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spk02: Hello, my name is Lisa, and I will be your conference operator today. Welcome to Silicon Labs' third quarter fiscal 2023 earnings call. I will now turn the call over to Giovanni Pacelli, Silicon Labs' senior director of finance. Giovanni, please go ahead.
spk09: Thank you, Lisa, and good morning, everyone. We are recording this meeting, and a replay will be available for four weeks on the investor relations section of our website. at investor.silabs.com. 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 third 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 that are 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 can 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'll now turn the call over to Silicon Labs Chief Executive Officer Matt Johnson.
spk11: Matt?
spk10: Thanks, Giovanni, and good morning, everyone. In the third quarter, the Silicon Labs team executed well in a challenging environment, driving revenue and EPS to both exceed the midpoint of our guidance. Current market environment continues to be characterized by a difficult combination of weak demand and high inventory. Specifically, end customers continue to carry inventory levels that are too high. At the same time, our end customers' demand environment continues to be weaker than previously forecast. In particular, we see weakness extending further into the broad industrial end market. As a result of these factors, our fourth quarter will be negatively impacted across both business units. We have contained operating expenses thus far in the second half of this year by focusing on temporary reductions in discretionary and flexible spending. Given the duration and severity of this downturn, we have now proactively taken the difficult decision to make structural reductions in headcount and other spending effective immediately to manage our effects further while maintaining investments in essential R&D projects to drive future growth. While the near-term outlook is clearly challenging, we are focused on managing what we can control and putting ourselves in a position to deliver strong growth and higher earnings power once this difficult market cycle is correct. Our design moon momentum has never been stronger, and we are as confident as ever in our potential. To underscore this, our industry-leading Series 2 platform continues to perform exceptionally well, driving our design moons to an all-time record level in Q3 and up 25% year-over-year. Importantly, we are starting to see this design wind momentum pay off with some exciting ramps that I will share after we hear from John. Also in Q3, we announced our next generation platform called Series 3 that will further position us to lead in this space. All of the items I've mentioned strongly position us moving forward. With that, let me turn the call over to John to cover Q3 results and guidance for the board of directors. John? Thanks, Matt, and good morning, everyone. Third quarter revenue was $204 million, above the midpoint of our guidance range and down 24% year-on-year. ASPs in the quarter declined sequentially, primarily due to product and customer mix. Unit volume was down just slightly on a sequential basis. Revenue was down year-over-year in both business units in the quarter. The industrial and commercial business ended at $121 million. period last year. All three product groups in INC declined in the quarter, with the broad industrial category experiencing the largest decline. Within the INC business, our performance in smart metering, however, has continued to be an area of relative strength. Home and life revenue of $83 million was down 33% year-over-year and was up 4% sequential We continue to see strength in life applications, particularly in connected health devices. Geographically, we saw year-over-year decreases in all regions, with APAC being down less than the Americans. APAC x China was up year-over-year. Distribution revenue was 81% for the third quarter, up slightly from the second quarter. Inventory on the channel was around 90 days. Our largest end customer was under 5% of revenue in the quarter, and our top 10 end customers were about 25%, consistent with our historical trends. Non-GAAP gross margin ended slightly lower than expected at 58.5% due to product mix. We continue to see a generally stable pricing and input cost environment with no significant changes expected in the next quarter. Non-GAAP operating expenses of $95 million contractor spending, and travel. Non-GAAP operating income was $25 million, or 12% of sales, and our non-GAAP effective tax rate was in line with the quarter at 24%. Non-GAAP earnings of 62 cents was 3 cents above the midpoint of our guidance, primarily due to higher revenue. On a GAAP basis, gross margin ended at 58.4%, and was $13 million below the midpoint of our guidance, primarily due to a change in stock competition expense driven by the expected lower achievement on performance-based awards. Accordingly, GAAP earnings per share were 32 cents for the quarter. Turning to the balance sheet, we ended the quarter with cash and investments of $417 million. Our accounts receivable balance grew in the quarter, to $102 million with day sales outstanding 45 days. Customers, including distributors, have requested longer payment terms in this current market environment. And accordingly, we temporarily extended payment terms for certain customers from our standard 30-day terms. We added about $22 million in net inventory accumulating strategic diving based on the strong design and momentum we've seen for the past few years. Inventory terms ended at two times. We repurchased approximately $16 million worth of shares in Q3, retiring approximately 100,000 shares. Our fully diluted shares outstanding in Q3 ended at 32 million shares. In Q2, we drew $80 million from our revolving credit facility. We repaid $35 million of that balance in Q3 and have an outstanding amount remaining of $45 million. Overall, the balance sheet continues to be very