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

Hi. Welcome, everyone. My name is Atif Malik. I cover U.S. semiconductors and equipment stocks here at Citi. It's my pleasure to welcome John Hollister, CFO of Silicon Labs; as well as George Lane, Director of IR. The format of today's discussion is fireside chat. I'm going to go with my questions first. And then if you have any questions for John or the Silicon Labs team, please e-mail them to me, that's atifmalik@citi.com.

John, for those in the audience, especially the generalists who are less familiar with Silicon Labs, can you provide some background, including core strengths and what differentiates your IoT portfolio and products from other companies in this space?

You bet, Atif. Thank you very much for hosting us at the Citi conference. We are a fabless semiconductor company. We're based in Boston, Texas. We have a global footprint, including major centers in Singapore and now in Hyderabad, India as well as throughout Europe and various places. We've been in business coming up on 25 years now, having been founded in 1996. The company has a very robust IoT portfolio, which is differentiated first by having a fully integrated system-on-chip platform that combines the microcontroller and the radio functionality on a single chip. We were one of the first in the IoT market with that functionality. And it allows for a greater level of integration, better performance, smaller form factors and saves the customer board space in their application and can allow us to do more with that technology. The platform is broadly applicable to many different types of markets and applications as well. So it's more general purpose in nature. So it really starts with that. Then we have really the broadest portfolio of connectivity options specifically tailored to this market, with a leading presence in the Zigbee and sub-gigahertz proprietary networking markets, where we've been operating for a long time in both of those markets, and that includes our Z-Wave protocol, and a growing presence in the Bluetooth and WiFi markets, which -- these are areas where we are seeing evolution in the standards themselves that are making them more relevant for the Internet of Things market. And we've had a lot of good customer traction in the Bluetooth and WiFi market areas. Combining those 2 together, we have identified approximately $1.5 billion of new opportunities on a lifetime revenue basis thus far this year. So a tremendous amount of customer interest in that, and we're seeing good traction there. And we have a leading presence in the markets themselves. So we are a leader in the smart home. We have a very solid footprint in the industrial space as well. Looking at the smart home technologies, we, just today, have hosted a worldwide conference called the Works With Conference to bring together product developers from around the world who are learning about our products and technologies and learning how to adapt them to work with various ecosystems, including Google, Amazon and others. So it's a lot of buzz and excitement about that. We've had over 5,000 people attend that conference today. So it's been a tremendous response, and we've been able to virtualize that and actually reach more people. So that's been very exciting.

Great. John, a common theme across companies I've hosted yesterday and today has been about lead times. It feels like COVID-19 is -- the disruption is still not normalized. We keep on hearing that demand is kind of outstripping the supply from -- in different parts of the market, whether it's in the smartphones. And you guys, we talked about on your last earnings call that bookings remained steady throughout the quarter but that lead times and backlog extended on kind of demand strength. When do you expect your lead times to normalize? Or still -- are you still seeing the effects from COVID-19 disruption?

Yes. We did see the lead time stretch out, Atif. We have historically run at approximately 7 weeks of order book lead time at any given moment. That has pushed up to 9 weeks on a year-to-date basis this year. And I think it's primarily a result of customers wanting to secure their supply lines and ensure that they've got their allocations identified in the face of an uncertain environment. And COVID has been part of that. We see the -- some of the trade tensions is also part of that. I'm not sure when it's going to go back. But I think it overall is not a major effect on how we're seeing it. We just have to be mindful of that as we look at our bookings progress and take these statistics in concert with each other.

Okay. Let's start with your IoT portfolio first. You saw a decline in the June quarter despite addition of Redpine, which added around $5 million in the June quarter. When do you expect to see growth resume in IoT? Or is that a function of the macro environment?

