Silicon Laboratories Inc. (NASDAQ:SLAB) Q4 2023 Earnings Call Transcript

Silicon Laboratories Inc. (NASDAQ:SLAB) Q4 2023 Earnings Call Transcript February 7, 2024

Silicon Laboratories Inc. misses on earnings expectations. Reported EPS is $-2.19125 EPS, expectations were $-1.44. Silicon Laboratories Inc. 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, and I will be your conference operator today. Welcome to Silicon Labs Fourth Quarter Fiscal 2023 Earnings Call. [Operator Instructions]. As a reminder, today’s program is 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 4 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 fourth quarter financial performance and reviewing 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 Silicon Labs 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. The Silicon 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 destocking to continue in Q1. On a unit basis, Disty inventory is now at lower levels than during the supply prices. 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 start to normalize, and we begin to see the further benefits of design wins ramping production. We’ve also seen slight improvements in our weekly bookings activity, but the management ability 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 span a broad range of technologies, applications and customers, and we are expecting delivered strong growth in 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 he joined GlobalFoundries. In addition, I would like to thank Mark Mauldin 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 update. Mark?

Mark Mauldin : Thanks, Matt, and good morning, everyone. Fourth quarter revenue was $87 million, above the midpoint of our guidance and down 66% year-on-year. I&C is 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 3 product groups in I&C declined in the fourth quarter with a broad industrial category experiencing the largest decline. However, for the full year, the smart cities 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 at smart home 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 a units basis, this fee inventory was down to its most level since the divestiture. The decrease in test mix in the quarter was due to a temporary shift toward direct customers as channel partners work through their inventory.

This mix shift also contributed to lower ASPs in the quarter. Our top 10 end customers were about 42% of revenue for the quarter and increased from historical trends driven by the lower revenue level and the mix 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 like-for-like basis in the next quarter. Non-GAAP operating expenses of $91 million were better than expected largely due to the earlier pooling 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 OpEx 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 include 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 days sales outstanding reverted back to 30 days reflecting strong collections in the quarter and no known bad debts 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 at about 1x. As a reminder, we hold a significant portion of our inventory in die bank, which provides flexibility as to its ultimate end-use application and customers and hope 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 or $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 was 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 10-K in a timely manner. Before returning the call to Matt, I will cover guidance for the first quarter. We expect revenue for the first quarter to be in the range of $100 million 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%, and lower gross margin for this quarter continues to reflect the fixed cost absorption with lower revenue levels. We expect non-GAAP operating expenses in the first quarter to be approximately $96 million. We expect the non-GAAP effective 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 — we expect GAAP operating expenses to be approximately $18 million, 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.

Matt Johnson : Thanks, Mark. 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 array of devices, including household appliances, air conditioning and smoke alarms. At CES this year, we are 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 in advanced IoT development more accessible to all.

We are partnering to integrate Arduino’s first-ever matter software libraries with Silicon Labs hardware so developers get our leading security, energy efficiency and processing power for matter in an intuitive ease use development environment. Additionally, Samsung recently announced matter label connectivity in the smart TVs and selected appliances that includes our Silicon and are currently hitting the market. We are excited to work with Samsung on their SmartLink platform as they expand their matter [indiscernible] ecosystem. Wi-Fi is in an increasing 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 ultra-low power Wi-Fi solution to 91%, which was selected as non-RE in the embedded category of the CES Innovation Awards.

The 917 has the lowest power consumption of any competing Wi-Fi 6 products on the market, enabling meaningfully longer battery lives 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 Life segment, we are securing new wins in Connected Health and APAC where we are engaged in more than a dozen customers for continuous glucose monitors. 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 environment continue to digitize.