healthy and remains well positioned to weather the current market environment and to execute on our strategy. Before I turn the call back to Matt, I will cover guidance for the fourth quarter. As Matt mentioned in his opening statement, the current demand environment is still quite challenging. as customers are focused on reducing their excess inventory. Our bookings activity slowed significantly during Q3 and we believe many of our end customers still hold higher than normal inventory levels. As a result, we expect a decline in revenue for the fourth quarter with a guided range of $70 to $100 million. We anticipate both business units to decline in Q4 Due to the uncertainty in the market environment, we are widening the guidance range to plus-minus $15 million from the revenue midpoint toward this quarter. We expect non-GAAP gross margin in the fourth quarter to be approximately 53%. The lower gross margin for this quarter primarily reflects the impact of certain fixed-cost elements in our cost of goods sold, which are being absorbed over a significantly lower revenue level. We continue to maintain discipline over our operating expenses, and the temporary reductions we discussed last quarter will remain in place for the fourth quarter. We expect non-GAAP operating expenses in the fourth quarter to be approximately $94 million. We expect the non-GAAP effective tax rate to be approximately 3% in the fourth quarter. Accordingly, our non-GAAP loss per share for Q4 is expected to be in the range $1.22 to $1.66. On a GAAP basis, we expect gross margin to be 53%. We expect GAAP operating expenses to be approximately $123 million, inclusive of an expected restructuring charge of around $6 million in G4. We expect GAAP earnings per share to be a loss of between $1.95 to $2.39 per share. I will now turn the call back over to Matt. Thanks, John. Despite the current economic challenges, we continue to execute on design wind ramps and long-term growth markets such as smart cities and healthcare, which are driving significant deployments of devices with sizable ramps in the coming year. In smart cities, Silicon Labs has been the wireless leader in smart metering market for many years. Like the leadership role we played in the successful rollout of smart meters in the UK, We are now playing a similar and dominant role in India's rollout, where 250 million smart meters are expected to be deployed in the coming years, with our production ramp starting early next year. In addition, we were awarded new designs with Landis and Gear, a leading provider of energy management solutions, who will use our Series 2 SOCs in its primary smart electric metering platform, ramping early next year. Also, within our industrial business, We have been designed into multiple products at one of the top two EV providers in the world, which we expect to ramp over the next few quarters. Turning to our life business, the healthcare space continues to accelerate and offer exciting new growth opportunities that are a great fit for our platform. We are starting to see our multi-year focus on this market pay off, having secured multiple designs globally. As part of this, we are excited to share our partnership with Dexcom, which will use our platform in its continuous glucose monitors, or CGMs, moving forward. Silicon Labs' ability to offer customizable and highly secure solutions with our Bluetooth SoCs was key in solidifying this relationship, and we expect these product ramps will begin contributing to our revenue early in 2024. At our fourth annual Works with Conference in August, which attracted thousands of IoT developers, I previewed Silicon Labs' fifth-generation platform called Series 3, which is on track to sample early next year. Series 3 brings three major new capabilities to the IoT. First, it brings new-to-industry performance through new levels of security, wireless performance, power consumption, and multiband and multiprotocol capabilities, areas we've always stood out in. Second are new levels of compute. Series 3 can support more than 100 times the processing capability of our current generation Series 2, including integrated artificial intelligence and machine learning accelerators, and enabling the integration of system processing from standalone MCUs into our wireless SOCs. And third, the IoT is seeing new to world volumes and applications. Because of this, our Series C platform will offer new levels of scalability with a multi-radio platform and common code base that will serve over 30 new wireless SOCs, a 2 to 3x increase over the number of Series 2 products, as well as extendable and scalable memory architecture, including support for external flash. As part of scalability, Series 3 is built on a supply chain that leverages multiple fabs and geographies to maximize the resilience and reliability of supply. As part of the Series 3 announcement, Silicon Labs also announced the next version of its developer tool suite, Simplicity Studio 6, which will allow developers to utilize the most preferred integrated development environments on the market while giving them the latest tools to support their continued development on Series 2 as well as Series 3. As we told our developers, an investment in our industry-leading Series 2 platform is also an investment in our Series 3 platform. Importantly, Series 2 will continue to grow and be supported with new silicon and software and will complement Series 3, with both platforms coexisting for many years to come. In closing, I would like to acknowledge that despite the near-term weakness in our end markets, our team is dedicated to overcoming this market downturn without hampering our long-term strategic and financial goals. The fundamentals of our story and the growth prospects for our end markets remain sound, and our position in those markets has only become stronger. Based on everything we're seeing, we believe Q4 will be our bottom, and we expect a return to sequential growth in the first quarter of 2024. I will now hand it back over to Giovanni for Q&A.
