SLAB - NASDAQ

Hello. My name is Didi, and I will be your conference operator today. Welcome to the Silicon Labs Second Quarter Fiscal 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now turn the call over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead.

Thank you, Didi, 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 Chief Financial Officer, Dean Butler. They will discuss our second 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 on the Investor Relations section of the Silicon Labs website. I'd now like to turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson. Matt?

Thanks, Giovanni, and good morning, everyone. Silicon Labs delivered second quarter results in line with our outlook, driving strong sequential and year-over-year growth in both sales and profitability while closely managing operating expenses. We remain laser- focused on converting our design win pipeline into production ramps, and this quarter's results demonstrate our consistent progress. Our current forecasts indicate that 10 of our 12 largest customer ramps are on track or ahead of plan for 2025. As we shared in our March Investor Day, our leading -- industry-leading Series 2 platform continues to drive rapid revenue growth and share gains across both of our business areas, including significant growth in Bluetooth and Wi-Fi products. Looking at Q2, our Home and Life business was up double digits year-over-year, driven by continued stabilization in smart home applications as well as shipments to connected healthcare customers as many of these designs began production in early 2025. In the smart home, we saw strength in home automation applications like gateways and smart lighting. Additionally, our newest Wi-Fi device, the 917, is providing battery-powered Wi-Fi connectivity for the Roku battery camera that is now available on Walmart shelves as well as Roku Battery Camera Plus. Both models are available at Amazon and online at other major retailers. Silicon Labs enables a high-fidelity 1080p camera to operate on battery power for up to 2 years before needing to be replaced, an incredible breakthrough. Meanwhile, our healthcare initiatives are progressing well as we continue to ramp new customers. Overall, we remain confident in the strong growth potential of this market, including in continuous glucose monitoring applications, which we continue to expect will become 10% of our revenue. Our Industrial and Commercial business was also up double digits year-over-year. Sequentially, the growth was underpinned by strength in the electronic shelf labeling market and an ongoing recovery of broad-based industrial applications that are typically served through our distribution channel. We are also seeing steady shipments to global smart metering customers, including India's electric metering rollout and expect to begin shipments for Japan's metering refresh cycle later this year. Looking beyond Q2 results, our Series 2 platform continues to drive the growth of our design win pipeline and positions us extremely well for continued market share expansion. This includes new design wins in applications like commercial building controls, where utility companies are encouraging more efficient power consumption, utilizing our best-in-class multiprotocol solutions and domain expertise, along with further traction in ecosystems like Matter and Amazon Sidewalk. We're also working towards establishing new partnerships in connected healthcare and are confident that our market share momentum in applications like diabetes management will continue. In addition, we have secured design wins in other emerging medical applications like remote vital sign monitors and medicine delivery applications as our products emerge as best-in-class for many of these market needs. Finally, in our commercial business, we've seen strong engagement for logistics applications like real-time asset tracking. In fact, we recently won a new high-volume design win with one of the world's largest pallet makers, highlighting increasing customer interest in proximity-based tracking of higher-value assets moving through their supply chains. Building on our track record of being first to introduce new-to-industry innovative features and capabilities on our Series 2 platform, we are excited to announce that our first Series 3 device, the 301, is shipping in volume production and now claims the title as the world's first device to achieve PSA Level 4 security certification. This milestone reinforces our long track record of industry-first achievements and sets a new benchmark for trusted embedded computing. Additionally, another Series 3 device, the 302 will be sampling next year and will bring industry-leading energy efficiency and wireless performance to battery-powered devices that support both Bluetooth and matter applications, setting another industry performance benchmark. Moving forward, our market share momentum driven by our Series 2 platform and the introduction of our next-gen Series 3 platform positions us incredibly well to sustain outsized growth in our accelerating markets. Looking near term, while the evolving tariff discussions somewhat limit our visibility, we have not observed significant changes to our customers' forecast. Additionally, our customer surveys do not indicate end customer inventory builds and in many cases, reveal lower inventory positions compared to 90 days ago. Our outlook for sequential growth into the third quarter continues to be supported by share gains in secular growth markets, execution of new program ramps and consistent improvements in our order patterns. This combination gives us confidence that we are on track to outperform the broader semiconductor market this year. Now I'll hand it over to Dean for the financial update. Dean?

