Silicon Laboratories, Inc.

Hello, my name is Deedee and I will be your conference operator today. Welcome to the Silicon Labs first quarter fiscal 2025 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1 1 again. Please be advised that today's conference is being recorded. I will now turn the call over to Giovanni Vacelli, Silicon Labs Senior Director of Finance. Giovanni please go ahead.

Thank you Deedee 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 Silicon Labs President and Chief Executive Officer Matt Johnson and Chief Financial Officer Dean Butler. They will discuss our first 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 our website. I'd now like to turn the call over to Silicon Labs Chief Executive Officer Matt Johnson. Matt.

Thanks Giovanni and good morning to everyone. Silicon Labs drove strong first quarter results consistent with our outlook and showing momentum across the business. As we highlighted in our recent analyst day, we are well positioned to outperform the broader semiconductor market. And our Q1 results illustrate that with both sequential and year over year revenue growth in both of our business units. Our home and life business grew mid single digit sequentially nearly doubling year over year as share gains and connected healthcare continued materializing into production ramps. In addition, smart home applications showed signs of strength in the quarter. Our industrial and commercial business continued its recovery growing high single digit sequentially and double digits compared to the same period last year. As design when ramps and smart metering and shipments to electronic shelf labeling customers maintain their momentum. While the overall macroeconomic environment remains uncertain with we expect to outperform the market given our leadership position in high growth markets and a multi year history of share gains. As we look at the current quarter and the balance of the year our conversations with customers and distribution partners indicate that we have no reason to change our forecast due to the dynamics of global trade policy at this point. Our outlook for sequential and year over year growth into Q2 is based on continued linear improvement in our bookings patterns and progress on new program ramps and secular growth areas like connected healthcare, smart home, commercial retail and global metering deployments. Additionally, supply chain diversification is an area we focused on for several years, including as part of the roadmap for our next generation series three platform. Our current footprint is not significantly affected by the shifting geopolitical landscape, although it's too early to quantify the potential indirect impacts of tariffs on global economic demand. We have not yet seen any significant impact on our customers forecasts. Our team is focused on delivering innovative products that reinforce our breadth depth and singular focus on the IoT space. This includes our latest series two device, the BG29 family of Bluetooth low energy SOCs designed to bring industry leading performance, battery life, security and increased memory capacity for the smallest form factor Bluetooth devices. The BG29 family represents a breakthrough in our ability to bring highly differentiated technology to connected healthcare applications, including blood glucose monitors, as well as other wearable health devices. We also introduced our new BG22L and BG24L SOCs optimized for common Bluetooth applications. Notably, these devices bring the most competitive combination of security, processing power and connectivity for high volume, low power applications, including asset tracking and small appliances. The BG24L SOC also supports advanced AI ML acceleration in the latest in Bluetooth channel sounding, ideal for radio congested areas like warehouses, smart cities and residential apartment complexes. Additionally, our recently announced series two multi protocol SOC, the MG26, is now generally available accelerating developers path to designing future proof matter devices and smart home and commercial applications like LED lighting, switches, sensors and locks. The MG26 also sets a new standard for concurrent Bluetooth and BG25L wireless performance alongside best in class security, as well as for machine learning capabilities that enhance performance for critical tasks like predictive maintenance, anomaly, anomaly and keyword detection. As matter continues to pull thread technology into the mainstream, we're seeing our 15.4 design wind momentum accelerate. This reinforces our view that we are well aligned with the increasing matter adoption as both the leader in thread technology and trusted partner internet security providers and ecosystem partners who are building our out matter infrastructure. Finally, at our analyst day, I was pleased to announce that our first series three device, which was sampling last year, is now ramping to production. Series three will continue as broader alpha sampling this year, and we're already seeing strong design wind momentum with the first device, which is a testament to the great execution of the Silicon Labs team. While we believe series three will be even more impactful than our series two over a longer time horizon, as we further expand our addressable market and Wi Fi compute and AI inference, our ability to offer our customers both series two and series three in parallel with code compatibility between the two platforms is a significant competitive differentiator for us. In conclusion, even amid trade uncertainty, we're highly confident in our ability to deliver sequential growth fueled by linear improvements in our order patterns and continued new product ramps across our business units. Looking ahead, we're well positioned to outperform based on our expanding presence in growing markets, differentiated product portfolio and continued share games. Now I'll hand it over to Dean for the financial

update.

