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

Okay. Let's get started. Good morning, and welcome to JPMorgan's 52nd Annual Technology, Media and Communications Conference. My name is Peter Peng, small and mid-cap semiconductor analyst here at the firm. I'm pleased to have Matt Johnson, President and CEO; Dean Butler, SFP and CFO, with payers today. I have asked Matt to start off with an overview of Silicon Laboratories in the summary of the March quarter and June quarter outlook, and then we can kick off the Q&A.

Sure. So for anyone who's not familiar with the company, Silicon Labs is focused on embedded wireless technology. We're actually the largest dedicated company in the world with that focus and what we do is provide complete solutions for wireless technologies that would be used in embedded communications. So think of technologies that many of you have heard of, like Bluetooth and Wi-Fi and then other technologies like 15.4, like ZigBee, Thread, sub-gigahertz across Wison, Z-Wave, Amazon Sidewalk, all those technologies. And what we do is provide complete solutions around those. Silicon, the software, the tools, all the enablement around those. And then supporting all the ecosystems that go behind it. So our focus is to be the provider that has every requisite wireless technology our customers need for embedded applications. And that's been our focus, and it's been a pretty exciting market cycle aside because what we see is embedded wireless really accelerating. IoT adoption really accelerating and our position to capture that, I think, is the strongest it's ever been. To answer your question about kind of the last quarter's guidance, what we said back in Q4 is we had not called the market cycle, but we called our trough or bottom and we saw a path to sequential growth moving forward from there. And that's what we're able to do in Q1. That's what we've guided in Q2, and we feel confident that continues to be the case moving forward. A lot of the key indicators out there, whether it's bookings, backlog or moving in the right direction. Never as fast as we want. And the question we get most often is what's the rate. We're going to see ourselves moving out of this, and that's difficult to call. But the confidence in the direction is as good as it gets.

Okay. Maybe just kind of start with some near-term question. That's been a lot of the investor focus. So you continue to undership demand to fully flesh out your excess inventory in the channel at your customers, into the June quarter. Like can you give us a sense of what your customer inventory situation is like? And when do you expect to ship to consumption levels?

Sure. Customer inventories is difficult to track and call. But what we do is we sample our top customers, and what that told us is back in Q4, we believe our customers were carrying an excess inventory of over 1/4 of what they should be carrying. And so what we've said since then is we've seen that continue to work its way down over the last few quarters. And the easy way to think about it as they work down their excess inventory, our revenue increases and approaches consumption. So not there yet. We've seen the average excess move down, it's in the count of customers with excess move down, but still higher than it should be. So I think as we go throughout this year, you'll continue to see our revenue go up and approaching the consumption level that we've said is over $160 million a quarter, not at $160 million a quarter.

Got it. Okay. If we kind of just look at consensus estimate, the Street is modeling a pretty aggressive second half revenue ramp, somewhere in that close to 50% growth for the second half of the year. So if we were to get there, what kind of drivers can bring us to that number?

Yes. I mean the easy way to think about it is you can break it into maybe 3 major drivers or legs, if you will. One is this dynamic we just talked about, simply said destocking excess inventory at our customers. Our channel inventory is already very low, but that end customer inventory, as I said, is that works down, revenue can go up towards consumption. So that can be a meaningful driver for us. And it's the biggest driver we're seeing right now. The second major driver is design wins. We've been winning design wins at an accelerated rate over the last few years. Very happy with what we've been able to accomplish there, and we're starting to see those ramp. A lot of those were supposed to ramp last year, but they are ramping now. So that gives us kind of the second major growth driver in addition to just getting revenue back to consumption levels where we want it to be. And then the third, it's the most difficult to call of all those is the overall market -- end market. That's been more challenging. There's a lot of mixed signals out there in terms of what that looks like. But we don't need that in the next few quarters to drive the growth that we're looking at. Those first 2 can carry us there.

Okay. So you have 2 business end segments. You have your Home & Life and then you have your Commercial & Industrial. And the behavior seems to be a little bit different for your Home & Life, they could kind of correct it over a 5-quarter period. Where is your Industrial, it was a pretty drastic 2 quarters. So I mean, can you just share some insights on what you're seeing from those end markets? And as we kind of position for the up-cycle, how does that give you insight into that?

