Hello. My name is Lisa, and I will be your conference operator today. Welcome to Silicon Labs' Third Quarter Fiscal 2023 Earnings Call. I will now turn the call over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead..

Thank you, Lisa, and good morning, everyone. We are recording this meeting, and a replay will be available for four 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, John Hollister. They will discuss our third quarter financial performance and review recent business activities.

We'll 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 and on the Investor Relations section of the Silicon Labs website. I'll now turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson.

Matt?.

Thanks, Giovanni, and good morning, everyone. In the third quarter, the Silicon Labs team executed well in a challenging environment, driving revenue and EPS to both exceeded the midpoint of our guidance. Current market environment continues to be characterized by a difficult combination of weak demand and high inventory.

Specifically, end customers carry to -- continue to carry inventory levels that are too high. At the same time, our end customers' demand environment continues to be weaker than previously forecast. In particular, we see weakness extending further into the broad industrial end market.

As a result of these factors, our fourth quarter will be negatively impacted across both business units. We have contained operating expenses thus far in the second half of this year by focusing on temporary reductions in discretionary and flexible spending.

Given the duration and severity of this downturn, we have now proactively taken a difficult decision to make structural reductions in headcount and other spending effective immediately to manage our OpEx further while maintaining investments in essential R&D projects to drive future growth.

While the near-term outlook is clearly challenging, we are focused on managing what we can control and putting ourselves in a position to deliver strong growth and higher earnings power once it's difficult market cycle corrects. Our design win momentum has never been stronger, and we are as confident as ever in our potential.

To underscore this, our industry-leading Series two platform continues to perform exceptionally well, driving our design wins to an all-time record level in Q3 and up 25% year-over-year. Importantly, we are starting to see this design win momentum pay off with some exciting ramps that I'll share after we hear from John.

Also, in Q3, we announced our next-generation platform called Series 3 that will further position us to lead this space. All of the items I've mentioned a strongly position us moving forward. With that, let me turn the call over to John to cover Q3 results and guidance for the fourth quarter.

John?.

Thanks, Matt, and good morning, everyone. Third quarter revenue was $204 million, above the midpoint of our guidance range and down 24% year-on-year. ASPs in the quarter declined sequentially, primarily due to product and customer mix. Unit volume was down just slightly on a sequential basis.

Revenue was down year-over-year in both business units in the quarter. The Industrial & Commercial business ended at $121 million, down 17% during the same period last year. All three product groups in I&C declined in the quarter with the broad industrial category experiencing the largest decline.

Within the I&C business, our performance in smart metering, however, has continued to be an area of relative strength. Home & Life revenue of $83 million was down 33% year-over-year and was up 4% sequentially. We continue to see strength in Life applications, particularly in connected health devices.

Geographically, we saw year-over-year decreases in all regions, with APAC being down less here Europe and the Americas. APAC, ex-China was up year-over-year. Distribution revenue was 81% for the third quarter, up slightly from the second quarter. Inventory in the channel was around 90 days.

Our largest end customer was under 5% of revenue in the quarter, and our top 10 end customers were about 25%, consistent with our historical trends. Non-GAAP gross margin ended slightly lower than expected at 58.5% due to product mix.

We continue to see a generally stable pricing and input cost environment with no significant changes expected in the next quarter. Non-GAAP operating expenses of $95 million was in line with our expectations as we executed focused spending reductions in the quarter primarily related to variable compensation, contractor spending, and travel.

Non-GAAP operating income was $25 million or 12% of sales, and our non-GAAP effective tax rate was in line with the quarter at 24%. Non-GAAP earnings of $0.62 was $0.03 above the midpoint of our guidance, primarily due to higher revenue.

On a GAAP basis, the gross margin ended at 58.4%, GAAP operating expenses were $107 million, which was better than expected and was $13 million below the midpoint of our guidance, primarily due to a change in stock compensation expense driven by the expected lower achievement on performance-based awards.

Accordingly, GAAP earnings per share were $0.32 for the quarter. Turning to the balance sheet. We ended the quarter with cash and investments of $417 million. Our accounts receivable balance grew in the quarter to $102 million with days sales outstanding 45 days.