Dean.

Thanks, Matt. Good morning to everyone. I will review the financial results for our recently completed quarter, followed by a discussion of our current outlook. Revenue for the March quarter was $178 million, up 7% sequentially and in line with the midpoint of our prior guidance. Year over year, consolidated revenue was up 67%. In our industrial and commercial business, March quarter revenue was $96 million, up 8% sequentially and up 47% from the same period last year. Sequentially, the growth was driven by better than forecasted customer ramps and smart metering and continued electronic shelf label market growth. Home and life, March quarter revenue was $82 million, up 5% sequentially and nearly doubling with a year over year growth rate of 99%. As we anticipated, the sequential increase in home and life was driven by strength in smart home applications and shipments to connected health customers. Sell through at our distribution partners continued to gain momentum with channel inventory decreasing by eight days to end at 48 days, which is down from 56 days in the prior quarter. This marks a new low level of channel inventory and is well below our targeted level of about 70 to 75 days. Distribution made up approximately 66% of our revenue mix for the quarter. March quarter gross margins saw positive improvements as long tail channel sales and industrial applications benefited our mix. Gap gross margin was 55%, non-gap gross margin was 55.4%, which was up from the prior quarter, above the midpoint of our prior guidance and ahead of our forecasted progression. Gap operating expenses were $130 million, which includes share-based compensation of $20 million and intangible asset amortization of $5 million. Non-gap operating expense of $105 million reflects the normal uptick of the company's annual merit cycle and reset of the employee bonus programs. Gap operating loss was $32 million and non-gap operating loss was $7 million. During the quarter, we recorded a gap tax charge of approximately $2 million. Our non-gap tax rate remained 20%. Gap loss per share was $0.94. Non-gap loss of $0.08 per share beat the midpoint of our guidance by $0.01. Turning to the balance sheet. We ended the quarter with $425 million of cash, cash equivalents, and short-term investments. Our days of sales outstanding was approximately 30 days. During the quarter, we further reduced our internal inventory by $22 million, ending the quarter $83 million of FNET inventory, which contributed to our positive operating cash flow of $48 million for the March quarter, despite operating losses. Days of inventory on hand improved to 94 days, another sequential improvement from 125 days at the December quarter end. I want to thank our supply team here at Silicon Labs for having successfully guided our internal inventory balance to our targeted level, and you should now expect to see an uptick in working capital deployment as we maintain these levels to support the ramp of new customer designs throughout 2025. Speaking of supply chains, we have completed a review of our supply chain and find that there is almost no direct impact to us under the current tariff rules as we know them today. Given our wide berth of customers and applications, there are likely to be varying degrees of potential impact to customers. The two outstanding questions are, one, what will the indirect impact and demand be when we are able and when we'll be able to measure that? And two, will the tariff rules change either positively or negatively as we go forward? As it stands today, our order patterns from customer bookings and distribution POS showed sequential improvement in the first quarter and have maintained this trajectory quarter to date into the June quarter, an indication to us that our end markets are progressing in their cyclical recovery. Additionally, our end customer surveys continue to report that excess inventory is not currently a concern. We are encouraged by these positive trends entering Q2, and as such, our confidence in above market growth this year remains intact, anchored by new product ramps rather than on a reliance of robust end market demand. We anticipate revenue in the June quarter to be in the range of $185 million to $200 million, which at the midpoint would imply 32% -over-year growth and an 8% sequential growth. Importantly, we have not witnessed any significant customer pull-ins and have kept our forecasting methodology consistent with prior quarters. We remain confident that Silicon Labs will outperform the broader semiconductor market this year, despite the shifting trade dynamics given our unique new program ramps. With improved mix of industrial applications and channel strength, we expect the gross margin improvements in the June quarter with both gap and non-gap gross margins to be in the range of 55% to 57%. We expect gap operating expenses in the June quarter to be in the range of $129 million to $131 million. We expect non-gap operating expenses to modestly increase in the June quarter, driven by full quarter accounting of payroll-related items including the company's bonus plans and annual merit cycle, resulting in an expected range of $106 million to $108 million. Finally, gap loss per share is expected to be in the range of $0.55 to $0.95 loss on an assumed basic share count of 32.7 million shares. Non-gap earnings per share is expected to be in the range of $0.19 to a loss of $0.01 on an expected diluted share count of 33 million shares. That wraps up our prepared remarks. I'd like to now hand the call back over to the operator to start the Q&A session. Operator?

Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And our first question comes from Christopher Rowland of Susquehanna. Your line is open.

Hey, guys. Thanks for the question, and congrats on the results here. I guess there is obviously some uncertainty in the back half here. You guys seem pretty comfortable around it and the variability there, but how are you thinking about the September quarter after a little bit of June upside here or perhaps just how the second half is shaking up overall?

Yeah, I'll start that, Christopher. So first, you know, we're only guiding the quarter at a time, but I think the pieces that are important to think through, and some of them were covered in the prepared remarks, everything that we look at or see, whether it's customer forecasts, bookings, billings, inventory level at our customers, at our distributors, all these things are behaving very well linearly and as expected. So right now there's not anything out there to indicate that there's a big shift coming, which is important. Now, obviously, we're being hypervigilant, watching all these things all the time, as I think the rest of the industry is. The other thing that's really important as you're thinking through this, as we've said consistently, we're not looking for broad market strength to drive this year for us. We're looking for the performance this year to really come from the design with ramps that we've been talking about, and that's what we're seeing here. So we're encouraged by that, happy to see the ramps. They're not singular. They're broad. And that's really what's driving our growth, not a broad market recovery right now.

Great. Thanks so much, Matt. And then I believe you thought maybe last quarter that Home and Life would outperform INC, but it seems like there was more INC strength than Home and Life. It was kind of flipped. So perhaps you can talk about what was kind of unexpectedly good and bad between the segments and how they shook out.

Yeah, I don't know if there was necessarily unexpected good or bad. A little bit of timing change, maybe between the two of them. I would note that on a -over-year basis, our Home and Life business was almost double, up 99 percent, and the industrial commercial is up 47 percent. I think our expectation is, hey, could INC grow that fast, given sort of the sequential change that it had of about 8, 9 percent in the quarter? The metering business, which we said before, India specifically, that business has been ramping faster than what we've historically seen. And I think we were a little cautious whether that was able to continue and that metering business continues to ramp and actually ramping better than we originally anticipated, Chris.

Thank you very much, Dean. Appreciate it.

Thank you. And our next question comes from Thomas O'Malley of Barclays. Your line is open.

Hey, guys. Thanks for taking my questions. My first one is just on inventory in the channel. So you guys have obviously worked that down pretty significantly. I think you said 48 days of inventory in channel versus a target of 70 days. When you look at your June guidance, what's your target for channel inventory there? Are you going to refill that or take that to new high levels? Like, just given the stronger demand environment, I'm curious what the strategy is for June.

Yeah, Tom, the general expectation for the June quarter, we do not want to end June again at 48 or, heaven forbid, even lower. I think if we look at the way that we're running our forecast, we would expect the channel forecast to come back above 50 days for the quarter, but certainly below 60. So I think low 50 is probably where it will likely stand when we forecast into June. Eventually, we want to drive it back to the target level 70, 75 days. That is a multi-quarter progression. I would not expect to see us fill the channel in the June quarter. Really, we're almost -in-mouth in a lot of these smaller long-tail customers, but you won't see any big step-up progression, at least the way that we see it today,

Tom. Hopeful. And then you guys have talked for a long time now about specific company wins, driving the growth versus broad market recovery. For just context, can you help us understand as a percentage of your revenue today, how much kind of in the March quarter and the June quarter, maybe, if that snapshot is easier, is new product versus stuff that you would deem like broad-based product? And then can you try to walk us through what the pricing difference is between some new products and something that you would sell on a broad-based understand? It needs to be probably loose commentary, but I think that'd be some helpful perspective, just given how focused you are there.

Sure. This is Matt. I'll take a shot at that. I mean, quick answers. Easy way to think of it. We don't break out the total revenue that way, but I can say a majority of the incremental revenue you're seeing is definitely coming from those new ramps. That's a very easy way to think of it. And on pricing, not meaningfully different. In fact, I think you're seeing our gross margins progress each quarter, even with this new ramp growth. So not meaningfully different. And we see a path to being able to drive sequential revenue growth on design-win ramps and sequential gross margin progression as well. So hopefully the sum of those two things gives you the full picture.

Thank you.

And our next question comes from Toris Von Berg of Stiefel. Your line is open.

