within, it depends. The broad industrial is softer or softening, I think, than the other spaces where you see more strength on, you know, big trends within those, like metering continuing to grow, ESL continuing to grow. So each of those, you know, big picture, home and life weaker, industrial and commercial stronger, both being impacted overall by the market. And then underneath the next level, it varies by the subsegments, if you will.
spk04: No, thanks for all the color there, guys. Matt, maybe a bit longer term, you're going to be ramping all the Series 2 stuff, and you talked about strength in design wins. So what I'm trying to get an idea about is the inventory burn that needs to happen of current generation and maybe legacy products versus how quickly the design wins for the new programs can ramp and really contribute to revenue and what that balance looks like. So just kind of Time to revenue across the different segments for the Series 2 platform as you've secured these design wins. Any color there would be helpful. Thanks.
spk01: Yeah, sure. So a few things. The Series 2 ramp has already started. So I think that's important. If you step back and look at the opportunity funnel of $18 billion, it's the driver of that funnel growth over the last few years easily. If you look at our design wind performance over the last few years, Series 2 has been the driver of that design wind growth and our revenue growth over the last couple of years. Series 2 has been the biggest contributor to that growth. So it's important to recognize that's already happening. That being said, it's still very early days in that ramp. If you look at the funnel, if you look at the design wins, you know, we're just at the beginning of that cycle. And there's many, many more years to come of that growth. So I think, you know, it's important to frame it that way. It's already started. I think one of the difficult things that we're seeing is, as we keep saying, we're not immune to macro, but we think we can do better. It's hard when we have these different ramping businesses and design rooms ramping and the soft macro environment. And to synthesize those two things into the picture that we're seeing, I think the two things that give us the most confidence are, one, If you look back over, you know, last year and even first half of this year, I think we've performed very strong relative to other IoT businesses out there. And if you look at that design win performance, you know, even this year in the first half, up 23% year over year versus last year, which was an incredible year for design wins. So that gives us confidence that not only do we, you know, have we been able to do that, but it gives us confidence we'll be able to continue to do that It's just tough to reconcile with the current market environment that we're seeing right now.
spk04: Understood. Thank you, guys.
spk09: Next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.
spk06: Hey, guys. Thanks for taking my question. And bear with me as I set up this question. Ultimately, what I'm trying to understand is, by how much we're expecting revenue to trend below the long-term trend line. And so as I look at your distribution inventory, it's about 29 days above, I believe, your long-term target, which translates into about $50 million in revenue headwind, about the same amount in terms of the expected sequential revenue decrease. So my question is, Is that expected sequential decrease in revenue in the third quarter primarily right-sizing the distribution inventory, or does it also have to do with just generally weak booking trends?
spk01: I'll start. I think you should add, John. Thanks, Gary. So, quick answer, it's more than just inventory. It's a market. As well, you know, as we were getting towards the end of Q2, we just saw, you know, bookings really slow and there's just so much, I guess, uncertainty with customers, visibility is low. So, you know, there's also a market component to that as well. But the other thing I'd add that's important, you know, the DSI or those days of inventory, they're higher than historical for us, but they're also not alarming for us either. You know, we are going into, you know, ramps that are significant and substantial for us that are not just, you know, one quarter of ramps, but it's quarters and years of ramps. And, you know, if anything over the last few years has taught us that we need to be better prepared for that. So while, you know, it is higher than historical and we're not, you know, trying to drive that up by design, we definitely, you know, it doesn't scare us that it's at a higher level than historical. given the confidence we have in future ramping business. John, anything you want to add?
spk03: Yeah, just one quick point. It's a point of clarification perhaps, but as you know, Gary, as we refer to bookings, we're talking about end customer demand. So that's really, you know, what we're referring to when we refer to week bookings to round out Q2. And so far here in third quarter, we are referring to end customer demand.
spk06: Okay. Thank you for that color with respect to, um, some of the levers on the cost side, specifically OPEX, how much of the reduction, recent reduction in operating expenses is structural or permanent, and how much is variable?
