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spk02: Thank you for standing by. My name is Jonathan and I will be your conference operator today. Welcome to Silicone Labs fourth quarter fiscal 2023 earnings call. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If your question has been answered and you wish to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Giovanni Pacelli, Silicone Labs Senior Director of Finance. Giovanni, please go ahead.
spk07: Thank you, Jonathan, 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 .silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicone Labs President and Chief Executive Officer, Matt Johnson, and Interim Chief Financial Officer, Mark Muldin. They will discuss our fourth 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 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 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 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 Silicone Labs website. I'll now turn the call over to Silicone Labs Chief Executive Officer, Matt Johnson. Matt? Thanks, Giovanni, and good morning,
spk05: everyone. The Silicone Labs team delivered fourth quarter results above the midpoint of our guidance. During the quarter, we saw reductions in both channel and end customer inventory. We expect end customer inventory to continue in Q1. On a unit basis, DISTI inventory is now at lower level than during the supply crisis. We believe Q4 of 2023 represents our low point of revenue. We expect to return to sequential growth starting in Q1 as our customer's inventory starts to normalize and we begin to see the further benefits of design with ramping production. We've also seen slight improvements in our weekly bookings activity, but demand visibility continues to be low. We are encouraged by another year of outstanding design win achievement despite the challenges of the current operating environment. The projected lifetime revenue of our 2023 design wins was at low double digits year over year in line with the ambitious targets we set. These design wins span a broad range of technologies, applications, and customers, and we are expected to deliver strong growth and earnings power as the market dynamics improve. Before we turn the call over to Mark, I would like to take a moment to express our gratitude to John Hollister, who has stepped down after 20 years of dedicated service to Silicon Labs, 10 of those years as CFO. John's financial stewardship has been instrumental to our success over the years and his insights and partnerships have been invaluable. On behalf of the entire team, thank you, John, for your outstanding work and commitment, and we wish you the best as you join Global Foundries. In addition, I would like to thank Mark Malden for stepping in so effectively during this transition. I can also share that the search for our new CFO is going well, and we are impressed by the caliber and potential fit of the candidates we are engaged with and are looking forward to concluding the search as quickly as possible. Now, I'll hand it
spk10: over to Mark for the financial update. Mark. Thank you, Matt, and good morning, everyone. Fourth quarter revenue was $87 million, above the midpoint of our guidance, and down 66% year on year. ASPs declined sequentially in the quarter, primarily due to product and customer mix. Unit volume was also down on a sequential basis. Revenue was down year over year for both business units in the quarter. The industrial and commercial business unit ended at $60 million, down 62% from the same period last year, and 51% sequentially. All three product groups and I&T declined in the fourth quarter, with the broad industrial category experiencing the largest decline. However, for the full year, the smart city and commercial product groups achieved record revenue levels, driven primarily by strength in electronic shelf labels and metering. Weak demand and high customer inventories continue to negatively impact the home and life markets. H&L revenue was down 73% year over year, and 67% sequentially at $27 million. Despite the near-term weakness, we are well positioned as demand recovers and inventories normalize, with growth expected in smart homes and particular strength in connected health. Successful market initiatives are driving H&L design wins above our targets in terms of projected lifetime revenue. Distribution revenue was 63% for the fourth quarter, down sequentially, and well below our typical levels. Inventory in the channel decreased to 79 days, and on the unit's basis, DST inventory was down to its lowest level since the divestiture. The decrease in DST mix in the quarter was due to a temporary shift toward direct customers as channel partners worked through their inventory. This mixed shift also contributed to lower ASPs in the quarter. Our top 10 end customers were about 42% of revenue for the quarter, an increase from historical trends driven by the lower revenue level and the mixed shift. Non-GAAP gross margin ended lower than expected at 51% due to product and customer mix. We continue to see a generally stable pricing and input cost environment, with no significant change expected on a life per life basis in the next quarter. Non-GAAP operating expenses of $91 million were better than expected, largely due to earlier pull-in effects of the restructuring which commenced in November. Non-GAAP operating loss was $47 million, and our non-GAAP effective tax rate was lower for the quarter at 14%. Non-GAAP loss of $1.19 exceeded our guidance, driven largely by the op-ex and tax rate favorability. For the full year, our non-GAAP operating margin was 8%, non-GAAP earnings for the full year were $1.65. On a GAAP basis, gross margin ended at 51%, GAAP operating expenses were $117 million, which was better than expected. GAAP operating loss was $73 million for the fourth quarter and $24 million for the full year. GAAP loss per share was $2.19 for the fourth quarter and $1.09 for the full year. The GAAP results included an approximate $9 million charge for the separation costs associated with the reduction in workforce during the fourth quarter. Turning to the balance sheet, we ended the year with cash and investments of $439 million. Our accounts receivable balance declined in the quarter to $29 million, indicative of the lower revenue levels. Our day sale outstanding reverted back to 30 days, reflecting strong collections in the quarter and no known bad bets from our customers. We added $27 million in net inventory in the quarter to $194 million. We anticipate that our internal inventory will level off in Q1. Inventory turns ended at about one time. As a reminder, we hold a significant portion of our inventory in Dibank, which provides flexibility as to its ultimate end-use application in customers and helps to mitigate inventory obsolescence risk. We continue to have $45 million outstanding on our revolving credit facility. Our board of directors has authorized a new share repurchase program in 2024 for $100 million. We will continue to be very opportunistic on share repurchases as we manage liquidity and optimize the use of working capital. Overall, the balance sheet remains very healthy and well positioned to execute our strategy and weather the current market environment. As we announced last week, we identified a material weakness in our internal controls related to the operation and documentation of certain inventory controls. There is no impact to any amounts reported in our current or historical financial statements. We are in the process of developing a plan to enhance the design and operating effectiveness of our internal controls to address the material weakness and still expect to file our Form 10K in a timely manner. Before returning to call the map, I will cover guidance for the first quarter. We expect revenue for the first quarter to be in the range of $100 to $110 million. We anticipate both business units to grow in the quarter. We expect non-GAAP gross margin in the first quarter to be approximately 52%. The lower gross margin for this quarter continues to reflect the fixed cost absorption over lower revenue levels. We expect non-GAAP operating expenses in the first quarter to be approximately $96 million. We expect the non-GAAP affected tax rate to be approximately 20% in the first quarter. Our non-GAAP loss per share for Q1 is expected to be in the range of $0.92 to $1.04. On a GAAP basis, we expect gross margin to be 52%. We expect GAAP operating expenses to be approximately $118 million. We expect GAAP loss per share to be between $1.89 and $2.05 per share. I will now turn the call back over to Matt. Thanks Mark.
