Hello. My name is Sarah, and I will be your conference operator today. Welcome to Silicon Labs' Second Quarter Fiscal 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead..

Thank you, Sarah. We are recording this meeting, and a replay will be available for four weeks on the Investor Relations section of our Web site at silabs.com/investors. Joining me today are Silicon Labs' President and Chief Executive Officer, Matt Johnson; and Chief Financial Officer, John Hollister.

They will discuss our second quarter financial performance and review recent business activities. This information, along with accompanying financial tables and the earnings press release is available on our Web site.

We will take questions after our prepared comments, and our remarks 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 on the Investor Relations section of the Silicon Labs Web site. I would now like to turn the call over to Silicon Labs' Chief Financial Officer, John Hollister.

John?.

Thanks, Giovanni. I'm pleased to report that strong revenue performance for the second quarter set a new record, at $263 million, up 55% year-on-year and above the top-end of our guidance range. Our industrial and commercial business grew exceptionally well in Q2, ending at $144 million, up 61% from the same period of fiscal 2021.

We saw significant year-on-year growth in Q2 across all major portions of the [I&C] [Ph] business in industrial, commercial and smart city applications. The home and life business was also up strong for the quarter to $119 million, an increase of 49% year-on-year, with particular strength in connected home applications.

In terms of our connectivity protocols, revenue from our Bluetooth product lines more than doubled in the second quarter, year-on-year. We also saw mid-to-upper double-digit growth rates across our other supporting protocols, such as Zigbee, Thread, proprietary wireless, Z-Wave, and Wi-Fi.

Looking at our revenue in Q2 geographically, we saw the strongest sequential growth in Q2 in the Americas region, followed by Europe. Asia-Pacific was down. In Q2, the COVID lockdown situation in China did impact our customers, distributors, and suppliers.

For example, two of our large regional distributors in China experienced increases in distribution inventory levels due to the lockdowns, and are primarily responsible for the increase in our [indiscernible] inventory. Distribution revenue for the second quarter was around 80% of total revenue.

Our business continues to be very diverse, and our solutions are used in thousands of applications by tens of thousands of customers worldwide. Our top-20 end customers represent around 30% of total sales. And our single largest customer is 5% of sales.

The demand environment continues to be strong, and our demand remains above our ability to fully supply it. That said, we are seeing more volatility in our recent bookings patterns, with more variation on a week-to-week basis combined with higher levels of customer reschedules. We have not seen a large uptick in order cancellations.

We believe the broad-based nature of our customer footprint combined with our significant industrial exposure offers greater stability to macro weakness than more heavily consumer-oriented semiconductor operations. Non-GAAP gross margin for the quarter exceeded expectations due to favorable product mix.

Q2 gross margin was 62.4%, which was a decline from first quarter, as anticipated, due to the significant price increase effect in Q1.

Non-GAAP operating expenses were slightly elevated, ending at $110 million, due to additional product development costs, higher variable costs on upside business performance, and increased travel as we resumed more normalized travel patterns in Q2 coming out of the pandemic.

R&D expenses were $68 million or 26% of revenue, and SG&A expenses were $41 million or 16% of revenue. Non-GAAP operating income was $55 million or 21% of sales, exceeding expectations. Our non-GAAP effective tax rate was slightly favorable, at 24%. Non-GAAP earnings ended at $1.17 per share, above the top-end of our guidance range.

On a GAAP basis, gross margin was 62.3%. GAAP operating expenses were $133 million, with R&D expenses at $84 million, and SG&A expenses at $49 million. GAAP operating income was $31 million or 12% of sales.

Stock compensation expense for the quarter was $14 million, and amortization of intangible assets was $9 million, both in line with our expectations. GAAP earnings were $0.60 per share, above the high end of our guidance range. Turning to the balance sheet, cash and investments ended at $1.5 billion.

Accounts receivable ended at $72 million reflecting DSO of 25 days. Net inventory increased in the quarter to $74 million, up from Q1 and ending at 5.4 turns. We also invested working capital into our supply chain in Q2 to secure future capacity. Our distributor inventory increased slightly to 60 days.

