SiTime Corporation (NASDAQ:SITM) Q1 2024 Earnings Call Transcript

SiTime Corporation (NASDAQ:SITM) Q1 2024 Earnings Call Transcript May 8, 2024

SiTime Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you standing by. Welcome to SiTime’s First Quarter Earnings Call and Webcast. 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] Please be advised today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Brett Perry with Shelton Group Investor Relations. Brett, please go ahead.

Brett Perry: Thank you, Kevin. Good afternoon, and welcome to SiTime’s first quarter 2024 financial results conference call. Joining us on today’s call from SiTime are Rajesh Vashist, Chief Executive Officer; and Beth Howe, Chief Financial Officer. Before we begin, I’d like to point out that during the course of this call, the company may make forward-looking statements regarding expected future results, including financial position, strategy and plans, future operations, the timing market and other areas of discussion. It’s not possible for the company’s management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. Neither the company, nor any person assumes responsibility for the accuracy and completeness of forward-looking statements. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform statements to actual results or to changes in the company’s expectations. For more detailed information on risks associated with the business, we refer you to the risk factors described in the 10-K filed on February 26, 2024, as well as the company’s subsequent filings with the SEC.

During the call, we’ll refer to certain non-GAAP financial measures, which are considered to be an important measure of company performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with U.S. GAAP. The GAAP to non-GAAP reconciliation includes stock-based compensation as well as acquisition related items related to amortization of intangible assets, one-time acquisition related charges and expenses or income related to changes in the estimated fair value measurement of acquisition consideration payable and sales based earnout liabilities. Please refer to the company’s press release issued today for a detailed reconciliation between GAAP and non-GAAP financial results.

With that, it’s now my pleasure to turn the call over to SiTime’s CEO, Rajesh. Please go ahead.

Rajesh Vashist: Thank you, Brett. Good afternoon, all. I’d like to welcome new as well as existing investors to our first quarter 2024 earnings call. For those of you that are not as familiar with SiTime, we are the leader in a dynamic new semiconductor category called precision timing. In electronics, timing is ubiquitous and ensures reliable functioning. SiTime precision timing solutions serve the needs of AI, data center, automated driving, IoT and 5G. We are in the early days of transforming the $10 billion timing market. On our Q1 results, those were at the high end of our outlook. Revenue for the quarter was $33 million and non-GAAP gross margins were 57.9%. In the past few months, we’ve continued to see a downward trend in customer inventories as expected, which has resulted in a pickup in order activity.

In our last earnings call, SiTime forecast sequential growth throughout this year in Q2, Q3 and Q4 2024 trending back to a target growth rate. Now we reiterate that growth. We continue to see positive evidence of this. One of SiTime’s strengths comes from the diversity of end markets, customers, geographies and products. This strength shows in 2024, where every end market is expected to grow over the previous year. I will shortly provide more color on three noteworthy markets, the comms enterprise data center or CED and automotive and industrial. We’ve always stated that one of the best use cases of precision timing is in the CED market because of its high growth, high ASPs and high gross margins with enduring revenue. At CED customers worldwide, we see diverse applications using a broad product line, which I am going to talk about now.

In North America, customers are developing enterprise AI systems and all aspects of data center network infrastructure such as switches, SmartNIC, optical modules and active electrical and optical cables. We’re providing key OEMs and CSPs or cloud service providers with complete timing solutions, both clocks and oscillators for many different use cases. Our products uniquely reliably deliver high performance in the presence of common system stressors such as high and rapidly changing temperatures, vibration and other kinds of system noise. As our data center customers push harder to increase their performance, they are looking to precision timing. SiTime is working closely with these customers to deliver optimized timing solutions and we expect this trend to grow over time.

In Taiwan and China, we are engaged with many of the key ODMs and OEMs that develop optical modules and servers for CSPs and OEMs around the world. We are in a good position to benefit as 800G optical modules, displace 400G and become mainstream in the next two years. We’re also beginning to win the next generation of 1.2 terabit and 1.6 terabit module designs that will ramp into production in the next year. In Europe, our focus in the CED market is on telecom applications, while 5G infrastructure deployment has slowed in the past few years, we expect that the next generation of 5G advanced equipment, which includes features for high performance and efficiency and lower power will start ramping in 2025. We are engaged with key OEMs that will provide 5G advanced equipment such as remote radio units, distributed units and centralized units.