spk09: Giovanni? Thank you, Matt. Before we open the call for Q&A, I would like to announce our participation in three upcoming conferences. Stifel's 2023 Midwest One-on-One Growth Conference in Chicago on November 9th, Wells Fargo's 7th Annual TMT Summit on November 29th in Rancho Palos Verdes, and the Barclays Global Technology Conference in San Francisco on December 7th. We'll now open up 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. Lisa?
spk02: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question will be coming from Matt Ramsey of TD Collins. Please go ahead.
spk04: Thank you very much. Good morning, everybody. And hang in there, guys, in the tough environment. I think, Matt, I wanted to start my question and just to kind of back up and reassess things on kind of first principles about some of the assumptions we have in the model relative to what's going on here. It sounds like pricing, stability, exciting things coming with Series 3, still really strong design win traction. to me like an inventory correction on steroids a bit. And I'd like to get you to respond to that and just think about, as you think about the design wins going forward that you guys continue to accumulate, are you concerned that maybe the volumes and revenue going forward that underpin those design wins have just come down and the TAM for the business that you're looking at is smaller or is this just literally an inventory correction that we gotta get through before we get back on the bike. I'm just trying to think about, given the level of fall-off in revenue here, how are you guys thinking about reassessing the actual TAM for units and dollars relative to just the design wins? Thanks.
spk10: Yep, completely understand. Thanks, Matt. Yeah, let me do my best to answer that. Just start with, you know, before we get into the inventory and the demand, it's important to point out that we really essentially indexed to a couple major end segments. Consumer, which has been down for a year now pretty significantly, and industrial, which had been more resilient, but we've been seeing signs of that, and that really came through as we were leaving Q3 and going into Q4, the weakness in that space. But the end inventory is really important to talk about, right? So we've really when we sample our top 40 or 50 customers, they're carrying more inventory than they normally do by at least a quarter, I'd say is an easy way to think about that. And on top of that, I think their expectation for demand and growth and strength was higher. And when those two things converge and the demand lasts and that inventory is high, the impact is profound. And that's what we're seeing. So that is the first piece of it. And in terms of the second piece, in terms of, you know, in markets and design wins and all that, a few things. One is, you know, we don't see share loss here. When we look at it on a socket by socket basis, we see gains. And that's reflected in our design win numbers and strength with a record uh you know q3 that was i think up around 25 percent year over year but what we do see is you know while some of those have ramped um we see those ramps being impacted by the overall market maybe their volumes are less than they thought ramps might be pushed out as they work through inventory etc but the big ramps um are solid and there although some might be delayed. And so, you know, we shared some of those in the prepared remarks that are, you know, pretty substantial and coming very soon in Q1. But I don't see anything on share loss. I want to be clear about that. And your question about the TAMP, I mean, I think there's an argument to be made that when the market's down like this, the size of the market is significantly less. But the fundamentals in terms of the long-term size of the market, the growth of the market, none of that's changed at all. So what we really see is that confluence of end inventory and demand being much softer than expected coming together. And we've got to navigate that. But the fundamentals haven't changed. And that's what gives us confidence moving forward.
spk04: Thank you for all that perspective, Matt. I really appreciate it. John, just as my follow-up, two things. One, it looked like you guys burned $50 million or something like that in cash, and you're guiding to, obviously, a negative P&L for the December quarter. So I just wanted to do a check on cash balances, liquidity, the revolver, stuff like that, just to see how you're thinking about it. And then you spent a little time on some OPEX reductions in the script. Maybe you could quantify how we should think about that for 2024. Thanks.
