SiTime Corporation (NASDAQ:SITM) Q4 2022 Earnings Call Transcript

SiTime Corporation (NASDAQ:SITM) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Good afternoon, and welcome to SiTime’s Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, the conference call is being recorded today, Wednesday, February 1, 2023. I would now like to turn the call over to Brett Perry of Shelton Group Investor Relations. You may begin.

Brett Perry: Good afternoon and welcome to SiTime’s fourth quarter 2022 financial results conference call. On today’s call from SiTime are Rajesh Vashist, Chief Executive Officer and Art Chadwick, Chief Financial Officer. Before we begin, I would 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 is 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 a 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 the forward-looking statements. The company undertakes no obligation to publicly update forward-looking statements for any reason at the date of this call to conform these 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 25, 2022, as well as the company’s subsequent filings with the SEC.

Also, during the course of the call, we’ll refer to certain non-GAAP financial measures, which we consider to be an important measure of company’s 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 only difference between GAAP and non-GAAP results is stock-based compensation expense and related payroll taxes. 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. First, I’d like to welcome you as well as existing investors to SiTime’s Q4 2022 earnings call. SiTime is a leader in a dynamic new product category called Precision Timing. In electronics, timing is ubiquitous and ensures reliable functioning of systems. SiTime created precision timing to service the needs of applications like automated driving, 5G, enterprise and IoT. We are early in a growth as we transform the $10 billion timing market. SiTime has shipped 3 billion precision timing chips to 20,000 customers in 300 applications. We had a solid fourth quarter. Revenue for the quarter was $60.8 million and revenue for ’22 was $283.6 million. This is a 30% growth over the previous year even though the second half of 2022 was challenging.

Non-GAAP income was $14.4 million for the quarter and $82.9 million for the year, which is 29% of revenue. On the product side, SiTime introduced four new products since the last earnings call. Previously, we had introduced four key performance metrics as indicators of future revenue, SAM expansion, design wins, ASPs and single source business. While we don’t expect to do this on an ongoing basis, given the current market conditions, we’re giving further insight into our business by using these metrics this time. In 2021, our SAM was $1 billion. In 2022, we grew it to $2 billion. We’re on track to get to $4 billion by the end of 2024. With a highly differentiated precision timing products, SiTime is creating a market where we continue to expand our advantages.

Since our last earnings call, we introduced four new products and are on track to introduce five more in 2023. Customer activity for these nine new products, which includes architectural discussions and sampling, continues to be robust. Seven of these nine products are in our focus segments, Comms Enterprise, Automotive and Aerospace Defense. Last week, we introduced two new Endura product families that expand our presence in the aerospace defense market in applications such as position, navigation and timing, PNT, tactical communications, network service synchronization and surveillance. Both products deliver up to 10 times better environmental resilience, which is crucial for these applications that operate in harsh environments. Our funnel and design wins continue to grow at a higher rates than in previous quarters.

In Q4 €˜22, our design wins grew 55% over the same period in €˜21. Additionally, 65% of these design wins were in our focus segments of comms enterprise, automotive and aerospace defense. Higher average selling prices or ASPs are an indication of the value that we provide to customers. Our ASPs continue to grow and are expected to be higher in €˜23 than in €˜22. As in the past few years, we are not seeing any meaningful loss of business to competitors even though their availability has increased and lead times have shortened. We attribute this to the highly differentiated nature of our products. The customer trust that SiTime has earned is of tremendous importance to us and a metric of that is a percentage of business that is single sourced.

In €˜23, we expect to continue to have 80% of our business as single sourced. Looking further out, our funnel is in a similar single source position across geographies and market segments. Now coming to our guidance for Q1 €˜23. As we said earlier, the shortages of past few quarters that customers and their contract manufacturers to purchase more than they needed. SiTime is continuously evaluating the inventory situation at our top 50 customers and their more than 100 contract manufacturers. While most customers’ inventory is as we forecasted earlier, a new development is that our historically largest customer recently informed us that they have more inventory at their subcontractors than the previously thought. Despite the rest of the business being as expected, this will lead to lower revenue in Q1 €˜23 than previously thought.

We continue to believe Q1 2023 will be the lowest quarter of the year as we expect Q2 to be higher than Q1 and the growth to resume in the second half. In conclusion, end customer demand continues to be generally healthy. Our design wins and SAM expansion continues to grow. Our connections with customers is closed and growing through design wins. SiTime continues to be the leader in precision timing, a category that we created and we are confident about our future success. Art?