Customers, including distributors, have requested longer payment terms in this current market environment. Accordingly, we temporarily extended payment terms for certain customers from our standard early-day terms.

We added about $22 million in net inventory in the quarter to $168 million as we continue to accumulate a strategic benefit based on the strong design win momentum we've seen for the past few years. inventory turns into at two times. We repurchased approximately $16 million worth of shares in Q3, targeting approximately 100,000 shares.

Our fully diluted shares outstanding in Q3 ended up 32 million shares. In Q2, we drew $80 million revolving -- from our revolving credit facility. We repaid $35 million of that balance in Q3 and have an outstanding amount remaining of $45 million.

Overall, the balance sheet continues to be very healthy and remains well positioned to weather the current market environment and to execute on our strategy. Before I turn the call back to Matt, I will cover guidance for the fourth quarter.

As Matt mentioned in his opening statement, the current demand environment is still quite challenging as customers are focused on reducing their excess inventory. Our bookings activity slowed significantly during Q3, and we believe many of our end customers still hold higher-than-normal inventory levels.

As a result, we expect a decline in revenue for the fourth quarter with a guided range of $70 million to $100 million. We anticipate both units -- business units to decline in Q4. Due to the uncertainty in the market environment, we are widening the guidance range to plus minus $15 million from the revenue midpoint for this quarter.

We expect non-GAAP gross margin in the fourth quarter to be approximately 53%. The lower gross margin for this quarter primarily reflects the impact of certain fixed cost developments in our cost of goods sold, which are being absorbed over a significantly lower revenue level.

We continue to maintain discipline over our operating expenses, and the temporary reductions we discussed last quarter will remain in place to the fourth quarter. We expect non-GAAP operating expenses in the fourth quarter to be approximately $94 million. We expect the non-GAAP effective tax rate to be approximately 3% in the fourth quarter.

Accordingly, our non-GAAP loss per share for Q4 is expected to be in the range of $1.22 to $1.66. On a GAAP basis, we expect gross margin to be 53%. We expect GAAP operating expenses to be approximately $123 million, inclusive of an expected restructuring charge of around $6 million in Q4.

We expect GAAP earnings per share to be a loss of between $1.95 to $2.39 per share. I will now turn the call back over to Matt..

Thanks, John. Despite the current economic challenges, we continue to execute on design win ramps and long-term growth markets such as smart cities and health care, which are driving significant deployments of devices with sizable ramps in the coming year.

In smart cities, Silicon Labs has been the wireless leader in smart metering market for many years.

Like the leadership role we played in the successful rollout of smart meters in the U.K., we are now planning a similar and dominant role in India's rollout where 250 million smart meters are expected to be deployed in the coming years, with our production ramp starting early next year.

In addition, we were awarded new designs with Landis+Gyr, a leading provider of energy management solutions to use our Series 2 SoC in its primary smart electric metering platform, ramping early next year.

Also, within our Industrial business, we have been designed into multiple products at one of the top two EV providers in the world, which we expect to ramp over the next few quarters. Turning to our Life business. The health care space continues to accelerate and offer exciting new growth opportunities that are a great fit for our platform.

We are starting to see our multiyear focus on this market payoff, having secured multiple designs globally. As part of this, we are excited to share our partnership with Dexcom, which will use our platform in its continuous glucose monitors, or CGMs, moving forward.

Silicon Labs' ability to offer customizable and highly secure solutions with our Bluetooth SoCs was key in solidifying this relationship, and we expect these product ramps will begin contributing to our revenue early in 2024.

At our fourth annual Works with Conference in August, which attracted thousands of IoT developers, I previewed Silicon Labs' fifth-generation platform called Series 3, which is on track to sample early next year. Series 3 brings three major new capability to the IoT.

First, it brings new to industry performance through new levels of security, wireless performance, power consumption, and multiband and multi-protocol capabilities, areas we have always stood out in. Second, our new levels of compute.

Series 3 can support more than 100 times of processing capability of our current generation Series 2, including integrated artificial intelligence and machine learning accelerators and enabling the integration of system processing from stand-alone MCUs into our wireless SoCs. And third, the IoT is seeing new-to-world volumes and applications.