spk05: Looking ahead in 2024, we are excited about several trends of wireless connectivity, including more matter-certified products coming to market, as well as strong growth in our life, smart cities, and commercial segments. In Q4, the CSA released Matter 1.2, which extends the benefits of matter to a wider array of devices, including household appliances, air conditioning, and smoke alarms. At CEF this year, we were encouraged by the strong level of engagement with customers, ecosystem partners, and ISPs regarding the matter protocol. It's clear that interest in matter and the availability of matter-enabled devices is accelerated. As part of this, we announced our collaboration with Arduino to make matter protocol and advanced IoT development more accessible to all. We are partnering to integrate Arduino's first ever matter software libraries with SiliconLabs hardware so developers get our leading security, energy efficiency, and processing power for matter in an intuitive, -to-use development environment. Additionally, Samsung recently announced matter-enabled connectivity in its smart TVs and selected appliances that includes our silicon and are currently hitting the market. We are excited to work with Samsung on their SmartThings platform as they expand their matter-enabled ecosystem. Wi-Fi is playing an increasingly important role in IoT devices, including in conjunction with matter. In Q4, we expanded our portfolio of industry-leading series II-based products with the soft launch of our -low-power Wi-Fi solution, the 917, which was selected as an honoree in the embedded category of the CDS Innovation Awards. The 917 has the lowest power consumption of any competing Wi-Fi 6 product on the market, enabling meaningfully longer battery life to a whole new class of applications. We believe this will continue to drive new opportunities and design wins as customers look to integrate Wi-Fi into their products. In our live segment, we are securing new wins in Connected Health and APAC, where we are engaged with more than a dozen customers for continuous glucose monitoring. The demand for connected health devices is growing rapidly, driven by demographics and an increase in chronic illnesses or diseases like diabetes. And we are confident that our solutions will continue to gain traction and serve as market wealth. In 2023, we achieved record revenue in our commercial product group as retail environments continue to digitize. For example, in electronic shelf labeling, we ran new designs with SDS and Argetag, now In addition, we have also secured new design wins in the ESL space for shelf labels, cameras, and sensors with our Bluetooth solutions. The Smart Cities product group also had a record year, driven largely by METER. However, we are also gaining share in the solar market with integrated solutions for both wireless, connectivity, and compute and solar panels, which help to optimize energy production and increase fire safety. 2023 was a difficult year, characterized by weak demand and high inventory levels. While we are seeing things moving in the right direction, the market is still working through its correction. As we have stated, we believe Q4 represents our bottom, and we expect to return to sequential growth starting in Q1. In closing, I want to thank the Silicon Labs team for their execution in securing significant design wins and gaining share, provenly managing our expenses and advancing industry-leading technology and solutions for the IFT. Despite the near-term challenges, the long-term growth trajectory of our end markets and our strong position within those markets remains unchanged. As inventory normalizes, demand improves, and design wins ramp up the production, we are well positioned to return to growth. I'll now hand it back over to Giovanni
spk07: for Q&A. Thank you, Matt. Before we open the call for Q&A, I'd like to announce our participation in Morgan Family's 2024 TNT conference in San Francisco on March 5th. 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.
spk02: Jonathan? Certainly. One moment for our first question. And our first question comes from the line of Matt Ramsey from TD Cowan. Your question, please.
spk15: Thank you very much. Good morning, guys. I guess for my first question, and I think during the quarter we talked a number of times about some of these dynamics, but I wanted to get an update on the inventory situation. We see all the statistics you guys publish on your own inventory, channel inventory, and Matt, we take some of your comments on customer inventory, but I imagine that's an average of products where you have tons of inventory of some products in certain end markets, and perhaps you're even still having escalations at other products, and it's a pretty diverse set. So if you could maybe spend a little bit of time talking about areas where you feel like you've cleaned everything up and we're sort of back to normal lead times and normal inventories if you have that visibility, and are there particular areas where you haven't? And just give a little bit more detail, maybe not average metrics, but some specifics by end markets. Thanks.
spk05: Sure. Good morning, Matt. I understand, I think. Let's see, I'm going to start just working through. Internal inventory, obviously well understood. By design, we're the building dye inventory for the ramp on the other side of this market environment we're in. As Mark said, we kind of expect that to be peaking now, and we feel good about where that's at. There's a ton of flexibility given that we carry it in dye banks, and we can configure it as needed. Next piece of inventory channel, also well understood. We saw our days go down, as we mentioned. What's remarkable about that is the revenue level that that occurred at. Going from around 200 in Q3 to 87 million in Q4, the actual material in the channel came down significantly. As we've commented, it's actually lower than it was in the supply chain crisis. So you can see the clear trend and pattern there as the industry tries to, and ourselves, work down those inventories. The real trick is customer inventory, or end customer inventory, which is the most difficult because, as you pointed out, you can't get a report that gives you that with precision. Given the geos, technologies, applications, and just the sheer number of customers we have, it's much more difficult to get an exact number on that like we can with the other inventories I already mentioned. So, easy way to say it, if you compare to this time last quarter, what we do is we sample our top customers. Last quarter, it was 40 to 50. We've expanded that, and what we see and believe is that's coming down. We're happy to see that. I'm not going to imply precision that doesn't exist. We see it coming down. That's the average across all the customers, and even the count of customers with more inventory than they should is coming down as well. So that's encouraging. We expect that trend to continue through Q1, and it also speaks to, as we've been saying, our, for lack of a better term, end consumption of our products is obviously higher than our revenue levels would imply as we're working down those channel and end customer inventories. So hopefully that's helpful, and I'm not going to put specific numbers out there that imply precision that doesn't exist, but we definitely see it moving in the right direction, which is encouraging. No,
spk15: thanks, Matt. That context does help. I realize that we're going through a transitory period, but I guess as my second question, I wanted to ask a little bit about gross margin. There's a lot of pieces moving around, and I got a few investor questions this morning. So first question is just to confirm. I didn't see it in any of the releases, and you guys didn't mention it, so I think this is true, but just to confirm that there weren't any kind of explicit inventory write downs. And I guess the second question is any kind of rule of thumb of how gross margin might trend as we come out of this, like revenue levels where we can get back within the long-term range. I imagine it has a mixed component between the two segments as well, but if you could give us any kind of guidance there. You mentioned in the prepared comments there was a little bit of movement on pricing, so I was curious about that as well, but anything on margins would be helpful. Thanks.
spk05: Yeah, sure. I'll work from the detail and then up to the bigger picture to answer that. So Q4, first thing is what I call the low level gross margin from the beginning, even in the guide, is really driven by that collector term fixed cost absorption at that low revenue level, but it still came in lower than expected, and the reason for that was really around the mix. At $87 million of revenue, which is indicative of our consumption or normal operating level, the customers come in lumpy, right? And that resulted in an unfavorable mix that got to where we're at. We do not expect that to be a permanent trend, but we should be clear. In Q1, we'll still have those challenges of lower than consumption revenue level, and lower revenue than we want to absorb all those fixed costs. So we still see gross margin challenge in Q1, although improving slightly. To answer your big picture question, I think that's critical, and we all know this. We shouldn't be looking at our gross margin in the peak or the trough of these cycles as indicative of the longer term trend. Back during the peak of the supply chain crisis, we were over 60 by a meaningful amount, and there was an expectation that could be our new normal, and we said no. We expected that was a transitory environment, and that's proven out. Right now, we believe we're in our trough, and that's also transitory. We don't believe that that's indicative of our long term gross margin. Our commitment to our gross margin model that we've said all along has not changed, is unwavering, and we see a continued path to delivering that. We just have to get through this correction cycle, and that's what we expect to see. So hopefully that answers your question, Matt.
spk15: Thank you very much. All the best as you guys manage through this. Take care.
spk02: Thank you. One moment for our next question. And our next question comes from the line of Thomas O'Malley from Barclays. Your question, please.
spk13: Good morning, guys, and thanks for taking my question. I just wanted to first check in on the March quarter. Could you give us some color as to which of your segments you're expecting to grow more into the March quarter, just to get to your guidance of 105? And then also, you mentioned in the fourth quarter that units and ASPs are both down, expected with the reset. But can you talk about what you're seeing kind of through the quarter, such thus far from a pricing perspective and just how that's playing into the March guidance?
spk05: Sure, Thomas. This is Matt. So quick answer on segments, Q1, I would expect both of our segments to grow in Q1. Big picture, it's really tough to call this market environment, but we ultimately believe that home and life is probably further through its cycle than industrial and commercial. So if I were to buy it, I would expect more there, but we're not calling specific numbers in our guidance. In terms of the pricing environment overall, no big changes. What we've been saying and experiencing seeing is price and behavior that is very much in line with this type of environment. No surprises there. It is worth commenting. There is one competitor out there who has done things that I would say are not indicative or typical of this environment. And what I mean by that is setting lower price points and trying to fill fab to justify capacity. But for us, that competitor doesn't overlap a lot with our portfolio, so not significant. But it would be incorrect to say that everything is normal if I don't call that one out. But aside from that, seeing very expected behavior of people trying to drum up business, trying to fill their capacity and get demand back up and running. But if we're just honest about it, the problem is the price. The problem is inventory and the market cycle that we're going through. And no big changes in our outlook or expectations. Based on what we've seen so far.
