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

All right. Welcome back. I'm Blayne Curtis, semiconductor analyst at Barclays. Next company up, we have Silicon Labs. From the company, John Hollister, SVP and CFO.

John, I always like to start at very high level. And it's been a pretty dynamic year, but seeing a nice recovery in the second half of the year, getting back to modest growth year-over-year. So just give us an overview, health of the markets and what you're seeing on this recovery. And then we'll dive into some of the moving pieces.

Yes, Blayne. Thanks very much, and thanks for having us again at the Barclays conference. We saw earlier this year strong results in the communications end market with the need for bandwidth and building up the core networks really driving a lot of extra growth in the first half as well as likely some build ahead with the geopolitical tensions that are out there, et cetera. And saw some impact from the initial wave of COVID on the wireless IoT part of our business. Those trends really reverted in the third quarter. And looking forward here in this quarter, where the timing business, the communications segment has settled off really on both of those trends I talked about. And we're seeing very strong growth on the IoT wireless side with programs that have been in the works for a while really kicking in as well as a resumption of the secular growth that is inherent in that industry. So we saw strong performance in the third quarter in the connected home end market as well as the smart lighting market. Smart lighting market, in particular, is a very good example of a newer program that has been in the works for a while and is now really ramping, and we think that ramp is going to continue. So we're pretty bullish about the IoT wireless opportunity as we look ahead here. And I feel like the investments we are making are paying off and we're in the right space there.

Maybe that's a good place to start, in IoT. Home automation lighting had always been a good driver for you. The lighting I have in my room today, maybe I need a smart lighting. But the -- can you talk about the work-from-home, live -- learn-from-home, work-from-home, home repair apparently is also part of that category. And how do you kind of judge the tailwinds you're seeing this year and ones that you'll see as an ongoing multiyear trend?

It's hard to tease that out with very much precision. I mean, I certainly think there is a DIY enhancements with COVID that's taking place, where people are trying to bolster their at-home infrastructure. We all sort of sense that anecdotally for sure. But that said, we think the trends are long term and durable. And not just at home, but also smart retail is another growing area where we see technologies being applied to create more contactless and electronic wireless-driven applications. Electronic shelf labeling is a good example. If you haven't been out, I've had the chance to visit some retail outlets here in the Austin area. And I'm seeing it hit the shelfs now of the kind of e-paper-driven shelf labeling that's wirelessly connected to pass pricing information and other information to the consumers in a very efficient way. Retailers are looking at ways to then leverage that to perform other functions potentially around measuring their inventory levels on the shelves, for example. So a lot of opportunity out there in those applications, and that's yet another area of growth over time here.

I see on your earnings call, Tyson mentioned growing wireless 30% next year. It's not the whole IoT bucket, so maybe you can level-set us on that. And then you also talked about a funnel of $9 billion, which is a very large number versus your current run rate. So maybe walk us through how you think about a funnel and think about how that converts into actual revenue.

Yes. So the funnel builds over time with us. As we identify opportunities. We add those to our opportunity pipeline, and then we accumulate those opportunities that we identify, and that really becomes our funnel. The funnel is measured on the basis of lifetime revenue. So the annual impact of that, of course, varies by the end market that's being served and the life cycle of those particular applications. But generally, 3 to 5 years is a rough gauge of the durability of those applications. So that is the funnel. It is exciting to see the funnel get that large. It tells us that we're likely seeing most of the IoT market. We're getting a look at most of the products that are coming to market, which is logical given our strength and leadership in this market. And that speaks to the ability to hopefully post double-digit growth here in this area for a consistent period of time. You're right, the kind of growth opportunity we identified on the call was focused on the wireless portion of our IoT, which, as a reminder, is about 2/3 of our over IoT product category. The other 1/3, microcontroller part of the business, would be more flattish, perhaps up, perhaps down a bit, but in the flattish kind of growth profile given that the bulk of our investment in IoT is focused on the wireless application. So it's very exciting. We've seen real strength in the Bluetooth opportunity set. We announced our very low-power BG22 Bluetooth device earlier this year right around the time of the CES, right before everything shut down. And have since added to that with some different form factors of that technology, expanding it into -- to include some modules here more recently. The opportunity identification just on that portfolio has been about $1 billion this year for the Bluetooth space. So we're making a major move into Bluetooth and a similar move over time into WiFi as we've enhanced our portfolio with the Redpine acquisition, also very low power and ideally engineered from the ground up to address the IoT market.

You kind of partially answered this, but I want to talk about, when you think of that funnel, you serve almost a half dozen -- or actually a half dozen radio technologies. Is there a think -- is there a way to think about which flavors of radios you're seeing the best traction with?