Thanks, Matt, and good morning to everyone. I will first review the financial results for our recently completed quarter, followed by a discussion of our current outlook. Revenue for the June quarter was $193 million, up 9% sequentially and in line with the midpoint of our prior guidance. Year-over-year, consolidated revenue was up 33%. In our industrial and commercial business, June quarter revenue was $110 million, up 14% sequentially and up 25% from the same period last year. Sequentially, the growth was driven by customer ramps in electronic shelf label deployments, continued smart meter rollouts and a steady demand improvement for a wide range of industrial applications. Home & Life June quarter revenue was $83 million, up 2% sequentially and up 45% from the same period a year ago, driven by new design ramps with medical customers more than doubling versus the same quarter 1 year ago. During the quarter, distribution made up approximately 69% of our revenue mix. Sell-through at distribution partners continued to grow and channel inventory increased slightly to end at 51 days, up from 48 days in the prior quarter despite our intention to begin moving toward our target range of 70 to 75 days. June quarter gross margins saw positive improvements as the long tail channel sales and industrial applications continue to benefit our mix. GAAP gross margin was 56.1%. Non-GAAP gross margin was 56.3%, which was up 90 basis points from the prior quarter and above the midpoint of our guidance. GAAP operating expenses were $131 million, which includes share-based compensation of $20 million and intangible asset amortization of $3 million. Non-GAAP operating expenses of $107 million was consistent with our prior guidance. GAAP operating loss of $23 million and non-GAAP operating income was $1 million. During the quarter, we recorded a GAAP tax charge of approximately $3 million. Our non-GAAP tax rate remained 20%. GAAP loss per share was $0.67 and non-GAAP earnings of $0.11 per share beat the midpoint of our guidance by $0.02. Turning to the balance sheet. We ended the quarter with $416 million of cash, cash equivalents and short-term investments. Our days of sales outstanding was approximately 30 days. During the quarter, our balance sheet inventory remained essentially flat, ending the quarter at $81 million of net inventory. Days of inventory on hand improved to 86 days, a sequential improvement from 94 days at March quarter end. As it stands today, we have not seen a direct impact to our supply chain from the shifting tariff rules. While the outcome of ongoing tariff discussions and their potential indirect impact on global demand are still uncertain, conversations with our customers do not currently point to any meaningful pull forward in demand. Order patterns from customer bookings and distribution POS continue to show positive improvement, extending a multi-quarter trend of positive progressions. This supports our view from last quarter that our end markets are making headway in their cyclical recovery. Additionally, our survey showed that our end customers' inventory ticked down in the quarter and in many cases, revealed relatively low inventory positions. Now for our current outlook. We anticipate revenue in the September quarter to be in the range of $200 million to $210 million, which at the midpoint would imply a strong 23% year-over-year growth rate and a 6% sequential growth. Importantly, we believe Silicon Labs is tracking to outperform the broader semiconductor market this year based on the execution of our new customer design ramps and further supported by improving cyclical demand. With continued strength in industrial applications and sales through our distribution channel growing, we expect continued gross margin improvement in the September quarter with both GAAP and non-GAAP gross margin expected to be in the range of 57% to 58%. We continue to manage operating expenses tightly and remain committed to our published financial model of growing expenses 1/3 the rate of revenue growth, allowing for rapid earnings acceleration moving forward. In line with that philosophy, we expect GAAP operating expenses in the September quarter to be in the range of $130 million to $133 million. We expect non-GAAP operating expenses to modestly increase in the September quarter to be in the range of $107 million to $110 million as the employee bonus pool is expected to accrue at a higher contribution given our return to profitability. Finally, GAAP loss per share is expected to be in range of $0.60 loss to a $0.20 loss on a basic share count of 32.8 million shares. Non-GAAP earnings per share is expected to be in the range of $0.20 to $0.40 on an expected diluted share count of 33 million shares. This wraps up our prepared remarks. I'd like to now hand the call over to the operator to start the Q&A session. Didi?

[Operator Instructions] Our first question comes from Quinn Bolton of Needham & Company.

Congratulations on the continued strong outlook. I wanted to ask a question just on the Home & Life business. I know it's up strongly year-on-year, but it was sort of up 2% quarter-on-quarter, perhaps a little bit below my estimates. How are you thinking about that business as you get into the second half of the year? I think you reiterated the target for continuous glucose monitors to hit 10% of sales. Is that still on track for the second -- by the end of 2025?

