Good morning. My name is Nick. I will be your conference operator today. At this time I'd like to welcome everyone to Silicon Labs' Second Quarter Fiscal 2020 Earnings Conference Call. I'd now like to turn the call over to Mr. George Lane, Director of Investor Relations & International Finance. George, please go ahead..

Thank you, Nick. And good morning everyone. Tyson Tuttle, Chief Executive Officer and John Hollister, Chief Financial Officer are on today's call. We will discuss our financial performance and review our business activities for the second quarter. After prepared comments we'll take questions.

Our earnings press release and the accompanying financial tables are available in the Investor Relations section of our website at www.silabs.com. This call is also being webcast and a replay will be available for four weeks. Our comments today will include forward-looking statements, 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 in the Investor Relations section of Silicon Labs website. I would now like to turn the call over to Silicon Labs, Chief Financial Officer, John Hollister..

Thanks George. Revenue for the second quarter ended strong a $207.5 million, near the top end of our guidance range and up slightly year-on-year. This was down on a sequential basis from Q1, which as a reminder was a 14 week quarter.

Q2 IoT revenue was $115.1 million which was stronger than expected primarily due to upside demand in microcontroller products. Revenue from wireless products was in line with expectations. Infrastructure and automotive revenue was $92.5 million, which was slightly better than expectations for the quarter.

In particular, revenue from timing and other communications products were strong and up sequentially from Q1. Partially offsetting the strength was a decline in revenue from broadcast products due to a weak automotive market and a decline in consumer market based on some customer build ahead that took place in the first quarter.

By end market, communications revenue was up sequentially. Revenue from the automotive, consumer and industrial markets was down from Q1. Looking at sequential revenue by geography, results were mixed with second quarter APAC revenue up, whereas, Americas and Europe revenue was down. Our percentage of revenue from distribution was a record at 81%.

Distributor inventory days declined by one day to 53 versus 54 in the first quarter, in line with our target range for distributor inventory. Non-GAAP gross margin for the quarter ended up at 61.4%, which was slightly above expectations based on the strong product mix in the quarter.

Non-GAAP operating expenses were favorable in the quarter at $90 million, which was better than expected. During the quarter, we had lower spending on medical claims due to the Corona virus shutdowns, especially during the month of April. We also had lower than expected spending on new product development.

Non-GAAP R&D expenses were $52 million and SG&A expenses were $37 million. Non-GAAP operating for Q2 - Non-GAAP operating margin for Q2 ended at 18%, up 260 basis points from Q1. Non-GAAP earnings per share was $0.74, which was above the high end of our guidance range due to upside revenue, strong gross margins and favorable operating expenses.

The non-GAAP effective tax rate for the quarter was approximately 13%. On a GAAP basis, gross margin was 60.9%. GAAP R&D expenses were $71 million and GAAP SG&A expenses were $48 million. We reported a GAAP loss per share of $0.04 for Q2. Stock compensation expense for the quarter were $14 million.

Amortization of intangible assets were up in the quarter to $11 million reflecting the increase from the acquisition of the connectivity business of Redpine Signals. Turning now to the balance sheet, we ended the second quarter with cash and investments of $729 million.

During the quarter, we issued $535 million of new convertible notes with a 5-year term maturing in 2025. The 2025 notes have a coupon interest rate of 0.625% and a conversion price of approximately $123 per share. As was the case with our 2022 notes, the new 2025 notes are also provisionally callable after three years.

The use of proceeds for this new offering was largely to refinance our outstanding debts including fully paying off our revolving line of credit balance, which was $310 million at the end of Q1. We also used a significant portion of the proceeds from the 2025 note issuance to retire around 60% of the existing 2022 notes.

Our GAAP reported debt balance at the end of Q2 was $572 million and this entire balance is long-term. The underlying par values are now $163 million from the 2022 notes and $535 million from the 2025 notes for a total of $698 million.

The remaining balance of 2022 notes may be settled at maturity upon exercise of the provisional call through open market repurchases or through a combination of these steps using cash, issuance of common stock or a combination of cash and stock.

Now, having completed these various transactions, our balance sheet is very strong from a liquidity perspective. Our accounts receivable balance for Q2 declined by about $4 million ending at $70 million, representing day sales outstanding of 31 days, which was stable from Q1.

Inventory ended up about $2 million to $70 million representing turns of 4.6 times better than expected and in line with our working capital objectives. Cash flow from operations was strong in the first half of this year with approximately $100 million year-to-date.