Yes. It's -- I mean, admittedly, it's difficult to call just the way this whole cycle has gone. But the quick way to think about it, the Home & Life business certainly went into the cycle first, and we've seen that come out are working its way out now. Industrial is different. Industrial went in later into the cycle and the correction. But it's notable that the behavior we typically expect from Industrial, which is more, I don't know, for like well behaved and well moderated down and up. It was across thousands of customers. It was pretty steep as I think they collectively realized the demand levels weren't what they had thought and they also realized at the same time they were carrying more inventory than they should. And that combination was pretty bad. So my point is it went down much faster than we've typically seen in industrial. So not saying it's going to come out as quickly, but I think it's worth noting that it's a difference than we've typically seen. So we could see more strength in Industrial faster on the other side, but we're not banking on that. But sitting here today, we're seeing encouraging signs in both segments. Bookings continue to increase. Pull-in requests continue. Excess inventory is working down in both segments. So we're seeing the right signs in both.

Okay. Just kind of turn into your design win pipeline. You kind of talked to it about the strength of it and it's pretty impressive, right? We -- in 2023, it was a pretty severe downtown, yet you grew your design win pipeline by almost double digits. And it's kind of reflective of our differentiated technology and product portfolio. So maybe if you can just kind of talk about some of the -- do you see that continuing into 2024? And how are you seeing these design wins behave from an end market perspective?

Sure. So yes, big picture, what we've shared is, back in '21/'22, when we had grown our revenue over 40% both those years, our design wins grew at a faster rate during that same time frame. So then going into '23, where revenue was down, typically, you see some correlation between design wins and revenue, and you'd expect your design wins to decline coming off of that kind of incredible cycle. We were still able to grow our design wins to your point. And really, that's on the strength of our current generation of products. Our Series 2 products are really hitting the sweet spot in the marketplace. We see that as the de facto standard of platform in the marketplace. We continue to release new products on that platform. And it's just -- it's serving us incredibly well. So that is what's allowing us to drive design and growth. And yes, we do expect it to continue growing our design wins moving forward. And at the same time, we're working on our next-generation Series 3, which will be sampling this quarter. So it's a really powerful combination to have the success we've seen on the current generation and to be starting to introduce our follow-on generation so closely. I think that will serve us well, big picture. In terms of the behaviors, we touched on it earlier, a lot of design wins, but also at the same time, a lot of ramps that were delayed. We expected some of those ramps last year delayed for various reasons. Inventory they needed to work down, dynamics of those companies were working through. But as I've said, we are starting to see those ramp now, which is encouraging. And just for those who are not familiar with our company, design win that we count as lifetime revenue like last year or the year before, that can take years to ramp into production 4 or 5 years in many cases. So it's not this big step function necessarily after you win it. It can take a long time. And we're starting to see the effect of those giving us a tailwind moving forward, which is really exciting.

Okay. I think that's kind of the great part of your story is that you have the end market recovery, you have the destocking and you have all these unique design wins that's going to layer in. So this year, you talked about some design wins that's going to drive some incremental. Maybe if you can just rank order for us what you think are the significant design win ramp this year? And maybe like if not quantitatively, maybe qualitatively talk about how significant they are?