Yes, sure. Quinn, this is Matt. Quick answer is, let's say, big picture, CGM is still on track, still committed to that 10% number on the time line we had mentioned. I think what's going on big picture here is, as we've said for many quarters, the primary driver of our growth are these share gains in these major ramps. And those ramps can be lumpy. They can be -- some are ahead of schedule, some are behind, some are bigger, some are lower. But as we shared in the prepared remarks, we're tracking a tremendous amount of ramps. And of those, our top 12, 10 of those are on track. So in aggregate, we're able to stay on track or better to our expectations. And the easiest way to look at it is our expectations by segment, by application and by customer haven't changed. So we feel good about the outlook and no major changes.

Perfect. And then I guess one for Dean. Dean, you've done a great job here on gross margin, getting back to sort of, I think, your longer-term target of 57% to 58%. Do you expect it to kind of hang out in this level going forward? Or do you see room for potential further improvement above that 57% to 58% level in future quarters?

Yes. This is an area I think the team has done super well on, Quinn. Just to reiterate what our long-term financial model is 56% to 58%, so midpoint sort of 57%. Where we are now, we're trending to the high end of that range. We just guided 57% to 58%, so in that higher end of that portion. My expectation is that we continue to drive into this higher end of it as distribution channel continues to contribute in a meaningful way as a lot of our industrial type customers are doing quite well in the marketplace. That's going to keep us in the high end of that zone. I do think over time, it will probably bounce between this 56% and 58%. I am not at a point where we're going to reassess the long-term model and say, hey, we can go higher from that 58% mark. But at least from what we can see on the near term over probably the next couple of quarters, given how distribution is trending, we look like we're going to stay in that high end.

And our next question comes from Tore Svanberg of Stifel.

Yes. Let me echo my congratulations, especially on the operating leverage here. My first question, Matt, is on your design win pipeline. The growth is clearly driven by your execution towards that pipeline. Could you perhaps give us any update as far as numbers? Is it growing? Yes. Just want a little bit more color on the actual pipeline.

Yes, sure. Thanks, Tore. Big picture, we've shared that we've had a tremendous success over the last few years from a design win perspective. And we've really tried to pivot to making sure we ramp all those designs that we've secured, and that's exactly what we're starting to see here. And we've been consistent in the primary driver of our growth this year are those share gains and ramps that are happening. But to answer your question directly, we still -- like what we see, and we still have that momentum. The opportunity funnel is the largest it's ever been. We are on track for design wins, which are larger than they've been. And we have great momentum. The easiest way to think about it, Series 2 is still gaining market share and winning. Wi-Fi is allowing us to increment up and start growing even faster. And now we're putting Series 3 in the mix with new-to-world capabilities and features. So no expectation that, that will slow down. So we like where we're at and we like what we're seeing.

Very good. And as my follow-up, I had a question on the glucose meter business. I know you mentioned multiple customers now. Again, could you perhaps give us some color on how many customers are ramping there? Because clearly, you're gaining share. And I think last time you had a call, I think you talked about already working with 10 or a dozen customers in glucose meters.

Yes. Specific numbers, I hope I don't screw this up guys from Analyst Day. But I think what we shared with that is we are engaged with over 60 customers in this space, and we are ramping more than 12 in this space. So that's where we're at. And as we shared in the prepared remarks, we're continuing to make progress on that in that particular space and even expanding out into additional applications within the medical and healthcare space, where we're just finding our products are really dialed in. So liking what we see there, Tore.

And our next question comes from Tom O'Malley of Barclays.

I have kind of the inverse question to Quinn into June. You saw some really strong trends in the industrial and consumer business. You've seen during this earnings period, other large players kind of talk about some pull forward in industrial. I was curious, was there any geographic changes in the mix of revenue in the June quarter? I think you called out shelf labeling, the disti channel and then India smart metering, but anything to note in terms of geo differences in that June quarter?

Yes, Tom, this is Matt. Quick answer is no. Pretty consistent across the board. In fact, it's worth pointing out, we're seeing that broadly that we acknowledge all the uncertainty that's out there around tariffs, and we're watching closely for signs of build aheads, pull-ins, and there has to be something going on out there around that, but the data is encouraging. We see bookings consistent with what forecast was, no major anomalies there. Customers are in line with expectations, consistent improvements, but linear. And inventory is in line, right? Our internal inventory looks good. Disti inventory, if anything, is low as we're trying to build that up. And end customer inventory on average is actually down over the last 90 days. So the data -- despite the uncertainty that's out there, the data is encouraging and going in the right direction.