spk03: John, you go first. Yeah, sure. Yeah, Gary, it is variable and temporary. We did take some limited structural actions earlier this year, But that is not comprehended at the moment. What we are referring to for third quarter and second half is discretionary spending. We have frozen hiring. Our executives are reducing their base pay and other similar items like that. But that should be considered temporary in nature. And as we hopefully get through this downturn and start to see more of an upswing heading into next year, we would revert those items back.
spk01: Yeah, temporary in nature and temporary by design. We keep saying the design winds that we're ramping, we need to be able to support them. That's why everything we're doing is setting ourselves up for that ramp, whether it's strategic inventory, having the resources to support these ramps. We don't want to do anything that diminishes that on the other side. Got it. Thank you, guys.
spk09: Your next question comes from Blaine Curtis with Barclays. Please go ahead.
spk00: Hey, good morning. Thanks for taking my question. I had two. I just want to understand the positioning on industrial. Like Home and Life has been correcting now the fourth quarter. It always takes kind of longer to work through things. Industrial being down the substantial double digits, I was kind of curious if you just comment on the inventory position, industrial and commercial, and is this a start of a longer correction?
spk01: I would characterize it a little different on the industrial commercial. We've seen, and we've said this, you know, multiple quarters, industrial commercial has definitely not been as impacted as home and life. I mean, that's clear. But it has been impacted, and it's been impacted consistently. You know, even, yes, we had a record quarter last quarter. That quarter would have been way better, you know, because it has design wins ramping and things that have been helping it, you know, have a record quarter. but it's still diminished from what it should have been if it wasn't for this market environment. So I think what's going on is not a new phenomenon. It's actually been a long march, and we're continuing to see that going into Q2.
spk00: Sorry, Q3. I wanted to ask on the gross margin. So in June, top line was okay, but actually you had a higher mixed industrial commercial margins, I think, were worse than your guidance. So just trying to understand, I know you mentioned the timing of pricing and cost, but I think that was something that you should have contemplated, I guess, when you gave the guidance. I'm just kind of curious what changed in June. And then when you look at September, huge revenue downfall, but the margins are flat. So can you walk me through that, and is there any further headwinds? Does it take some time for the higher-priced inventory to flow through? Can you talk about what happened in June and kind of any perspective beyond September for gross margins? Sure, Blaine.
spk03: And, yeah, the explanation for the sequential decline was referring to the price increase activity. The variation against the guidance was really a result of product mix in terms of specifically what we shipped out in the quarter. You know, certain products have lower gross margins than others, and there was a slightly higher mix of that in second quarter, a stable trend in third quarter. But, you know, the top-level comment here is this is very much in line with with our expectations and long-time commentary that over time, we should expect to see some modest erosion of gross margins. And that's a message that we have to talk about.
spk01: Yeah. I mean, it seems like a long time ago now when we were in the supply chain crisis and we were getting pressure to increase margin models and these types of things. And there was some commentary in the industry that this is new normal. You know, our view was it was temporary. And, you know, that's what we at least are experiencing playing out that, you know, if anything, the easiest way to conceptualize things is they're back to normal now on just normal pricing pressure that we saw pre supply chain crisis. And that's what we're seeing now. And, you know, the supply chain crisis was the anomaly, I think, if there was a way to look at it. And it's, you know, steady. There's no, you know, step functions or anything like that going on. And the other dynamic that's worth pointing out that is substantial is the strength of the product portfolio in Series 2 that we keep talking about. You know, we're going to be announcing Series 3, you know, in a few weeks. But Series 2 is still early days in its ramp and the strength of its product cycle. And I just mentioned the FG28, a new part that came out. Just to give you all some perspective here, That part is, you know, it's a solution that integrates both sub gigahertz and Bluetooth. and it brings new to industry capabilities, you know, AIML capability, industry-leading security. That has an incredible effect in helping us navigate the market while there is, you know, normal industry price pressure.