Before I cover guidance for the third quarter, I'd like to provide a brief update on the Corona virus and its effect on our operations. The health and safety of our employees, their families and our communities is our top priority.

We remain at a near 100% work from home posture in the United States and will continue to do so based on the status of reopenings around the country. Our global workforce outside the U.S. has begun their transition to Phase II or Phase III of reopening depending on the jurisdiction.

In all cases, we are at a minimum, following the direction of local and national health authorities. We have a long history of global remote collaboration and this has served us well during the pandemic.

The semiconductor industry has been deemed an essential business and we have been able to safely conduct operations on site for certain engineering activities. Our flexible, fabless business model positions us well to effectively deal with the pandemic and our supply chain continues to be resilient despite global uncertainties.

Now, I will cover guidance for the third quarter. We expect revenue for the third quarter to be in the range of $208 million to $218 million with IoT up on growth in wireless and infrastructure and automotive down. We expect non-GAAP gross margin to be approximately 60.5%.

We expect non-GAAP operating expenses to be $92 million and our non-GAAP effective tax rate to be 11.5%. We expect non-GAAP earnings to be in the range of $0.67 to $0.77 per share. On a GAAP basis, we expect gross margins to be approximately 60%.

We expect GAAP operating expenses to be a $118 million and GAAP results between a $0.01 loss per share to a $0.09 earnings per share results. I will now turn the call over to Tyson.

Tyson?.

Thank you, John. Second quarter revenue was at the high end of our guidance range. Clearly, the global pandemic has and will continue to impact the way people live, work and play.

We are well positioned to execute our strategy and IoT connectivity and Internet infrastructure in light of recent trends in the market, which we see accelerating as the world moves even faster to becoming more connected.

The pandemic has led to increased demand for many of our products, with the need to stay connected through this unprecedented time, indicating the strength of our broad product portfolio and diverse customer base. Design win activity remains strong.

In particular, I'm very pleased to report that we've seen excellent market reception for our Secure Bluetooth 5.2 SoCs, the BG22, which was announced in January. The BG22 is experiencing among the highest levels of product adoption and opportunity pipeline growth we have ever seen.

In the 6 months since entering the market, we have identified over $1 billion in new opportunities with a wide range of applications in consumer, medical and smart home applications. I'd also like to take a moment to talk about the effectiveness of our marketing efforts, which have adapted quickly to the pandemic.

While we are up, we were already in the process of evolving our go-to-market strategy and programs through an expansion of our digital marketing efforts. COVID-19's impact on business travel and remote work has accelerated this development. In-person customer engagements and events have gone virtual and the results have been positive for our business.

Thousands of customers are spending dedicated time in virtual environments learning about our products, as opposed to hundreds in prior in-person engagements. Our virtual BG22 workshops and tech talks have been very popular and with more attendees, repeat views and more accounts engaged then in-person events of this nature.

The world was already becoming more connected, whether it's smart home, smart retail, smart medical or wireless industrial infrastructure technologies. The global battle against COVID-19 has accelerated this transition and made it abundantly clear that the technologies necessary to enable connectivity are more important than ever.

Our strategy and products are well positioned in light of the strength. Silicon Labs offers the broadest portfolio of wireless connectivity solutions for the IoT in the industry. Our products are enabling much of the connectivity and experiences, people have increasingly come to rely on in daily lives.

Our Internet infrastructure business is also enabling broadband suppliers to meet increasing demand for communications bandwidth. One specific application of our IoT portfolio is the retail sector, where substantial changes to how we shop were already under way before social distancing and other measures.

Retailers are accelerating investments in implementations of smart retail technologies, which are now affordable, effective and reliable enough to be deployed at scale in large footprint retail environment, delivering value added benefits for retailers and consumers.

Silicon Labs products are powering electronic shelf labels, enabled with remote dynamic pricing, intelligent merchandise security tags that push product features and promotions to shoppers' smartphones.

Real time indoor asset tracking using Bluetooth angle of arrival technology, precise tracking and location of inventory and personnel and the ability to purchase products via smartphones without needing to wait in check-out lines.

These and other IoT enabled implementations in our portfolio are helping retailers shift more effectively to an omnichannel commerce strategy, while delivering efficient value add contactless environments for shoppers and store staff.

Our IoT and isolation products are used widely in ventilators, glucose monitors, pulse oximeters and other medical applications. Consistent with our core values, we have prioritized support for these customers to accelerate deployment of these critical devices in light of the urgent global fight against COVID-19.