So far, this year, we have returned $600 million to shareholders through our stock repurchase program. Since we announced the divestiture just over a year ago, we have returned a cumulative $1.75 billion retiring $11 million shares or 25% of our pre-divestiture share count.

Our share repurchase activities will provide a durable long-term benefit to our earnings power going forward. And we intend to continue to return capital to shareholders. However, this month, our Board of Directors approved an additional open market repurchase program of $250 million through the end of fiscal 2022.

Next, I'll cover guidance for the third quarter. We expect our revenue for Q3 to be in the range of $265 million to $275 million. We expect our non-GAAP gross margin for Q3 to be between 60% and 61%.

We expect non-GAAP operating expenses to increase to around $113 million with the increase from the Q2 level primarily in R&D based on continued investment in products. Due to our strong cash position and rising interest rate environment, we expect our other income and expenses line item to increase to around $4 million for Q3.

Our convertible notes have a fixed interest rate. We expect our non-GAAP effective tax rate for Q3 to be 26%. And please note that absence any legislative changes, we continue to expect the tax rate to decline by a couple 100 basis next year as the amortization stock on R&D [deductions] [Ph] accumulates.

We expect our non-GAAP earnings to be in the range of $1.08 to $1.18 per share. We expect GAAP gross margin to be about 60%, GAAP operating expenses to be approximately $137 million, and GAAP earnings to be in the range of $0.49 to $0.59 per share. I'll now turn the call over to Matt for business update.

Matt?.

Thank you, John, and good morning, everyone. Silicon Labs continue execute well in a challenging macro environment posting record revenue in ESP during the June quarter. We are seeing volatility in the market, and as John mentioned, increasing variability in our booking pattern.

That said, we are driving solid execution, strong design win momentum, and notable share gain while experiencing continued strength in our diverse end market. Demand continues to meaningfully exceed our ability to supply. And we are focused on meeting our customers' requirements.

Our second quarter result was driven by double digit growth across all our major product groups and end markets highlighting the diversity within our business. Our opportunity pipeline continues to expand, and now sits at $15.5 billion, up 54% year-over-year.

We continue to see a significant design win momentum as well, and our year-to-date total already approaching our 2021 full-year levels. This gives us confidence in expectations for continued outperformance in the market. In Q2, we saw a strong growth across all wireless protocols.

Our Bluetooth solutions were a notable source strength reflecting our growing market share. Revenue related to our Bluetooth portfolio grew at an exceptional pace of 52% sequentially and 114% year-over-year. And our Bluetooth design win momentum is accelerating.

In the Industrial & Commercial business, we saw a solid revenue growth, record design win, and a strong demand environment. We also see major design wins with leading global electronic shelf label customer including two of the top three providers.

In Home & Life, we saw a solid revenue growth again this quarter as well as record level design win led by the smart home segment specifically. While we recognize the market volatility including some consumer weakness and market softening in the quarter, we know our ongoing design win momentum.

For example, we continue to expand our smart home position with design wins that take advantage of the Matter connectivity standard supported in our recently launched MG24 product. Customers are showing strong interest in Matter.

And we continue to support the connectivity standard [borrowings] [Ph] in Matter protocol development to help developers create the world's best Matter-based solutions. We are highly focused on the competitive landscape for recruiting and retaining talented employees.

We have built a strong early talent pipeline and have over 350 interns and new college graduates joining this year. Forty five percent of our global intern products this year comes from historically underrepresented talent groups.

Our new college graduate hiring also continues at an accelerated pace, further enhancing our ability to scale and build a sustainable talent base. We are investing our employee experience through a variety of training programs, resource groups, and other initiatives to ensure that we retain and attract the critical talent that drives our business.

As we announced earlier this morning, Bob Conrad has been appointed to our Board of Directors. Bob has nearly 40 years in experience in the semiconductor industry, most recently with Freescale and NXP, before retiring, in 2019.

He brings a strategic mindset and deep industry experience which will be invaluable as we continue to scale and grow the company. We also announced that Bill Wood has shared his intention not to stand for reelection to our Board of Directors. He will retire effective as of the date of our 2023 Annual Stockholders Meet.

Bill has served on the Silicon Labs Board of Directors since the beginning of the company, and we're grateful for his leadership over the years. We're also looking forward to our upcoming Works With Developer Conference, being held September 13 to 15.