spk13: Super helpful. And then I just wanted to follow up. Obviously, you moved the report here due to inventory controls issue. It looks like you're not really seeing any impact of that in the quarter. A couple things. One, could you maybe give us a little bit more color as to what's going on there if you can? And two, you mentioned that most of the inventory that you're carrying right now is die bank. Could you maybe give us the split of how much of that inventory is die bank? I would assume that if you were looking at inventory controls, it would be more for products. So I would assume a smaller portion of your overall inventory. Any color there would be helpful. Thank you.
spk10: Sure. This is Mark. For the controls issue, late in January, we just identified some areas within our inventory accounting process that needed some improvement there. We are working to develop that plan to address it going forward. The way these things work, generally speaking, we're going to have to have the new controls in the process and shown as effective at least for more than one quarter. So we'll have that item open out there at least through the first quarter. But in general, it just had to do with having more documentation
spk09: and reviews over some of the assumptions that go into the judgmental aspects of the inventory valuation.
spk14: Thank you very much, guys. Appreciate it.
spk05: Yeah. And just a comment, a meaningful majority of our inventory is in die bank because for people out there, just importantly understand, while we have a remarkable diversity in our end customers, end applications, what we try to do is not have that same diversity in silicon. In silicon, we'll have SOCs that address as much market as possible, and they can be tailored, customized, configured in silicon to address, for lack of a better term, different part numbers and SKUs and applications and customer needs. And on top of that, there's software flexibility that is substantial as well. So it's really an advantage for us to carry in die bank. It gives us the maximum flexibility to respond and to manage inventory responsibly by taking that approach. So quick answer is that's where most of it is in.
spk02: Thank you. Our next question comes from the line, Toris Vonberg from Stiefel. Your question, please.
spk11: Yes, thank you. First question is on the home and life business. So Matt, I know this is a difficult question to answer, but I'll ask it anyway. I think it peaked at a run rate of half a billion. Now the run rate is 100 million, so it's quite stunning. And I'm just wondering if you could unpack a little bit as you had that half a billion dollar peak, what was cyclicality and what was more secular businesses? And if you look at the mix today, that $27 million, how much of that is quote unquote more secular business versus cyclical business? I know again, it's difficult, but if you can unpack some of that, that'd be great. And I assume you're not going to give us a true consumption number of that business, but any more color you could add would be really helpful.
spk05: Yeah, sure, Tori. That is not easy to answer, but I'll do my best to provide some perspective and context that hopefully will be helpful. So maybe just going way up to the top, big picture, we haven't provided an exact consumption number for the company or for the segments. But it can be helpful to remember that we did do some meaningful op-ex actions in Q4 of last year, and obviously those were with that consumption level in mind. And whatever you do there for cuts, you want your break-even point to be below that consumption level. So that's important conceptually, just as a way to help think about it. Going into home and life, it's been what, four or five plus quarters now of decline that we've seen in that business. We do see what I call cautiously optimistic signs that we're seeing some improvement in booking, seeing some knock pushouts anymore, it's more pull-ins. But visibility remains low because people aren't even ordering within lead times, they're ordering on a much shorter basis as they need. I think they're still working through their inventory. They've been rattled, they're uncertain. So I do move a little bit further through that cycle of correction. And we're seeing encouraging signs, but not at the level to say we're on the other side of this yet or we're out of the woods. So I want that to be clear. That being said, yeah, we went through a remarkable journey from demand. One, I think there was a shift from services to goods and then back to services. Demand spike, people wanted expected demand levels would be continuing in perpetuity, people built inventory, and then there's a whole bunch of trends under there that are difficult to pull out or tease out or parse out how much is contributing to each. But you have the end market strength, you have the secular positions that are very important. Matter is starting to show a lot of strength in there that are prepared remarks. And then we talked about life a few times that life has been durable throughout this because of that secular strength. But at the same time, the design and momentum we've started sharing with the world on that is really just in its early stages. And that will be impactful as well. So I'd say it's shown resilience because throughout this, because of those ramps that are starting, but the real growth there and real impact is yet to come. So, you know, and the last piece is the whole piece, you know, as an end market, we continue to see solid progress and opportunity there, whether it's trends such as matter, such as Amazon sidewalk, such as, you know, just the market finding a splitting on the other side of this downturn. You know, what I'm trying to convey is our confidence in that end segment from a growth perspective remains very strong. And our confidence in our position there also remains very strong as we bring in, you know, really great momentum around Bluetooth where we're clearly gaining share. And we're going to do the same thing as Wi Fi. And that will help not only firm or stabilize the home for us, but actually grow the home moving forward. So I know that's a lot to worry about, but those are all some of the moving pieces in there. And the punch line is our confidence in the space continues to be strong. We know we're gaining share and we see opportunities to grow through some of those trends, like I mentioned, for matter, Bluetooth growth, Wi Fi growth, going forward.
spk11: Now, that's really helpful. I appreciate that, Matt. As my follow up, so I know obviously, you know, there's a cyclical bounce coming here. That's pretty obvious. But I know on top of that, you also have a lot of new design wins. You have some new secular businesses that are ramping. You talked about some of the glucose metering, smart metering, shelf labeling, then you got Wi Fi. So I guess the real question that I have here, you know, is if you look at some of those newer businesses, any update there and, you know, could these be really material to revenues for calendar 24, especially in light of perhaps some of the most cyclical business at such a low level?
spk05: Yeah, understood. Quick answer is yes. That is our expectation that, you know, we've been unwavering in our view that, you know, we're going through a particularly vicious market cycle, you know, that has impacted demand, inventory, destocking that's substantial. And, you know, we're trying to be clear. We're not calling the market bottom here. You know, we're not out of the woods yet. It's clearly the cycles haven't worked fully through, but we are calling our bottom. And the reason we're comfortable doing that is, you know, we're not calling the rate necessarily, but we do see the confluence of all those things that the inventory to stocking is going in the right direction. We do see our position in the market is strong. And, you know, those designs are starting to ramp. You know, we just last year we called out a few that people were unaware of. We just called out a couple more on this call that people are unaware of. And there's more. So these are intended to, you know, give some perspective that they're happening. Yes, there's a massive counterbalance with this market cycle. But at some point, those two things will, you know, the ramps are going to continue and only get stronger and the market will work through its cycle. And when those things come together, you know, it looks like we'll be positioned for a strong growth when those two happen.
spk21: Great. Thank you very much.
spk02: Thank you. One moment for our next question. And our next question comes from the line of Kodiakree from the Benchmark Company. Your question, please.
spk08: Yeah, thank you. I think my question, excuse me. Maybe you can talk about just your order linearity throughout the last 90 days. You mentioned that orders are coming in with less than your typical turns request. Can you talk about that pattern of orders and how that gives you visibility to the bottom?
spk05: Sure.
spk08: So
spk05: I'm trying, I don't want to make a wise remark. It's hard for us right now because what is normal has really been disrupted over this entire cycle. I'll start with that. But to answer your question directly, last 90 days, what we've seen is a trend in an encouraging direction where they're increasing. Not increasing at the level that we'd like to see to say this is done, we're on the other side of it, but optimistic that they're going in the right direction, which is always important. The visibility continues to be low because our lead times right now, let's just say, about a quarter roughly, a little over a quarter. And most of the behavior is customers, the majority of the ages, customers ordering well within that. So that gives you an indication of what we're seeing. It's also worth pointing out that given where we think we're at in the cycle between, for lack of a better term, the consumer industrial segments, probably seeing order patterns a little more indicative of consumer and home and life in general being further through the cycle than industrial and commercial. But like I said earlier, we do expect both to grow from Q4 to Q1. So hopefully that helps give some context and perspective. Simple headline, going in the right direction, but still have further to go.
spk08: Excellent. Thank you. And lastly, last quarter you talked pretty optimistically about Series 3. That has been a little absent this quarter. Can you just give us an update on how that platform has progressed this quarter?