Nonin Medical is using one of our Bluetooth low-energy modules in there 3230 pulse oximeter, helping doctors and patients detect COVID-19 early and manage care remotely. Connected Pulse Oximeters like Nonin's 3230, send and receive data to doctors and patients in the comfort of their home, helping to free up space in hospitals and healthcare centers.

The medical device industry is becoming a more connected part of the IoT and we are pleased to see our silicon, software end solutions provide real value across a range of healthcare applications.

Our recent acquisition of Redpine Signals and their impressive Wi-Fi 5 portfolio and IP - Wi-Fi products and IP portfolio, especially Wi-Fi 6, is the latest example of our commitment to expanding our position [technical difficulty].

All right. I'm going to pick up for Tyson here. Statement is, our recent acquisition of Redpine Signals and their impressive Wi-Fi products and IP portfolio, especially Wi-Fi 6, is the latest example of our commitment to expanding our position as the leading provider of silicon, software and solutions in IoT.

We have generated an opportunity pipeline through Redpine products that is already over $500 million, in less than one quarter after closing the acquisition. Going into the transaction, we sensed strong customer demand, which is confirmed by the strong opportunity pipeline.

Our new Hyderabad, India design center is an important pillar of our slab for auto strategy, as we continue to drive toward greater simplicity and scale. We significantly increased our design head count with the acquisition, while maintaining discipline in our operating expenses.

We will continue to scale the Hyderabad design center and look forward to expanding the team beyond Wi-Fi and Bluetooth into our other core growth businesses and operations.

Silicon Labs have spent more than a decade, earning a reputation as the leader and proponent of multiple wireless protocols, which are enabling and unifying the Internet of Things.

We lead the industry in Zigbee and Z-Wave solutions and we will continue to embrace and support open standards as evidenced by our decision to open the Z-Wave standard to all Silicon and stack vendors this year.

We look forward to the community building on the existing interoperability, backwards compatibility, S2 security framework, easy installation with SmartStart and low power functionality of Z-Wave.

At the end of 2019, we joined the Connected Home Over IP project, known as CHIP, a working group originally formed within the Zigbee Alliance, including industry leaders such as Amazon, Apple, Google, NXP and Silicon Labs, as well as many other companies in the smart home ecosystem.

CHIP's mission is to develop and promote the adoption of a new royalty free connectivity standard to increase compatibility among smart home products with security as a fundamental design tenant.

We strongly support this initiative, which will simplify development for IoT device manufacturers and increase ecosystem compatibility for consumers everywhere. In the second quarter, we joined the Wi-SUN Alliance's board of directors.

Wi-SUN is an open standard, which is widely deployed for a long range mesh networks and utility, smart city infrastructure and industrial IoT applications, effectively enabling developers to extend wireless connectivity across many miles or kilometers of distance.

Wi-SUN also offers significant advantages versus other LPWAN standards, given its scalability and multi-vendor interoperability. We will leverage our seat on the Wi-SUN's board of directors to help accelerate the global adoption of this field-proven industrial IoT wireless standard.

In May, we announced a new line of energy friendly power management ICs, serving as dedicated companion chips for our EFR32 wireless devices and EFM32 microcontrollers.

The EFP01 PMIC family provides a flexible system level power management solution, enhancing the energy efficiency, a battery powered applications including IoT sensors, asset tags, smart meters, home and building automation, security and health and wellness products.

Turning toward infrastructure and automotive, we saw high sequential in year-on-year growth in our timing and access products. As well as strong year-on-year growth in isolation. Timing had record revenue driven by growth in all three strategic markets, communications, wireless infrastructure and data centers.

Timing also had a record quarter for long-term design wins, led by strong adoption of Silicon Labs' solutions in 5G wireless infrastructure. Isolation had a strong quarter in the broad-based market, particularly in China with both strong revenue and design wins.

Our infrastructure and automotive products are well positioned to capture increased market share and help solve problems in networking and healthcare applications that are increasingly important as the pandemic continues. With many companies committed to extending periods of virtual work increase in bandwidth demand are accelerating.

Our timing and isolation products are being used in data centers and networking equipment to deliver increased bandwidth around the world.

Over the past few years, we have expanded our timing portfolio from core and Metro Optical Networking Markets to address adjacent opportunities in wireless infrastructure, industrial, data center and automotive markets, which combined now represent more than 40% of our overall timing revenue.

The success of this strategy combined with accelerated bandwidth demands is reflected in our strong timing revenue and design-wins. The market for our isolation products is growing annually, particularly in solar, industrial and electric vehicle applications, which is the fastest growing segment of the automotive market.