spk10: Sure, Matt. So on the cash balance, we continue to have a strong cash balance. Our revolver that's outstanding is really around optimizing between short-term investments and interest, et cetera, to optimize that portion of our cash flow P&L. So we're not concerned about the liquidity of the company. to have a robust cash balance. In terms of the OpEx actions, remember that in the second half of 2023, we undertook temporary non-sustainable OpEx containment actions, such as travel, contractor spending, some of our bonus programs, et cetera. These things need to come back heading into next year, and it's related to that. Unfortunately, we are taking some structural measures reductions in the business. From a quantification perspective there, Matt, the way to think about that is first quarter objects we see as roughly flat to the second half run rate as these two things basically offset each other. And then we'll monitor this as we move through the rest of next year based on the rate pace of revenue improvement, which we do anticipate happening. Through the course of next year, we just need to see how strong the recovery is based on the ramps and recovery of the general market.
spk04: Very clear. Thanks, guys. See you next week.
spk02: Thank you. One moment for the next question.
spk11: And our next question will be coming from Tor Sandberg of Stiefel.
spk02: Your line is open.
spk06: Yes, thank you. I wanted to zoom in on your comment about Q4 being a bottom and seeing some growth sequential in Q1. It sounds like you have some design ramping. That's pretty clear. But can you also talk about the inventory correction? I mean, obviously, given the size of the Q4 guidance down here, obviously, one would think that that's clearing out of inventories. But any more color visibility you have on inventory the inventory situation as you go into 2024, that'd be helpful.
spk10: Sure. Yeah, Tori, this is Matt. A few things on that. You know, we are definitely not calling the market bottom and want to be clear about that. And it should be clear there's also headwinds, right? You know, it's unclear how much more of a correction industrial has as an end segment. So there's some headwinds there. And on end customer inventory, that would be awesome if it was super clean on a quarter boundary, but it isn't. It's not uniform across our customers. We talked to, as I said, our top 40 or 50. They're carrying more than they should, some less, some more. some extending into you know q1 and q2 some okay now but if you average it all out it's really the biggest impact is it's about a quarter that they they have they're carrying more than they typically should or would so that's important so we're not saying the inventory headwind will go away but the the biggest piece of it should hopefully be addressed so that's that's one And so you have those headwinds for sure, but that should be working its way through an end inventory. And then the tailwinds would be obviously starting from a remarkably low revenue number moving forward and that inventory working down at our customers and the design wind strength that we have. As I said earlier, none of those sockets are gone. We continue to accumulate them. uh and and some of the bigger ones are right around the corner so it's a confluence of those things story that gives us the you know confidence to say you know based on what we're seeing what we believe is this will be our bottom and we can drive sequential growth from here yeah that that's very helpful and and as my follow-up um i know this is always a very tricky question given cyclicality and inventory management and so on and so forth but
spk06: You know, your revenues peaked at 270, you're guiding to 85 at the midpoint. Where do you think the true consumption is of your business, you know, whether on a quarterly or an annual basis? Just so sort of we get a sense for, you know, where you will eventually go back to, you know, as we get through this inventory adjustment period. Thank you.
spk10: Yeah, Tori, this is John. Yeah, it is a hard question to answer given the lack of visibility we have into into the inventory level and how that relates to our revenue run rate as we're seeing the effect of that right now. But, you know, suffice to say, we think it's meaningfully higher than where we're running the guiding right now. That is clear. But, you know, clearly we do need to take some action around our OpEx and we're reacting and executing accordingly.
spk11: Sounds good. Thank you.
spk02: Thank you. One moment while we prepare for the next question. Our next question will be coming from Gary Mobley of Wells Fargo. Your line is open.
spk08: Hey, guys. Thanks for taking my question. I wanted to make sure I have the impact of the inventory reduction squared away in my head. So you talked about $200 million worth of perhaps excess inventory, or said differently, roughly a quarter's worth of revenue. And you're guiding the fourth quarter revenue down $120 million sequentially, roughly. So that is, what, roughly 60% of it being digested in the fourth quarter, and then maybe 40% digested into the first quarter. And to what extent does this $85 million revenue guide reflect lower turns assumption, just given the lack of visibility as your lead times have shortened?