Yes, thank you, and congrats on the results. So Matt, I think in the past we've talked about, you know, especially three new segments, potentially each one representing 10% of revenues this year. I think we're talking about the shelf label glucose meter and smart meter. Are things sort of still tracking towards that number?

Yeah, so big picture, Tori. Those are the three areas we've talked about the most, and we're seeing good progress in all three is the quick answer. And one thing that we covered in our analyst day that I'd also like to reinforce, not backing off of those three areas at all, those are going to be growth engines for us for many, many years to come. And, you know, we also have introduced additional growth engines such as MATTER. We mentioned that Wi-Fi is growing 40% for us, BLE growing 80%. Both of those represent significant share gains. And we're really starting to see AI ML start to increase as well. So quick answer is those areas are going well. And you heard Dean mention, you know, maybe a little faster than expected in areas like metering in India. And we're also seeing additional growth vectors come online as well. So the combination, you know, is what's giving us that confidence to say we see a path to outperform the market and drive this growth independent of how this all plays out with tariffs.

And, Tori, let me just give you one quick modification on a quantified number. You said 10% across all three. We had previously said the blood glucose is expected to be a 10% application. We had not quantified the other two, just so you have the right data point. So 10% for one of them, not all three combined.

Got it. No, that's fair. And my follow up question is on Series 2 and Series 3. Obviously Series 3 is still very, very small. First of all, is Series 2 now more than half of revenues? And how should we think about ASP increases as Series 3 starts to ramp more meaningfully?

Yeah, so we haven't broken out the Series 2 specific, but it's increasingly larger and larger piece of the total revenue. And it's what's driving, you know, the incremental growth you're seeing. All these design-win ramps right now we're talking about are Series 2 ramps, which is worth pointing out. As I mentioned in our analyst day, we have shipped over a billion units in Series 2, lifetime to date. And we've secured or won five or six billion more units that we'll be shipping in the coming years and quarters. So there's still a lot more to come out of Series 2. At the same time, we've already started production shipments on Series 3. And, you know, to answer your question on ASPs and expectations there, content's higher with, you know, increased wireless performance, increased compute, AI, ML, more memory scalability. So I would expect, you know, overall higher ASPs on Series 3 toward. So, you know, the most important thing for people to take away, Series 2 is doing just fantastic in the marketplace and still has a lot to go. Series 3, our goal is to meaningfully outperform Series 2. And we're liking what we're seeing right now. We're already ramping production with a lot of products to follow. So that combination of current gen, next gen, just bringing what it brings, we like our positioning is the best way to say it. Excellent. Thank you for that color.

Thank you.

Our next question comes from Cody Cree of the Benchmark Company. Your line is open.

Thanks, guys, for taking my questions and congrats on the progress. Maybe if you can just give me a bit of a split for your expectations for the June quarter between your home and life and industrial and commercial.

Yeah, Cody, we expect that the mix between those probably be pretty consistent over the last couple of quarters. Last quarter to a first order, it landed industrial commercials about 55% and home and life about 45%. And that's been plus or minus a percent or two for the last sort of three quarters in a row. I would expect that to also be the case as we go into the June quarter. And it's going to depend a little bit as all these new programs ramp, we might be off a point here or there, but to a first order, kind of 55, 45.

Excellent. Thanks for the help. And then maybe just back to the tariff situation. Can you just talk about some of those end markets, those end applications that you believe are more exposed to tariffs than others? I have a hard time thinking through your end application mix and finding a lot that have tariff sensitivity, but maybe I'm just missing something.

Yeah, I think, well, I think the quick and honest answer is it's difficult to answer because we really cover so much in terms of GEOs and customers, applications, markets, etc. So extremely broad across tens of thousands, as we've said before, but maybe a way to abstract it up. And Dean just talked about it. We do have an industrial consumer split of around 45, 55, with industrial being the larger piece. So that's one way to think about it. A big picture. We haven't found any one of our end markets or major markets that's uniquely susceptible or exposed to this, at least as they are presented and out there so far. But obviously, we'll keep watching that closely. It's dynamic.

All right. Thanks, guys. Thank you.

Our next question comes from Quinn Bolton of Needham and Company. Your line is open.

Again, let me offer my congratulations on the nice results. I wanted to follow up on the inventory question, Dean. You know, it looks like you're going to modestly increase channel inventory in the June quarter. You said it would take several quarters to get back to the 70, 75 day target. Is that something you would anticipate getting back to, say, by the end of the calendar year? Is that a good time frame for us to be thinking about when you would normalize or look to normalize channel inventory?