We also believe that, our newest oscillators such as the Epoch OCXO, Elite RF and EliteX, Super-TCXOs deliver exceptional performance in these applications. Our continued success in our core CED market is especially hardening, as it validates the strategy that we presented at our IPO. At that time, we said we would expand our serviceable market or SAM with breadth in our product portfolio and we accomplished this. We introduced 17 compelling new oscillators and clocks for this market. The recent introduction of our Chorus clock generator for AI data centers adds to the clock products that we acquired from Aura, all of which are complementary to our oscillator portfolio. The integration of Aura products is progressing well and by the end of 2024, we will have added 40 new clocks, further expanding our portfolio in this market.

As our most innovative customers seek out our most innovative solutions, our customer connections are strengthening and our business is growing. While it will take time to generate meaningful revenue from the clock products, we’re happy with the progress to date, as it validates our strategy of offering a full product portfolio with one-stop shop for the precision timing needs. With all this, we believe we are in great position in the comms enterprise data center market. Another market where we expect to see growth in 2024 is automotive. While there is current uncertainty in the growth of EVs, our presence in a variety of automotive applications, particularly in ADAS electronics should help us to grow in 2024. Our products are used in sensing, communications and computing in automotive electronics and the growth of electronics in all cars, not just EVs is a multi-year trend, which bodes well for our future automotive revenue.

Over time, our focus will be on developing new products that dramatically improve the performance and reliability of automotive electronics. In this market, we are beginning to see some pricing pressure, but expect to offset this with new designs ramping into production in 2024, as well as increasing market share. The industrial market is our most diverse amongst all markets with over a 100 end applications that use our products. While industrial applications are typically lower volume than in consumer, these designs can last as long as 10 years. To give you a sense of the diversity of our business, here are some new use cases in the industrial markets. Seismic sensors for geo exploration of oil, gas and minerals, new gas detection sensors for environmental safety as well as efficient farming equipment, which uses GNSS electronics with centimeter level positioning.

Our products deliver an order of magnitude better performance in these harsh environments in these applications, where they operate and we expect they’ll do naturally well. To summarize, we believe that SiTime strategy is paying off. We will leverage our strengths in end market diversity and product breadth as we return to a target growth rate. I’ll now turn the call over to Beth to discuss our financial results in more detail.

Beth Howe: Thanks, Rajesh, and good afternoon, everyone. Today, I’ll discuss our first quarter results and then provide our outlook for the second quarter of fiscal 2024. Q1 revenue was $33 million, compared with $42.4 million in Q4, down 22% as expected in line with typical seasonality. Drilling into revenue by market, sales into the communications, enterprise and data center market were $9.9 million or 30% of sales. Sales into the mobile, IoT and consumer market were $10.3 million or 31% of sales, with sales to our largest customer totaling $6.3 million or 19% of sales. Sales into the automotive, industrial and aerospace market were $12.9 million or 39% of sales. Non-GAAP gross margins were 57.9%, down 40 basis points sequentially.

The impact of lower volumes was partially offset by favorable mix and cost. Total non-GAAP operating expenses for the quarter were $27.4 million with R&D expense of $16.4 million and SG&A expense of $11 million. Total operating expenses were up sequentially as expected due to first quarter, the full integration of the Aura transaction as well as seasonally higher FICA taxes. We continue to be disciplined in the management of expenses, while investing in our portfolio. The Q1 non-GAAP operating loss was $8.3 million. Interest and other income was $6.3 million and the Q1 non-GAAP net loss was $1.9 million or $0.08 per share. Turning to the balance sheet. Accounts receivable were $16.8 million with DSO of 46 days, which is flat sequentially. Inventory at the end of the quarter was $74.4 million, as we continue to make strategic wafer purchases.

During the quarter, we generated $1.7 million in cash from operations, invested $3 million in capital purchases and ended the quarter with $517 million in cash, cash equivalents and short-term investments. Let me now review our outlook for Q2. As we noted last quarter, we are well positioned for long-term growth and expect to grow sequentially as well as year-over-year for the remainder of 2024. We are taking a prudent approach to managing our cost structure as we absorb the acquisition and prioritize investments to drive long-term growth. With that in mind, we are providing the following outlook for the second quarter. We expect revenue of $40 million to $42 million, an increase of 21% to 27% sequentially. Gross margins to be roughly flat compared with Q1, operating expenses of $27.5 million to $28 million and interest income of at least $5 million.

As a result, we expect non-GAAP earnings per share to be in the range of $0.01 to $0.05 per share. In closing, we are executing on our strategy. We have a unique technology that addresses large and growing markets and our design wins reinforce the strength of our value proposition with customers. All-in-all, we are excited about our market position and believe our growth story is firmly intact. With that, I’d like to hand the call back to the operator for questions-and-answers.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Tore Svanberg with Stifel. Your line is open.