Because of this, our Series 3 platform will offer new levels of scalability with a multi-radio platform and common code base that will serve over 30 new wireless SoCs, a 2 time to 3 time increase over the number of Series 2 products as well as extendable and scalable memory architecture, including support for external flash.

As part of scalability, Series 3 is built on a supply chain that leverages multiple fabs and geographies to maximize the resiliency and reliability of supply.

As part of the Series 3 announcement, Silicon Labs also announced the next version of its developer tool suite, Simplicity Studio 6, which will allow developers to utilize the most preferred integrated development environment on the market while giving them the latest tools to support their continued development on Series 2 as well as Series 3.

As we told our developers, an investment in our industry-leading Series 2 platform is also an investment in our Series 3 platform. Importantly, Series 2 will continue to grow and be supportive of new silicon and software and will complement Series 3 with both platforms coexisting for many years to come.

In closing, I would like to acknowledge that despite the near-term weakness in our end markets, our team is dedicated to overcoming this market downturn without hampering our long-term strategic and financial goals.

The fundamentals of our story and the growth prospects for our end markets remain sound, and our position in those markets has only become stronger. Based on everything we're seeing, we believe Q4 will be our bottom, and we expect to return to sequential growth in the first quarter of 2024. I will now hand it back over to Giovanni for Q&A.

Giovanni?.

Thank you, Matt. Before we open the call for Q&A, I would like to announce our participation in three upcoming conferences.

Stifel's 2023 Midwest One-On-One Growth Conference in Chicago on November 9, Wells Fargo's Seventh Annual TMT Summit on November 29 in Rancho Palos Verdes, and the Barclays Global Technology Conference in San Francisco on December 7. We'll now open up the call for questions.

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

Lisa?.

[Operator Instructions]. Our first question will be coming from Matt Ramsey of TD Cowen. Please go ahead..

Thank you, very much. Good morning everybody. Hang-in there guys in the tough environment. I think, Matt, I wanted to start my question and just to kind of back up and reassess things on kind of first principles about some of the assumptions we have in the model relative to what's going on here.

It sounds like pricing stability, exciting things coming with Series 3, still really strong design win traction and at first read, that seems just to me like an inventory correction on steroids a bit.

And I'd like to get you to respond to that and just think about -- as you think about the design wins going forward that you guys continue to accumulate, are you concerned that maybe the volumes and revenue going forward that underpin those design wins have just come down and the TAM for the business that you're looking at is smaller? Or is this just literally an inventory correction that we got to get through before we get back on the bike? I'm just trying to think about, given the level of falloff in revenue here, how are you guys thinking about reassessing the actual TAM for units and dollars relative to just the design wins? Thanks..

Yes. Completely understand. Thanks, Matt. Yes, let me do my best to answer that. Just to start with, before we get into the inventory and the demand, it's important to point out that we really essentially indexed to a couple of major end segments, consumer, which has been down for a year now pretty significantly.

And Industrial, which had been more resilient but we've been seeing signs of that, and that really came through as we were leading in Q3 and going into Q4, the weakness in that space.

But the end inventory is really important to talk about, right? So, we've -- really, when we sample our top 40 or 50 customers, they're carrying more inventory than they normally do by at least a quarter. I'd say it's an easy way to think about that. And on top of that, I think their expectation for demand and growth and strength was higher.

And when those two things converge and the demand less and that inventory is high, the impact is profound, and that's what we're seeing. So that is the first piece of it. And in terms of the second piece, in terms of end markets and design wins and all that, a few things. One is we don't see share loss here.

When we look at it on a socket-by-socket basis, we see gains. And that's reflected in our design win numbers and strength with a record Q3 that was, I think, up around 25% year-over-year. But what we do see is while some of those have ramped, we see those ramps being impacted by the overall market.

Maybe their volumes are less than they thought, ramps might be pushed out as they work through inventory, et cetera. But the big ramps are solid and there, although some might be delayed. And so, we shared some of those in the prepared remarks that are pretty substantial and coming very soon in Q1.

But I don't see anything on share loss, I want to be clear about that.

And your question about the TAM, I mean I think there's an argument being made that when the market is down like the size of the market is significantly less, but the fundamentals in terms of the long-term size of the market, the growth of the market, none of that's changed at all.