Art Chadwick: Great. Thanks, Rajesh, and good afternoon, everyone. Today, I’ll discuss fourth quarter and full-year 2022 results, and I’ll provide guidance for the first quarter of 2023 and make some comments on the year. I’ll focus my discussion on non-GAAP financial results and refer you to today’s press release for a detailed description of our GAAP results, as well as a reconciliation of GAAP to non-GAAP results. Revenue in the fourth quarter was $60.8 million and revenue for the full-year 2022 was a record $283.6 million, up 30% over 2021. Sales into our mobile, IoT and consumer segment were $24.7 million or 41% of total sales. Sales to our largest customer, which is included in this segment were $15.5 million or 26% of sales.

Excluding sales to our largest customer, sales into this segment were $9.2 million or 15% of sales. Sales into our Industrial, Automotive and Aerospace segment were $20.3 million or 33% of sales. Sales into our communications and enterprise segment were $15.8 million or 26% of sales. Non-GAAP gross margins were 63.1%, down about 2 points from Q3, due to the lower revenue. Non-GAAP gross margins for the full-year were 65.2%. Non-GAAP operating expenses for the quarter were $28.2 million as we held spendings essentially flat with Q3. Expenses were $16.6 million in R&D and $11.6 million in SG&A. Non-GAAP operating margins were 16.8% for the quarter and 26.7% for the year. Interest income for the quarter was $4 million, up substantially from prior quarters, due to higher investment yields.

Non-GAAP net income was $14.4 million or $0.64 per share. Non-GAAP net income for the year was $82.9 million or $3.66 per share. Accounts receivable at the end of the quarter were $41.2 million with DSOs of 61 days, compared to $44.9 million and DSOs of 55 days in Q3. Inventory at the end of the quarter was $57.7 million, up from $45.4 million at the end of Q3 as we bought additional wafer safety stock, to provide a cushion in the event of any future geopolitical or other supply chain issues. During the quarter, we generated $5 million in cash from operations, invested $8 million in capital purchases and ended the quarter with $564 million in cash, cash equivalents and short-term investments, essentially flat with the prior quarter. I’d now like to provide some financial guidance for the first quarter of 2023.

The macro environment remains somewhat challenging and it is clearly having an impact on industry-wide semiconductor demand. It also appears that many customers and especially their subcontract manufacturers overordered when supply bottlenecks eased last year. This higher inventory coupled with the current demand environment has led many customers to reduce order rates as they work through excess inventory. And that is what we are experiencing now. Last quarter, we offered comments on Q1 of 2023 and said that revenue would be down sequentially from Q4 for two reasons. First, we expected the usual seasonal slowdown with our largest customer. And second, we expected a lull in comms and enterprise sales as our customers in those markets work through excess inventory.

Our view on Q1 remains consistent with the comments we made last quarter with one exception and that has to do with our largest customer. As Rajesh mentioned, it now appears that their subcontract manufacturers have enough inventory to support their needs through the first-half of the year. This means that sales to our largest customer will likely be nominal in both Q1 and Q2. To be clear, we have not lost any sockets with this customer. Therefore, once they work through this inventory sales should rebound to more normal levels starting in Q3. As a result, we now expect Q1 revenue will be somewhere between $37 million and $39 million. Gross margins will be down a few points due to the lower sales and will be approximately 60% plus or minus a point.

We will hold operating expenses relatively flat with Q4, so approximately $28 million. Interest income will increase to somewhere between $5 million and $5.5 million. Diluted share count will be approximately 23 million shares. So at the midpoint of that guidance, we therefore believe Q1 non-GAAP net income will be approximately breakeven. We also believe that Q1 will be the low quarter for the year. That revenue will increase in Q2 and that once excess inventory gets worked down, sales should rebound nicely in the second half of the year. I’d like to conclude my remarks by saying that even though we are going through this short-term dip, we firmly believe that our long-term growth story is intact. Our process and product developments continue as planned; we expect to introduce at least five more new product families this year with each spawning numerous derivative products.

