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

Great. Well, good afternoon, everyone. I'm Craig Hettenbach, semiconductor analyst with Morgan Stanley. I'm very pleased to have with us today Silicon Labs. Just before I get into the fireside chat, I do want to bring people's attention to the disclosures. They can be found at www.morganstanley.com/researchdisclosures. So with that, I want to welcome CEO, Tyson Tuttle; and CFO, John Hollister. Welcome.

Hey, guys.

Hey, Craig.

Nice to talk to everybody out there.

Great. So Tyson, maybe I can just kick off, at a high level, just kind of overview of Silicon Labs, kind of focused on your technologies and growth drivers before we dig in a bit more.

Yes, absolutely. Just real quickly, Silicon Labs is a 20 -- almost a 25-year-old company, later this month. The -- and we've been public on the NASDAQ since the year 2000, so celebrated our 20th anniversary last year as a public company. And really, fundamentally, mixed-signal RF design and semiconductors is the legacy and history of the company and a long history of successes in a lot of different areas. I took over -- I've been with the company about 24 years now and have been CEO for almost 10. And really, when I took over from Navdeep, we really set out to focus on building components and really focusing on the system-level IoT opportunity, where we see the dramatic proliferation of devices in IoT. And a lot of those are going to be wirelessly connected. You can think about it as a microcontroller with wireless connectivity, fully integrated power management, sensor interfaces and then all the software and protocols that run on top of that. And so we've spent about the last 10 years building out that portfolio, both through organic investment and a number of different M&A events, building out our software platform, building out the tools, building out the channel, to address this very exciting large and growing diverse opportunity, thousands of applications, tens of thousands of customers, in these embedded IoT applications. And we've seen a lot of progress. When we started out, we have just a small microcontroller business. And now IoT is about 60% of our revenue. We did about $870 million last year. And certainly, we're seeing a lot of strength here, along with the whole industry, coming into 2021. On the other side, we have a number of opportunities in the Infrastructure and Automotive area, and that's about 40% of our revenue. And that contains a number of different components. One of the big opportunities is in our isolation business, which is really -- think about it as the high-voltage power. And it goes into things like, well, big opportunity in electric vehicles. This year, we see about 1% of the cars with electric -- that are electric, but that moving to maybe 30% over the next 10 years or so. And so -- and we have a leading position with leading suppliers in the electric vehicle area, things like solar energy, the inverters to take the power from the cells, the power wall type, the batteries and interface to the electric line motors, industrial applications. So that isolation and Power business is really, really exciting. And then a big opportunity on the Infrastructure side, communications infrastructure. We have a long-standing timing and clock business and oscillators, where we kind of provide the heartbeat of a lot of these very high-performance, high-speed networking devices and a nice position with all the leading infrastructure providers on kind of the core network. But then emerging in data center, and especially in 5G, we've done a number of targeted applications going after 5G and the radio heads and the base station units and see that as a very nice growth vector for us here over the next couple of years. So if you look at the overall market opportunity that we have, we've got about a -- we've got a funnel of about $15 billion, which is a lifetime revenue opportunity. And then we've been driving increasing design wins across the board in all of those various growth areas. And those 3 growth areas I talked about is over 80% of our revenue now. So we've got now significant growth throughout the business. We've seen a lot of acceleration of these applications coming out of the pandemic. And I'm sure we'll talk about all the dynamics there. But really exciting future ahead of us here at Silicon Labs. We've done a lot of work to really position ourselves well to take share and to have leadership positions in the areas that we're focused in.

Excellent. That's a great overview. In the context of that product portfolio, there was some news a couple of weeks ago that the company could consider an asset sale. And just, at a high level, I just want to get your sense in terms of these businesses, kind of how they fit together and how you view both the IoT business and the Infrastructure and Autos?

Yes. So certainly, rumors are rumors, and we're not in a position to comment on any of that further stuff. But if you look at -- we've got a common underlying mixed-signal heritage in the company. We started talking about that in the beginning when we talked about just where the company comes from. And that's an underlying philosophy of being fabless, of being -- moving things into the digital domain where possible and more and more onto the software side and making things robust and calibratable and making the yields good. And we come from that sort of a background and then take more of a system view, specifically in IoT around the SoC and the software and the cloud and the security and everything, but also in the timing business, where we're going after Synchronous Ethernet. And then from a -- on the Power side, being able to add functionality into our devices, that's very smart. We can leverage the digital kind of nature of our solutions to add value-added features and to make devices smarter and to make devices more connected. And so that's kind of an underlying thing. And then, certainly, corporate infrastructure, sales channel, there's a lot of commonalities that we did, but each one of these businesses that we have also serve different markets and different customers, with IoT being the broadest range of applications and customers in the Power side, a lot of customers now on the Infrastructure side. So there's a lot of places, and we have a lot of -- the culture of the company is such that folks have, a lot of times, moved around to a lot of different areas. And that, I think, drives fundamentally both a more dynamic culture and keeps things more interesting, but also drives a lot of innovation and kind of cross-pollination among a lot of the things that we do.