spk03: Let's, John, give one more comment. The point of emphasis, again, is that we see ourselves delivering a premium gross margin to the IoT market, and I just felt it was important to highlight that.
spk01: Yeah, that's been consistent throughout and hasn't changed.
spk00: Okay, thanks, guys.
spk09: Question comes from Srini Pajuri with Raymond James. Please go ahead.
spk08: Thank you. Good morning, guys. John, just to clarify, I guess the 79 days of DSI, are you thinking that's going to be the new normal, or do you expect that to come down a bit over the next few quarters?
spk03: Yeah, Srini, we'll monitor that over time here. Certainly, you know, it may come in, it may go up a little bit. We're just monitoring that and not really, I know as Matt said, not overly concerned about where that is setting. Our focus is more on the end demand. That's really the basis of our commentary on the state of the market.
spk08: Okay, got it. And then, Matt, you know, maybe you can talk about the environment. It looks like the units are actually up sequentially. So obviously, you know, you said demand is weak. Is it more of a pricing commentary? Because, you know, in a cyclical correction, we tend to see units come down, you know, quite, you know, meaningfully. So I'm just wondering, as we look through the September quarter, what does your guidance, I guess, contemplate in terms of units and ASPs? And, you know, how are you thinking about just the unit, you know, or the next, I guess, quarter or two?
spk01: Yeah, I think the easiest way to think about it is we're now in a demand-challenged environment, so that's the primary driver. We just mentioned the pricing dynamics are pretty much as we expected, and we're not seeing anything new or anomalous there. So it's really a story of end demand, which is really a story of units, ultimately, that, you know, we're navigating, if that helps frame it.
spk08: Yeah, that's helpful. And then maybe one last one for me. Matt, obviously, you know, you've been in the market for a few quarters now with your Wi-Fi solutions. Just curious, you know, if there's any update on the progress there. How are you thinking about that particular, you know, product line? Thank you.
spk01: Yeah, sure. So, I guess we didn't mention that in the remarks, but if you go back a big picture, quick answer is good and strong, and we're happy with the progress. Let me be clear, it's never big enough, fast enough. That's the world we live in. But ultimately, as we've said, we made a focus years ago to increase our focus on Bluetooth. We loved our progress there. Fastest growing space for the company. We expect that to continue. We have the design room momentum to continue that. And then we added the Wi-Fi piece, and now we have the benefit of Wi-Fi being one of our stronger growth areas as well. So we are seeing the progress that we wanted to see there. Even with the market environment that we're in, we're still seeing strong Wi-Fi performance, and we're happy about that.
spk08: Thank you.
spk09: Your next question comes from Jeremy Kwan with Stifel. Please go ahead. Pardon me. Is your line on mute perhaps?
spk05: Yes, sorry. Good morning. Can you hear me? Yes. Great. Yeah, I guess a couple questions. I guess if you look at the new cyber security labeling, what kind of impact do you see or when? Is this something that is expected to impact, you know, over the next couple months? Or when do you see, you know, customers really kind of clamoring for this type of solution? You know, when can we expect to see more of an impact on the top line here from that initiative?
spk01: Sure. A quick answer is it'll be a while. I'd love to say short term. That'd be awesome. But I don't think that's realistic the way these things usually play out. For anyone who's not familiar, the Biden administration's cyber and security labeling program really creates, for lack of better terms, some standardization for end markets for consumers and companies around security on these devices, which is exactly what you'd want to see and what's needed. So to answer the question directly, I think you're going to see this take time to ramp. As the industry starts to deploy it, you know, you're talking – quarters and years of impact here. And, you know, easy way to frame the positioning. We've been betting, focusing on security now for a long time. have the strongest portfolio capability out there in the industry. And this is good for us. This serves us well. And, you know, we're already known for this for our customers. We win business because of this by our customers. And this will only help. It gives us a tailwind, but it won't be short term as much as I'd like it to be. It'll be a long game.