This will expand our SAM from about $1 billion a year ago to about $4 billion by the end of 2024. Design win and quote activity has been strong and that coupled with new product introductions and an expanding SAM should lead to continued long-term growth. And on that note, I’d like to hand the call back to the operator for Q&A. Thank you.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Quinn Bolton with Needham and Company. Your line is open.

Quinn Bolton: Hey Art and Rajesh. I guess, I wanted to start with just the environment. Obviously, it sounds like inventory correction is going to keep results fairly depressed in the first half of the year, but wondering if you might comment today where do you think the natural level of demand or what do you think consumption of your products is running at on a quarterly basis, so that as we start to snap back to that consumption, we have some sense what the revenue ramp might look like in the second half of the year?

Art Chadwick: Yes, that’s a great question, Quinn. It’s difficult to quantify that precisely. Clearly the demand is substantially higher than the guide that we gave for Q1. As both Rajesh and I talked about, there is a lot of excess inventory in the channel. As I mentioned in my discussion, I think you go back to 2021 and there are a lot of shortages in the industry and when those shortages eased, a lot of folks, a lot of our customers and certainly their subcontract manufacturers took advantage of the supply and over ordered. So they ended up with too much inventory that has to get worked down. So I’m not going to put a number on it. But clearly that is suppressing our revenue, I would say substantially certainly in Q1 and we will also do that in Q2.

I think, if you just look at our historic numbers, I mean, for the year, we did $283 million in 2022 and there’s some over buying in that. I think clearly in the first half of the year. But if you notch that down, that’s going to be a normalized number for 2022. And I think longer term, our 30% growth rate is intact once we get through this dip. So people I think can kind of triangulate what the back half should look like and definitely what 2024 should look like given that kind of growth rate. So I know I didn’t give you any numbers there. But try to add some color to what we said earlier.

Quinn Bolton: So maybe just trying to frame it, it sounds like that the $284 million in 2022, obviously included some amount of inventory burn. It sounds like it could be ballpark $20 million to $40 million and so it sounds like a run rate might be closer to $240 million to $260 million, is that sound about, right?

Art Chadwick: I would not dispute that number. I don’t want to get tied down to an exact number, but I think the logic there is founded.

Quinn Bolton: Great. And then just a sort of a quick follow-up just as margins historically have trended or followed revenue. I assume that since you think revenue is troughing in the first quarter that the 60% guide for Q1, would you expect that also to be the trough for the year and that as revenue grows sequentially through the rest of the year that gross margin would trend higher?

Art Chadwick: Yes, absolutely. And we’ve talked about this before. Even though we’re fabulous, we do have a certain amount of what I call fixed manufacturing overhead as the cost of our ops group and some depreciation on some of the back-end equipment that we own that’s located at our OSATs. So — and that’s about 10 points of margin, so when the revenue is lower, the absorption rate is lower and that’s what drove lower gross margins from Q2. There was 65% and change down to — I’m sorry, in Q3, down to 63% in the quarter that we just announced and my guide down to 60% in Q1. So the direct answer to your question is yes, gross margins will increase as revenue increases. I would expect that we can exit the year with gross margins close to our historic margins again, we had gross margins just over — non-GAAP gross margins just over 65% for the full-year that we just ended. And I think we should be able to get back to that level exiting this year 2023.

Quinn Bolton: Perfect. Thank you for the additional color, Art.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Chris Caso with Credit Suisse. Your line is open.

Chris Caso: Yes, good afternoon. So for the first question, I just — I guess based on what you provided in guidance, if you can give some color on the additional segments. I mean, it seems like the guidance seems to imply sort of flattish revenue for both industrial auto, aero, kind of, enterprise. And then seasonal decline in the consumer part that’s outside of your main customer. Is that a reasonable expectation? Any kind of color you could provide around that?

Art Chadwick: Yes. I think that’s a pretty good analysis. Again, comms and enterprise will be substantially lower from Q4 to Q1 for the reasons that I mentioned and that is our largest customers that’s plural in that segment have enough inventory to get them through the first quarter. So their order rates are relatively low for Q1. So the biggest decline would be in comms and enterprise. In our auto and industrial segment, in total, that’s going to be flattish, I think from Q4 to Q1. And then our IoT and consumer space excluding our largest customer will be flattish, but our largest customer of course will be down very substantially. Revenue to them as I mentioned was $15.5 million in Q4 and it will be quite nominal. Nominal means less than $1 million in Q1.