Got it. Maybe we could segue to the supply chain. It's been, of course, a topic of interest at this conference. And I know you have some views in terms of perhaps how we got here. So before we get into the near-term impact, maybe just taking a step back, what's your sense in terms of the conditions as they stand today, kind of how we got here, and I guess, most importantly, for investors, how do we address this on a mid- to longer-term basis?

Right. So it's -- we certainly -- there's -- so you've got to start with Moore's Law. And you've got to think about the progression of Moore's Law. And a lot of the CapEx in the industry has been going into advanced nodes. So things like 7-nanometer, going to 5, going to 3. And we haven't -- and in the past, we have always relied on the fact that a lot of the applications freed up the mainstream fabs, the n minus 1, n minus 2 fabs. The digital applications all moved to the new node. We're seeing kind of less of the applications move where things move, that velocity slow down for one. And then the integration of functions into those SoCs, some things were getting left outside, certainly power management. But other functions, you're seeing more die and more things being left. And then the core, the processors and the AI and that sort of stuff, moving, and then some -- there are probably fewer of those, and so some of the customization of the different types of applications happen in other die that are around that. So we've -- just structurally, with Moore's Law, we've been investing a lot in these advanced nodes. We haven't built a lot of mainstream capacity, and that's partly because those cutting-edge nodes get more and more expensive every generation. And so that causes a little bit of a backup into the mainstream nodes and all of that. Then with the trade war, we saw some capacity move out of China, and that's mostly mainstream capacity because there's no advanced node capacity in China. So a little bit of that moved back out. That filled things up. And then we've got the pandemic, and that has dramatically increased across a lot of different application areas the demand for semiconductors. There was a little bit of a lull, some factory shutdown, in particular, in Automotive, but things have come roaring back as people understand that, I mean, a lot of the demand for industrial equipment or things in the home or computing devices or now cars and electric vehicles and those content, those trends have actually structurally moved up to where the demand for semiconductors in general is just increasing, and we've taken a step up. And through that process, we've filled up our fabs. And so this is a global -- every vendor is in a case where TSMC is 40% overbooked or more like that. And every fab is really running at capacity right now. And that's, if you think about it, on a broad macro scale, that is going to limit the pace of growth of industrial production of a lot of the manufacturing jobs globally. Inventory levels are very, very low. And there's a lot of cases -- there's been a lot of pressure from governments to say, "Hey, we need more capacity towards Industrial and Automotive applications to protect jobs." There's been a lot of policy applied to try to shift some of the priorities in various ways. But fundamentally, we're not going to get out of this situation. We -- I think that, especially as the pandemic ends, we're going to see even greater demand. Go out and try to buy a graphics card right now and then go buy a water heater in Texas. You certainly can't find one of those. But there's just a lot of stuff that needs to get built, and there's more and more semiconductors needed. And until we build some additional factories, and specifically, mainstream is where a lot of the constraints are, we're not going to -- and that takes 18 to 24 months. We don't see a lot of constraints fundamentally in the back end. It's a little easier to scale wire bonding and handle our capacity. We're very lucky that we have mostly -- most of our parts are tested on our own test platform. So we don't have a lot of test capacity. So it's really wafer capacity. And we've got our share of allocation, and we're doing all right. But at the same time, when you get into these situations, you've got to really make sure, especially when you're talking about a broad business, you've got to really make sure that you're being very fair about the allocations and that you know exactly what everybody's demand is going to be. So it gets you -- I think the whole industry is operating in a much more tactical mode right now. And you've got to make sure that people have what they need. You don't want people to be building inventory. And there's a lot of activity going on there. And then another, I think, important topic is in terms of cost. And you are -- there's things like expedite that cost money. And certainly, to get capacity and to build capacity is going to cost money. And if you just look at it over the mid- to long term, if you're going to build new fabs, those fabs aren't going to be fully depreciated and somebody is going to have to pay for them. And those costs are going to have to be borne by the end market. Anybody, like the people that are -- the manufacturers for wafers and the wafer fabs and the back-end suppliers, they can't get squeezed. The semiconductor companies can't get squeezed. And there is a broad trend across the industry that we have to raise pricing to be able to pay for the increased capacity. We can't get squeezed with margin in the middle. It's not the right thing for our customers or for our employees or certainly, for our investors. So that's something that, for us, is a discipline. And it takes time to implement, but is something that's very important. And John, I don't know if you had anything to add to that. Sorry, it's a little long-winded, but it is a big and very kind of multidimensional kind of topic.