In its third year, Works With is the premier developer conference for building the skills to create impactful connected devices. We bring the industry together to continue simplifying and accelerating wireless adoption worldwide. In summary, despite the changing landscape and the broader market, our team executed well across the board.

In the one year since Silicon Labs became a pure-play IoT company, we have delivered record revenue growth and increased earnings power while returning significant capital to our shareholders.

The IoT wireless market is showing remarkable resilience, and we are more confident than ever in our ability to lead and scale in this large and growing market.

Giovanni?.

Thanks, Matt. Before we open the call for Q&A, I would like to announce our participation in two upcoming conferences; KeyBanc Capital Markets' Annual Technology Leadership Forum in Vail on August 12, and Citi's 2022 Global Technology Conference, in New York, in early September. We will now open the call for questions.

To accommodate as many people as possible before the market opens, I ask you to limit your time to one question with one follow-up inquiry, if needed..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Raji Gill with Needham & Company. Please go ahead..

Yes, thank you for taking my questions, and congrats on all the good momentum. And just wanted to get a little more insight on your commentary around seeing more volatility and variability in the order book and customer scheduling, wondering if you can clarify.

And did you say that you have not seen an uptick in customer cancellations or have you -- you haven't seen a large uptick in order cancellations? I'm just trying to get clarity on that language.

And also, if you could elaborate a little bit further on when you say you're seeing variability in the order books, what does that mean, and is there specific --.

Hi, Raji, this is John. Yes, sure thing. Let me start, Raji. You know, as we all know in the supply crunch over the last period of time of time, and just given the strength of our demand and the secular drivers that we have, it's been a period of really sustained, strong bookings for several quarters.

We have begun to see more variability there in the week-to-week booking patterns, with some weeks continuing to be very strong, some weeks are more light in the regard of new bookings, although the cumulative backlog remains high and significantly above our ability to fully service that backlog.

In terms of the push-outs and cancellations, yes, we've seen a few cancellations, Raji, but not as a major trend or sort of broad-based in nature, but what we are seeing more frequently are customer requests to reschedule deliveries further out in time as they continue to assess their own demand profile..

Thank you for that, that -- it's helpful. Just for my follow-up, if you look at your revenue growth, you're on track to kind of exceed your annual guidance of 35% to 40%. And last year, you grew also 40% or so.

Wondering if you could talk about the contrast between pricing and unit growth, if I recall, last year, much of the growth or majority of the revenue growth was attributed to unit growth, and maybe 10% of the growth was attributed to ASP increases. This year, it seems like it's going to be more even.

So, double-digit price increases versus, say, double-digit unit increases, so, wanted to get your thoughts on the pricing environment.

Are you continuing to kind of pass on input cost to your customers? How long do you think that that pricing power or the price increases is going to sustain itself, especially as we go into next year where there could be a deceleration in demand? Thank you..

Let me start, and then I'll pass it to Matt. Raji, this is John again. So, you're right, and that your summary assessment there is a good way to frame that, with double-digit contributions this year from both pricing and unit output. And we saw more unit output contribution in the second quarter than the first quarter.

And as we progress through the year, you'll see more of a stable pricing environment. Just as another data point to highlight that, the ASPs that we generated in Q2 were essentially flat to Q1. So, sequentially, the growth in the business was fully driven by unit output.

As far as the pricing power and how long that will sustain, let me turn it to Matt to comment longer-term..

Yes, sure. This is Matt. I think two quick comments. One is, it's important to recognize that we have been incrementing up our supply, which is extremely important for our customers, and we expect that to continue.

On the pricing piece, we took a little bit different approach than some others, and we did a increase one time that [with calling] [Ph] our customers, we're trying to not nibbling it to that death on this; we're trying to reflect what we think is going to happen over the course of the year based on what we're being communicated by our suppliers as well as [some estimates] [Ph], and that's worked pretty well.

I think that we're seeing that that's worked well for our customers, it allows them to plan and navigate the year. In terms of the durability of that, right now, we don't see any indications of supplier pricing changes, right? And that seems to be relatively durable.

And, in fact, I think the expectation for most suppliers is that they're going to continue to increase their price. So, we feel good about how we've approached it. And, right now, indications are those prices will continue to increase in small amounts from suppliers, and that's what we've baked into our plans. So, we feel good about it..