For example, in electronic shelf labeling, we ramp new designs with SES-Imagotag, [indiscernible] Group. In addition, we have also secured new design wins in the ESL space for shelf labels, cameras and sensors with our moves solutions. The smart cities also had a record year, driven largely by meter However, we’re also gaining share in the solar market with integrated solutions for both wireless activity and compute and solar panels, which helped to optimize energy production and increase first. 2023 was a difficult year characterized by weak demand and high inventory levels. While we’re seeing things moving in the right direction, the market is still working through its correction. As we stated, we believe Q4 represents our volume, 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. prudently managing our expenses and advancing industry-leading technology solutions for the IoT. Despite the near-term challenges, the long-term growth trajectory of our end markets and within those markets remains unchanged. As inventory normalizes, demand improves and design wins ramp into production, we are well positioned to return to growth. I’ll now hand it back over to Giovanni for Q&A.

Giovanni Pacelli : Before we open the call for Q&A, I’d like to announce our participation in Morgan Stanley’s 2024 TMT Conference in San Francisco on March 5. [Operator Instructions]. Jonathan?

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Q&A Session

Operator: Our first question comes from the line of Matt Ramsay from TD Cowen.

Matt Ramsay : 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. I — 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 still having escalations and 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 overall 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 market.

Matt Johnson: Sure. I understand, I think. Let’s see, I’m going to start just working through internal inventory, obviously, well understood by design, we’ve been building by 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 bank, 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 million to $87 million in Q4, the actual material in the channel came down significantly. We commented is actually lower than it was in the supply chain prices.

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. And 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 already mentioned. So if you were to say, 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. And 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 occurs. We expect that trend to continue through and it also speaks to, as we’ve been saying, are, for lack of minute term, in consumption of our product 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 not going to put specific numbers out there that apply precision that doesn’t exist, but we definitely see it moving in the right direction, which is encouraging.

Matt Ramsay : No, 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 2 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.

Matt Johnson: Yes, sure. I’ll work from the detail and then up to the bigger picture answer that. So first thing is the — what I call the low level gross margin from the beginning, even as the guide is really driven by that [indiscernible] 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 a normal operating level, the customers come in lumpy, right? And that resulted in an unfavorable mix that go where we’re at. we do not expect that to be a permanent trend. So — but we should be clear, in Q1, we’ll still have those challenges, 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 picture question, I think that’s critical. And we all know this; we should 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 prices, we were over 60 by a meaningful amount, and there was an expectation that could be our new normal, 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 transform. 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 direction cycle, and that’s what we expect to see.

Operator: And our next question comes from the line of Thomas O’Malley from Barclays.

Thomas O’Malley : I just wanted to first check out in 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 million. And then also, you mentioned in the fourth quarter that units and ASPs were both down as 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?

Matt Johnson: 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 & Life is probably further through its cycle than industrial and commercial. So if I were to buy is, 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. So what we’ve been saying and experiencing seeing is price debate that is very much in line and indicative of this type of environment. No surprises there. It is worth commenting that there is 1 competitor out there who has done things that I would say are not indicative or typical in this environment.

And what I mean by that is setting lower price points and trying to fill fast 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, we’ve seen very expected behavior people trying to drum up business trying to drive — fill their capacity and get demand back up and running. But if we’re just honest about it, the problem isn’t price — the problems, inventory and the market cycle that we’re going through. And no big changes in our outlook or our expectations based on what we’ve seen so far.

Thomas O’Malley : 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 of 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 because 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.

Mark Mauldin: Sure. This is Mark. For the controls issue late in January, we 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 the process and shown it’s effective at least for more than 1 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 and reviews over some of the assumptions that go into the judgmental aspect of the inventory valuation.

Matt Johnson: And just to comment, meaningful majority of our inventories in Di Bank because for people out there just importantly understand while we have a remarkable diversity in our end customers and applications. What we try to do is not have that same diversity in Silicon. So in Silicon we’ll have SoCs that address as much market as possible, and they can be tailored customized to figure in Silicon to address, for a lack of better term, different part members of SKUs and applications to customer needs. And on top of that, there’s Silicon — I’m sorry, software flexibility that is substantial as well. So it’s really an advantage for us to carry a die bank and 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.