spk05: Yeah, sure. Not absent by design, just in the middle of a lot of work. So a quick way to think about it, Series 2, we've continued to release products on Series 2, couldn't be happier with the impact that's having on the market. Design wins, momentum has been excellent. It's been everything you'd want to see, and it's still in a very powerful spot in its life cycle that is going to drive growth for us for a long time. Series 3, making progress there on track to what we've said, what we've committed, and the impact that we expect that that's going to have not only on us as a company, but on our industry. And easy way to think about it, Series 3 takes that platform that is so pervasive, which is Series 2, and gives people the ability to lever that and push even further on all the dimensions that we are industry leading on. Whether it's the wireless performance, whether it's the scalability, flexibility, whether it's the compute that our customers want, including AI, ML, or the industry leading security, even being quantum ready. So the combination of those things has our customers excited. But what I don't want to do, and why you probably notice it's not the call, that will be work for us for years to come. And we're well into it, we're very comfortable with where we're at in that cycle, but we'll be talking about Series 2 for years still, and we'll be talking about Series 3 for years to come. And both will kind of coincide or be parallel to each other for at least the next 5 to 10 years. So it's important to have that perspective as we talk about both of those. One's not going away and the other's not replacing it. But very encouraged by Series 3 where it's at in the market customer response.
spk20: Great, thank you guys.
spk02: Thank
spk03: you, one moment for our next question. And our next question comes from the line of Quinn Bolton
spk02: from Needham & Company. Your question please.
spk04: Thanks for taking my question. I guess I just wanted to, you've talked about starting to see some more encouraging orders in Home and Life, and you've also said it sort of further through the inventory correction. Just wondering if you could specifically talk more about what you're seeing on the industrial commercial side. If Home and Life is sort of four to five quarters in, would you expect industrial commercial to kind of have that same four to five quarter under pressure before you kind of get back to more normalized run rates?
spk05: Yeah, I understand the question. Quick and honest answer is we don't know for sure. There's some really interesting behavior out there in the marketplace. For us, we saw industrial enter at the start of a decline much later than consumer. For us, I think it was around Q2 where we really started seeing the signs of softening. What was remarkable for us is usually, and I think historically, typically, usually it's much more measured and not as abrupt. But across thousands of customers, we really did see that segment just really slow down big time, really going from Q3 to Q4, and that was reflected in our guidance. So then the reason I explained that is, yeah, so we're a few quarters in to the cycle of growth and we see it, but it also hasn't been a typical one in the sense of how severe. So we're assuming it's going to continue for the next few quarters. Even with that being said, we still see this as our trough or bottom and able to drive sequential growth from here. But I wouldn't call the markets done and we believe industrial still has some time to go. But with the caveat, we also haven't seen it go down as abruptly as we did in this current cycle.
spk04: Got it. That's helpful. Just a question on the DISSI inventory. You guys said it came down to 79 days, obviously down a ton in terms of dollars, given the lower revenue level. Do you guys have a target that you're shooting for that DISSI? I mean, I imagine as revenue starts to recover, if you just kind of hold DISSI inventory flat, that the days in DISSI is going to come down still pretty nicely. So just any thoughts you can give us, how we should be thinking about where you want to try to get DISSI inventory. Thank you.
spk05: Yeah, understood. I think we've said over the last few quarters, in normal times, whenever those happen, we'd be somewhere in the 60 to 70 day range as a target. It's not an absolute or hard target, but something in that range. But right now, it's obviously higher than that, but on a much lower revenue level. And as you pointed out, that can spike very quickly as things start to ramp back up. But you have to counterbalance it with the whole industry spooked by inventory right now. Everyone's trying to work down the inventory, and that's what you see out there. So distributors are trying to work it down, customers are trying to work it down. So if we're honest about it, as an industry, we'll probably swing the pendulum a little too far. Maybe this will be one of the times that it doesn't happen, but it's possible that you'll see those inventory levels go down, and then there'll be a bounce on the other side that's faster than anticipated because we take it too far as an industry. We're trying to watch that, we're trying to be responsible and do our best to manage it. But the real focus for us in problem child is end customer inventory, which is going the right direction, which is encouraging, but not done.
spk02: Thank you. Thank you, one moment for our next question. And our next question comes from the line of Gary Mobley from Wells Fargo Securities. Your question, please.
spk06: Morning, guys. Thanks for taking my question. Matt, you briefly covered this in your prepared remarks, but I missed it, to be honest. I was hoping that you could share with us more metrics on design wins in retrospect, specifically the 2023, what the growth and lifetime value was for the design wins captured in the period, and as well whether or not there was a particular emphasis on any one wire standard or module generation. I would presume the majority of it is on series two. Any color would be helpful.
spk05: Yeah, sure. So yeah, I think in the prepared remarks and from our side, I think we said, you know, we did deliver to our target, and I'll mention in a second why that's remarkable. And we saw that as a big deal because, you know, as we entered this year, sorry, as we entered last year, 2023, we knew it would be a great, you know, market environment, but we didn't anticipate it would be as bad as it was. But we set our design target in a different environment, and usually when you see the market drop like it did and as volatile as it has been, usually you see that convey and impact your design and performance. And the reasons are multiple. Like think about it in real terms right now. We have customers that are working through inventory, that are trying to work, you know, a lot of customers are doing R&D reductions, so they're impacting schedules and projects that way. All those things come into play, but, you know, with, you know, certainly not happy with our revenue performance in 2023, but the team was able to secure and deliver a design and performance that was on that original plan, which is outstanding. And the reason to be very direct is series two, right? We're still not in the series three design phase yet, you know, that's just still a ways away. But in series two, as I said earlier, it's knocking it out of the park, and that's the engine that's driving design. The easy way to think about it is right now, that drives the growth of our funnel, opportunity funnel, that drives the design growth, and that'll be the major driver of revenue growth. And that's why we're so excited about series three, because now that we have that position in the market, we can leverage that with software compatibility and portability, because what our customers are starting to realize is investment in series two is also an investment in series three, which is awesome. So we're starting to get that critical mass and position with our platform in the industry that will serve us well. In terms of the other questions, it was pretty broad, honestly, in terms of, you know, all our geos saw good progress, all our wireless technology saw good progress, and all our focused end market segments saw good progress as well. If you wanted to call out some big ones, it would be what you expected. Areas where we're just really seeing great progress and cleaning up those secular growth areas that we were talking about with Tori earlier, definitely having a big impact. And then take an area like we've been consistent in Bluetooth, where we see strength in all of our wireless areas, but Bluetooth, we've really just seen that often grow from a design perspective, and we see ourselves continuing to take share there. So that's one that you could probably call out as a standout. And, you know, as we've been saying, I expect it's, you know, we just released the soft launch 9.17 for Wi-Fi, you're going to start seeing the same in Wi-Fi as we bring industry leading capabilities there as well. So those are the drivers, Gary, hopefully that gives you some perspective, but no one thing aside from definitely some strength in Bluetooth, but all the focus areas performed very well, and we hit our mark.
spk06: Thanks, Matt. Your main Foundry partner is basically calling for a pretty good rebound year, some pretty good growth. And I realize a lot of that rebound is at leading edges of lithographies, maybe not where you're at, but to put this in the form of a question, are you potentially going to see maybe higher Foundry quotes and as well related some expanding lead times? Could we possibly, you know, see lead times more than 13 weeks at some point in the year?
spk05: Sure. Don't understand the question, don't know for sure. I think that we've been very deliberate about our one strategic inventory build and our dive bank to smooth this out. You know, going into the supply crisis, we were carrying a much lower level. So our intent by having that is to try to smooth the response and not have it be as abrupt and lumpy. You know, and we have a great relationship with all our Foundry partners, including our largest. So, you know, we feel, you know, just to be very blunt, we were able to navigate the supply crisis with our relationships and partnerships. I definitely believe we'll be able to navigate the other side of this downturn that we're in. And I think we're much better prepared. We've learned a lot. We're carrying different dive banks. We've learned a lot about forecasting, watching customer inventories, et cetera. So I think the confluence of all those was positioned as well. And I do believe we're, from a supply perspective, very well positioned to navigate it, all things considered.
spk02: Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Giovanni Pacelli for any further remarks.
spk07: Yeah, thank you, Jonathan. And thank you all for joining us this morning. This concludes today's call.