We are well positioned to compete by offering advanced digital isolation and superior integration, which improves the performance and footprint of system. Turning to our leadership team, I am happy to welcome our new Chief Information Officer, Karuna Annavajjala to Silicon Labs.

As CIO, Karuna now overseas IT services for Silicon Labs growth global business operations including strategic planning, business application platforms, cyber security and service delivery. Karuna brings more than 20 years of progressive leadership in strategic planning, IT management and process improvement.

As part of our SLAB for auto initiative, Karuna will play a lead role in accelerating Silicon Labs efforts to simplify, streamline and scale our business with the IT systems that touch every part of our company.

These systems enabled a rapid effective pivot to remote work and we will continue to bolster our IT resources moving forward to ensure our ability to execute and secure.

Our strong second quarter revenue performance reflects our agility and continued focus on our target markets and I would like to extend the leadership teams praise and gratitude to all our employees, partners, customers, suppliers and key stakeholders who're pushing forward during these unprecedented times.

I'm extremely pleased with how we have all worked together to stay focused and in some ways have learned to more efficiently achieve our goals.

As we enter the third quarter, we are preparing to launch a number of new products and developer tools across our business, extending our broad connectivity portfolio in leadership and Bluetooth, IoT device security, Wi-Fi and timing solutions. This includes our first progress in implementing our Secure Vault technology.

The Secure Vault is a new suite of security features that set the new bar for giving IoT device makers state-of-the-art tool to effectively meet escalating IoT data privacy and device security challenges, as well as adhering to evolving regulatory mandates.

Finally, we will be hosting our first-ever Works With smart home developer conference September 9th and 10th. Works With is a two-day virtual event where smart home developers will learn how to connect our platforms, devices and protocols to work with ecosystems from industry leaders including Amazon, Apple HomeKit, Google, Samsung and many others.

The Works With conference features a number of key notes, panels, hands-on workshops and technical sessions led by engineers shaping the future of smartphone technology. Registration is free and is available at workswith.silabs.com. We hope you will join us.

I also want to take a moment to acknowledge the turning point in history we are seeing around the fight for equality and racial justice. Since Silicon Lab's inception, our corporate values have embraced diversity, equity and inclusion. Success in this important area requires sustained momentum and we are committed to be a force for positive change.

We are thinking about how we can build not only a smarter, more connected world but a more diverse equitable and inquisible. Our Company, our industries and our communities are at their best when bright minds from every part of our society have the opportunity to contribute and succeed. Thank you for your time and attention.

Before we take your questions, I'd like to turn the call back to George..

Thank you, John. Before we open the call for the question-and-answer session. I would like to announce our participation in the KeyBanc Capital Markets Future of technology Series on August 13th and Citi's 2020 Global Technology virtual Conference on September 9th, both using virtual platforms. I would now like to open the call up for questions.

To accommodate as many people as possible before the market opens, we ask that you please limit your questions to one with one follow-up..

Hi, this is Tyson and I apologize for dropping off. I had a power outage here at the house and so I'm back on. So I'm here for Q&A. And thank you John for finishing up the script for me..

That's good..

[Operator Instructions] First question comes from Gary Mobley, Wells Fargo. Please go ahead.

Congratulations on the strong execution in a challenging environment. John, you mentioned that you had a strong finish to the second quarter. So I'm curious to know how bookings trended during the second quarter month-by-month and as well what you guys have seen so far during the first few weeks of the third quarter..

Yes, Gary, this is John. So bookings have been steady as we indicated earlier in the last call. We did see an extension of lead times on the bookings, those have been running around seven weeks and they have pushed out to eight and then also around nine weeks of backlog coverage.

So that trend has persisted, so we've entered the third quarter with an unusually high level of backlog coverage. But all things considered, bookings were fairly steady through the course of the quarter..

Okay, I appreciate that color. And then is a point of clarification or I guess validation. Redpine, I believe is expected to contribute roughly $2 million to $3 million to revenue in the second quarter and then roughly $5 million per quarter thereafter.

Was that how it played out for the quarter and is that - is there any change to your outlook?.

Yes, that is how it played out for the quarter. Redpine's now a part of our overall wireless product portfolio. We think the amount of opportunity traction we're seeing is in line with our expectations. And we're very encouraged about the prospects for that portfolio..

The next question is from Blayne Curtis of Barclays. Please go ahead..