Helpful. And then when I look at the gross margins, which are very impressive going into the September quarter. It looks like the incremental gross margin is close to 80% quarter-over-quarter. That's the highest you've done in the last couple of years. So if you look at the divergence in revenue trends in the September quarter, do you continue to see more disti and by that measure, more industrial and commercial into the September quarter? But maybe give us a little color on segment trends into September and then why you're seeing such a big step-up on the gross margin side?

Yes, Tom, I think you got it right on sort of segment and business mix. As you know, a lot of the industrial tends to go through the channel. And the channel customers generally are long tail, lower unit count and therefore, generally higher ASP. So we do get a better margin step-up as more and more things flow through the channel. A lot of that is industrial based. There are other like small benefits that you get through as revenue increases, right? You get some efficiencies on some of the fixed costs that you run your supply chain. But the majority here is really the dynamic around industrial customers going through channel.

And our next question comes from Christopher Rolland of Susquehanna.

Yes, just regarding distribution in the channel, are there opportunities to refill the channel to grow the channel here? And like as we look over the next few quarters, maybe in terms of dollars, what could that opportunity be?

Yes. I mean, short answer, Chris, is we've been trying for the last couple of quarters to actually fill the channel back to where it should be. We had this call 90 days ago, and we said, hey, channel inventory at that point was 48 days. Now this quarter, it's 51. We said, "Hey, we'd like to build the channel back up and start working toward our target. And in fact, during the June quarter, we anticipated trying to get more inventory in. But the reality is the dynamic that's happening within the channel is as we ship into channel and try to refill, customers actually are taking that inventory in terms of POS, and we can see it go out the other side in POS. We then follow up with a subset of our end customers that we can reach and we survey them and ask them, hey, what's happening with the inventory? Are you just taking POS and putting on your shelf? And in fact, that doesn't seem the case. In fact, majority actually have lower end customer inventory. So we're sort of trying to track as it moves through channel. It looks like this is largely being consumed and deployed. I think it's a bunch of customers that are coming back slowly over time, and we're seeing continued positive momentum. If we can refill the channel, we can. And like the last 2 quarters, we've been trying. I don't think you'll see any sort of big step-up in any given quarter, but our intention is to move the channel from where we are this 51 days to start to move it toward our target of 70 to 75 days. I just think it's going to take a few quarters, Chris.

Excellent Dean. That's actually a lot of fill at 70 to 75. It will be nice to see. I guess for my second question here, how are you -- you mentioned tariffs, how are you thinking about tariffs? And would you be passing this on to customers? Or would you eat some of it? What's your strategy here?

Yes. I think generally speaking, from our review of tariffs, which, as you know, the rules sort of keep changing. It's all about the specific rules when they get published and how those get rolled out. We've looked at a number of options among our supply chain. For the most part, it's relatively modest in its most extreme cases that we can kind of model out. It's a relatively modest impact on the company. I think our intention would largely be to pass them along if that comes. Again, we think the impact in itself is modest. So we don't think that would cause any undue harm across the customer base if that were to come to play. And there are some geographic sort of differences when we look at what is the amount of inventory that comes across the United States border was sort of the big contentious one. For us, it's kind of in the 10% range. So if whatever rate you want to assume on tariffs and every country has a different rate, generally, we're shipping directly in by Silicon Labs only about 10%. So that's how we get to this sort of pretty modest impact, if you will, Chris.

And our next question comes from Cody Acree of The Benchmark Company.

Congrats on the progress. Maybe, Matt, if you can help us with just any of the Wi-Fi strength that you mentioned, just any of the application wins and any of the ramps that you're seeing there?

Yes, sure. So continued progress in Wi-Fi. The biggest one that we just shared in the prepared remarks, which is really worth pointing out is the Roku design. What's unique about that is where we have shined where we have focused in this space is playing to our strength, which is battery-powered applications, so long battery life. As we've shared, our device, longest battery life in the world for a Wi-Fi application, and that's what Roku is taking advantage of. So they've put a 1080p camera out there that can operate for up to 2 years on battery power, which is pretty remarkable. That's on store shelves now at Walmart, available at Amazon and other retailers. And I think that is a good example and indicative of what we're seeing in Wi-Fi overall, where as we bring this capability to bear in the market, customers are starting to take advantage of it, especially in battery-powered applications to do things they could not do before. So we like what we see there. We like the progress. As always, it's a new market. It always takes longer than you want, but it's going in the right direction.