Yes. There's a few ways to think about that. I think one thing we've tried to do to help our audience is to start kind of sticking with a few themes in a few application areas where we're consistently talking about those. One of the challenges we have in our space is there's so many applications, so many customers, tens of thousands of customers and thousands of applications. It can be difficult to kind of understand our market and customers. So we've picked a few areas in each of our subsegments. Examples of those would be recently, we started talking more about the health care space, continuous glucose monitoring, where to answer your question, that's a big driver for us. That's where historically, we didn't have a lot of sockets there and customers. But after multiple years of focus, we're really starting to make progress on multiple customers, multiple wins, and those are starting to ramp now. And the nature of that market, the volumes are fairly high. So that could be a meaningful area for us and will be, I think, starting this year. After that, another one we talked about a lot that also has a pretty big potential right under CGM would be the electronic shelf label space or digital shelf labels. That's where we see a pretty not new technology necessarily, but I think early days in terms of industry adoption. You see almost every retailer globally having a plan to adopt this technology in various ways and levels. And just like CGM, we're very well positioned there across multiple suppliers. We are ramping now in that space. And again, given the nature of that business, the volumes are pretty meaningful. And maybe the last one under that we talk about is the smart meter, gas, water, electric. I think everyone is aware that the grid challenges globally, and that space has really kind of hit its sweet spot in terms of returns and the technology maturity to deploy. So again, very similarly, we're very well positioned there. We're ramping, and I put that right under the first 2 in terms of impact to us moving forward. And to be clear, there's many other spaces, many other areas that we see us being well positioned in ramps. But those 3, we talk about quite a bit. And they're all happening now, and they're going to start impacting us more meaningfully moving forward. I'd rank them in that order.

Okay. Okay. So this is a technology conference, and we're not going to get away from talking about AI. I mean you have -- you guys -- there's -- as AI kind of proliferate and moving on to inference at the edge. I mean, you guys have your Series 3 platform, and that's a 22-nanometer process node, which you can kind of bring 100x more capability, rises your prior generation and has some AI/ML accelerates in there. So maybe just help us understand like what your Series 3 platform can do? And help us understand from AI angle, how that plays into that?

Sure. Maybe before we do that, I'll just do a very self-serving plug for our current generation, Series 2. That generation has from an artificial intelligence perspective, machine learning accelerators on a lot of our products. So what that is -- generative AI is really not being deployed at the extreme edge where we are in embedded applications, but machine learning is. So we have the industry's most effective, most power-efficient solutions for deploying machine learning at the edge. And what I mean by that is we allow with the solutions we've put into Series 2, customers can deploy machine learning at the edge on battery-powered applications. So you can run inference at the edge in a very practical real-life way instead of running on a general-purpose core and not getting the battery life you want and need. And we've had this for a while, and we're really starting to see encouraging signs of adoption and uptake as customers start to figure out applications that make sense for them, which is really exciting to see. To answer your question on Series 3, as you would expect, almost in every generation and including this one, the need for scaling compute, whether it's general purpose or AI continues. So just like in Series 2, we introduced things that people didn't really understand at the time. Levels of security that were new to industry, custom manufacturing capabilities that were new to industry, machine learning on our devices. We're doing the same thing in Series 3 because we got a target 5 to 10 years from now, what we think our customers will want and need. That's what we're doing in terms of compute. So general purpose will scale up substantially in terms of general purpose compute, the same for AI. We'll be bringing, again, new-to-industry capabilities to our customers in this space. Because I think you can plot it out big picture, it's definitely where the market is going and wants to go, and we want to make sure that we're always a couple of steps ahead of our customers and our competitors.

Okay. And the Series 3, you're going to be expanding way more products, 2 to 3x more products than your Series 2. So maybe you can just talk about the strategy there? Is it just new wireless SoC technology? Just more expanded footprint, market segmentation? Maybe you can just go through your strategy there.

Yes. It's basically all of the above. Anyone who's not familiar or maybe our generations or platforms are not maybe the best named. Our Series 3 will be our fifth generation of wireless technology. And every generation, you obviously learn an incredible amount, some of it the hard way, and then you roll that forward into the next generation. So Series 1, we introduced in that generation for wireless SoCs. Series 2, which is our more course platform right now, we will have done 10 to 12 wireless SoCs. We just announced one actually a few weeks ago and we'll continue to introduce Silicon and software. We do over 500 software products on top of that every year. So that's basically continuing to proliferate. Our goal in Series 3 is to 2 to 3x as you've said, and we're looking to do around 30 products in that space. Because as we gain momentum and we take our platform approach, we're really learning on how to do something that I think is really unique in the industry, which is generate not only so many products, but so many differentiated products with so many different wireless protocols integrated. So industry-leading integration of wireless technology, industry-leading integration of almost every ecosystem you've ever heard of in the wireless space, and then industry-leading performance around security, machine learning, et cetera. Each generation, we're getting better. And one, if you put yourself in the customer's shoes, our goal is they look at the landscape and say, there's no need to work with anyone else, talk to anyone else, adopt anyone else's solution because we have all the requisite technologies, all the requisite ecosystems, and we have a solution that is really optimal for what they're doing in their application. So that's our goal, and that's why there are so many products coming out each generation is that machine, that engine builds, and we service more and more of the market more effectively.