spk03: Yeah, Jeremy, this is John. Just, you know, it's a good example, once again, of Silicon Labs advancing the state of the art in an important area for IoT and being known as a thought leader in our space.
spk01: I would think of it the same way as, you know, think about a security. Years ago, we were offering these features and capabilities, and some people were scratching their heads. Now, you know, we win designs because of it. Look, you know, the administration is updating policies to help enable these things that are already built into our inherent capability of our entire portfolio. Think the same of AI and ML. We're, you know, introducing capability in devices that today some people say, you know, how is that going to – that is the same concept just a few years, you know, later down the road where you're going to see multiple applications and devices taking advantage of these processors and their, you know, efficiency to enable new capabilities on the edge. So same way just, you know, further down the road.
spk05: Great. Thank you. Thank you for that caller. It's very helpful. Maybe just a quick question on geographic expectations. It sounded like Europe was quite strong in the second quarter here. How do you see this playing out in the third quarter? Is there any areas of relative strength or weakness that you can call out?
spk03: Thank you. Sure, Jeremy. I think the first thing to note, and we did not talk about this in the prepared remarks, is China. Our China Revenue, again, has been weak and impacted by the Chinese economy in the second quarter, remaining at about the 10% level for the full first half of the year. And we have not seen signs of recovery there. So that said, the weakness we're seeing really is global at this point. There's a widespread overall weakness in demand. It's not isolated to any particular TR.
spk05: Great. Thank you very much.
spk09: Again, if you'd like to ask a question, please press star then one. Our next question comes from McDoyle with Needham. Please go ahead.
spk07: Hey, guys. McDoyle for Roger Gill. Just wanted to focus on the September margin guide again and just kind of ask more directly how you're able to keep the margin declining from declining when we're seeing such a sequential revenue drop, and is that an indication of mix or ASP strength?
spk03: Yeah. Sure, Magnus, John. You know, as a fabulous company, we really operate strictly on a variable manufacturing cost model. We do have a limited amount of internal fixed costs, but it's pretty moderate. So, you know, that's to say that our gross margin really is not influenced by the revenue level. It's variable based on what we're seeing at that point in time. You know, that's really the main explanation to your question.
spk07: Okay, I got it. For the bookings commentary, can you just expand on which markets or applications you're seeing more of that slowdown? And then also, do you think that customers are maybe hesitant to order related to this new intra-quarter cancellation policy? And could that be a positive in terms of over-ordering on the next up cycle?
spk01: Yeah, I'll start, and it would be good for John to add as well. The bookings pattern right now is pretty broad. You have to remember, you know, we don't have any, you know, one or two major customers that make up big chunks of our revenue. I mean, less than 5% for our biggest. And what we're seeing is, you know, broad across customers, broad across the channel, broad across segments and geos. It's, you know, it's really difficult to distill out or tease out a clear pattern there. What you can see as a clear pattern is a customer, their certainty, their visibility, their confidence is not strong in terms of current demand and their ability to work through inventory. You know, I don't think their confidence in the long term is shaken, but they're trying to navigate this as well and ordering with very short lead time. I mean, very short. You know, just, you know, easy way to think about it is our current backlog position is now reverted all the way back to, you know, pre-supply chain, pre-pandemic, where, you know, in that pre-environment, tons of backlog work to navigate supply. Now we've gone all the way back to that. but ordering with even shorter lead times because of their lack of visibility and certainty as well. So I know it doesn't, you know, help answer what you're looking for, but that's what we're seeing.
spk03: Yeah. And second part of your question, Mick, is, you know, not really. I don't see the policy affecting things overall. You know, our approach is to try to gain as much visibility and confidence as we can short term. But, you know, the customers are managing their inventory levels and their own experience over time.
spk07: Thank you.
spk09: This concludes our question and answer session. I would like to turn the call back over to Gianfani Pacelli for any closing remarks.
spk02: Thank you, Sarah, and thank you all for joining this morning. This concludes today's call.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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