Yes. The 15.4 technologies are a major part of it. That's been pretty consistent for a while now, and that includes primarily Zigbee but also Thread technology. Subgig is part of it as well. And then you've got -- within subgig, you've got both the proprietary as well as Z-Wave technologies. And then you see big growth in Bluetooth and more to come on WiFi. So it's really across the board. And we're seeing customer traction in all of the technologies on wireless that we're offering.

Maybe the 1/3 that's not wireless, you've seen some periods of strengths and periods of weakness. Where are we at with that portfolio?

Yes. Here in the second half, it's tailed off a bit. I think the China reopening phenomenon that occurred in the really late March through June caused a real surge in that set of products. For Q2, that backed off some. In the third quarter, we indicated IoT overall would be up some in the fourth quarter. So I think stable is how I would position that portfolio as a -- from a growth perspective.

And you mentioned the 2 new Bluetooth products. Maybe you can walk us through the competitive landscape there. There's obviously some more established players who've been in Bluetooth. And Silicon Labs, I always think of, is doing more integrated, good power envelopes. What -- if you're going to win in this market with these products, what's really driving it?

Yes. It's a number of things. It's very, very good RF performance, as to start with, inside of a low-power form that can address long battery life and good power optimization. Also enhanced security in this market, which is becoming increasingly important for the Internet of Things space. We've made significant investments in our security posture over the years. We have an onboard secure element aspect of our 40-nanometer platform that is seen very positively by the customer base. And then also an area where we are differentiated in the Bluetooth space is by enhancing our connectivity, combining Bluetooth with other technologies and multiprotocol. So we have the ability to do Bluetooth combined with Zigbee or combined with subgigahertz and utilize the Bluetooth channel for commissioning products and attaching to smartphones for enhanced functionality. So it's a number of factors where we have a lead, and that's getting noticed by the customer base.

I'm going to ask you later on overall gross margins, you always get that question. But I kind of just think of -- when you look at the portfolio of IoT products and all the different radio standards, is there a real difference between the margin profile of these? And if Bluetooth-only ships, is it lower versus something that's more proprietary like Thread or Z-Wave?

Yes. I mean, there is some mix there. There's also customer mix, has an effect on that margin portfolio. There's not a tremendous amount of mix on the technologies themselves. And the customer mix is at least as important as the technology mix.

Maybe moving to the infrastructure side. You mentioned timing trailing off. I think it, per your guidance, continues into Q4. Why is it weak? And kind of think about when does that kind of drivers, your growth next year?

Yes. I think a couple of factors contributing to the weakness are an outsized build in the first half that's in a digestion period. Of course, the restrictions that have been imposed on Huawei, who has done -- roughly a 2-plus percent customer for the company, largely focused on the timing, products that has had a clear effect there as well. And the final point I would point to is related to that, just the general extension of the 5G ramp out in the market. I think we have the opportunity to begin to see some other players step in on 5G to hopefully recover that some, though likely with some lingering effects of pushing that out. And the inventory digestion as well, I think, is underway. So ideally, with a strong recovering macro environment and ramps in 5G and digestion of the telecom space, we should be in a position to grow timing next year. And that would be our goal. And hopefully, the healthy market can enable that to happen.

And what is -- I know the wireless business is a little bit more nascent for you. What's the mix between wireless and wired there? And are the trends you just outlined the same?

Yes. So wireline remains the predominant mix. [ Wireline ] is nascent and is a minority of the timing mix overall today. So the inventory digestion comments are really more focused on the wireline part of the business, with the 5G course really affecting the wireless piece of it. I mean, the good news on wireless is given our nascent footprint, there's really upside to that, to the overall story, based on us penetrating that market. And we have -- we do have customer traction outside of China as well to enable a broader global 5G experience.

Maybe moving to your isolation business. I think there's, obviously, the macro slowdown should hurt you, maybe some industrial applications, but then there are some more discrete drivers. So walk us through the moving pieces first, and then I'll get in some more questions.

Yes, you bet. And you've got it right, COVID and the sort of just general impact on industrial activity midyear has had an effect on isolation down. We were down in third quarter there. Hopefully may end up with some growth there in the fourth quarter here. And looking forward to onward growth next year, both driven by industrial recovery in the economy, which should be constructive to that, as well as the secular trend of both electric vehicles where we have a good market presence as well as green energy applications, like solar and wind, where we also have designs. On the electric vehicle side, we're excited about our presence in that market and think that can be constructive to long-term growth in isolation.

I guess that was my curiosity there in terms of the -- how big are those businesses today? Is it primarily the industrial market? Or has the kind of the -- yes. Go ahead.

Yes. It's interesting. Isolation is one of our -- probably the broadest-based product line that we have. It's very distribution-focused and goes across many applications, many different customers in the industrial side. Overall, the composition by end market is in industrial end market, which is the majority of our footprint there. We also have a presence in the communications market where isolation technology is used in high-performance data centers for the power switches in those data centers. And then finally, in the automotive space for obvious application on EVs. But the industrial side is the largest of those.

