Silicon Laboratories Inc. (SLAB) Earnings Call Transcript & Summary

Good day and welcome to the Silicon Laboratories 2020 Annual Meeting of Stockholders. I would now like to turn the conference over to Tyson Tuttle. Please go ahead.

Good morning. I am Tyson Tuttle, the company's President and Chief Executive Officer. Welcome to the 2020 Annual Meeting of Stockholders of Silicon Labs. It is 9:00 Central Time and the meeting will come to order. We will first present the items to be voted upon, then we will provide a brief review of our operations and 2019 financial results. We will then announce the preliminary voting results.

I'm Jalene Hoover, the company's Director of Investor Relations and International Finance. Stockholders of record may submit questions during the meeting by typing them into the "Ask A Question" box on the web portal. Subject to the allotted time at the end of the meeting, we will answer your posted questions. We respectfully request that you limit your questions to fiscal year 2019. We will discuss first quarter fiscal 2020 activity and financial results in our upcoming earnings call. If we are unable to respond to your question during the shareholder meeting, you may contact our Investor Relations team at [email protected] following the meeting.

The Board of Directors has appointed Silicon Labs' Chief Legal Officer, Mr. Néstor Ho, as the secretary of this meeting. The Board has appointed Mr. Andrew Wilcox from Broadridge Financial Solutions as the inspector of election, and he will tabulate the results of the voting. The Board of Directors set the close of business on February 26, 2020, as the record date for stockholders entitled to vote at this meeting. We have an affidavit from [ Daniel Zinni ] of Broadridge Financial Solutions certifying that each stockholder of record and each identifiable beneficial owner on February 26, 2020, was sent an official notice regarding the availability of proxy materials on or about March 9, 2020. The list of the company's stockholders as of the record date has been on file and open for stockholder examination at the offices of the company for the preceding 10 days and is available now for examination via the registered shareholder list -- link on the web portal. Mr. Wilcox has reported that a majority of the total number of shares entitled to vote are present either in person or by proxy at this meeting and constituting a quorum. A quorum being present, this meeting may proceed. I will now present the items to be voted upon. The first item is the election of 3 Class I directors to serve on the Board of Directors until their terms expire at our 2023 Annual Meeting or until their respective successors are duly elected and qualified. The nominees are Nav Sooch, Bill Wood and Nina Richardson. The next item is the ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for our fiscal year ending January 2, 2021. The third item is the advisory vote regarding the compensation of the named executive officers as described in our proxy statement. This vote is not binding, but it will inform our Board and Compensation Committee about stockholder sentiment regarding our executive compensation philosophy, practices and policies, and they will be able to consider such sentiment when determining executive compensation. Each of these proposals is described in detail in the proxy statement. We will now vote on the matters. It isn't necessary for stockholders to vote at this time if they have voted by proxy, unless they wish to change their vote. If there are such stockholders who wish to change their vote, please do so by clicking on the Voting button on the web portal and following the instructions here. We will now pause to wait for any stockholders to complete voting. [Voting]