Go ahead, Craig.

Yes. No, sure. No, I appreciate all the context. And there is a near-term headwind on pricing and gross margin and then a number of companies are kind of sorting through this. And so I guess on that point, you guys have also talked about looking to kind of pass through. And just maybe talk to us about how that plays out in terms of timing and then when things balance out a bit on that gross margin headwind.

Yes. So I mean, we have implemented some price increases. There are more in discussion and in process. And it's -- and more potentially that we could do beyond that. So I think through the balance of this year, you will see us taking actions in that area. And as Tyson said, we have an objective to not absorb cost increases, but do our part on the price increase side as well.

Yes. If you think about it, if you get $1 of price increases -- or cost increases, you need to increase your prices by $2.50 to be able to maintain your margins. And so there's a discipline associated with this that is really a function -- that you've got -- that's the proper way to run a business. And it does take some time. We've got some mix effects as our IoT business grows. The margin in our IoT business is slightly below the average than some of the higher-margin stuff and our timing in 5G with the Huawei export ban and all of that. That took a little bit of a hit. And then you get a little bit of near-term stuff. But overall, if you look longer-term, it's our objective to manage within our business model and to make sure that we're doing the right thing by having the right approach to pricing relative to our input costs and to pass those on as appropriate so that we can continue to invest in the business and drive the expectations that shareholders have for.

Sure. And just speaking to how robust the business has been. Last quarter, you guys noted that bookings are 50% above the prior peak. And also, lead times have nearly doubled. So just can you talk about the breadth of the strength that you're seeing? And then also, any time we get into this type of environment, when things really heat up, there is the concern about kind of double ordering and things like that. So if you can address just breadth of bookings and what you're seeing from an inventory perspective out there.

Yes. It is continuing, Craig, is the first point to make here. We continue to see very strong bookings that are significantly higher than the run rate as one would expect for the business right now. And it is broad-based. It's really touching most of our product lines and most of our geographies. On the point of monitoring this, it's kind of getting back to what Tyson was talking about. We have to be careful that we're understanding customer ordering patterns and that we're treating folks fairly in the allocation of that. And that's a lot of hard work from our sales team and our business units to continue to assess that as we look at it.

Got it. All right. Maybe we could dig into the segments. And just starting with IoT, if I look at all the different wireless protocols that you have in support, Tyson, maybe just talk about that in terms of the breadth of the technology. And what does that mean for your customer engagements and what you're able to do for customers?

Right. So our focus in IoT is, again, on these embedded applications, where you're fully integrating, in general, all of the functions that are in the device. And we have primarily focused -- so we're not doing something that looks like a phone. It's an embedded microcontroller-based type architecture and supporting multiple wireless protocols. And so -- and within those wireless protocols, we have focused on the personal area networks, things like Bluetooth, that talk to your phone, and then the local area networks, things like Wi-Fi, the Zigbee, Z-Wave smart home kind of network technologies. And then we also support a broad range of the kind of, we call them, proprietary, but they're basically custom wireless protocols that a lot of companies support for either a legacy protocol or they want to optimize something. When it's a closed system, they don't have to be standards-compliant, and they want to optimize for code size, therefore power consumption or data rate or something like that. And so we have a very flexible platform. So our approach is to really address all of the local area network and personal area network standards and to enable customers to run the protocol that they need. And sometimes they need multiple. Maybe they will commission a device with Bluetooth, but then it jumps on to another network or maybe talking to 2 different networks at the same time. We have -- on the proprietary side, we have over 100 customer -- 100 different protocols running on our platform, very interfaced like the way that customers program and interface that. We've made that very efficient. And so that provides a significant differentiation and flexibility to our -- and then you can run other protocols on top, on some of the same devices. So it's really that flexibility. Like I said, there's thousands of applications for IoT. And each one needs a different combination of application functionality of wireless connectivity, needs to be highly integrated, have a software environment to where customers can write their software. We also feel like making that easy. And really focusing on the tools and the developer experience and being able to get products to market quickly is important, not only for our customers but also from an efficiency standpoint. We need to drive -- if you think about our IoT business, we are investing very heavily in that, we have been, and investing at a level that really is commensurate with the business that's 2 or 3x the size. And the ability to scale that revenue over time, I think that we've got the hardware platforms. And we're going from our Series 2 into our Series 3, and that continues the pace, but it's -- there's more and more software and then there's more and more customer supported. So you've got to be able to drive efficiency in that cycles of learning, where it's like when you answer a question, then that goes -- and you'll answer it once, and then that gets into a form that customers can use. When I buy a product, I don't like to read the manual and I don't like to talk to anybody. I want it to just work. And so that's what we try to do in terms of our culture and our philosophy, to be able to scale our support network as we get 10,000 customers, going to 20,000, going to 30,000 customers and to being able -- as that business grows, to be able to grow into that in terms of the investment levels and profitability that's required. So it's -- they have got all of those wireless protocols. You can't just come in and do one. That will only get you a certain part. If you really want to go after these trillions of devices that are going to be deployed in the IoT, you've got to have that kind of portfolio approach and really think about how you're going to get your customers to market in an efficient way. And that's what we've really been focused on for a long time. We've made a lot of progress and really excited about the trajectory of that. We talked about our wireless business growing, which is over 2/3 of the IoT total, growing north of 30% this year. And that's only strengthening when you think about the acceleration from the pandemic and a lot of the new applications that are coming along. So I -- so hopefully, that gives you a little bit of color as to the IoT business and the size of the opportunity, about a $10 billion funnel today and just tremendous design win momentum in there and a lot of customer applications ramping. So very excited about it.