spk10: Yeah, Gary, you know, we're working through this and, you know, as best we can to navigate the inventory situation at our customers. I guess on your question on terms, you know, okay, so we definitely have seen very low terms in the business. That's really at the root of what is going on here. Turns have been quite low for multiple weeks, and that is really underpinning the weakness in our guidance. And it is exactly that, that we look to ERST as the first indicator of a recovery emerging as customers clear inventory. As the inventory clearance happens, we should see turns improve. I hope that's answering your question. That's kind of the best I have for you right now.
spk08: Okay. Fair enough. All right. And so I wanted to ask about the flexibility of the buyback. I think you have listed in your PowerPoint deck on your investor section of your website $100 million left in the buyback. How much flexibility do you have to ramp that up considering the cash in the balance sheet, the lending capability and whatnot? And to what extent are you willing to borrow at today's interest rate environment to buy back stock at these levels?
spk10: Yeah, we do have flexibility up and down, Gary, to the point of being opportunistic on it, but also being mindful of our overall liquidity. These are all factors at work as we comprehend the best way to approach that. But we're not locked in, so to speak. We do have flexibility. All right. Thank you, guys.
spk02: Thank you. One moment while we prepare for the next question.
spk11: Our next question will be coming from Quinn Bolton of Needham.
spk02: Your line is open.
spk07: Hey, guys. Thanks for taking my question. Just wanted to follow up on Gary's question there. He kind of went through the math of the inventory clearance. Maybe you clear 50%, 60% of it in Q4. It would seem that Q1, while you're guiding it up, is still going to have a significant inventory effect. And then hopefully by the end of Q1, maybe you've cleared most of that and you start to get back to better sequential growth rates. Just wondering if I'm thinking about the shape of the trajectory, right, or if you would think it's a different trajectory off the bottom.
spk10: Yeah, Quinn, thank you. This is Matt. I'm not sure about that trajectory. If we step back, I think just looking at a big picture, to be clear, Our internal inventory, we are definitely growing that by design, intentionally, strategically, in support of the future business and ramps we've secured. And it's important for our customers. We're our sole source on, you know, majority of our products, the primary silicon on a lot of our products. And our customers have just been through, you know, this whole supply chain mess that, you know, we have to make sure that we're ready to support this business that we keep securing. So that's one piece. The distribution or channel piece is, you know, obviously separate. And in that case, you know, that's, I think it's around, what, 90 BSI. So higher, but at the end of the day, we're carrying, you know, about a quarter's worth at, you know, suppressed revenue levels. So as we've said, you know, in the last few quarters, It's higher than our historical, but not alarming to us and definitely manageable as we look forward and with what we know that's coming down the road. I think our biggest challenge is our end customers and what they are carrying in their lines and supply chain and being able to, that's high, higher than it's historically been. And at the same time, they thought their demands was going to be much stronger. And the compounding or confluence of those two things coming together is extremely impactful. And that's what we're seeing in Q4. Yeah, this is John. But let me try to address what I think you and Gary are both asking and say this. We are not saying that all inventory will be cleared in the fourth quarter. No. Matt indicated that. We've got a mix of customers. based on the best we have and it's very imperfect information, do you see some of them with inventory levels that would require more time to clear? And, you know, in the first quarter, some even beyond first quarter. So I'm trying to respond to what you and Gary were asking about.
spk07: Yeah, I guess that's where I started to drive at, was it feels like, you know, obviously a low guide for the fourth quarter, but it doesn't look like you're clearing all of that, you know, quarters worth of inventory to get customers. And so I'm kind of assuming that the March quarter, I know you're not guiding, but the March quarter probably isn't all that different from the December levels. And then hopefully by the end of March, you will have gotten through most, maybe not all, but most of that inventory buildup of customers. And then we'll just have to see sort of where end demand is and, you know, how quickly, you know, that the consumption rates recover, I guess is the way I'm thinking about it.
spk10: Yeah, I'm going to reiterate. I understand the comment and question now. I think the easiest way to frame it is what we've said is, one, definitely not saying we'll get through all of it, and very imperfect, right? There's no reports for this. This is just a lot of discussions with customers on the phone and trying to get a feel for what that level is, and they're moving in targets. But we believe that in Q4, based on their expectations, their levels, we'll get through, you know, easy way to think of it is a majority of that, but there's still going to be some to work. And that's what gives us the confidence in saying, you know, we see that as our bottom. And, you know, it's not only the inventory, but it's a big factor moving forward. It's also those ramps on the other side of it that are helping as well. But, you know, it's a massive, massive hit in Q4, and that inventory is a huge piece of that. So it's important that we're clear about that. But, you know, the data says that it'll work through a big chunk of it.