Tore Svanberg: Thank you and congratulations on the continuous recovery here. It sounds like pretty strong growth for Q2. Rajesh, I was hoping you can maybe talk a little bit about where the growth is coming from, especially within your three product segments?

Rajesh Vashist: It’s from all of them, Tore. That’s the nice part about it. Clearly, CED is going to do very well and so is automotive and industrial, but equally consumer is going to grow, although not as much, it is going to continue to grow as well. I think we’re going to see growth in all three segments.

Tore Svanberg: You mentioned that customers continue to make progress on reducing inventory levels. Is it safe to say that process is almost complete? Or are you still seeing certain customers still digesting inventories?

Beth Howe: Hey, Tore. This is Beth. So we have seen a lot of progress in the inventory digestion. As we said last quarter, I think it’ll be pretty much behind us by the end of this quarter. A lot of customers are back to normal buying patterns and the remainder I think will be pretty much behind us this quarter.

Operator: Our next question comes from Quinn Bolton with Needham & Company. Your line is open.

Quinn Bolton: Let me offer my congratulations on the strong outlook. I guess, Beth to follow-up on your last answer there, if you think most customers sort of through the inventory correction by the end of the second quarter here, do you think, we’re sort of getting back to consumption levels? Should we be thinking about the 40% to 42% level as getting close to consumption? Or do you think the 40% to 42% is still well below consumption levels? And then second question just as you’re looking to the second half of the year, in most years, SiTime sees pretty healthy seasonality in the business second half over first half. Wondering, if you envision normal seasonal second half strength this year, especially as customers emerge from the inventory correction?

Beth Howe: So let me address those questions. As we think about our sell through versus our sell in, I think, we’re seeing good return to more normalized patterns, if you will and being able to see that in the bookings as well. And so, really excited about seeing that return. In terms of seasonality, I think we do expect seasonally stronger second half than first half, though I think we’ve also seen some pick-up here in Q2 that Q2 is probably a little bit stronger than we would have thought 90 days ago, but we do still expect second half to be stronger than first half.

Operator: Our next question comes from Suji Desilva with Roth MKM. Your line is open.

Suji Desilva: Congrats on the recovery here. Longer-term question perhaps to start, as you grow back to kind of 30% year-over-year and over the next several quarters, do you think this time that the consumer mix will still kind of be the larger element as you grow? It was 50%, 60% before. I’m assuming exactly that high but or will it be more of a blended mix as you kind of grow into a larger revenue this time around with all the design win pipeline you have?

Rajesh Vashist: Yes. We’ve always maintained that as the new products that we have launched over the last three years, plus the Aura acquisition, most of them go into the communications, enterprise and data center or CED markets. We expect to see continued strong growth in that market. We see that market, that revenue for us getting to be $100 million in the coming years. We also expect continued growth in automotive, which we also think will get to a very high number in coming years. While consumer and industrial continue to grow, while consumer will grow. Most of the products that we launched in the last two years, 80% of those products were intended for industrial, automotive and the CED markets. It’s reasonable to assume that our mix is going to grow as designed significantly into the higher gross margin, higher ASP, much stickier products in the CED, industrial and to some extent in the automotive market.

Suji Desilva: And the, on the data center success you’re having, do you have a sense of what percent of that is coming from AI infrastructure build out, which the hyperscalers are focusing on right now? Do you have a sense of how levered you are to that?

Rajesh Vashist: It’s pretty high. In fact, I would pretty much say, it’s some of the bulk of it given the optical modules, given the NIC card business, given the active cabling and optical cables, I think all of those are going in there. There are switches in there. There are top of the rack switches in there. I think most of it that’s coming is from there worldwide. But I deliberately put in the telecom piece just to say that, I know telecom is a little bit out-of-fashion these days, but the next generation of 5G equipment is happening and SiTime has secured significant design wins. And whenever that comes back, let’s say in the middle of next year, we are going to participate in that too.

Operator: Our next question comes from Chris Caso with Wolfe Research. Your line is open.

Chris Caso: Just a question about the long-term growth rate rejection, and I think you reiterated that kind of 30%. Can you speak about that in the context of this year or next year? Are those kinds of reasonable assumptions from these levels now that the inventory burn is pretty well done that we could start looking at driving expectations of 30% growth from these levels going forward?

Rajesh Vashist: Yes. Even as early as last earnings call in February, I was indicating between 25% and 30% growth for this year. And I continue to see that I might even argue a little bit towards the higher end of that. But it is early days for this year. We’re still in the first week of May, but I continue to see significant potential for SiTime in Q3, Q4, but very clearly in next year 2025, I certainly see 30% inline of sight.