spk02: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. Thank you for standing by. My name is Jonathan, and I will be your conference operator today. Welcome to SiliconLabs' fourth quarter fiscal 2023 earnings call. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If your question has been answered and you wish to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Giovanni Pacelli, SiliconLabs' senior director of finance. Giovanni, please go ahead.
spk07: Thank you, Jonathan, 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 .silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are SiliconLabs' president and chief executive officer, Matt Johnson, and interim chief financial officer, Mark Muldin. They will discuss our fourth 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 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 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 reconciliation of our GAAP non-GAAP results is included in the company's earnings press release and on the investor relations section of the SiliconLabs website. I'll now turn the call over to SiliconLabs' chief executive officer, Matt Johnson. Matt? Thanks, Giovanni, and good morning, everyone.
spk05: The SiliconLabs team delivered fourth quarter results above the midpoint of our guidance. During the quarter, we saw reductions in both channel and end customer inventory. We expect end customer inventory to be stocking to continue in Q1. On a unit's basis, this inventory is now at lower level than during the supply crisis. We believe Q4 of 2023 represents our low point of revenue. We expect to return to sequential growth starting in Q1 as our customers' inventory starts to normalize and we begin to see the further benefits of design wins ramping to production. We've also seen slight improvements in our weekly bookings activity, but demand visibility continues to be low. We are encouraged by another year of outstanding design win achievement despite the challenges of the current operating environment. The projected lifetime revenue of our 2023 design wins was up low double digits year over year in line with the ambitious targets we set. These design wins have been a span of broad range of technologies, applications, and customers, and we are expected to deliver strong growth and earnings power as the market dynamics improve. Before we turn the call over to Mark, I would like to take a moment to express our gratitude to John Hollister, who has stepped down after 20 years of dedicated service to SiliconLabs, 10 of those years as CFO. John's financial stewardship has been instrumental to our success over the years, and his insights and partnerships have been invaluable. On behalf of the entire team, thank you John for your outstanding work and commitment, and we wish you the best as you join global boundaries. In addition, I would like to thank Mark Malden for stepping in so effectively during this transition. I can also share that the search for our new CFO is going well, and we're impressed by the caliber and potential fit of the candidates we're engaged with, and are looking forward to concluding the search as quickly as possible. Now I'll hand it over to Mark for the financial updates.
spk10: Mark. Thanks Matt, and good morning everyone. Fourth quarter revenue was $87 million dollars above the midpoint of our guidance and down 66 percent year on year. ASPs declined sequentially in the quarter primarily due to product and customer mix. Unit volume was also down on a sequential basis. Revenue was down year over year for both business units in the quarter. The industrial and commercial business unit ended at $60 million dollars, down 62 percent from the same period last year and 51 percent sequentially. All three product groups in I&C declined in the fourth quarter with the broad industrial category experiencing the largest decline. However, for the full year the smart city and commercial product groups achieved record revenue levels driven primarily by strength and electronic shelf labels and metering. Weak demand and high customer inventories continue to negatively impact the home and life market. H&L revenue was down 73 percent year over year and 67 percent sequentially at $27 million dollars. Despite near-term weakness, we are well positioned as demand recovers and inventories normalize, with growth expected in smart homes and particular strength in connected health. Successful market initiatives are driving H&L design wins above our targets in terms of projected lifetime revenue. Distribution revenue was 63 percent for the fourth quarter, down sequentially and well below our typical levels. Inventory in the channel decreased to 79 days and on the unit basis, this inventory was down to its lowest level since the divestiture. The decrease in this mix in the quarter was due to a temporary shift toward direct customers as channel partners work through their inventory. This mixed shift also contributed to lower ASPs in the quarter. Our top 10 end customers were about 42 percent of revenue for the quarter, an increase from historical trends driven by the lower revenue level and the mixed shift. Non-GAAP gross margin ended lower than expected at 51 percent due to product and customer mix. We continue to see a generally stable pricing and input cost environment, with no significant change expected on a life per life basis in the next quarter. Non-GAAP operating expenses of 91 million dollars were better than expected, largely due to earlier pull-in effects of the restructuring which commenced in November. Non-GAAP operating loss was 47 million dollars and our non-GAAP effective tax rate was lower for the quarter at 14 percent. Non-GAAP loss of $1.19 exceeded our guidance, driven largely by OPEX and tax rate favorability. For the full year, our non-GAAP operating margin was 8 percent, non-GAAP earnings for the full year were $1.65. On a GAAP basis, gross margin ended at 51 percent, GAAP operating expenses were $117 million dollars, which was better than expected. Non-GAAP operating loss was 73 million dollars for the fourth quarter and 24 million dollars for the full year. GAAP loss per share was $2.19 for the fourth quarter and $1.09 for the full year. The GAAP results included an approximate $9 million dollar charge for the separation cost associated with the reduction in workforce during the fourth quarter. Turning to the balance sheet, we ended the year with cash and investments of $439 million dollars. Our accounts receivable balance declined in the quarter to $29 million dollars, indicative of the lower revenue levels. Our day sale outstanding reverted back to 30 days, reflecting strong collections in the quarter and no known bad debts from our customers. We added $27 million dollars in net inventory in the quarter to $194 million. We anticipate that our internal inventory will level off in Q1. Inventory terms ended at about one time. As a reminder, we hold a significant portion of our inventory in Dive Bank, which provides flexibility as to its ultimate end-use application in customers and helps to mitigate inventory obsolescence risk. We continue to have $45 million dollars outstanding on our revolving credit facility. Our board of directors has authorized a new share repurchase program in 2024 for $100 million dollars. We will continue to be very opportunistic on share repurchases as we manage liquidity and optimize the use of working capital. Overall, the balance sheet remains very healthy and positioned to execute our strategy and weather the current market environment. As we announced last week, we identified a material weakness in our internal controls related to the operation and documentation of certain inventory controls. There is no impact to any amounts reported in our current or historical financial statements. We are in the process of developing a plan to enhance the design and operating effectiveness of our internal controls to address the material weakness and still expect to file our Form 10k in a timely manner. Before returning to call the map, I will cover guidance for the first quarter. We expect revenue for the first quarter to be in the range of $100 to $110 million dollars. We anticipate both business units to grow in the quarter. We expect non-GAAP gross margin in the first quarter to be approximately 52%. The lower gross margin for this quarter continues to reflect the fixed cost absorption over lower revenue levels. We expect non-GAAP operating expenses in the first quarter to be approximately $96 million dollars. We expect the non-GAAP affected tax rate to be approximately 20% in the first quarter. Our non-GAAP loss per share for Q1 is expected to be in the range of $0.92 to $1.04. On a GAAP basis, we expect gross margin to be 52%. We expect GAAP operating expenses to be approximately $118 million dollars. And we expect GAAP loss per share to be between $1.89 and $2.05 per share. I will now turn the call back over to Matt. Thanks, Mark.