spk07: Got it. Got it. And then just on the split of the business, I assume you're probably seeing a bigger hit to the industrial and commercial just as you know, that business seemed to be much stronger, you know, through the second quarter this year. And I could certainly see more inventory having accumulated there versus home and life, which has been under pressure for, you know, about a year now.
spk10: Yeah, it's tough. Yes. I think that, you know, really in the second half of this year, the industrial impact is, is really been significant where it had been, you know, so much more resilient and durable prior to that. Consumer, been hit all along, you know, over the last year, and significantly, but, you know, also worth pointing out, both are down in Q4, not only industrial. So, new low levels for both of those, Q3 to Q4. Got it. Thank you.
spk02: Thank you for your question. One moment while we prepare for the next question. Our next question will be coming from Cody Acree of the Benchmark Company. Your line is open.
spk01: Yeah, thanks, guys, for taking my questions. I guess, John and Matt, if you can maybe speak to your order linearity over the last quarter, the last few months, and maybe how are you looking at your forecasting methodology, just adjusting how you're expecting to predict going forward?
spk10: Sure, I'll start. Yeah, I would not say there's any linearity would be the starting point on that. You know, it's been somewhat remarkable that, you know, seeing bookings decline, and then you'll see a pause, maybe a little bit of calm, and then they'll decline some more. Same thing on terms. Terms continue to drop. So it's been extremely challenging as we try to forecast this. And remember, the forecast is a, you know, we have, you know, tens of thousands of data points and customers. And, you know, our forecast is really an attempted bottom-up accumulation of their views. But I think the biggest challenge is when the market is – changing so quickly, so volatile, the visibility is as low as it is, our customers are struggling to forecast that as well. And that accumulation is very challenging. So obviously, you know, as we go through these quarters and see this, we're, you know, trying to do our best to reflect that, to communicate that, be transparent about that. And, you know, I think I'd say it feels, you know, each time a little more conservative. I don't know how else to to say it given what we're experiencing until we see, you know, really strong signs on the other side of that of the market recovering, which we're not seeing yet.
spk01: Thanks, Matt. And then, John, if you can maybe give us any better picture of your OPEX budget for next year as you port some of these cost reductions in the model?
spk10: Yeah, Cody, like I said, you know, First quarter, we expect to be roughly flat to the second half run rate in the mid-90s based on the best available information we have as of yet. And beyond that, Cody, we just have to monitor this and see how the recovery goes. And our model remains our compass, how we want to operate the company, and that's what we would seek to get back to as soon as we can. So we're going to maintain supply. as we head into the second quarter, second half of next year, based on how things are tracking.
spk11: Okay, great. Thank you, guys.
spk02: Thank you. One moment while we prepare for the next question. Our next question is coming from Serini Paduri of Raymond James. Your line is open.
spk00: Thank you. Good morning, guys. John, on the inventory, especially the disti inventory, I think you said roughly 90 days. I'm guessing that's about 200 million. So as we go through, I guess, the next quarter exiting December, heading into March, I'm just trying to understand how we should think about the absolute inventory. How much of that disti inventory are you hoping to draw down And, you know, if you could maybe give us some color when and where I think it normalizes, I guess, you know, what is a normal level for you in this environment?
spk10: Yeah, Srini, sure. Yeah, so 90 DSI at the end of third quarter is in the neighborhood of more like $100 million of value, roughly, not $200 million. Okay, got it. Yeah, and we do expect that to moderate and decline in the fourth quarter based on what we're seeing. I mean, that's part of the challenge here is the very weak POS or sell-through demand is at the root of what's behind our guidance here. Over time, I think we can see some further reduction of that with the market recovery, but landing in the 60, 70 days DSI is normal, that would be fine, you know, from an operating perspective as we look ahead.
spk00: Got it, got it. Thanks for that. And then, Matt, you know, your comment, obviously, the environment is not great. We've heard similar comments from some of your peers, but the magnitude of your, you know, outlook is definitely worse than what we've heard so far from your peers. So I'm just trying to understand as to why there is such a discrepancy. I guess it could be just, you know, your conservatism or it's possible that some of your customers have a little bit more inventory and some of your components were maybe, you know, constrained a bit more that caused inventories to go up a bit more than versus, you know, what your peers are seeing. So just trying to reconcile that as to why you would be, you know, I guess much worse than some of your peers here given your comments that you're not losing any share.
