Silicon Laboratories Inc. (NASDAQ:SLAB) Q1 2024 Earnings Call Transcript

Silicon Laboratories Inc. (NASDAQ:SLAB) Q1 2024 Earnings Call Transcript April 24, 2024

Silicon Laboratories Inc. misses on earnings expectations. Reported EPS is $-1.77142 EPS, expectations were $-0.98. SLAB isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Jonathan. I will be your conference operator today. Welcome to Silicon Labs First Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions]. As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.

Giovanni Pacelli: 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 investor.silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs President and Chief Executive Officer, Matt Johnson; and Interim Chief Financial Officer, Mark Mauldin. 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’ll now turn the call over to Silicon Lab’s, Chief Executive Officer, Matt Johnson. Matt?

Matt Johnson: Thanks, Giovanni, and good morning, everyone. Silicon Labs reported solid first quarter results with revenue and EPS exceeding the midpoint of our guidance. We are confident that Q4 represented the trough for us and we expect revenue growth to accelerate from Q1 into Q2 Based on a sampling of our top customers, we believe they have made further progress in reducing excess inventory in the quarter. We also continue to see steady improvements on our weekly bookings levels, although still below the level we’d like to see. On a unit basis, channel inventory remains very well decreasing again in the quarter. We are working closely with our distribution partners and key customers to manage lead times and increase order visibility as the demand environment begins to improve. I’m also incredibly excited about the senior leadership announcements that I will cover later in the call. Now I’ll hand it over to Mark for the financial update. Mark?

Mark Mauldin: Thanks, Matt, and good morning, everyone. First quarter revenue came in at $106 million, above the midpoint of our guidance and up 23% sequentially. Revenue was up for both business units. The industrial and commercial business ended at $65 million, up 9% sequentially with the broad Industrial category experiencing the largest increase in the quarter. Home & Life revenue was up 51% sequentially, at $41 million, driven by a rebound at smart home, particularly in home security applications. We are well positioned in the Home & Life markets as market initiatives such as matter-enabled ecosystems and Connected Health getting further traction. Overall, ASPs were about flat compared to the prior quarter and unit volume was up.

Our regional revenue mix was also consistent in the quarter with EMEA and the Americas slightly outpacing APAC. Distribution revenue mix was about 66% for the first quarter, up from last quarter, but still below our typical levels. Channel inventory decreased to 61 days. On a unit basis, channel inventory was down almost 25% sequentially and 50% year-over-year. As Matt mentioned, we’re working closely with our distribution partners and customers to bring order patterns within our standard lead times to improve demand visibility as the market recovers. Non-GAAP gross margin ended in line with guidance at 52%. As expected, customer mix was the largest headwind on our gross margin along with the impacts of fixed costs over the lower revenue levels.

We expect gross margin to increase toward targeted model as revenue further recovers. Non-GAAP operating expenses of $94 million were better than expected largely due to slower than expected hiring and discretionary spending. Non-GAAP operating loss was $39 million and our non-GAAP effective tax rate was 20%. Non-GAAP loss of $0.92 was at the top end of our guidance range, mainly driven by the OpEx favorability. On a GAAP basis, gross margin ended at 52%. GAAP operating expenses were $114 million which was also better than expected. GAAP operating loss was $59 million for the first quarter. GAAP loss per share was $1.77 for the first quarter, above the top end of our guide. Turning to the balance sheet, we ended the year with cash and investments of $333 million.

We repaid the $45 million outstanding on our revolving credit facility in the quarter and have no outstanding debt. Our DSO was approximately 30 days and we continue to see no customer credit concerns. Our internal inventory was up slightly in Q1 at $198 million. Inventory turns ended at one time and we expect this represents our peak inventory level for the year. Importantly, the die bank inventory we strategically built over the past year positions us to address the channel efficiently as in-market demand improves. Before returning the call to Matt, I will cover guidance for the second quarter. We expect revenue for the second quarter to be in the range of $135 to $145 million. We anticipate both business units to be up sequentially. We expect non-GAAP gross margin in the second quarter to be approximately 53%.

The gross margin for this quarter continues to reflect a temporary customer mix shift away from the channel and toward direct customers as distribution partners worked to further reduce their inventory. We expect non-GAAP operating expenses in the second quarter to be approximately $102 million and the non-GAAP effective tax rate to be approximately 20%. Our non-GAAP loss per share for Q2 is expected to be in the range of $0.58 to $0.70. On a GAAP basis, we expect gross margins to be 53%. We expect GAAP operating expenses to be approximately $125 million and GAAP loss per share to be between $1.45 to $1.61. I will now turn the call back over to Matt. Matt?

Matt Johnson: Thanks, Mark. We continue to gain share in both Home & Life and Industrial & Commercial end-markets with their industry-leading power efficiency, security and RF performance, as well as our leadership position in matter. Last quarter in our Home business, we highlighted the release of Matter 1.2 by the CSA, which expands matter’s reach to include smart TVs, white goods and gateways. Matter 1.2 also extends Wi-Fi connectivity to a wider range of home devices such as appliances, home security systems and automation products, including battery-powered cameras, switches, sensors and window shades. As consumer interest in interoperability intensifies, more customers are embracing matter-enabled ecosystems. Silicon Labs remains a trusted partner in this rapidly expanding market.