Excellent. Can you touch on just the Redpine acquisition? I know it's early on, but just how it's performing versus expectations in any context in terms of that funnel or what it does for your growth in terms of incremental for Redpine?

Sure. We closed that application in April of last year, which was right at the beginning of the pandemic, which I think, for most of us, seems like a long time ago, but it's less than a year. And we brought in really a leading portfolio of low power Wi-Fi 4 SoCs. They're in a similar process technology as our Series 2. We've been integrating that team and driving the road map to Wi-Fi 6 and driving into the Series 3, which is a 22-nanometer platform, and working on a lot of those. So in terms of the team in Hyderabad, which is we're scaling that team and have new leadership -- hired a new leader in that group, who recently started, and really excited about the opportunity to really expand our R&D capabilities over there. And then in terms of -- there was a pipeline of opportunities that came in, and we continue to drive those into production and think that those expectations are going to be met this year. We had talked about that $100 million, kind of getting to that sort of a run rate over the course of 2 to 3 years. And we feel like we're -- we've got a good line of sight to doing that, a lot of new application areas. We've been, again, getting this cultural focus on ease of use and how to scale that into the broader market and bringing some of that in, both in terms of driving the road map into Series 3, but also as we think about the customer support and how you drive the definition of those parts in that portfolio over time. So it's -- very pleased with the Redpine acquisition, a great team. A great set of products. And really, that opens up this really large Wi-Fi opportunity for us in a real way and lets us drive the road map forward into Wi-Fi 6 and a lot of the more advanced kind of things, where we can integrate that with a lot of the other pieces that we have.

Great to hear. Maybe we could touch on just the industry backdrop for connectivity. I mean there's been a fair amount of consolidation in recent years. Do you see any impacts of that in terms of the growth niches that you have and what you're executing on? Like how has the industry evolved around some of this consolidation?

Yes. If you look at the competitive land, and we're talking about just IoT here, I assume, is I kind of view our biggest competitor as ourselves. We have a massive opportunity, and it's our choice to go and prioritize that right and to drive the customer engagements. And we have competitors that, I would say, are more niche, that do not necessarily do the full breadth. They may have a Bluetooth, but they don't have the mesh networking. Or they don't have their proprietary business or they don't have Wi-Fi, or they just have their proprietary stuff and without the same level of focus on the overall platform and the breadth of technology. So we know there's no company with the breadth of technologies that we're able to deliver on the market. And some of the larger companies have done acquisitions, and then they don't really know how to carry it forward or they may be -- there's been a lot of -- it depends on what you define as IoT. When I talk about IoT, I mean, embedded SoCs, that sort of thing. We've seen companies license cellphone connectivity chips that they go out and sell or which was the Cypress and now the Synaptics stuff that they licensed out. And those are really just cellphone chips that get sold into things that look like cellphones and they're not really competitors. You've got larger companies like TI that have been very strong in connectivity for many years, but you've got to make the proper level of investment. And you've got to get into the right process nodes and you've got to evolve the software, and you've got to do -- you can't just go in a pinpoint application and then take one application at one point in time. People want a whole -- a lot of customers will have hundreds of SKUs and want to take -- do something once and replicate that across. And then they want to know that they're going to support that for a long time. They want to see the commitment long-term, and they want to see the road map going forward. And so that, the software stickiness, all of that, from a competitive standpoint, it's really -- the sky is the limit, and it's really limited by our ability to get products out in customers to market and to drive the support. It's a huge market. And the pandemic has only made this -- the acceleration of this is really fantastic and gives us an opportunity to accelerate our efforts, I think, here as we go through the year and get through all these supply challenges and really talk about the deployment of these IoT technologies at scale, whether it's in smart cities or smart factories or in retail. And those are all big productivity enhancers in the economy and really differentiators for all of these connected applications. When you connect something up, you make it smarter, you make it more valuable. You can add features over time. And to the extent that companies aren't doing that, it's kind of a race to the bottom. So the urgency to deploy these, whether it's for safety or for health or for productivity or for tracking and automation, we're starting to see this kind of become -- get this -- it's kind of a snowball effect. It's kind of starting to build on itself and some momentum really kind of accelerated here.