spk10: Yeah, sure. Makes total sense. So multiple things, right? One is, you know, our percent of our industrial and commercial business is pretty high as a percent of our total revenue going into the second half of this year. And that's getting hit pretty hard right now. So that's one element that, you know, we've already seen the consumer piece. Industrial and commercial is really unique to the second half of this year. um because we talked about the demand piece too and our customers and inventory i think you know we had a lot of customers who expected you know a lot of ramps a lot of strong growth uh and we're carrying inventory as such um and i think that those coming together um the way they have is hit us really hard and you know like i said before we have all these design ones that i think you know some of those have been delayed some are not the levels our customers expected uh all of that i think you know is unique to us given that we've been accumulating designs at such a past uh fast level over the last few years so the uh you know predictability of being able to forecast for our customers even the timing of those ramps the magnitude of those ramps i think is challenging and then there's there's other pieces that are you know more difficult to know and are speculative right but We definitely have, as I said earlier, we are sole source in a lot of our sockets, almost all of our sockets, and the primary silicon in a lot of those. We're on mature nodes. If customers worry about supply, I think while our gross margins are strong, the ASPs are lower. And we have customers that are planning on these ramps. So, you know, maybe they did accumulate more in anticipation of those, but that's unclear and difficult to know because it's hard to compare end customer inventory level. What we know is our ramps and design ends, we have confidence in those. The variability is on the timing. And we know that our customers are carrying more than they want and they're working that down. But that's, you know, temporal or temporary. So that's what gives us the confidence on the other side of that. But I really think the confluence of all those things I mentioned are what's, you know, hitting us and unique to us in Q4 and the second half in general. But all those things can be true and don't change. The fundamental piece on the other side that the growth potential, market position, share gains, you know, the potential there is still just as strong. So we just have to navigate this environment responsibly. That's why we're doing what we're doing in OpEx and position ourselves to capture all this opportunity in business that's been secured on the other side of it.
spk00: Thanks, Matt. Makes sense.
spk02: Thank you. One moment while we prepare for the next question. Our next question. We'll be coming from Blaine Curtis of Barclays. Your line is open.
spk10: Hey, good morning. Thanks. I have two questions. I'm just kind of curious for the December quarter, $85 million. Between the two segments, I'm just having a hard time with the order magnitude so large of the correction. I mean, you actually saw a little growth in consumers, so I think the view was going into this that maybe you're kind of getting through things, and then you're seeing a decline. So I guess curious what you think the trigger was. I mean, was it lead times coming in or just, you know, the customers just turned off and what was the trigger for that? And then just of that 85 million, can you help us between those two segments a little bit more? Sounds like industrial is worse, but just any kind of like broad strokes would be helpful between those two segments. Yeah. I mean, quick answers. Industrial is definitely the bigger challenge because We're seeing that hit harder right now. Consumer has been hit all along. But you're absolutely right that, you know, we've seen a little bit of, let's call it stability in Q3 on consumer. And that's going down again, Q3 to Q4. You know, the team believes that, you know, seasonally consumer is stronger in Q3 in anticipation of, you know, holiday builds in that cycle. And, you know, we saw some benefit from that, but those levels obviously aren't stable and holding going Q3 into Q4. So that could be impacting the consumer side of it, but we're not sure. We need a few more clicks before we can save for certain. That's it. And then I want to ask on gross margin. I mean, I'm assuming there's some fixed cost absorption that's not happening here. I was wondering if there's any written off inventory, and then if you can help us on the recovery of gross margin next year. Yeah, Blaine. It's really two effects in the fourth quarter. There's not an unusual amount of obsolescence or write-offs or contemplated, but we are seeing both with the sharp reduction in revenue for an oversized concentration effect of customer and product mix on the downside. That's one leg of it. But the thing I mentioned and what you mentioned is also a big piece of it that we just have fixed that is being absorbed over a smaller revenue base. We do anticipate with recovery in the market that gross margins would revert back to what we experienced in third quarter and as we move into first quarter and second half of 2024. We think this is anomalous, what we're seeing in the fourth quarter of 2024. Thanks.