Our commitment to building matter infrastructure has well-positioned both Silicon Labs and Thread Technology moving forward. As an example of this, we are actively working with 24 of the 26 major ISPs in North America and Europe that are integrating matter into their solutions. Earlier this month at Embedded World, we can continue to build out our Series 2 platform with the unveiling of the xG26, our most advanced multi-protocol wireless device family yet, engineered to future -proof IoT technology. This new family ensures that manufacturers’ current designs can keep pace for the escalating demands of sophisticated IoT applications. The xG26 enhances performance with advanced compute capability, embedded AI/ML acceleration for energy-efficient battery-powered devices, top tier security, 2.4 gigahertz wireless connectivity, twice the Flash and ram and support for wireless protocols such as matter, Bluetooth Low Energy and multi-protocol and threats.

Additionally, with Amazon Sidewalk moving through its initial rollout phases and are driving partnerships with manufacturers to facilitate their wireless development within this growing ecosystem. Though Amazon Sidewalk is still in the very early stages, we secured a design win in the quarter with one of North America’s leading hot water heater manufacturers providing a Wi-Fi dual band solution with matter and Amazon Sidewalk capabilities. This win was directly related to our being a key Amazon partner in the development and rollout of Sidewalk enabling us to leverage our technology leadership as the Sidewalk ecosystem continues expanding. In our Life business, we are excited to see further global expansion of our continuous Glucose Monitoring Solution.

As an example, we have secured additional APAC design wins in the quarter for more than a dozen total design wins n the region, a few of which are starting to ramp in the quarter. In the Industrial end-markets, the integration of machine-learning at the Edge is proving essential. As a reminder, we have multiple wireless SoCs in production with industry-leading integrated AI/ML capability. Our customers are enhancing the efficiency of connected equipment with wireless connectivity for applications such as predictive maintenance. We recently secured a design win with a leading connected equipment provider in the construction industry to facilitate real-time data analysis and location tracking. Similarly, AI/ML at the Edge is boosting efficiency in HVAC systems in smart buildings using motion sensing, while also enhancing vehicle safety with reverse [Ph] seat monitoring technologies.

In the Smart Access sector, Chamberlain Group, a global leader in intelligent access has chosen our xG28 device for their 11 million plus myQ users because of its superior compute power and radio performance that delivers a more reliable user experience. Our position at smart cities remains strong, particularly in the metering sector where wireless communication is making electric grids more efficient and sustainable. We are actively involved in developing solutions for low disaggregation or non-intrusive load monitoring that are maintaining our leadership in smart metering across various regions. In the Commercial domain, we are tapping into the retail automation trends such as electronic shelf labeling where emerging technologies like shelf cameras and standalone sensors.

While the overall market penetration for electronic shelf labeling is still nascent, our multi-protocol solutions and design wins in this area reinforce our belief that this market will be an additional growth engine for us driven by expanding deployments globally. Looking ahead, we’re strategically allocating resources through initiatives that bolster our long-term growth and scalability. The roll out of Series 2 continues to progress well. Like the xG26 that we just announced and is contributing significantly to our current and future growth. At the same time, the development of Series 3 continues in parallel helping position us for an even stronger future. We will begin sampling Series 3 to Alpha customers this quarter. Series 3 introduces industry-leading wireless performance, compute and scalability on a multi-radio platform in a unified code base that will support over 30 new wireless SoCs. I want to thank Mark for stepping in as Interim CFO during the CFO transition.

And I look forward to Dean Butler joining us on May 15th. We also announced two additional leadership appointments. Bob Conrad, a long-time industry veteran is stepping down from our Board of Directors to become our SVP of Worldwide Operations. Bob’s expertise and rapidly scaling semiconductor businesses will be critical as we position to scale even faster. Additionally, Radhika Chennakeshavula joins Silicon Labs as our new Chief Information Officer. Radhika will oversee IT operations, Enterprise Applications, Data Analytics and Critical Digital Transformation initiatives. I would also like to thank Sandeep Kumar for his role in leading our worldwide operations team for the last 18 years. Sandeep has been pivotal in leading Silicon Labs operational strategies including during the recent supply chain crisis.

I would also like to express my gratitude to Karuna Annavajjala for her leadership in our IT organization over the last four years. Looking ahead, we remain laser-focused on executing on our new Series 2 and Series 3 products, driving design wins and continuing to accelerate our position. As excess inventory to our customers corrects, our design wins ramp and end-market demand improves, we’re well-positioned to drive revenue and profit growth throughout 2024 and beyond. I’ll now hand it back over to Giovanni for Q&A.