So, what we really see is that confluence of end inventory and demand being much softer than expected coming together and we got to navigate that. But the fundamentals haven't changed, and that's what gives us confidence moving forward..

Thank you for all that perspective, Matt. I really appreciate it. John, just as my follow-up, two things. One, it looked like you guys burned $50 million or something like that in cash, and you're guiding to, obviously, negative P&L for the December quarter.

So, I just wanted to do a check on cash balances, liquidity, the revolver, stuff like that, just to see how you're thinking about it. And then you spent a little time on some OpEx reductions in the script. Maybe you could quantify how we should think about that for 2024? Thanks..

Sure, Matt. So, on the cash balance, we continue to have a strong cash balance, our revolver that's outstanding is really around optimizing between short-term investments and interest, et cetera, to optimize that portion of our cash flow P&L. So, we're not concerned about the liquidity of the company, and we continue to have a robust cash balance.

In terms of the OpEx actions, remember that in the second half of 2023, we undertook temporary non-sustainable OpEx containment actions, such as travel, contractor spending, some of our bonus programs, et cetera. These things need to come back heading into next year.

And it's because related to that, unfortunately, we are taking some structural reductions in the business. From a quantification perspective there, Matt, the way to think about that is first quarter OpEx, we see is roughly flat to the second half run rate as these two things basically offset each other.

And then we'll monitor this as we move through the rest of next year based on the rate pace of revenue improvements, which we do anticipate happening through the course of next year. We just need to see how strong the recovery is based on the ramps and recovery of the general market..

Very clear. Thanks guys. See you next week..

And our next question will be coming from Tore Svanberg of Stifel. Your line is open..

Yes. Thank you. I wanted to zoom in on your comment about Q4 being a bottom and seeing some growth sequentially in Q1. It sounds like you have some design wins ramping. That's pretty clear.

But can you also talk about the inventory correction? I mean, obviously, given the size of the Q4 guidance down here, obviously, one would think that, that's clearing out of inventories. But any more color or visibility you have on the inventory situation as you go into 2024, that would be helpful..

Sure. Yes, Tore. This is Matt. A few things on that. we are definitely not calling the market bottom, and we want to be clear about that. And it should be clear, there's also headwinds, right? It's unclear how much more of a correction Industrial has as an end segment. So, there's some headwinds there.

And on end customer inventory, that would be awesome if it was super clean on the quarter boundary, but it isn't. It's not uniforms across our customers. We talk to -- as I said, our top 40 or 50, they're carrying more than they should, some less, some more, some extending into Q1 and Q2, some okay now.

But if you average it all out, it's really the biggest impact is, it's about a quarter that they have. They're carrying more than they typically should or would. So that's important. So, we're not saying the inventory headwind will go away, but the biggest piece of it should hopefully be addressed. So that's one.

And so, you have those headwinds for sure, but that should be working its way through an end inventory. And then the tailwinds would be obviously starting from a remarkably low revenue number moving forward, and that inventory working down at our customers and the design win strength that we have. As I said earlier, none of those sockets are gone.

We continue to accumulate them, and some of the bigger ones are right around the corner. So, it's a confluence of those things story that gives us the confidence to say, based on what we're seeing and what we believe is this will be our bottom, and we can drive sequential growth from here..

Yes. That's very helpful. And as my follow-up, I know this is always a very tricky question given cyclicality, and inventory management, and so on and so forth. But your revenues peaked at $270 million, you're guiding $285 million at the midpoint.

Where do you think the true consumption is of your business, whether on a quarterly or an annual basis, just to sort of we get a sense for where you will eventually go back to as we get through this inventory adjustment period? Thank you..

Yes, Tore, this is John. Yes, it is a hard question to answer, given the lack of visibility we have to into the inventory level and how that relates to our revenue run rate as seeing the effect of that right now. But suffice to say, we think it's meaningfully higher than where we're running guiding right now. That is clear.

But clearly, we do need to take some action around our OpEx and we're reacting and executing important..

Sounds good. Thank you..

Our next question will be coming from Gary Mobley of Wells Fargo. Your line is open..