And maybe just lastly, with your September back now above $200 million a quarter, your trajectory is definitely promising. But any thoughts on, given your pipeline and your visibility, when you would expect to be able to challenge your prior '22 highs? Do you think that, that's something you can achievably get into a range in '26?

So we're not guiding beyond the quarter, but maybe the most helpful thing that we can share is kind of in line with what we shared not that long ago at our Analyst Day, we have been securing a tremendous amount of design wins over the last few years. And those are just now starting to ramp. And to help make that real, one stat that we shared was in our Series 2 platform, kind of the current or prior gen, however, you want to think of that, of what we've secured, we've only shipped a little over 1 billion units in that space. We've secured more than another 6 billion units of wins that we haven't shipped yet that are starting to ramp or will be ramping. So that kind of gives you a sense of what's been won and what's to come, where as we said, at the same time, we're still winning more designs in Series 2. It is still ultracompetitive while we're bringing in Series 3, the next generation, we had a press release yesterday where we brought the highest level security to the IoT at the PSA Level 4, which is just an indication of what's going to start to come out on this platform as we introduce it new to industry, new-to-world capabilities, features and performance. So that combination, I think, positions us really well for continued growth going into next year. But not specific on time line, and that's obviously not easy to call.

And our next question comes from Peter Puk of JPMorgan.

Congratulations on the strong results. I think back at your Analyst Day, you gave a number on your new customer ramps being 50% of your year-over-year growth in 2025. And if I kind of work on what the consensus numbers are, that's about $100-plus million. Just given some of the commentaries about how you said kind of those are on track, does that -- are we surpassing that number? And then more importantly, I guess, does that number start to grow in 2026 as well?

So Peter, it's Matt. I don't remember the exact number you're quoting, but maybe the most helpful thing around that is we mentioned, I think, 10 of our top 12 ramps. And just to be clear, there's many more ramps that we're tracking as part of that. So that's just kind of the biggest ones that have the easiest to track most visibility, but tip of the iceberg in terms of the ramps that we're working on and managing. So tough to correlate that to a specific number. But going back to the prior question and comments, we do expect continued ramps and continued growth based on design wins and share gains. That's the fastest and easiest way I can say it. We have been gaining share, and we believe we're going to continue gaining share, and we have opportunity funnel and design win momentum to support that.

Got it. Okay. That's helpful. And then when I kind of look at your -- some of the seasonal trends, typically, your December quarter is flattish, but you guys have been kind of driving above seasonal trends for the past several quarters. And so just given some of these positive booking trends and design win ramps, is there -- is it possible to drive sequential growth through the remainder of the year?

Peter, you're asking about a Q4 guide, which we're not at a point we're ready to comment on. Look, most of our momentum really has been on design wins coming into production. And if that's the case, you should actually outperform seasonality One of the sort of notable things, which just so everybody has it is all throughout 2025, lead times that we're getting orders have been more and more turns based. So it limits some of our visibility a little bit to be able to comment on, hey, what does seasonality look like in a quarter or 2 from now and how that's evolving. But I think to the extent that design wins continue to be the primary growth driver, you should continue to do a little better than sort of a steady-state market-driven only number.

And we have a follow-up from Tore Svanberg of Stifel.

Just one quick one for you, Dean. 20% tax rate, obviously, with a big beautiful bill, that's probably going to change. So I don't know if you have any comments there. Should we just sort of wait to see how things develop? Or do you have an early read on '26 tax rate?

Well, so our non-GAAP long-term tax rate of 20%, we tend to assess that on an annual basis or as needed if a big structural change happens. In fact, there's one big beautiful bill that ended up passing on July 4, actually was on the very last day of our quarter. Our quarter ended on July 5, just given the fiscal cycle this time. So we have included all of the tax-related adjustments that we think are in, but those are on the GAAP side of the books. On a non- GAAP basis, we haven't yet assessed what that impact would be longer term. I think it's sort of marginally lower, but whether that ends up changing sort of the longer-term sort of time horizon that we have yet to come to a conclusion on point.

I will now hand the call back to Giovanni Pacelli.

Thank you, Didi, and thank you all for joining this morning, and thank you for your interest in the company. Before concluding today's call, I'd like to announce our upcoming participation in KeyBanc's Technology Leadership Forum on August 11 in Deer Valley, Utah. This now concludes today's call. Thank you.