Yes. Just a quick point of clarification, the $5 million figure is a run rate measure. We actually had a partial quarter in second quarter for that Redpine portfolio. So it was more like $3 million of contributed revenue in the June quarter. But back to your question, we did see demand for some of our IoT products down in the June quarter due to social distancing measures, which prohibited people from going into homes for installation of smart meters, for example, or home automation or home security equipment. We also saw various retail outlets really closed due to the pandemic and unable to ramp some of the product launches that they were -- had in mind. That also affected the June results. We're seeing those things revert in the third quarter. So we're seeing IoT come back, and we expect IoT to grow significantly in the third quarter, and we're pleased with the progress we're seeing thus far in the quarter around a resumption of those programs -- some of those programs that were impacted in the second quarter.

Great. John, I don't understand the Redpine business very well, but I do get quite a few investor questions in terms of how that acquisition has gone. Are there areas that can be divested, the video side of things? Can you just talk about what does Redpine bring?

Yes. So Redpine -- the Redpine Signals portfolio is a very IoT-focused, low-power WiFi and Bluetooth combo solution with the primary emphasis on the WiFi side. This complements our portfolio very well and adds low-power WiFi to it. And importantly, as we see the evolution of the WiFi standards with WiFi 6 or 802.11ax forthcoming in the market, we believe that, that standard will be even more engineered to address IoT opportunities. And we see this platform is a great vehicle for us to be a leader in that and to be one of the first to market with an ax solution. And so we are working on that and encouraged by the progress of the integration thus far. The Hyderabad team were doing a great job. They complement our culture very well. And another aspect of this acquisition is that it gives us a very good footprint in Hyderabad, upon which we plan to grow significantly in the years to come. So it's going well so far. We're encouraged by the prospects for the future there.

Okay. And just looking at the industrial segment. We've had Infineon, Microchip and TI, they all talked about things have started to improve particularly in China. What are you seeing on the MCUs on the industrial side?

Yes. We saw very strong performance in China on the industrial and communications part of the market in the second quarter. The Chinese economy closed related to the pandemic back in the February, early March time frame and then it reopened. So it's been one of the first in the world to reopen. And then, of course, in the second quarter, we saw a real burst of demand for products in that market and really led by the microcontroller products that we have in the China market. Also the communications market was strong in China as well. So we definitely did experience that in Q2 as well.

And for the September quarter, are you assuming IoT to be down?

No. IoT, we expect to grow significantly in the third quarter. And so out of the way to think about that, the microcontroller piece of our IoT portfolio, which is about 1/3 of our IoT business, that will moderate a bit from the strong performance we saw in the second quarter. But on the other hand, the wireless piece of IoT, which is larger, that's about 2/3 of our IoT portfolio, we expect that to come back in the third quarter, and we are seeing that.

Okay. And then, John, if you can touch on who are the competitors on the IoT side, and how sticky is your stickiness with the customers?

Yes. It varies by the type of connectivity. So when you look at Zigbee and mesh networking, we compete with NXP, a bit with TI in that market. On the Bluetooth side, of course, Nordic Semiconductor has built a strong franchise in Bluetooth. In the low-power WiFi space, it's fairly new. There are not a lot of companies that truly have low-power WiFi. There's a company in China called Espressif, who is in that market. So it really varies. And I'll tell you, as customers adopt our connectivity technologies, it is quite sticky. They enjoy robust network performance with us. We have strong tools to help them analyze the performance of their networks as well as the benefits of low-power operation and strong RF performance. So that complements what we do as well.

Yes. I have to say, boy, the mesh really works. I work out of my garage on Sundays, and I don't get any WiFi signal. So switching to that really helps for work from home. So let's -- moving on to the infrastructure part of your business, particularly timing and access was a bright spot with strength in communications. Like you pointed out, wireless infrastructure, data center, boosted by 5G and work from home. Can you talk about what you're seeing in this market in the second half?