All right. We are getting towards the end of the 30 seconds. All right. Now that everyone has had the opportunity to vote and I now declare that the polls for the 2020 Annual Meeting of Stockholders of Silicon Labs are closed at 9:04 -- 9:05 a.m. Central Time. While the inspector of elections tabulates the preliminary voting results, I would like to briefly review the operations of the company. I'm going to advance to the slides. This is our forward-looking statement, Private Securities Litigation Reform Act. All right. So Silicon Labs was founded in 1996 and just celebrated our 20th anniversary as a public company, listed on the NASDAQ stock exchange. We are a leading provider of silicon software and solutions for a smarter and more connected world, leveraging the core competencies of the company since the founding of the company, really around mixed signal and RF integration. And we have a track record of industry first and disrupting large markets. Today, we are targeting large and diverse end markets, which offer a long runway for growth for the company's products. In order to scale and accelerate that growth, we are focused on simplicity and figuring out how to make our devices easy to use so that they can scale across broad markets. We also use a fabless manufacturing model, which is very scalable and allows us to focus on product development and customer support. Today, we have about 35,000 customers and have a very strong intellectual property portfolio of about 1,700 patents. Silicon Labs is headquartered in Austin, Texas. That's where I am this morning. We also have our international headquarters in Singapore and 5 design centers as well as in Europe as well as a design center in Boston and several in the U.S. We do have a global sales force situated around the world. The company has had a consistent set of value since the early days really focused around people and around the way we work together. We hire, foster and empower great talent and have always had a top tier of talent within the company and continue to grow that talent base. So we focus on commercial success. And ultimately, we're here to create customer value, and we do that through innovating on our products as well as, again, making our products easy to use. We hold ourselves accountable and work hard to meet our commitments, and doing the right thing is really, really important and we try to do that in all aspects of our business. We've been recognized for a number of accomplishments, being a Great Place to Work for our corporate culture at the GSA, the Austin Business Journal, the Austin American-Statesman, Fortune Magazine, so a very broad range of awards recognizing the success that we've had at Silicon Labs. Our growth opportunity is very, very large. The served market by 2023 is forecasted to grow at a 9% CAGR from today to $14 billion out of a TAM of $31 billion. The infrastructure markets that we're targeting and really the growth in bandwidth that we see in data centers and in wireless, especially during the work-from-home time, is driving our business. And then the Internet of Things is also a very, very important market for us, driving the largest amount of that market opportunity. Today, we have leading solutions in these markets and we are well positioned to capture share. Today, we have about 8% market share, and we see that over this period of time, we should be gaining share against our competitors. The end markets that we are pursuing, we're about 50% today industrial with the second largest area in the consumer space and then communications, high-speed communications, with automotive being smaller. You see that the industrial segment is the one that has the largest growth. It's about a 13% growth out of a 9% total CAGR and that's where we have a lot of focus. Our customer base has continued to diversify. About 20% of our revenue comes from our top 10 customers and over 70% of our revenue goes through the distribution channel. You can see on the right the customer ranking and there's a long tail of customers that form our business at Silicon Labs. Our product categories. Just last month, we combined our access, broadcast and infrastructure categories into infrastructure and automotive. And looking back at 2019 revenue, that was 42% of revenue, IoT was 58% of revenue. We've been investing in success in IoT and have shown very good growth over the course of time. Last year was a tough year in the silicon -- in the semiconductor business. And the wireless business, for instance, was down about 16% where our wireless business grew 14%. And so the growth in our IoT business, even in a down year, we were able to continue to have a 5% growth for that year. We also recently announced the acquisition of Redpine Signals' Wi-Fi and Bluetooth business last month as well as their development center in Hyderabad, India, and that was for $308 million and is pending closing today. Also in 2019, we had a number of announcements in IoT in terms of our Bluetooth 5.1 as well as our SoC, the BG22 SoC solution for Bluetooth that was announced in January. We also collaborated with the Z-Wave Alliance to open the Z-Wave Specification and have a number of series to our Series 2 platform with the next-generation 40-nanometer products starting to get those out and having those certified into modules. Now the market opportunity for IoT, out of that $14 billion IoT, is about $10 billion of that and that has about a 10% CAGR on the SAM. So again, we are very well positioned and have leading positions in multiple markets within IoT with our SoCs. And we grew our design win lifetime about 38% of the LTR revenue, 38% last year. So that bodes well to being able to continue to gain share. Today, we have about 7% market share and see that as going into the double digits in the road ahead. This market is very, very -- and has a long runway for growth. And we are the undisputed leader in IoT wireless today, that we have the #1 market share and the #1 growth and we've been consistently outperforming the market. This is really with our scalable platform where we again drive simplicity to make these devices easy to use and program for our customers and target those at a broad range of customers and applications. So the breadth and depth of our technology is really unmatched. The IoT SAM, you see today, about $7 billion is going to about $10.4 billion spread between the industrial and consumer segment and the home and consumer area of the market. And that's also fairly evenly divided between microcontrollers and wireless. Some of the market trends that we're seeing, IoT adoption is accelerating globally. It's helping to improve lives, improve business models, helping the environment and there's a strong ROI on the implementation of these, especially in the industrial sector. Cloud and AI need more data and need more connected devices, and so this is really driving a lot of the growth that we're seeing out of new market. The industry is also really collaborating and aligning around the connected home over IP in the smart home space as well as security and privacy standards that continue to evolve. We also see the wireless technologies that are required such as Thread and subgigahertz going mainstream, the Bluetooth, followed by Zigbee and Z-Wave doing very, very well and really convergence of the app and data models where devices talk to one another. And again, our ability to drive