I think that's without a stake in the ground, you know, directionally right. I mean, I think the problem that we face, Quinn, is as POS continues to grow as the channel outflow, which is a sale to all the sort of long tail end customers, we're sort of chasing a catch up, right? So as outflow increases, inflow sort of needs to increase in addition to that. And I think we are likely to pipeline material in there to slowly grow it over the next few quarters. Is it get to 70 by the end of the calendar year? You know, maybe it could take a quarter or two longer than that. Just depends on how the POS side of that equation is going. If that makes sense, Quinn.

Yeah, it sounds like it takes some time to stage the inventory on the way in. And if POS is better or worse than expected, that obviously affects inventory. So, yeah, I think it makes sense. And then I guess, Matt and Dean, just a question. There continues to be sort of some chatter out there sort of bottom of the cycle that pricing continues to be pretty aggressive. You guys are showing nice margin expansion. So it doesn't look like you're seeing any adverse effects from pricing. But just wondering if you could talk about what you're seeing in pricing on a like for like basis. I know the mix shift to Series 2 and Series 3 is a tailwind. But are you seeing fabbed competitors in particular get more aggressive with pricing sort of as we're near or at the bottom of the cycle?

Yeah, I guess it felt, you know, the quick answer on pricing is, you know, nothing has really changed. It's been consistent with what we've been seeing for a while now. Where a lot of companies would like to have more revenue and they're trying to use pricing to get more revenue. I haven't seen that meaningfully move the needle at all in terms of share shifts or anything out there in our space. You know, we obviously need to be competitive on pricing, but we thrive relative to our competition on differentiation, bringing features, performance capabilities that no one else has. And that's how we have a premium gross margin versus anyone we compete against. And that's how we've been able to do, I think, exactly what we said we'd do, which has been incrementally start working back on gross margin coming through the cycle. So quick answer is no meaningful change. I think the market's behaving as the market behaves and no change in what we've been saying or our expectations. Got it. Thank you.

Thank you.

Our next question comes from Joe Moore of Morgan Stanley. Your line is open.

Great. Thank you. You sort of talked about customers. You haven't seen any evidence of pull ins. It seems like inventories are still under control. Can you talk about what those conversations are like? Because I just imagine, you know, we've seen two years of inventory leaning out and now we're dealing with on again, off again tariffs all over the world. It seems like if I were running a customer's business, I would want to hold more inventory. I would want to build ahead of some of that. So you can just give us some sense of what the interaction with customers is like during all of this.

Yeah, Joe, this is Matt. I think the quick answer is and I'm not being wise about this, but, you know, fortunately, just having been through this inventory cycle, you know, those numbers are all fresh. And we've been, you know, taking the inventory assessment around customers all along. We had to stop that. So, you know, this has just been a continuation of coming out the other side of the inventory correction cycle. And I think the fast way to answer what you're asking, no meaningful changes and customer inventory, no one trying to build positions, that type of thing. But what we do see is a lot of people saying the same thing, wondering what the trade policies will do over time. What will stick? What will go away? What the implications will be over time? And the honest answer is no one knows. So, you know, I think uncertainty is the easy way to define it. So what that uncertainty hasn't done is driven behavior around inventory. And we're watching that super close.

That's very helpful. Thank you. And then when I follow up at the analyst that you had talked about sources of inorganic growth that you would be willing to think about larger M&A, things like that. How do you see that in the current environment? Are those deals, you know, more difficult to do in this kind of global tension or just how are you thinking about that?

Yeah, no, no change in our strategic desire there or direction. I think the quick answer is, you know, right now there's just a lot of uncertainty around trade and where this will land and how it will play out. So I haven't seen any meaningful changes as a result of that. And I think it's probably too soon to say. Thank you.

Thank you. I will now hand the call back to Giovanni Pacelli.

Thank you, Didi. And thank you all for joining this morning and your interest in the company. Before concluding today's call, I would like to announce our upcoming participation in JP Morgan's 53rd annual Global Technology, Media and Communications Conference in Boston tomorrow, May 14. We'll also be participating in Steeples Cross-Sector Conference in Boston on June 4 and Baird's Global Technology Conference on June 5 in New York City. Thanks again. And this concludes today's call.

This concludes today's conference call. Thank you for participating and you may now disconnect.