spk02: Thank you. One moment for the next question.
spk11: Our next question will be coming from Joe Moore of Morgan Stanley.
spk02: Your line is open.
spk05: Great. Thank you. I wonder if you guys could address like for like pricing. You know, you saw the prices go up the last couple of years when foundry costs went up. Are you seeing any change there? And if you're not, I guess, to the extent that you're thinking about next-generation design wins, building your pipeline, do you see more price competition for those new sockets?
spk10: Yeah. A couple of comments, Joe. This is Matt. Yeah, what we've seen is the market kind of return to pricing behavior that is typical for this type of market and really – You know, I'm going to call it typical of pre-pandemic and now, you know, kind of post-pandemic. So, you know, an easy way to think about it is the price pressure is really on design wins more than anything, as you pointed out, not on our existing business. That existing business tends to, you know, across thousands of designs and customers tends to run as it does. And where we see kind of the leading edge of price pressure is on those design limits, which, as I said, are at record levels, you know, last few years, including this year, including Q3. And what we're seeing there is price pressure that is typical, not anomalous. And, you know, we are still winning at an accelerating pace.
spk11: That's helpful. Thank you.
spk02: Thank you. One moment for the next question. And we have a follow-up question coming from Tore Sandberg of Stifel. Your line is open.
spk06: Yes, thank you. I just had two quick follow-ups. First of all, and back to the run rate, So if we go back to Q1 of 21, before you had obviously very strong growth through the pandemic years, the revenue run rate was around 158 million, if I'm not mistaken. I understand, you know, sell-through is deteriorating. I understand there's cyclicality with inventory and so forth. But it would just seem that, you know, a number around that level is probably, you know, where the consumption is of your business Just wondering if you have any comment, if you think that, you know, that is completely off or, you know, could that potentially be in the ballpark?
spk10: The only thing I understand, Torrey, this is Matt, the logic and the approach. The only thing I'd add or say and is the think of the design win momentum and share gains over that timeframe. Even if you consider the entire pandemic as a bill of inventory, which we don't believe that that's all it was, even if you did, there's gains in stronger business underpinning that exiting than entering. So that's an important component to add to your question.
spk06: That's great perspective. And the second question is, and maybe moving away from some of the near-term challenges here, In the past, we've talked about some new product cycles. Obviously, you mentioned Series 3, but there's also smart retail. There's your Wi-Fi business. You did talk a little bit about the India smart meter business, but could you give us an update on some of these newer businesses that are supposed to start ramping?
spk10: Yeah, sure. Yeah, Wi-Fi, you know, so let me step back, you know, big picture, we talked about, you know, an increased focus in Bluetooth, no change there. We're, you know, incredibly happy and excited with the progress we're making there. we are gaining share in Bluetooth and that continues. You know, Wi-Fi earlier on in that investment and that initiative, but, you know, one of our fastest growing areas this year and moving forward. So that's exciting progress as well. You know, when you look at it by segments, you know, we talked about, you know, digital retail, shelf labels, continuously good progress there. We just, you know, in our prepared remarks, mentioned the metering space which we've always had you know an incredibly strong position and that's gotten stronger and there's a lot of rollouts and tenders there that you know are going to give us some lift not just starting next year but also for quite a few years we've talked about healthcare life as an increased focus And we've made a lot of progress there some of that which we just shared in the prepared remarks the Dexcom which we're excited about and You know, you know another area that hasn't come up but it's worth mentioning our position in matter in the progress of matters is exciting and going well also and simply said For those who aren't familiar, one of our historically strong positions has been in 15.4, and 15.4 is getting pulled into the mainstream with Matter. That's why over 80% of the certifications in Matter are coming from Silicon Labs, and you're seeing Matter get pulled into the mainstream. You saw the latest iPhone 15 Max supporting Thread, which is great. and that will help pull matter more into the mainstream and end products where we're incredibly strong. So all those fundamental end markets and trends are going favorable. We just have an ugly end market environment and inventory situation that we've got to work through to see all the goodness of those other areas coming through going forward. Great perspective. Thank you.
spk02: Thank you. This concludes the Q&A session for today. I would like to turn the call back over to Giovanni for closing remarks. Please go ahead.
spk09: Thank you, Lisa, and thank you all for joining this morning. This concludes today's call.
spk02: Thank you all for joining.
spk11: You may all disconnect.
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