And thank you. And if could just squeeze in one more, and I'll back up in the queue. Just could you remind us, John, what your lead times are? Thank you..

Yes, they're quite extended. We're looking -- it depends on the product line, but just in sort of aggregate terms, between six and 12 months of lead time at this point..

Thank you..

Our next question comes from Gary Mobley with Wells Fargo Securities. Please go ahead..

Hey, guys, thanks for taking my question. I want to start off by saying I appreciate the fact that you guys have been exceeding your long-term financial targets so far this year, and congratulations on that.

But as I look at the low-end of your long-term financial target, as you present at your Analyst Day, that's roughly $1.25 billion of revenue, 55% gross margin.

However, if I simply extrapolate out your $113 million non-GAAP OpEx guide that you're putting out there for the third quarter, it looks like you might be a little below that long-term 20% margin target; maybe, call it, high-teens percent.

So my question is what can give to allow fruition of that low-end of the financial target, is it gross margin, is it maybe some more OpEx discipline?.

Hey, Gary, yes, this is John. I understand the point, and yes, we are pleased to be outperforming our long-term targets this year. As we look ahead, we've got a ways to go to that point, and we have no change sort of -- or that's the first thing to say, no change in the long-term model.

[Would you know,] [Ph] puts and takes between gross margin and OpEx, as you indicated, that's one point to make. And second point is we have introduced a bit more variability and flex into our spending profile that provides more optionality to the management team here..

Thanks, John. As my follow-up, can you remind us what you have remaining for capital return? I believe that your [indiscernible] long term is to keep maybe a billion dollars in cash for optionality, so to speak.

Does that mean there is roughly $500 million left to return?.

Yes. Just suffice to say, Gary, that we expect to continue to return capital to shareholders and don't really have a view that there is a [indiscernible] points around us. Yes, we would like to maintain some dry powder for M&A optionality. I am quite pleased with how this has gone so far, and would like to continue with that program.

Happy that the Board is authorized another $250 million. That would top up to full $2 billion we talked about and we did the deal, but that doesn't mean that's the end of the road [indiscernible]..

Okay, thanks, John. Appreciate it..

Our next question comes from the line of Matt Ramsay with Cowen. Please go ahead..

Thank you very much. Good morning, everybody. I guess for my first question, John, you mentioned in your script that distribution inventory had gone up. And I think that was you called out due to a couple of [indiscernible] in China having some COVID shutdowns that happened during the quarter. And I guess that's understandable.

Okay, maybe if you can give a little bit more color on how much that's going on up? And have you been tracking sell-through from those [indiscernible] seen that inventory start to come back down? Thanks..

Yes, a bit. So, on the second question, we're seeing the China market open up better than where it was in the second quarter for sure. And, suffice to say that the two areas where we saw accumulation are above the average clearly, and our composite goal for this remains to be in the 45 to 55 days category. So, we are a little ahead.

But some distributors they are below target actually. So, we expect to continue to normalize this and create more fill and also relieve some of the accumulation that's taken place in China..

Got it. Thanks, John. I guess stepping back a little bit bigger picture for my follow-up, I guess the observation is that you and your peer companies the results are really good. ASP margins really strong right now. And there is kind of a juxtaposition of the investor fears of what's coming down the pipe with the economy.

I think to that end, Matt, maybe you could spend a little bit of time on the design win momentum? How you are seeing different end markets behave from design end and design win perspective? What ASPs are being sort of contemplated? And some of the new wins that you are getting just translate that that might I guess help us talk to investors about the fact that these transits you are seeing now are sustainable and maybe defensible as the economy does get a little more [hairy] [Ph]? Thanks..

Sure. Yes, so this Matt. And focusing on -- I think it's a really important point because there is a lot of uncertainty out there in terms of what the market is going to look like in the coming quarters.

And one of the things that we can do that makes a massive impact and the most meaningful to insulate us from whatever happens is our share gains and design win momentum. It's one of the strongest indicators that we have of what the future is going to look like. So, you see our current performance.