Hi, guys. Thanks for taking my question. I wanted to make sure I have the impact of the inventory reduction squared away in my head. So, you talked about $200 million worth of perhaps excess inventory or said differently, roughly a quarter's worth of revenue. And you're guiding the fourth quarter revenue down $120 million sequentially, roughly.

So that is what, roughly 60% of it being digested in the fourth quarter? And then maybe 40% digested into the first quarter? And to what extent does this $85 million revenue guide reflect lower turns assumption just given the lack of visibility as your lead times have shortened?.

Yes, Gary. We're working through this as best we can to navigate the inventory situation at our customers. I guess on your question long-terms, we duplicate. So, we definitely have seen very low turns in the business. That's really at the roots of what is going on here.

Turns have been quite low for multiple weeks, and that is really underpinning the weakness in our guidance. And it is exactly that. that we look to first, as the first indicator of a recovery emerging as customers clear inventory as the inventory clearance events, we should see turns improve. I hope that's answering your question.

That's kind of the best half-way right now..

Okay. Fair enough. All right. And so, I wanted to ask about the flexibility of the buyback. I think you have listed in your PowerPoint deck on your Investors section of your website, $100 million left in the buyback.

How much flexibility do you have to ramp that up, considering the cash on the balance sheet, the lending capability, and whatnot? And to what extent are you willing to borrow at today's interest rate environment to buy back stock at these levels?.

Yes. We do have flexibility up and down, Gary, to the point of being opportunistic on it but also being mindful of our overall liquidity. These are all factors at work as we cover in the best way to approach that. But we're not locked in, so to speak, we do have flexibility [indiscernible]..

All right. Thank you, guys..

Our next question will be coming from Quinn Bolton of Needham. Your line is open..

Thanks, for taking my questions. Just wanted to follow up on Gary's question there. You kind of went through the math of the inventory clearance, maybe a clear 50%, 60% in Q1 -- sorry, Q4. It would seem that Q1, while you're guiding it up is still going to have a significant inventory effect.

And then hopefully, by the end of Q1, maybe you've cleared most of that and you start to get back to better sequential growth rates.

Just wondering if I'm thinking about the shape of the trajectory, right, or if you would think it's a different trajectory off the bottom?.

Yes. Quinn, thank you. This is Matt. I'm not sure about that trajectory. If we step back, I think just looking at it big picture, to be clear, our internal inventory, we are definitely growing that by design, intentionally strategically in support of the future business and ramps we've secured and it's important for our customers.

We are sole source on a majority of our products, the primary silicon, and a lot of our products. And our customers have just been through this whole supply chain math that we have to make sure that we are ready to support this business that we keep securing. So that's one piece. The distribution or channel piece is obviously separate.

And in that case, that's I think it's around 90 DSI. So higher. But at the end of the day, we're carrying about quarters worth at suppressed revenue levels. So, as we've said in the last few quarters, it's higher than our historical but not alarming to us and definitely manageable as we look forward and with what we know that's coming down the road.

I think our biggest challenge is our end customers and what they are carrying in their lines and supply chain. And being able to -- that's high, higher than it's historically been. And at the same time, they thought their demand was going to be much stronger. And the compounding or confluence of those two things coming together is extremely impactful.

And that's what we're seeing in Q4..

Yes, Quinn, this is John. Let me try to address what I think you and Gary are both asking and say this -- we are not saying that all inventory will be cleared in the fourth quarter.

Matt indicated that we've got a mix of customers and based on the best we have, and is very imperfect information, do see some of them with inventory levels that would require more time to clear in the first quarter, some even beyond first quarter. So, I'm trying to respond to what you and Gary are progressing on..

Yes. I guess that's what I started to drive that as it feels like, obviously, a low guide for the fourth quarter but it doesn't look like you're clearing all of that quarter's worth of inventory at customers.

And so, I'm kind of assuming that the March quarter, I know you're not guiding, but the March quarter probably isn't all that different from the December levels, and then hopefully, by the end of March, you will have gotten through most, maybe not all, but most of that inventory buildup at customers.

And then we'll just have to see sort of where end demand is and how quickly the consumption rates recover, I guess, is the way I'm thinking about it..