spk05: Looking ahead in 2024, we're excited about several trends in wireless connectivity, including more MATTER-certified products coming to market, as well as strong growth in our life, smart cities, and commercial segments. In Q4, the CSA released MATTER 1.2, which extends the benefits of MATTER to a wider range of devices, including household appliances, air conditioning, and smoke alarms. At CEF this year, we were encouraged by the strong level of engagement with customers, ecosystem partners, and ISPs regarding the MATTER protocol. It's clear that interest in MATTER and the availability of MATTER-enabled devices is accelerated. As part of this, we announced our collaboration with Arduino to make MATTER protocol and advanced IoT development more accessible to We are partnering to integrate Arduino's first ever MATTER software libraries with SiliconLabs hardware, so developers get our leading security, energy efficiency, and processing power for MATTER in an intuitive, -to-use development environment. Additionally, Samsung recently announced MATTER-enabled connectivity in its smart TVs and selected appliances that includes our silicon and are currently hitting the market. We're excited to work with Samsung on their smart think platform as they expand their MATTER-enabled ecosystem. Wi-Fi is playing an increasingly important role in IoT devices, including in conjunction with MATTER. In Q4, we expanded our portfolio of industry-leading series 2-based products with a soft launch of our -low-power Wi-Fi solution, the 917, which was selected as an honoree in the embedded category of the CDS Innovation Awards. The 917 has the lowest power consumption of any competing Wi-Fi 6 product on the market, enabling a meaningfully longer battery life to a whole new class of applications. We believe this will continue to drive new opportunities and design wins as customers look to integrate Wi-Fi into their products. In our live segment, we are securing new wins in connected health and APAC, where we are engaged with more than a dozen customers for continuous glucose monitoring. The demand for connected health devices is growing rapidly, driven by demographics and an increase in chronic illnesses or diseases like diabetes, and we are confident that our solutions will continue to gain traction and serve this market well. In 2023, we achieved record revenue in our commercial product group as retail environments continued to digitize. For example, in electronic shelf labeling, we ran new designs with SDS and Argotag, now Fusion Group. In addition, we have also secured new design wins in the ESL space for shelf labels, cameras, and sensors with our Bluetooth solutions. The Smart Cities product group also had a record year, driven largely by METER. However, we are also gaining share in the solar market with integrated solutions for both wireless, connectivity, and compute and solar panels, which help to optimize energy production and increase fire safety. 2023 was a difficult year, characterized by weak demand and high inventory levels. While we are seeing things moving in the right direction, the market is still working through its correction. As we have stated, we believe Q4 represents our bottom, and we expect a return to sequential growth starting in Q1. In closing, I want to thank the Silicon Labs team for their execution in securing significant design wins and gaining share, provenly managing our expenses and advancing industry-leading technology and solutions for the IFT. Despite the near-term challenges, the long-term growth trajectory of our end markets and our strong position within those markets remains unchanged. As inventory normalizes, demand improves, and design wins ramp up the production, we are well positioned to return to growth. I'll now hand it back over to Giovanni for Q&A.
spk07: Thank you, Matt. Before we open the call for Q&A, I'd like to announce our participation in Morgan Family's 2024 TMT Conference in San Francisco on March 5th. 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. Jonathan?
spk02: Certainly. One moment for our first question. And our first question comes from the line, Matt Ramsey from TD Cowan. Your question, please.
spk15: Thank you very much. Good morning, guys. I guess for my first question, and I think during the quarter we talked a number of times about some of these dynamics, but I wanted to get an update on the inventory situation. We see all the statistics you guys publish on your own inventory, channel inventory, and Matt, we take some of your comments on customer inventory. But I imagine that's an average of products where you have tons of inventory of some products in certain end markets. And perhaps you're even still having escalations at other products, and it's a pretty diverse set. So if you could maybe spend a little bit of time talking about areas where you feel like you've cleaned everything up and we're sort of back to normal lead times and normal inventories if you have that visibility, and are there particular areas where you haven't? And just give a little bit more detail, maybe not average metrics, but some specifics by end markets.
spk05: Thanks. Sure. Good morning, Matt. I understand, I think. Let's see. I'm going to start just working through internal inventory, obviously well understood, by design, we're the building die inventory for the ramp on the other side of this market environment we're in. As Mark said, we kind of expect that to be peaking now, and we feel good about where that's at. There's a ton of flexibility given that we carry it in die banks, and we can figure it as needed. Next piece of inventory channel, also well understood. We saw our days go down, as we mentioned. What's remarkable about that is the revenue level that that occurred at. Going from around 200 and Q3 to 87 million and Q4, the actual material in the channel came down significantly. As we've commented, it's actually lower than it was in the supply chain crisis. You can see the clear trend and pattern there as the industry tries to, and ourselves, work down those inventories. The real trick is customer inventory, end customer inventory, which is the most difficult because, as you pointed out, you can't get a report that gives you that with precision. Given the geos, technologies, applications, and just the sheer number of numbers on that like we can with the other inventories I already mentioned. Easy way to say it, if you compare to this time last quarter, what we do is we sample our top customers. Last quarter, it was 40 to 50. We've expanded that, and what we see and believe is that's coming down, and we're happy to see that. I'm not going to imply precision that doesn't exist. We see it coming down, and that's the average across all the customers, and even the customers with more inventory than they should is coming down as well. That's encouraging. We expect that trend to continue through Q1, and it also speaks to, as we've been saying, our, for lack of a better term, end consumption of our product is obviously higher than our revenue levels would imply as we're working down those channel and end customer inventories. Hopefully, that's helpful. I'm not going to put specific numbers out there that imply precision that doesn't exist, but we definitely see it moving in the right direction, which is encouraging.
spk15: Thanks, Matt. That context does help. I realize that we're going through a transitory period, but I guess as my second question, I wanted to ask a little bit about gross margin. There's a lot of pieces moving around, and I got a few investor questions this morning. So, first question is just to confirm. I didn't see it in any of the releases, and you guys didn't mention it, so I think this is true, but just to confirm that there weren't any kind of explicit inventory write-downs. I guess the second question is any kind of rule of thumb of how gross margin might trend as we come out of this, like revenue levels where we can get back within the long-term range. I imagine it has a mixed component between the two segments as well, but if you could give us any kind of guidance there. You mentioned in the prepared comments there was a little bit of movement on pricing, so I was curious about that as well, but anything on margins would be helpful.
spk05: Thanks. Yeah, sure. I'll work from the detail and then up to the bigger picture to answer that. So, Q4, first thing is what I call the low-level gross margin from the beginning, even as a guide, is really driven by that -better-term fixed-cost absorption at that low revenue level, but it still came in lower than expected, and the reason for that was really around the mix. At $87 million of revenue, which is indicative of our consumption or normal operating level, the customers come in lumpy, and that resulted in an unfavorable mix that got us to where we're at. We do not expect that to be a permanent trend, but we should be clear. In Q1, we'll still have those challenges of lower than consumption revenue level and lower revenue than we want to absorb all those fixed costs. So, we still see gross margin challenged in Q1, although improving slightly. To answer your big picture question, I think that's critical, and we all know this, we shouldn't be looking at our gross margin in the peak or the trough of these cycles as indicative of the longer-term trend. Back during the peak of the supply chain crisis, we were over 60 by a meaningful amount, and there was an expectation that could be our new normal, and we said no. We expect that was a transitory environment, and that's proven out. Right now, we believe we're in our trough, and that's also transitory. We don't believe that that's indicative of our long-term gross margin. Our commitment to our gross margin model that we've said all along has not changed, is unwavering, and we see a continued path to delivering that, and we just have to get through this correction cycle, and that's what we expect to see. So, hopefully that answers your question.
spk15: Thank you very much. All the best as you guys manage through this. Take care.
spk02: Thank you. One moment for our next question. And our next question comes from the line of Thomas O'Malley from Barclays. Your question, please.
spk13: Good morning, guys, and thanks for taking my question. I just wanted to first check in on the March quarter. Could you give us some color as to which of your segments you're expecting to grow more into the March quarter, just to get to your guidance of 105? And then also, you mentioned in the fourth quarter that units and ASPs are both down less expected with the reset, but can you talk about what you're seeing kind of through the quarter, thus far from a pricing perspective, and just how that's playing into the March guidance?
spk05: Sure, Thomas. This is Matt. So, quick answer on segments. Q1, I would expect both of our end segments to grow in Q1. Big picture. It's really tough to call this market environment, but we ultimately believe that home and life is probably further through its cycle than industrial and commercial. So, if I were to bias, I would expect more there, but we're not calling specific numbers in our changes. So, what we've been saying and experiencing seeing is pricing behavior that is very much in line and indicative of this type of environment, no surprises there. It is worth commenting. There is one competitor out there who has done things that I would say are not indicative or typical of this environment, and what I mean by that is setting lower price points and trying to justify capacity, but for us, that competitor doesn't overlap a lot with our portfolio, so not significant, but it would be incorrect to say that everything is normal if I don't call that one out, but aside from that, seeing very expected behavior of people trying to drum up business, trying to fill their capacity and get demand back up and running, but if we're just honest about it, the problem is in price. The problem is inventory and the market cycle that we're going through, and no big changes in our outlook or expectations based on what we've seen so far.