Giovanni Pacelli : Thanks, Matt. Before we open the call for Q&A, I’d like to announce our participation in JP Morgan’s Global TMT Conference in Boston on May 21st and Stifel’s 2024 Cross-Sector Insight Conference in Boston in early June. We’ll now open up the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question and one follow-up. Jonathan?

See also Jim Cramer’s New Picks: 10 Stocks to Buy and Bill Miller’s Latest 13 Stock Picks.

Q&A Session

Operator: Certainly. One moment for our first question. And our first question comes from the line of Matt Ramsey from TD Cowen. Your question please.

Matt Ramsey: Yes. Thank you very much. Good morning everybody. Matt, I wanted to – I mean, we are obviously going through the bottoming and now they’re at the beginning of the recovery and you made some – I think you guys made some comments in the script about maybe a little bit more mix toward direct sales versus the channel for this interim period and I guess that makes sense as to customers that are supported by the channel drain their own inventory. So I guess my question is, in the prior few months, how much more visibility have you gotten to customer level inventories that are supported by the channel? And if you could give any anecdote as to what you are hearing by – either by end-market or by geo as to how that direct sort of the customer inventory behind the channel is trending? That’d be really helpful. Thanks.

Matt Johnson : Yes, sure. Well, thanks, Matt. So quick answer is, end-customer inventory and channel distribution inventory are both moving in the right direction and down, is the fastest way to say it. In terms of end-customer inventory, our approach has been to sample our top customers and pretty extensively now given what we’ve been through and we see a consistent trend there is the fastest way I can say that from December to January, January to now, we’ve seen both the average of excess inventory working down, as well as account of customers who have excess inventory. So, it is not fully corrected and easy way to say that is, this revenue level that we’re guiding is not indicative of our consumption. But we continue to see it moving in a good direction and we like the progress for seeing and the same for this the inventory, I think this the inventory is, I don’t think we want that to go lower now.

I’d say that’s fully corrected. But the end-customer is moving in the right direction, but not there yet.

Matt Ramsey: Got it. No, that’s – a couple of things to follow up there, Matt. I think the first one being, do you feel like coming out of this, you’ll have built many deeper relationships, more visibility of relationships that you might have – the company might have over the next two, three, four years whatever, more visibility into customer level inventory levels behind the channel. I don’t know. I am just trying to figure out if this whole thing you guys going through with your partners has led to any permanent difference in visibility? And I guess my last – the last question is completely unrelated. You mentioned you might sample Series 3 to a few lead customers in the quarter. Any thoughts or anecdotes about which industries or what type of applications or anything like that that we could get some insights to, because that’s a pretty big markdown? Thanks.

Matt Johnson : Yeah, so the first piece, Matt, quick answer is, absolutely yes on stronger relationships and more visibility. Easy way to say it is, going through these things, it’s been a tough cycle and that builds the relationship. I guess, it can also work the other way, but what we’ve seen whether it’s a supply chain crisis or if it’s inventory crisis, relationships got stronger. And those partnerships got stronger. So that – I can say that with high confidence. And I also can say with high confidence our approach and visibility to understanding end-customer inventory has improved. As you all know, there’s not an easy approach there to report like we can do with obviously internal or distribution inventory. But we’ve learned a lot through this cycle and we’ve gotten, I think, much better at being able to see it, understand it and navigate it.

So, quick answer there is, yes. Series 3, we’re not sharing those customers. We are sampling, which is exciting. It’s a big milestone. I would encourage people to remember that Series 2 is still relatively early days in its cycle and ramp. And at the same time we’re already introducing our next generation. So, it’s going to be just to be blunt, Matt, it’s going to be a difficult message for our investors that both are doing really well and both are progressing. And that the game is long for both. But at the end of the day, the combination positions us extremely well and we’re happy with the progress on both.

Matt Ramsey: Thanks very much for the time, Matt. Appreciate it.

Matt Johnson : Yes.

Operator: 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.

Gary Mobley: Good morning guys. Thanks so much for taking my questions. Matt, you’re on record in a public venue back in March was saying that you think your end-customer consumption level, I think in the – related to the first quarter was about $160 million. So perhaps you undershipped the channel by $50 million. It hopefully that $160 million end-consumption level is a target that’s moving up into the right. And so my question is, based on the June quarter revenue guide of about $140 million, by how much are you undershipping end-customer demand in the current period?

Matt Johnson : Yeah, thanks, thanks Gary for reminding me of the record. So the quick answer is, what we said was, we see consumption at least $160 million as a data point there and we didn’t say it was at $160 million. We said it was at least at that number. So, that was the data point we provided. So, easy way to think about it on – as I said earlier to the previous question, we are seeing revenue at $140 million is not indicative of consumption. And as we said in that conference, we think it’s higher or at least $160 million as an easy way to think of it. So, I don’t think you can get to the math based on that of exactly what consumption is and exactly how much end-customer inventory remains. But easy way to say it, that is going in the right direction. End-inventory is going down, revenue is going up, getting closer to consumption, but still a ways to go.