Okay. Before I kind of move on to more questions, I want to see if there's any questions from the audience.

So let's talk a little bit about R&D priorities you're seeing on CES. You saw a lot of home health, aging at home, private or personal health care applications that really proliferated this year. For that part of your business, where are you prioritizing your R&D spend? And then on the same thing, a question on the Industrial side. And then are you looking at any M&A to augment any of your capabilities?

Sure, yes. So the question was where are we prioritizing R&D around health care and the same around Industrial, and then kind of what we're thinking around M&A. So, health care space right now, that's been an internal strategic focus for us for 4 to 5 years. So we've been developing products capability around that space. You're only just now starting to see that externally and really focusing it on predominantly in the Bluetooth space where we see really this need -- continuous glucose monitoring, great example, where you have solutions that are essentially disposable and really scaling in terms of global need and adoption, and then other areas that are affiliated with that, that kind of accelerated during the pandemic. So I think telemedicine and the need for things that are wirelessly connected for those visits, blood pressure cuffs, pulse oximeters, thermometers, all these things that you can connect to the smartphone and then the phone can upload to the doctor's office for the telemedicine visit. So areas like that, we're hyper focusing on. And just very transparently, there's reluctance to go too far too wide. You really want to clean up that space and then move on, not spread ourselves too thin. So that's where we're focused there. Industrial, it's really pretty remarkable that we're seeing, I think, a combination of a couple of things. One is the technology maturity is there for broader adoption in industrial environments, commercial environments and the financial returns are strong. In a lot of cases, 6, 9 months, maybe 12 months. So that's accelerated adoption. So great examples of that would be those shelf labels or the smart metering that we talked about. So our focus there is any place that sub-gigahertz, a great example, where we have a leading position in a technology that continues to deploy in those environments, and we're making sure that we're staying on top and leading that space. M&A-wise, what we've said is our goal -- we have a pretty strong track record of acquiring a company almost every year for the last decade. And that was really about acquiring technologies, requisite capabilities and technologies to do what we do today. Sitting here today, we don't find ourselves lacking or wanting a new technology, not to say never, but right now, we feel like we have all the key capabilities our customers want and need. So what we're looking to do from an M&A perspective is what could accelerate what we're doing today, what would allow us to step function in the areas we're in versus not necessarily opening up a new battlefront. And before next question, Peter, if you allow me to just take the opportunity to welcome and introduce Dean since second week on the job and on the road already. And maybe if you don't mind, just try to say a couple of words and introduce yourself. I think you know a lot of the team out here already.

Yes. Yes. I do know a lot of the investor base and certainly JPMorgan over the years. Joined the company, second week on the job, really out of the vision that actually Silicon Labs has, which is sort of connecting the future of the world that we all live in. I'm a real believer in that vision. In my prior shop, Peter, you and I worked together a little bit. That was always a company that we admire. We always admired Silicon Labs. I personally had some admiration on what Matt and the Silicon Labs team were able to build over a number of years. And when Matt and I sort of first connected and started talking about the opportunity of joining, actually the ability to sort of come in and help at a pivotal moment where the company has got a huge massive design win funnel that it's trying to convert into the bottom line and at the same time, trying to double down on its investments into Series 3 and sort of beyond. And that was a pretty exciting opportunity for me. And so when Matt and I and the rest of the team sort of talked about it, it was actually -- it was pretty exciting for me. And so I'm here, I'm available for all investors be out on the road pretty extensively and make myself readily available. So I'm happy to be along. So thanks for having us, too, Peter.

And maybe just kind of -- I know you've only been for 2 weeks, maybe share some of the initial observations you have of the team, the culture and the company?