software and simplicity into that drives our differentiation as well as our ability to scale into the broader market. Switching now to infrastructure and automotive. The industry was impacted by a slowdown in 2019. We saw this at about a 14% year-on-year decline in this, which was, in our infrastructure business, was 8% down, and then broadcast and access were both down about 19%. So they were impacted by the broad industry slowdown, especially in the first half of last year. During this time, we -- in 2019, we acquired Qulsar's IEEE 1588 timing portfolio, really systems solution with software and module assets. And we also announced a number of new products, the Si8900 family of isolation ICs, new clocks and buffers across the board as well as our entering the automotive market with our timing portfolio. So on the isolation and things side, a very, very robust product introduction cycle. We also enhanced our automotive radio tuners, the Si479x automotive family. The market opportunity for our infrastructure and automotive products is about $3.3 billion. Today, we have over 10% market share in these. And our focus is really on the communications infrastructure, wireless, data center, in the core network as well as industrial and automotive markets. The automotive piece and our power business is really helping to electrify and make the world greener, and our communications products are helping to make the world more connected. I think that's especially were more important now than ever. These products are driving above WSTS market growth, and we did drive design win revenue up 20% last year. If you look at this by technology, this is mostly industrial and consumer. In terms of the size of the market, you see the market growing from $2.7 billion to $3.3 billion between 2019 and 2023, mostly in our timing and power businesses with an opportunity on the automotive radio as well. Some of the key trends driving growth. On the communications side, you just see that bandwidth requirements are going up and up and up. There should be twice as much network traffic by 2023 than there is today. And this is really driven by networks upgrading from 4G to 5G technology, which is a big opportunity for us as well as the speeds increasing in the metro and core networks for 400, 800 gig and then also within the data centers, 100 gig, 400 gig. On the industrial side, the -- our power products, in particular, are helping us conserve energy and reduce greenhouse emissions. And then within automotive, you have the battery electric vehicles doing very, very well and forecast to grow, even though in the pandemic, people aren't driving as much, but we're going to be driving more and more. And more of those cars are going to be electric, and that needs charging, battery management, motor control. And also the data within the car driving our timing products with sensors, generating high-speed data within the car, and our products are well suited to that as well. The company has generated healthy cash over time. We've had about $1.6 billion in cumulative cash flow since 2007. And we've deployed about $1.8 billion of that. That's $1.1 billion in share repurchases at an average of $37.20 a share during that time and about $700 million in strategic M&A, again with the Redpine acquisition still to be announced. We have $134 million outstanding at the Board to authorize for share repurchase throughout the rest of the fiscal year, and we remain an opportunistic buyer of our stock. The target financial model, we updated this back in March with industry growth at greater than 1.5x or our growth greater than 1.5x the industry growth. In 2019, the revenue was down 3.5% at Silicon Labs versus the market down about 10% by that measure. IoT wireless also outperformed the market, which was up about 14% versus the market, down about 16%. And we've increased our design win LTR across the company at about 30% year-on-year. The gross margin came in above our -- at the high end of our model. The model, we revised back up to our -- from 58% to 60% to now 59% to 61% with R&D -- with the slightly lower revenue in 2019, R&D a bit above the model as well as SG&A, but we hit our model at 20% to 22% for R&D, 16% to 17% for SG&A. And we're maintaining disciplined OpEx management in the challenging micro environment during 2019 and that has been our posture. So our operating income came in a little bit below the target range, and that was really due to the overall market situation in 2019. So the key takeaways for Silicon Labs. Again, we've had a successful 2019 even despite the challenge out in the market. We've maintained leadership in high-quality, large and diverse end markets, and those markets have a long runway for growth. We believe that we're gaining share in these markets, in IoT, communications, infrastructure and power and electric vehicles, in particular, with those products being over 80% of our revenue. And that we have highly differentiated technology, great gross margins and really a strong track record of execution. We believe that we're well positioned to scale over time and to outperform the market to take share from our competitors. And on top of that, we have a healthy cash flow and a strong balance sheet. So with that, I will conclude the presentation part, the summary, and then we will have a Q&A in just a little bit. So I have received now -- so we'll go through and review the results of the voting. I received an e-mail this morning from Andy Wilcox with the preliminary report of the results. According to the preliminary report of the inspector of elections, the nominees for Class I directors have been elected to serve until our 2023 Annual Meeting of Stockholders. The appointment of Ernst & Young LLP as our independent registered public accounting firm was approved, and the compensation of named executive officers was approved. But the final results will be reported in a Form 8-K filing within 4 business days following this meeting. Now that concludes the business portion of the meeting today. With being no further business to come before the meeting, the 2020 Annual Meeting of Stockholders of Silicon Labs is now adjourned. I guess we'll now go into Q&A. Jalene?

Thank you, Tyson. At this time, we have no questions. For those of you using the platform, I will wait about 30 seconds, if you would like to type in your questions into the Q&A section of the portal. After those 30 seconds, we will conclude today's call.

We got to have at least one question, Jalene.

All right, we are not getting any questions from the audience. But Tyson, I'll ask you a question. Looking at 2019, what is the one thing that you are most proud of accomplishing at Silicon Labs?

I think that -- really getting our IoT business on a really good footing. The design win traction that we were able to see, in particular in IoT and wireless, I think, bodes well for our growth and speaks well to the leadership position we have in our platform.

Great. Thank you. That concludes the time we've allotted for the Q&A section. You may contact our Investor Relations team at [email protected] following the meeting if you have additional questions.

All right. Well, I would like to thank everyone for their investment and attendance for this meeting, and I appreciate your continued support and wish everyone good health and safety. Have a good day. Thank you.

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