Thanks for taking my question and nice result. You mentioned record adjusted revenue, curious if you could point any products or regions that drove that and then for the outlook you mentioned the strength in wireless, same kind of question, any color on what flavors or regions are driving that strength IoT..

Yes, I'll take the district part. This is John. Blayne, we clearly saw upside strength in China, with the strong recovery in that market and in particular from a product portfolio perspective, the microcontroller products, timing products were strong there as well as isolation.

So looking to the second quarter, we're seeing some recovery in the wireless business in areas like smart metering and some other products that were down in the second quarter due to the pandemic, we're seeing some of those opportunities come back. I'll see if Tyson has anything to add..

Yes, I'd say really the strength in IoT is in particular on wireless, as we move into Q3 and it's pretty broad across the application ranges. I mean you've got - John mentioned timing for wireless. We've also got smart home, we've got some smart medical stuff that is ramping.

A lot of this is both run rate stuff, but also some, we've had a very strong design win momentum in our wireless portfolio and so that's starting to layer on there. So we're seeing a nice ramp on wireless side as we're moving into Q3 and that was - we indicated that in the guidance..

And then I just wanted to ask on the infrastructure side, you're coming off a record at these timing as you look into September, what areas are you expecting to be down and then is there any areas that are out?.

Yes.

So if you look at infrastructure and automotive certainly as we were in Q2, we saw the automotive piece and also some of the consumer stuff in broadcast was down and then if you look at timing-well timing and isolation were both really strong, in particular timing was very strong and we see that customers - particular customers in China have been ordering ahead and are well stocked at this point.

Those ramps are moderating as we're coming into Q2. So it's really the timing is going to moderate a bit, which we saw very strong in Q2 and isolation keeps doing pretty well. And then you have the consumer ramp in broadcast, which will come back a little bit, but then we still see the automotive market as fairly weak.

So it's really overall infrastructure and automotive is going to likely be down here in Q3, but it's holding in pretty well. But with particularly the strength that we saw in Timing in Q2, that's hard to replicate..

Our next question comes from Raj Gill of Needham & Company. Please go ahead..

Thanks and congrats as well. On the competitive landscape particularly around kind of Wi-Fi 6, there has been some recent acquisitions, private acquisitions carve outs by other players in the space, trying to develop a stronger Wi-Fi portfolio to target IoT. Obviously Redpine brings some valuable assets on that front.

So wondering how you're looking at the competitive landscape? How is it evolving as you see it, as potentially new players enter into the market?.

Right. We've seen a number of acquisitions on the wireless, certainly on the Wi-Fi side.

The first thing to point out is that really you got two ends of the link, you've got the access point side, which if you look at Quantenna that went on and then some of the Marvell products that went to NXP and then certainly Intel going into MaxLinear, those are all really focused on the access point side, whereas our focus is on the IoT, the end nodes, the client devices and in particular, all of the various things, not mobile phones, not handsets, all of the IoT type devices and the Redpine products that came in to Silicon Labs last quarter, really, they had a leading SoC, so a single chip solution that integrated, why not just Wi-Fi, but also Bluetooth Low Energy and Bluetooth audio, in a fully integrated form factor and that is a very, very well suited to these client types devices.

We saw that Synaptics acquired our license for the second time, the Broadcom portfolio, which is really - their mobile handset devices that they're going to apply some number of devices.

Some of the NXP devices are also client side and then certainly you've got competition from what is now Infineon, the Cypress going into Infineon, but our solutions is extremely low power.

It's the lowest power solution in the market and there's a lot of applications that are low power and we're going to target that and as well as higher power devices, things like appliances, there are things like door locks, there is a lot of smart home devices that have this technology and a lot of industrial applications that integrate Wi-Fi and Bluetooth and we have a very good solution.

It's a Wi-Fi 4 solution today and then the technology in IP that we are working to integrate in with our platform in our portfolio, to be able to introduce Wi-Fi 6 over time.

And then the Wi-Fi 6 rollout is just at the early, early stages and we see that as an important inflection point in the market going forward to be able to drive success with customers and to drive growth. So we're very excited.

We think that we are very well positioned with the red pine products, both near term, during just since the acquisition, we created about $500 million of pipeline for those products that we - and we had talked about significant revenue ramp for those as we go into the years ahead and then longer term, very excited about Wi-Fi 6 and our ability to compete with all of the various providers out there in the market.

Not just those that are acquired but also companies like Qualcomm, that have been out there for a long time. So, hopefully that provides a little bit of clarity on the Wi-Fi side. But very excited about our work with the Redpine acquisition and also the design center, we have over in Hyderabad now..