Yes. So we saw a strong performance in the timing products in the second quarter. We actually set a record in our timing portfolio in the second quarter. We believe that was led by the demand for greater bandwidth. As the world has become virtualized, and we have a lot of people working from home and working over virtual environments as well as entertainment, infotainment, that has driven the need for bandwidth way up, and that drove a lot of demand for long-haul optical networking build-outs, data center build-outs. And the 5G is beginning. That's relatively smaller for us. We're new in that market. But have good design win momentum and look forward to that being a growth driver for the future. But really, the Q2 strong performance was led more by the wireline side of our timing portfolio. Looking into the second half here, Atif, we think that's going to moderate some based on the strong results in Q2. There likely was some customer build ahead out of the China market as well in Q2 for various reasons, but we do expect that to moderate some here in the second half.

Okay. And John, can you remind us how big Huawei exposure has been for Silicon Labs in the past like last year? And if kind of the cooling off effect post the recent ban, which comes off in next September, was that baked into your September outlook?

No, it was not. I'll answer that question first. The latest instructions or orders about that occurred after we issued our guidance. So that is not contemplated in the third quarter guidance. Huawei has been approximately a 2% customer for us. And at this point in time, we are planning to see shipments as is directed next week. There's a possibility of obtaining an export license that we will pursue, but we'll have to see how long that can take if it's even possible. But yes, we are planning to see shipment.

Okay. And how is the addition of 5G infrastructure globally impact your infrastructure business kind of long term?

Yes. I mean the way we think about this market, the wireline market, which is the predominant revenue mix for us today for timing, we see that as about $0.5 billion served available market size. So you can understand that we have a solid double-digit market share in that market. The addition of the wireless timing business, we think, almost doubles the served available market to near $1 billion. So -- and that's really greenfield for us, where our market share is low today, and we have the opportunity to grow that over time and accelerate our growth opportunities and timing, so we're excited about it. We have done a lot of work in the last few years to position our timing portfolio to be suitable for the 5G wireless rollouts. And we've garnered significant design wins along with that.

Okay. Can you talk about the strength that you saw with timing with the Chinese customers and if there's any concern that some of the demand has been getting pulled forward?

Yes. There's -- that's likely to be the case that there is some build ahead. But at the same time, we think the prospects for next year are strong for timing. And with the ongoing build-outs of long-haul networks and data centers as well as wireless. We think the prospects for growth and timing are solid.

Okay. And then can you talk about kind of emerging competition from the likes of Synaptics and MXL, MaxLinear, and Infineon in the IoT devices or even the infrastructure side?

Yes. Get on the -- yes. So I -- what I think you're referring to, there is more on the WiFi side, where our view is that those deals and the portfolios there are more high performance, high power, really taking what may have been used in smartphones or access points and repurposing it for embedded applications, which there's -- there may be a market for that but really is not the way we see it directly competitive with our low-power WiFi initiatives.

Okay. And then moving to the broadcast business. The business has declined in the last few years. How could you turn around this business back into revenue growth? Auto has been a bright spot for growth for this business in the past. Can you talk about the performance in autos this year and expectations next year?

Yes. So back in March, we consolidated our non-IoT businesses into one single reporting category, which is now the Infrastructure and Automotive category. We have automotive growth opportunities in infotainment as we have the FM radio, that is a growth business for us. We also have isolation technology that is used in electric vehicles, where we have a number of platforms around the world that have designed us in and are seeing revenue from that. And we have some new opportunities in timing actually with the high-speed communications that are now taking place in vehicles with ADAS and other systems like that, requiring high-performance timing chips actually. So we have automotive qualified some of our timing solutions and are getting that ready to sell into those applications.

Okay. And if you can update trends in smart metering, smart home, smart medical end markets for Silicon Labs.

Yes. So the metering was under some pressure in the second quarter due to the social distancing, things I talked about, similar with smart home. But we see those coming back in the third quarter. And I think our market position in those areas is strong. Customer interest is strong, and we think the opportunity to continue to grow in those applications is robust. And let me circle back, Atif, because you've asked about broadcast. So in the infrastructure and automotive category, we also have our consumer broadcast products, such as our TV tuner, which are today very high market share in the market with limited investments, strong cash generation and on a long-term secular decline phenomenon, but an overall lower portion of our mix than has been the case in the past.