And what I mentioned earlier is year-to-date we have secured design wins that are approaching the level of our entire year in 2021. And 2021 was a strong design win year for us. So that gives the most momentum and confidence that, however, this ends up playing out, we will be well-positioned gaining share and outperforming.

That being said, you asked about ASPs as well. We win competitive ASPs in the socket. So, these design wins are priced at competitive ASPs. There is not any assumption in there of long-term change. Honestly, it's one customer at a time; one application at a time, one socket at a time. And don't have to be competitive when we win them.

So that's how it's reflected when we recognize the design win. So, important topic, and we are very proud of the team's momentum there. And our goal is to not only continue that but accelerate it to the maximum extent we can moving forward..

Thanks, Matt, really appreciate the color..

Your next question comes from Tore Svanberg with Stifel. Please go ahead..

Yes. Congratulations on the strong results on a record quarter. First, for John; John, in the previous call, you talked about some potential gross margin pressures as we move throughout the year. It does sound or seem like gross margin is holding up quite a bit better.

Can you talk more about the dynamics there beyond the guidance that you gave for the September quarter?.

Yes. Sure, Tore. We are seeing some downward shift here.

We saw the somewhat anomalous Q1 due to the asynchronous effect of price and costs that come down in Q2 again, forecasting a bit more down in Q3 and really expected what Matt was talking about earlier in the call, where we implemented price dynamics ahead of some of the costs increases that are coming -- forthcoming.

And now we're seeing some of that. So, we had some additional cost increases materializing in the second half.

We have talked about that before and looking ahead, we will continue to monitor this and see how the market progresses as a supply chain may open up and capacity open up over time, so really, no major changes in our messaging around those points as well..

Great, very good. Yes, it's still several hundred basis points I think higher than what we had, or you had perhaps suggested before. Second question is for you, Matt; I think you called out the electronic shelf label market where you're now working with two of the largest players there.

Could you just elaborate a little bit on that? It seems like we're still in the very early innings of that becoming potentially a huge market of the next few years?.

Yes, absolutely. Thanks for asking that. First of all, that's a market that as you said, early days just beginning I think it has a substantial growth potential as a space. I think the global adoption of that type of technology is relatively low, but the use cases and needs accelerated in the pandemic.

And I think we're seeing what I would start to define as early signs of very broad adoption being planned by a lot of stores not just in the U.S., but globally as well. It's interesting to point out this is not a new phenomenon for us internally.

We've actually been focused on this space now for about seven or eight years, and we're starting to see the impact of that, and we're really excited about it. So, early days, well-positioned, and I think substantial potential moving forward..

Great. Congratulations again. Thank you..

[Operator Instructions] Our next question comes from Blayne Curtis with Barclays. Please go ahead..

Hey, thanks for taking my question. You mentioned in the script that you saw some weakness in home in life, just curious when you saw that weakness and you were able to offset it with design wins and actually grew quite nicely.

Just kind of curious as you looked to September, any color on that consumer weakness within that September guide and whether Home & Life can still grow?.

Yes, Blayne, we have seen some of the push outs affected that part of the business a bit more, fair to say that. And yes, we'll see how the trends evolve over the course of the quarter, but it is possible that that business could grow..

Yes, this is Matt. I just add to what John's saying, it's important to understand that dynamic, that demand continues to meaningfully exceed supply across all those markets and applications. So, we are seeing some of those push outs and some of that volatility which creates some challenges to schedule as those things happen.

But we definitely see the ability to continue growing in that space. And our priority is to find a way to close the gap for our customers on demand versus supply, because we still have a lot of hurting factors out there. We want to close those gaps. So, there it's definitely opportunity for growth..

Got you. And then, just a follow up on terms of the increase in inventory, just, I mean, it is not that much on overall basis, but it is a big sequential increase.

So, was that product that you had hoped to ship and just couldn't, given all these moving pieces?.

Yes, essentially, that's right. And it's also -- it speaks to our work on supply chain and what we've done there as well, but we're making some progress here, but not really at our goal. I mean, our target inventory turns level is more in the three to four times neighborhood. So, we remain a couple of turns above our target inventory turn level..

Got you. Thanks..

Sure..

I will now hand the call back to Giovanni Pacelli..

Thank you, Sarah, and thank you all for joining this morning. This concludes today's call..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..