Yes. I'm going to reiterate, but I understand the comment question now. I think the easiest way to frame it is what we've said is, one, definitely not saying when we'll get through all of it, and very imperfect, right? This is -- there's no reports for this.

This is just a lot of discussions with customers on the phone and trying to get a feel for what that level is and their moving-in target. But we believe that in Q4 based on their expectations, their levels, we'll get through -- easy way to think of it as a majority of that, but there's still going to be some to work.

And that's what gives us the confidence in saying, we see that as our bottom. And it's not only the inventory, but it's a big factor moving forward. It's also those ramps on the other side of it that are helping as well. But -- it's a massive hit in Q4, and that inventory is a huge piece of that. So, it's important that we're clear about that.

But the data says that will work through a big chunk of it..

Got it. And then just on the split of the business.

I assume you're probably seeing a bigger hit to the industrial and commercial just as that business seemed to be much stronger through the second quarter this year, and I could certainly see more inventory having accumulated there versus Home and Life, which has been under pressure for about a year now..

Yes, it's tough. Yes. I think that really, in the second half of this year, the Industrial impact has really been significant where it had been so much more resilient and durable prior to that. Consumer been hit all on over the last year and significantly, but it also, worth pointing out, both are down in Q4 not only in industrial.

So, new low levels for both of those Q3 to Q4..

Got it. Thank you..

Our next question will be coming from Cody Acree of the Benchmark Company. Your line is open..

Thanks guys. Thanks for taking my question. I guess, John, Matt, if you can maybe speak to your order linearity over the last quarter, the last few months.

And maybe how are you looking at your forecasting methodology, just adjusting how you're expecting to predict going forward?.

Sure. I'll start. Yes. I would not say there's any linearity would be the starting point on that. It's been somewhat remarkable that seeing bookings decline, and then you'll see a pause, maybe a little bit of calm and then they'll decline some more. Same thing on turns. Turns continue to drop. So, it's been extremely challenging as we try to forecast this.

And remember, the forecast is a -- we have tens of thousands of data points in customers. And our forecast is really an attempted bottom of accumulation of their views. But I think the biggest challenge is when the market is changing so quickly, so volatile, the visibility is as low as it is, our customers are struggling to forecast that as well.

And that accumulation is very challenging. So obviously, as we go through these quarters and see this, we're trying to do our best to reflect that, communicate that, be transparent about that.

And I think I'd say it feels each time a little more conservative, I don't know how else to say it, given what we're experiencing until we see really strong signs on the other side of that of the market recovery, which we're not seeing yet..

Thanks for that.

And then, John, if you could maybe give us any better picture of your OpEx budget for next year as you work some of these cost reductions in the model?.

Yes, Cody. Like I said, first quarter, we expect to be roughly flat to the second-half run rate in the mid-90s based on the best available information we have as of yet. And beyond that, Cody, we just have to monitor this and see how the recovery goes.

And our model remains our compass, how we want to operate the company, and that's what we would seek to get back to as soon as we can. So, we're going to maintain some flexibility on OpEx as we head into the second quarter and second half of next year based on how things are tracking..

Okay. Great, thank you, guys..

Our next question is coming from Srini Pajjuri of Raymond James. Your line is open..

Thank you. Good morning, guys. John, on the inventory, especially the disti inventory, I think you said roughly 90 days. I'm guessing that's about $200 million.

So, as we go through, I guess, the next quarter exiting December heading into March, I'm just trying to understand how we should think about the absolute inventory? How much of that disti inventory are you hoping to draw down? And if you could maybe give us some color when and where I think it normalizes.

I guess what is a normal level for you at this point..

Yes, Srini, sure. Yes. So, 90 DSI at the end of the third quarter is in the neighborhood of more like $100 million of value roughly, not $200 million. Yes. And we do expect that to moderate and decline in the fourth quarter based on what we're seeing.

I mean that's part of the challenge here is the very weak POA [ph] or sell-through demand is at the roof what's behind our guidance here. Over time, I think we can see some further reduction of that with the market recovery. But landing in the 60 days, 70 days DSI is normal that would be fine from an operating perspective as we look ahead..