Got you. I do want to circle back to the IoT segment. You bought out a WiFi asset. I think there were some sales of some kind of more mainstream WiFi. And I think in the past, you've said, we don't really do kind of the kind of the -- I forgot how you qualify it, but the volume WiFi, Bluetooth. I'm kind of curious, your positioning as you grow on and grow Bluetooth and wireless, do you think SLAB would move into those opportunities? And is there kind of -- or is it these technologies more going to be kind of just that connectivity alongside your more traditional Zigbee, Z-Wave, subgigahertz radios?

Yes. No. I think a couple of points to note. And we've seen some competitors really redeploy, if you will, WiFi and Bluetooth technology from either cell phones or, in the case of WiFi, access points into embedded markets and have some traction there. Our approach has been to more purpose built -- build the technology specifically for the low-power IoT market and address it in that manner. And that's really the Redpine portfolios -- meets that definition of that. So it's very low power and can deliver the right optimization of communication bandwidth and power for certain applications. I see us continuing with that strategy, but we also think that, that portion of the market is well positioned to grow and likely grow at a better rate than some of the other markets like cell phones and access points.

And I did want to ask you the -- you've had these configurable radios. So when you say that you're -- that it will have a Bluetooth but also does other standards. So are you -- when you deliver this, is it on 1 single radio, or is it kind of adding cost for that end customer?

It varies. We have different solutions that can either deliver a multiprotocol, multimode solution, if that's what's warranted for the application and what the customer is trying to do. We also have single-mode products that can be more cost-optimized for particular applications if that's what's called for in that particular application. So we can do either multimode or single mode, depending on what the customer needs.

And where -- the Redpine acquisition, you gave us some parameters as to what the run rate should be on that business. Maybe give us an update as to how that's tracking. And any flavor as to where their wins are?

Yes. It's in line with our expectations. We have been hard at work integrating the team. Very encouraged by how that's coming together. The applications are in similar spaces, some of our other technologies, in medical applications, sports and fitness applications, smart home applications, some industrial applications as well. So it's a fairly broad-based set of products and customers, or particular customers given the size of the portfolio as it came in the door. And we're working to expand that and broaden the customer penetration even further. We see good customer interest in that and look forward to continued growth there.

And I know you spent a lot of time in this activity. I mean, the company has been very acquisitive, but it's been really bolstering, that IoT bucket, have basically every radio flavor I can think of. You've worked on the module side, the MCU side and now the radio side. So I'm kind of curious how you think about your strategy going forward. Is there still more to do on the IoT side? And when you look at the infrastructure business, good margin, what else is there to do there?

Yes. On the IoT side, it's been a developing market. It's been evolving over time here. I feel good about the portfolio that we have. There could be some further evolution that pushes us into expanding into some new areas over time here. But we've got a lot to work with now, as you say, Blayne, with assembling the portfolio that we have. Our goal is to be the leader -- continue to be the leader in IoT wireless and to be a one-stop shop for the customer base, just like we were talking about in the single mode, multimode conversation. Whatever the customer needs to address the wireless IoT market, we want to be well positioned to deliver that. And that's how we're going to continue to think about the composition of our technology strategy. And if things materialize over time here that steers us into doing some additional work, we'll look at that. But right now, we've got a lot to continue to work with, with what we have right now.

And I did say I would harass on gross margins. And when I -- we gave you a hard time about margins. Couple of years ago, you had infrastructure take off. And it kind of -- I know that will help the blend. And I think from what you just said, that may help you next year. So that may be the answer. But I'm -- kind of curious, as you outlined, I think of applications like smart lightbulbs, I don't think of high margins. So I think you've laid out a range. You've been kind of at the high end and the bottom end of that range. So I get it's probably how you're going to answer it. But as you're looking at 30% wireless growth going forward, the mix may still skew towards IoT. How do you think about gross margins?

Yes. I think that's right. And steering toward the low end and a continued trend around that is the right way to think about that. Certainly, strong recovery in timing and installation would be constructive on the gross margin side. But if we just think about the absolute dollar difference between those businesses and the scale effects of IoT, the kind of growth that we're seeing in IoT, it's going to continue to add some pressure there. I mean, the good news is that's coming with strong top line, and over time here, margin accretion, operating margin accretion. And that's the trade-off and the play that we've had in mind for a number of years now, actually.

All right. Well, we're out of time. Appreciate you joining, always supporting the conference. Maybe next time, will be in person. But thank you, and thanks to all on the call.

Thank you, Blayne. It's great to see you again, and we'll look forward to next year.

Take care.

Okay.