spk13: Super helpful, and then I just wanted to follow up. Obviously, you moved the report here due to inventory controls issue. It looks like you're not really seeing any impact of that in the quarter. A couple things. One, could you maybe give us a little bit more color as to what's going on there if you can? Two, you mentioned that most of the inventory that you're carrying right now is die bank. Could you maybe give us the split of how much of that inventory is die bank? Because I would assume that if you were looking at inventory controls, there'd be more for products, so I would assume a smaller portion of your overall inventory. Any color there would be helpful. Thank you.
spk10: This is Mark. For the controls issue, late in January, we just identified some areas within our inventory accounting process that needed some improvements there. We are working to develop that plan to address it going forward. The way these things work, generally speaking, we're going to have to have the new controls in process and shown as effective at least for more than one quarter, so we'll have that item open out there at least through the first quarter. But in general, it just had to do with having
spk09: more documentation and reviews over some of the assumptions that go into the judgmental aspects of the inventory valuation.
spk14: Thank you very much, guys. Appreciate it.
spk05: Just a comment. A meaningful majority of our inventories in die bank, because for people out there, just importantly understand while we have a remarkable diversity in our end customers, end applications, what we try to do is not have that same diversity in silicon. In silicon, we'll have SOCs that address as much market as possible, and they could be tailored, customized, configured in silicon to address, for lack of a better term, different part numbers and SKUs and applications that customer needs. On top of that, there's software flexibility that is substantial as well. It's really an advantage for us to carry in die bank and gives us the maximum flexibility to respond and to manage inventory responsibly by taking that approach. Quick answer is that's where most of it is in.
spk02: Thank you. Our next question comes from the line, from Steve Hall. Your question, please.
spk11: Yes, thank you. First question is on the home and life business. I know this is a difficult question to answer, but I'll ask it anyway. I think it peaked at a run rate of half a billion. Now the run rate is 100 million, so it's quite stunning. I'm just wondering if you could unpack a little bit as you had that half a billion dollar peak, what was cyclicality and what was more secular businesses? If you look at the mix today, that $27 million, how much of that is quote unquote more secular business versus cyclical business? I know again it's difficult, but if you could unpack some of that, that'd be great. I assume you're not going to give us a true consumption number of that business, but any more color you could add would be really helpful.
spk05: Yeah, sure. That is not easy to answer, but I'll do my best to provide some perspective and context that hopefully will be helpful. Maybe just going way up to the top, big picture, we haven't provided an exact consumption number for the company or for the segments, but it can be helpful to remember that we did do some meaningful op-ex actions in Q4 of last year, and obviously those were with that consumption level in mind. Whatever you do there for cuts, you want your break-even points to be below that consumption level. That's important conceptually, just as a way to help think about it. Going into home and life, it's been what, four or five plus quarters now of the lines that we've seen in that business. We do see what I call cautiously optimistic signs that we're seeing some improvement in booking, seeing some knock pushouts anymore, more pull-ins, but visibility remains low because people aren't even ordering within lead times, they're ordering on a much shorter basis as they need. I think they're still working through their inventory, they've been rattled, they're uncertain. I do move much further through that cycle of correction, and we're seeing encouraging signs, but not at the level to say we're on the other side of this yet or we're out of the woods. I want that to be clear. That being said, we went through a remarkable journey from demand. One, I think there was a shift from services to goods and then back to services. Demand spiked, people wanted expected demand levels would be continuing in perpetuity, people built inventory, and then there's a whole bunch of trends under there that are difficult to pull out or tease out or parse out. How much is contributing to each, but you have the end market strength, you have the secular positions that are very important. Matter is a lot of strength in there that are prepared remarks. Then we talked about life a few times, that life has been durable throughout this because of that secular strength, but at the same time, the design and momentum we've started sharing with the world on that is really just in its early stages, and that will be impactful as well. I'd say it's shown resilience throughout this because those ramps that are starting, but the real growth there and real impact is yet to come. The last piece is the home piece as an end market, we continue to see solid progress and opportunity there, whether it's trends such as matter, such as Amazon sidewalk, such as just the market finding its footing on the other side of this downturn. What I'm trying to convey is our confidence in that end segment from a growth perspective remains very strong. Our confidence in our position there also remains very strong as we bring in really great momentum around Bluetooth where we're clearly gaining share, and we're going to do the same thing as Wi-Fi, and that will help not only firm or stabilize the home for us, but actually grow the home moving forward. I know that's a lot of work, but those are all some of the moving pieces in there. The punchline is our confidence in the space continues to be strong. We know we're gaining share, and we see opportunities to grow through some of those trends like I mentioned for matter, Bluetooth growth, Wi-Fi growth going forward.
spk11: That's really helpful. I appreciate that, Matt. As my follow-up, I know obviously there's a lot of new design wins. You have some new secular businesses that are ramping. You talked about some of the glucose metering, smart metering, shelf labeling, and then you've got Wi-Fi. I guess the real question that I have here is if you look at some of those newer businesses, any update there, and could these be really material to revenues for calendar 24, especially in light of perhaps the most cyclical business at such a low level?
spk05: Yeah, understood. Quick answer is yes. That is our expectation that we've been unwavering in our view that we're going through a particularly vicious market cycle that has impacted demand, inventory, destocking that's substantial, and we're trying to clear. We're not calling the market bottom here. We're not out of the woods yet. It's clearly the cycles have worked fully through, but we are calling our bottom. The reason we're comfortable doing that is we're not calling the rate necessarily, but we do see the confluence of all those things that the inventory and stocking is going in the right direction. We do see our position in the market is strong, and those designs are starting to ramp. Last earnings call, we called out a few that people were unaware of. We just called out a couple more on this call that people are unaware of, and there's more. These are intended to give some perspective that they're happening. Yes, there's a massive counterbalance with this market cycle, but at some point those two things the ramps are going to continue and only get stronger, and the market will work through its cycle. When those things come together, it looks like we'll be positioned for strong growth when those two happen.
spk21: Great.
spk02: Thank
spk21: you very much.
spk02: Thank you. One moment for our next question. Our next question comes from the line of Kodiakri from the Benchmark Company. Your question please.
spk08: Thank you. I think my question, excuse me, maybe you can talk about just your order linearity throughout the last 90 days. You mentioned that orders are coming in with less than your typical turns request. Can you talk about that pattern of orders and how that gives you visibility to the bottom?
spk05: Sure. I'm not trying to make a wise remark. It's hard for us right now because what is normal has really been disrupted over this entire cycle. I'll start with that. But to answer your question directly, last 90 days what we've seen is a trend in an encouraging direction where they're increasing. Not increasing at the level that we'd like to see, to say this is done, we're on the other side of it, but optimistic that they're going in the right direction, which is always important. The visibility continues to be low because our lead times right now, let's just say about a quarter roughly, a little over a quarter, and most of the behavior is customers, the majority of the day, there's customers ordering well within that. That gives you an indication of what we're seeing. It's also worth pointing out that given where we think we're at in the cycle between, for lack of a better term, the consumer and industrial segments, probably seeing order patterns a little more indicative of consumer and home and life in general being further through the cycle than industrial and commercial. Like I said earlier, we do expect both to grow from Q4 to Q1. Hopefully that helps give some context and perspective. Simple headline, going in the right direction, but still have further to go.
spk08: Excellent. Thank you. Lastly, last quarter you talked pretty optimistically about series three. That has been a little absent this quarter. Can you just give us an update on how that platform has progressed this quarter?
spk05: Yeah, sure. Not absent by design, just in the middle of a lot of work. So a quick way to think about it, series two, we've continued to release products on series two, couldn't be happier with the impact that's had on the market. Design wins, momentum has been excellent. It's been everything you'd want to see, and it's still in a very powerful spot in its life cycle that is going to drive growth for us for a long time. Series three, making progress there on track to what we've said, what we've committed, and the impact that we expect that that's going to have not only on us as a company, but on our industry. And easy way to think about it, series three takes that platform that is so pervasive, which is series two, and gives people the ability to leverage that and push even further on all the dimensions that we are industry leading on, whether it's the wireless performance, whether it's the scalability, flexibility, whether it's the compute that our customers want, including AI, ML, or, you know, as I said, industry leading security, even being quantum ready. So the combination of those things has our customers excited. But what I don't want to do, and why you probably notice it's not the call, we are, you know, that will be, you know, work for us for years to come. And, you know, we're well into it, we're very comfortable where we're at in that cycle, but, you know, we'll be talking about series two for years still, and we'll be talking about series three for years to come. And both will kind of coincide or be parallel to each other for, you know, at least the next five to ten years. So it's important to have that perspective as we talk about both of those. One's not going away, and the other's not replacing it. But very encouraged by series three, where it's at, and the market customer response.