Got it. Thanks, for that. And then, Matt, your comment, obviously, the environment is not great. We've heard similar comments from some of your peers. But the magnitude of your outlook is definitely worse than what we've heard so far from your peers. So, I'm just trying to understand as to why there is such a discrepancy.

I guess it could be just your conservatism or it's possible that some of your customers have a little bit more inventory and some of your components were maybe constrained a bit more that caused inventories to go up a bit more than versus what your peers are seeing.

So just trying to reconcile that as to why you would be, I guess, much worse than some of your peers here given your comments that you're not losing any share?.

Yes. Sure, makes total sense. So multiple things, right? One is our percent of our Industrial & Commercial businesses pretty high as a percentage of our total revenue going into the second half of this year, and that's getting hit pretty hard right now.

So, we're -- that's one element that -- we've already seen in the consumer piece, Industrial & Commercial is really unique for the second half of this year.

Because we talked about the demand piece too in our customers and inventory I think we had a lot of customers who expected a lot of ramps, a lot of strong growth, and we're carrying inventory as such. And I think that those coming together, the way they have has hit us really hard.

And like I said before, we have all these design wins that I think some of those have been delayed, some are not the levels our customers expected.

All of that, I think, is unique to us, given that we've been accumulating designs at such a fast level over the last few years, so the predictability of being able to forecast for our customers even, the timing of those ramps, the magnitude of those ramps, I think, is challenging.

And then there's other pieces that are more difficult to know and speculative, right? But we definitely have -- as I said earlier, we are sole-sourcing a lot of our sockets almost all of our sockets. And the primary silicon in a lot of those -- we're on mature nodes and customers worry about supply.

I think the -- while our gross margins are strong, the ASPs are lower -- and we have customers that are planning on these ramps. So maybe they did accumulate more in anticipation of those, but that's unclear and difficult to know because it's hard to compare end customer inventory level.

What we know is our ramps and design wins, we have confidence in those, the variability is on the timing. And we know that our customers are carrying more than they want and they're working that down. But that's temporary. So that's what gives us the confidence on the other side of that.

But I really think the confluence of all those things I mentioned are what's hitting us and unique to us in Q4 in the second half in general. But all those things can be true and don't change. Those fundamental pieces on the other side that the growth potential, market position, share gains, the potential there is still just as strong.

So, we just have to navigate this environment responsibly, that far we're doing what we're doing in OpEx and position ourselves to capture all this opportunity in business that's been secured on the other side of it..

Our next question will be coming from Blayne Curtis of Barclays. Your line is open..

Hi, good morning, thanks. I have two questions. Just kind of curious for the December quarter, $85 million between the two segments, I'm just having a hard time the order of magnitude so large of the correction. I mean you actually saw a little growth in consumer.

So, I think the view was going into this that maybe you're kind of getting through things and then you're seeing a decline. So, I guess curious what you think the trigger was.

I mean, was it lead times coming in? Or just the customers just turned off? And what was the trigger for that? And then just of that $85 million, can you help us between those two segments a little bit more? It sounds like industrial is worse, but just any kind of like broad strokes would be helpful between those two segments..

Yes. I mean, a quick answer is Industrial is definitely the bigger challenge because we're seeing that hit harder right now. Consumer has been hit all along. But you're absolutely right that we've seen a little bit of, let's call it, stability in Q3 on Consumer and that's going down again, Q3 to Q4.

The team believes that seasonally, Consumer is stronger in Q3 in anticipation of holiday builds in that cycle, and we saw some benefit from that, but those levels obviously aren't stable and holding going Q3 into Q4. So that could be impacting the consumer side of it, but we're not sure we need a few more clicks before we can say for certain..

Got you. And then I want to ask on gross margin. I mean I'm assuming there's some fixed cost absorption that's not happening here. Just wondering if there's any written off inventory.

And then if you can help us on the recovery of gross margin next year?.

Yes, Blayne. It's really two effects in the fourth quarter. There's not an unusual amount of obsolescence or write-offs that are contemplated. But we are seeing both with the sharp reduction in revenue in Q4, an oversized concentration effect of customer and product mix on the downside. That's one leg of it.