Yes, that's very helpful. And for my follow-up on the Timing, the record quarter in Timing, which was very impressive, you did mentioned 5G wireless infrastructure driving growth there.

I was wondering if you could talk about the potential silicon content increases that you're going to receive when you're going to a 5G base station? Is there kind of an uptick in terms of timing and clock solutions? Does that translate into higher silicon content for some of these base stations? Thank you..

Yes so, traditionally, we have not had much market share in wireless.

So in the 4G base stations, we didn't - really it wasn't requiring our Timing solutions and as we've gone into 4.5G and now 5G, we have a number of our clock and oscillators products that go into the radio head, that's the part that connects to the antenna, as well as the baseband unit which connects back to the main network.

And so we've got multiple sockets within each one of these, and we have share with four out of the top five suppliers and we're continuing to supply and to ship into all of the regions.

In turn, you're talking about what could be five to 10 clock chips and tens of dollars of content, in terms of each wireless base stations sold, potentially even more in that - more than that depending on the architecture. So, it's a substantial growth opportunity for our timing business.

We've traditionally been strong in the more optical high-speed background communication networks but we've also been expanding in data center and we're seeing a nice ramp of our business in the data centers, as well as a lot of industrial applications and even in automotive, even though that market is not very strong right now.

Longer term we see nice growth potential for timing as the data networks within cars become even faster and faster. So, really we view this year as the year of 5G. A lot going on in 5G, both from a design win perspective and the revenue perspective and really excited about the revenue growth opportunity in timing, both near term..

The next question from Tore Svanberg of Stifel. Please go ahead..

Yes, thank you and congratulations on the results.

As we look at this work from home economy, you talked about quite a bit of new design traction and I understand what's happening in the home, but what about on the industrial side or perhaps the enterprise side? What are some of the trends that you're seeing there that could potentially benefit your connectivity portfolio?.

It seems like we may have lost Tyson. This is John.

Yes, I think Tore, one notable item and we've talked about this a little bit in our prepared commentary, but if you think about smart retail and the changes that the pandemic is bringing about in terms of contact-less shopping and also remote operation of retail systems, this is a notable area where we're seeing, I would say acceleration of trends that were already under way.

And one particular application area to think about is electronic shelf labeling, where the company has enjoyed very strong design win traction in that application and it is accelerating.

We are realizing a very strong market position in electronic shelf labeling where vendors can remotely change pricing, both for contact-less purposes, but also to adhere to certain government mandates to manage that effectively, particularly in Europe. So, that is a good example of where we are seeing additional traction..

Thank you for that John and as my follow-up, I was going to ask about the Wi-SUN technology but I realize that's not fair to you John.

So, you have had quite a bit of design wins now in Bluetooth and I'm just wondering from a revenue perspective, when do we see the big inflection or perhaps the ramp there? Is that going to be a 2021 story or are you already expecting here in the second half, quite a bit of contribution from the new Bluetooth business?.

I think Tyson maybe back on.

Tyson, would you like to take that one?.

Yes, I am back on.

So the Wi-SUN is a long-range network that's widely deployed in metering and industrial type applications and where we are currently shipping Wi-SUN solutions into the market based on the existing standard, we just joined the standards organization and are actively working on new products and software to continue to gain this market and to drive it into even higher performance.

So, this is competing with cellular and with Laura type of applications. To get the number of units that have been deployed in each one of those technologies, Wi-SUN is actually very close in terms of market share. There has been a 100 plus million units shipped on Wi-SUN.

So we're actually quite excited about that, that technology seeing broader adoption in the market and very happy to support that as part of our IoT, overall IoT wireless platform..

Yes, so let me, let me address the Bluetooth question. We are seeing a pickup in Bluetooth and expect that portfolio to increase sequentially here in the third quarter.

On the specific new product that we've announced where the customer interest is off the charts, very strong, that will be more of a 2021 story in terms of the actual revenue as the customers are finalizing their qualifications and getting into production.

But overall, we are seeing strength to both sequentially and year-on-year in Bluetooth this quarter..

Thank you..

I would just mention that our, the Bluetooth, the traction that we've seen with the BG22 and the growth in the funnel and the engagement with customers in a variety of new applications that we're seeing is really unprecedented in the history of the company.

The speed at which this has been coming in and the customer engagement has been very, very high on the Bluetooth side. So, really excited about that product.