spk20: Great. Thank you,
spk03: guys. Thank you. One moment for our next question. And our next question comes from the line
spk02: of Quinn Bolton from Needham & Company. Your question, please.
spk04: Hey, guys. Thanks for taking my question. I guess I just wanted to, you know, you've talked about starting to see some more encouraging orders in Home and Life, and you've also said it's sort of further through the inventory correction. Just wondering if you could specifically talk more about what you're seeing on the industrial commercial side. You know, if Home and Life is sort of, you know, the same four to five orders in, would you expect industrial commercial to kind of have that same four to five order under pressure before you kind of get back to more normalized run rates?
spk05: Yeah, I understand the question. Quick and honest answer is we don't know for sure. There's, you know, some really interesting behavior out there in the marketplace. For us, we saw industrial enter at the start of a decline much later than consumer. For us, I think it was around Q2, where we really started seeing the signs of softening. What was remarkable for us is usually, and I think, you know, historically, typically, usually, it's much more measured and not as abrupt. But, you know, across thousands of customers, we really did see that segment just really slow down big time, really going from Q3 to Q4, and that was reflected in our guidance. So then the reason I explained that is, yeah, so we're a few quarters into the cycle correction as we see it, but it also hasn't been a typical one in the sense of how severe. So, you know, we're assuming it's going to continue for, you know, the next few quarters. And even that being said, we still see this as our trough or bottom and able to drive sequential growth from here. But I wouldn't call the markets done, and, you know, we believe industrial still has some time to go. But with the caveat, we also haven't seen it go down as abruptly as we did in this current cycle.
spk04: Got it. No, that's helpful. And then just a question on the dis-inventory, you know, it came down to 79 days, obviously down a ton in terms of dollars, given a lower revenue level. Do you guys have a target that you're shooting for, you know, for that DISTI? I mean, I imagine as revenue starts to recover, if you just kind of hold DISTI inventory flat, that the days in DISTI is going to come down still pretty nicely. So just any thoughts you can give us, how we should be thinking about, you know, where you want to try to get DISTI inventory. Thank you.
spk05: Yeah, understood. Yeah, you know, I think, you know, we've said over, you know, the last few quarters, you know, in normal times, you know, whenever those happen, you know, we'd be somewhere in the 60 to 70 day range as a target. It's not an absolute or hard target, but, you know, something in that range. But right now, it's obviously higher than that, but on a much lower revenue level. And as you pointed out, that can spike very quickly as things start to ramp back up. But you have to counterbalance it with the whole industry spooked by inventory right now, right? Everyone's trying to work down the inventory, and that's what you see out there. So distributors are trying to work it down, customers are trying to work it down. So, you know, if we're honest about it, as an industry, we'll probably swing the pendulum a little too far. Maybe this will be one of the times that it doesn't happen, but it's possible that, you know, you'll see those inventory levels go down, and then there'll be, you know, a bounce on the other side that's faster than anticipated, because we take it too far as an industry. We're trying to watch that, we're trying to be responsible, and do our best to manage it. But, you know, the real focus for us in Problem Child is end customer inventory, which is going the right direction, which is encouraging, but not done.
spk02: Thank you. Thank you, one moment for our next question. And our next question comes from the line of Gary Mobley from Wells Fargo Securities. Your question, please. Morning, guys.
spk06: Thanks for taking my question. Matt, you briefly covered this in the last session, and I was hoping that you could share with us more metrics on design wins in retrospect, specifically the 2023, what the growth and lifetime value was for the design wins captured in the period, and as well whether or not there was a particular emphasis on any one wire standard or module generation. I would presume the majority of it is on Series 2. Any color would be helpful. Yeah,
spk05: sure. So, yeah, I think in the prepared remarks and from our side, I think we said, you know, we did deliver to our target, and I'll mention in a second why that's remarkable, and we saw that as a big deal, because, you know, as we entered this year, sorry, as we entered last year, 2023, we knew it would be a great, you know, market environment, but we didn't anticipate it to be as bad as it was, but we set our design win target in a different environment, and usually when you see the market drop like it did and as volatile as it has been, usually you see that convey and impact your design win performance, and the reasons are multiple. Like, think about it in real terms right now. We have customers that are working through inventory, that are trying to work, you know, a lot of customers are doing R&D reductions, so they're impacting schedules and projects that way. All those things come into play, but, you know, with, you know, certainly not happy with our revenue performance in 2023, but the team was able to secure and deliver a design win performance that was on that original plan, which was outstanding, and the reason to be very direct is Series 2, right? We're still not in the Series 3 design win phase yet, you know, there's still a ways away, but in Series 2, as I said earlier, it's knocking it out of the park, and that's the engine that's driving design wins. The easy way to think about it is right now, that drives the growth of our funnel, our opportunity funnel, that drives the design win growth, and that'll be the major driver of revenue growth, and that's why we're so excited about Series 3, because now that we have that position in the market, we can leverage that with software compatibility and portability, because what our customers are starting to realize is investment in Series 2 is also an investment in Series 3, which is awesome, so we're starting to get that critical mass and position with our platform in the industry that will serve us well. In terms of the other questions, it was pretty broad, honestly, in terms of, you know, all our geos saw good progress, all our wireless technology saw good progress, and all our focused and market segments saw good progress as well. You know, if you wanted to call out some, you know, big ones, it would be what you expected, areas where we're just, you know, really seeing great progress and cleaning up, you know, those secular growth areas that we were talking about with Tori earlier, definitely having a big impact, and then, you know, take an area like, we've been consistent in Bluetooth, where, you know, we see strength in all of our wireless areas, but Bluetooth, we've really just seen that often grow from a design perspective, and we see ourselves continuing to take share there, so that's one that, you know, you could probably call out as a standout, and, you know, as we've been saying, I expect, you know, we just released the soft launch in 9.17 for Wi-Fi, you're going to start seeing the same in Wi-Fi as we bring industry-leading capabilities there as well. So those are the drivers, Gary, hopefully that gives you some perspective, but no one thing aside from definitely some strength in Bluetooth, but all the focus areas performed very well, and we hit our mark.
spk06: Thanks, Matt. Your main boundary partner is basically calling for a pretty good rebound year, with some pretty good growth, and I realize a lot of that rebound is at leading edges of lithographies, maybe not where you're at, but to put this in the form of a question, are you potentially going to see maybe higher founder quotes and as well-related some expanding lead times? Could we possibly, you know, see lead times more than 13 weeks at some point in the year?
spk05: Sure, don't understand the question, don't know for sure. I think that we've been very deliberate about our one strategic inventory bill internally, our Dibank, to smooth this out. You know, going into the supply crisis, we were carrying a much lower level, so our intent by having that is to try to smooth the response and not have it be as abrupt and lumpy. You know, and we have a, you know, great relationship with our, all our boundary partners, including our largest, so you know, we feel, you know, just to be very blunt, we were able to navigate the supply crisis with our relationships and partnerships. I definitely believe we'll be able to, you know, navigate the other side of this downturn that we're in, and I think we're much better prepared. We've learned a lot. We're carrying different Dibank. We've learned a lot about forecasting, watching customer inventories, etc. So I think the confluence of all those was positioned as well, and I do believe we're, from a supply perspective, very well positioned to navigate it, all things considered.
spk02: Thank you. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Giovanni Paselli for any further remarks.
spk07: Yeah, thank you, Jonathan, and thank you all for joining us this morning. This concludes today's call.
spk02: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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