But the thing I mentioned and what you mentioned is also a big piece of it that we just have fixed that is being absorbed over a smaller revenue base. We do anticipate with recovery in the market that gross margins would revert back to what we experienced in the third quarter and as we move into first quarter and second half of 2024.

We think this is anomalous, what we're seeing in the fourth quarter 2024..

Thanks..

Our next question will be coming from Joe Moore of Morgan Stanley. Your line is open..

Hi, thank you. I wonder if you guys could address like-for-like pricing. You saw the prices go up the last couple of years when foundry costs went up.

Are you seeing any change there? And if you're not, I guess, to the extent that you're thinking about next-generation design wins, you're building your pipeline, do you see more price competition for those new sockets?.

Yes. A couple of comments, Joe. This is Matt. Yes, what we've seen is the market kind of return to pricing behavior that is typical for this type of market and really, I'm going to call it typical of pre-pandemic and now kind of post-pandemic.

So, an easy way to think about it is the price pressure is really on design wins, more than anything, as you pointed out, not on our existing business. That existing business tends to cross thousands of designs and customers tends to run as it does.

And where we see kind of the leading edge of price pressure is on those design wins, which, as I said, are at record levels last few years, including this year, including Q3. And what we're seeing there is price pressure that is typical, not anomalous and we are still winning at an accelerated pace..

That's helpful. Thank you..

And we have a follow-up question coming from Tore Svanberg of Stifel. Your line is open..

I just had two quick follow-ups. First of all, I'm back to the run rate. So, if we go back to Q1 of '21 before you had obviously very strong growth through the pandemic years, the revenue run rate was around $158 million, if I'm not mistaken. I understand sell-through is deteriorating.

I understand there's cyclicality about inventory and so on and so forth. But it would just seem that a number around that level is probably where the consumption is of your business.

Just wondering if you have any comment if you think that, that is completely off? Or could that potentially be in the ballpark?.

The only thing I understand, Tore, this is Matt, the logic, and the approach. The only thing I'd add or say and is the Think of the design win momentum and share gains over that time frame. So even if you consider the entire pandemic as a build of inventory, which we don't believe that, that's all it was.

Even if you did, there's gains and stronger business underpinning that exiting than entering. So that's an important component to add to your question..

That's great perspective. And the second question is, and maybe moving away from some of the near-term challenges here. In the past, you talked about some new product cycles. Obviously, you mentioned Series 3, but there's also smart retail. There's your Wi-Fi business. You did talk a little bit about the India smart meter business.

But could you give us an update on any -- some of these newer businesses that are supposed to start ramping?.

Yes, sure. Yes, Wi-Fi -- so let me step back. Big picture, we talked about an increased focus in Bluetooth. No change there. We're incredibly happy and excited with the progress we're making there. We are gaining share in Bluetooth and that continues. Wi-Fi earlier on in that investment and that initiative.

But one of our fastest-growing areas this year and moving forward. So that's exciting progress as well. When you look at it by segments, we talked about digital retail, shelf labels, continues to see good progress there.

We just, in our prepared remarks, mentioned the metering space, which we've always had an incredibly strong position, and that's gotten stronger. And there's a lot of rollouts and tenders there that are going to give us some lift not just starting next year, but also for quite a few years. We've talked about health care, Life as an increased focus.

And we've made a lot of progress there, some of that, which we just shared in the prepared remarks, with Dexcom, which we're excited about. And another area that hasn't come up, but it's worth mentioning, our position in Matter, and the progress in Matter is exciting and going well also.

And simply said, for those who aren't familiar, one of our historically strong positions has been at 15.4 and 15.4 is getting pulled into the mainstream with that. That's why over 80% of the certifications in Matter are coming from Silicon Labs. And you're seeing Matter get pulled into the mainstream.

You saw the iPhone -- latest iPhone 15 Max supporting thread, which is great and that will help pull Matter more into the mainstream and end products where we're incredibly strong. So, all those fundamental, end markets and trends are going favorable.

We just have an ugly end-market environment and inventory situation that we got to work through to see all the goodness of those other areas coming through going forward..

This concludes the Q&A session for today. I would like to turn the call back over to Giovanni for closing remarks. Please go ahead..

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

Thank you all for joining. You may all disconnect..