If you just put that in context, our Series 1 devices were really optimized for the multi protocols and our BG22 is really the first device that we've had that is really truly optimized for the high volume segments of the Bluetooth market and so we've had a very good software stack and a very, very mature tool suite and now we really have a very competitive piece of silicon that has the lowest energy consumption, very good performance, excellent integration, very, very small size and that's seeing really, really good reception out in the market and we're really pleased to see that..

Next question is from Srini Pajjuri of SMBC. Please go ahead..

John, first on the inventory, it came down by a day, a little bit and I'm just curious as to how you're thinking about it as we head into the second half of the year?.

Yes. Srini. I mean this is the normal level for us and we would expect to operate at approximately this level, I mean plus-minus a certain amount of variance, that would be natural but this is in the range of what we consider normal and actually we had very strong POFs shipments in the second quarter, which allowed that to end in a good place.

But we consider that to be a good target range..

And then maybe for Tyson. Tyson, on the Redpine Wi-Fi business, you mentioned $500 million in design pipeline, when do you expect that to kind of translate into revenues? And when do you expect this business to inflect and maybe if you want to put, let's say, I think you're doing the low-single digits in revenue terms.

When do you see that going to double digits and how you're thinking about next year, potential contribution from that business? Thank you..

Right. So, if you look, you know the pipeline as you create a pipeline of opportunities that $500 million is the lifetime revenue of those opportunities.

And then as you engage with customers, you have to design in the product, you have to - they have to start to ramp their production and those - that process can take anywhere from 12 months or 18 months, sometimes even 24 months to go from an opportunity to actually the beginning of the revenue ramp.

So, the pipeline that we're adding now on top of Wi-Fi will impact really 2022, possibly a little bit in 2021, but Redpine also came in with a number of really interesting opportunities in some Tier 1 sockets and they had about this $20 million a year, $5 million a quarter type run rate.

And those opportunities that came in with, we continue to service and so that will then be layering on top of the revenue for next year.

So we do anticipate strong growth in the Wi-Fi products as we, as we go through the rest of this year and then especially as we enter into 2021 and then following on that at 2022, we'll see an even stronger uptick based on the deployment of those products into our channel.

And then the design win activity that we're able to generate here in the next - over the next year. So, so that's, we see this is kind of just building. It comes into the certain level build next year and then continues to evolve as we go into '21..

Next question from Matt Ramsay of Cowen. Please go ahead..

Tyson, I wanted to ask a question about your isolation business, particularly in the electric vehicle market, have been, kind of been remarkable.

Political momentum behind the proliferation of EVs in the face of the COVID-19 situation and pandemic and I've been pleasantly surprised at least to see the momentum of those ecosystem sort of sustain themselves and maybe even accelerate.

I wonder if you might talk about the engagements you're seeing and the timeline to revenue of some of the engagements for your isolation franchise in the auto market? Thanks..

Yes. So we've been the leading supplier of isolation technology into electric vehicles and this goes into really three main subsystems within an electric vehicle. You've got the battery monitoring, so as you interface with the 400 volt or 800 volt batteries, you've got to have isolation technology for the communications buses.

You've got the devices that the traction inverter that is powering the motors and so those require handling these high voltages and that requires isolation.

And then the on-board charger that charges from AC line into the car and then there's also opportunities within the charging infrastructure for electric vehicles as well where you've got high voltages and doing charging.

So, we are participating in all of those areas of the electric vehicles and we've been engaged with a lot of the early providers in these companies like BYD in China or Tesla and we've now seen a whole series of design wins with other Tier 1 automotive makers, large automotive makers.

We haven't announced those names as of yet, but we are seeing very strong market uptake of our isolation products in terms of share gain and just winning these new platforms.

And then, it's really the pandemic, but really even before that you've seen the acceleration, I think really had an inflection point in the market where the electric vehicle is now reaching cost points and functionality that makes it very competitive and it's disrupting the entire automotive market. And that really plays into our hands.

We don't have a lot of share in the internal combustion engines, but we have a very strong share on the electric vehicle side. We just saw recently here in Austin, Tesla building a billion plus dollars factory for the Model Y and the new truck and that's great news.

You see a lot of activity with all of the major car makers and that provides a substantial - as we see that is the largest revenue opportunity, growth opportunity in isolation and that's on top of everything we're doing in industrial and motor controls and power supplies and all the other areas.

So, with isolation, there is a very broad product line, but this electric vehicle opportunities and the content per vehicle is very, very attractive and significant for us..

Thanks for the color there Tyson. As my follow-up, John, I know you guys had raised the gross margin outlook for, I guess, the long-term model of the company at the Analyst Day a few months ago.