Okay. And from an application perspective, I know consumer products tend to get a lot of attention or focus, and that's great. It's a growing, expanding market. But could you maybe just touch on the industrial side of things in terms of what are some of the applications within that funnel you're talking about that are really kind of coming into their own in terms of in industrial?

Yes. I mean a lot of the commercial building stuff, a lot of the -- there's a lot of industrial -- I mean, there's smart retail and supply chain automation and some of the smart nanometering. Even some of the things in the smart home are done by installers and things like that, and those are more industrial-like in terms of the -- so actually, we think that the IoT is more industrial IoT, and there are some consumer applications that's not our primary focus. Actually, it's on -- the more -- the broader and the more longer-lived type of industrial applications. So that's where, I think, the majority of the applications are. There's always the high-volume consumer piece, and we've got solutions that can address that. But the long tail and a lot of -- the broad range of applications, we consider IoT as more of an industrial play than a consumer play.

Yes. Great. Well, as we come up on time, I want to wrap up with some things within Infrastructure and Automotive. And I guess, just starting within Automotive, EVs, in particular, the inflection that's happening in that market, can you just talk about your technology there and what you see as the growth prospects on the EV front?

Yes. So we talked about electric vehicles. We ship to the leading suppliers of electric vehicles today. You've got about 1% of the car shipping. And those numbers are increasing dramatically, and we're talking -- it could be 25%, 30-plus percent. It could be -- and in fact, the whole automotive industry is going to transition at some point. But so the isolation technology for battery charging, for battery monitoring and traction inverters, to get power flow through these vehicles, that our isolation business just has a fantastic opportunity there. They're -- basically, you take the big power FETs, and our chips are the ones that are driving those power FETs to do the power conversion. And we can integrate on our digital isolation technology. We can integrate a lot of really interesting features there. So they are very applicable for things like safety and driving higher efficiency, longer range and that sort of thing. And these same type of technologies are applicable into like solar energy. So a lot of the green energy applications there, which are really exciting, seeing a lot of -- lots of big opportunities in that space. And then industrial motors and test and measurement, there's a lot of applications with that technology. But on the Automotive side, that's the biggest opportunity. And we're seeing a nice ramp in those applications, certainly this year and going into next year.

Great. And then just lastly, on the comm infrastructure front and particularly, in wireless infrastructure, it could be lumpy and there's been headwinds from Huawei. But just what are you seeing there in terms of spending levels? And what's your visibility like in comm infrastructure?

Yes. So I think comm infrastructure in general is -- with Huawei coming down, a lot of that volume is shifting to other suppliers that may not have been quite as advanced. So 5G rollout, in general, is slowing a bit, but the -- it's really just a matter of accommodating that way. And we engage broadly with all of the vendors. So it's -- we are seeing the benefit of that activity. And then, just certainly, network infrastructure, the data center is -- there's a lot of CapEx going into the deployment of 5G, into the upgrades of the networks, into the cloud infrastructure as well. So it's -- timing is a fantastic long-term business for us. And we have a lot of activity like on, for some of the 5G networks, the Synchronous Ethernet, that the IEEE 1588 and getting everything synchronized, some really special kind of proprietary technology there and doing more of a system play that also adds content for us within those applications as they ramp.

Okay. Well, I think that puts us right on time here. So Tyson and John, I really appreciate spending the time with you today and walking through these important growth drivers that you have. And hope you and everyone else has a great day.

All right.

Thank you, Craig.

Thank you for your time, everybody.

Okay. Bye-bye.

All right. Take care.