With all the different moving parts in the business just over the next couple of quarters, how are you thinking about margins, given I guess a stronger mixed channel and a little bit of uncertainty and the end market still in the back half of the year? Thanks..

Yes, Matt, we're very pleased with the second quarter gross margin performance, with the product mix and channel mix, both being favorable and seeing that moderate a little bit here in the third quarter outlook, but still above the midpoint of our updated long-term model for gross margin.

So overall, we feel good about it and we'll continue to trust with our operations team and focus on sustaining and improving our gross margins that remains a core focus for us..

The next question, Suji Desilva of Roth Capital. Please go ahead..

A couple of questions on infrastructure.

I'm not sure if you covered this, but where is the mix today of the wireline optical versus the other markets you've been diversifying into and how does that mix a trend in a year from now, it sounds like the other parts of growing pretty well?.

Yes, Suji, this is John..

Yes, John..

Suji, this is Tyson. We mentioned on the call that the optical mix is about 60% right now. We've got about 40% in these other areas with the other areas, particularly 5G being the faster growing..

And how do you think that trends a year out? Is that a stable mix at this point or the other part is growing much faster?.

I mean, given that 5G is growing rapidly. We see the mix shifting from 40% going to higher than 40% over time. Although I would say that the core network upgrades and that we're seeing are also very significant. So I think it's, you're going to have growth in both areas.

But given the size of the 5G opportunity and that mix will probably shift closer to 50-50 as we move forward..

And a question on the Redpine Wi-Fi, can you remind us what's Labs competitive advantage here and who may be your top competitors, mostly for competitors here to understand how you're differentiating there..

Right. So, the Redpine products in particular have extremely low power consumption. It's about like so if you're running an application off of a battery, you'll get about 3 times the battery life by using our Wi-Fi products and that's a Wi-Fi 4 product and we'll have a follow-on Wi-Fi 6 product that's in the pipeline right now.

And we'll be one of the early companies out with a Wi-Fi 6-enabled device, that would be compatible with the existing products that we have. It's also a high - There is a high level of integration with this part, it integrates the processing, the energy management, all of the RF, the power amplifiers, so the level of integration is very high.

So you know, a lot of the devices will have a separate processor and a separate Wi-Fi and so being able to integrate all those in a high performance manner in a energy optimized manner is really the core of our differentiation.

We are competing with companies like Qualcomm and MediaTek, not with the same pipe of products but for Wi-Fi technology, somewhat with Cypress or now Infineon and then there's another company called Xpress sys, which has done very well in the maker market, kind of at the low end and we have higher performance, lower power consumption better integrated type of part compared to that as well.

And I'd say that our part is also very, very cost effective in terms of the implementation. So, both at the board level as well as the chip level. So we feel like we've got a very, very competitive technology or a very competitive set of products today and then really compelling road map as we move into Wi-Fi 6..

[Operator Instructions] Our next question comes from Alessandra Vecchi of William Blair & Company. Please go ahead..

Congratulations on a fabulous quarter. I apologize for the housekeeping question, but I had some connection issues after I got dropped quite a few times. But on - just on the operating expenses, again congratulations you guys have done really a formidable job there, especially in terms of starting to make progress toward the long-term target again.

I believe I heard at some point you mentioned maybe some lower R&D expenses due to product launches. But it sounds like there is quite a few things sort of on the common - on the docket. Could you maybe help us understand some of the puts and takes, as we think about OpEx in R&D over the next few quarters..

Yes, this is John. So we did have some tape-outs that were plans for Q2, that will now take place in Q3. So that cost pushed from the second quarter into the third quarter and that accounts for some of the OpEx increase in the third quarter.

And we also again had unusually low benefits costs in the second quarter related to the shutdown activity and that's beginning to come back as well. So we expect the third quarter to be up a couple of million dollars. The guidance was $92 million.

I expect the fourth quarter to be up a few million more dollars but ending the year roughly in line with where we had indicated at the beginning of this year and that's even taking into account the Redpine acquisition. So we've been able to now - we expect fully absorbed Redpine into our OpEx plan from the beginning of this year.

Heading into next year, we're going to look carefully at this, here in fall cycle as we go through our annual operating plan and talk with our management team and the Board of Directors and should be able to provide color as we form a view on 2021..

This concludes our question-and-answer session. Now I like to turn the conference back over to Mr. George Lane for closing remarks. Please go ahead..

Thank you, Nick. And thank you everyone for joining us this morning. This concludes today's call..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..