SiTime Corporation (SITM) Earnings Call Transcript & Summary

Good afternoon, and welcome to SiTime's Fourth Quarter and Fiscal Year 2019 Financial Results Conference call. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, February 5, 2020. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead.

Good afternoon, and thank you all for joining us today on our first conference call as a public company. On the call from SiTime are Rajesh Vashist, our Chief Executive Officer; and Art Chadwick, our Chief Financial Officer. Before we begin, I'd like to point out that during the course of this call, the company may make forward-looking statements regarding expected future results, including financial position, strategy and plans, future operations, the timing market and other areas of discussion. It is not possible for the company's management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. Neither the company nor any other person assumes responsibility for the accuracy and completeness the forward-looking statements. The company undertakes no obligation to publicly update forward-looking statements for any reason after the date of this call to conform to these statements, to actual results or to changes in the company's expectations. For more detailed information on risks associated with our business, we refer you to the risk factors described in our S-1 filing with the SEC in November 2019. Also during this call, we will refer to certain non-GAAP financial measures, which we consider to be an important measure of company's performance. These non-GAAP financial measures are provided in addition to and not as a substitute for or superior to measures of financial performance prepared in accordance with U.S. GAAP. The only difference between GAAP and non-GAAP results is stock-based compensation expense. But please refer to the press release issued today for a detailed reconciliation between our GAAP and non-GAAP financial results. And now I'd like to call -- turn the call over to Rajesh. Please go ahead.

Thanks, Leanne. I want to thank you all for joining our call. Since this is our first conference call as a public company, I'd like to start with a brief description of what we do. We are SiTime, and what we do is in our name. SI stands for silicon, and we make timing devices. Timing solutions are the heartbeat of every electronic system, and we are the leader in advanced silicon timing solutions. Our solutions solve complex timing problems and enable industry-leading electronics. Uniquely, we're the only company worldwide that is focused on all aspects of timing. Traditionally, timing devices have used quartz, and we are adding silicon or siliconizing the timing market and bringing with it the disruptive benefits of silicon, which are faster innovation, higher performance, reliability, robustness and unique features that enable better electronics. This is a trend that's been around. We know that digital cameras got replaced by -- replaced film, LEDs replaced bulbs, solid-state drives replaced hard disk drives and so on. And so when history shows that when silicon goes up against non-silicon, silicon always wins. And we believe we are the right side of history as we replace quartz with our unique silicon MEMS technology. SiTime is an analog semiconductor company, but we are different in some ways. We're different because we also do MEMS, which is microelectronic mechanical systems, and we do advanced system-level integration of the 2. SiTime has achieved our unique leadership by innovating in each of these 3 areas of expertise. For example, we have invested decades in MEMS design processes and simulation tools. Our analog circuits are co-developed to work with our MEMS, and we have many specialized circuits, such as temperature sensors that set new benchmarks in performance. On the systems integration side, our material science and thermal mechanical know-how is unique to the semiconductor industry and is important to our success. With these 3 areas of expertise, we can provide better solutions that allow us to go after the most value-added segments of the $8 billion timing market that we expect will grow to $10 billion in the next few years. SiTime solutions have been designed in -- into over 200 applications across our target markets, which are Enterprise and Telecommunications Infrastructure, Automotive, Industrial, Aerospace and Defense and finally, Mobile, IoT and Consumer. Since our inception in 2006, we have sold products to over 10,000 customers. We have over 65 different products that can be programmed into tens of millions of part numbers. Some of SiTime's customers buy our products for a high performance, environmental resilience and reliability, while others buy because of the small size and low power. We don't have time on this call right now to describe all our product variants, but I would like to talk about some of our newer ones. One of our higher -- one of our new high-performance products is our Elite family of products. Elite is a TCXO, which stands for temperature compensated oscillator. That provides a very stable clock frequency in spite of changes in ambient conditions. Such devices, such TCXOs are the heartbeat of 5G, data centers and other high-performance telecommunications and network applications. In 2019, SiTime won over 200 design wins with this Elite product family. We began production shipment in '19 and expect sales of Elite to drive sales growth in 2020, particularly in telecommunications and networking. An even newer product is our Emerald platform, which provides higher performance than Elite. Emerald is an OCXO, which stands for oven-controlled oscillators. Here, we provide frequency stability that is an order of magnitude better than a TCXO. OCXOs are used in equipment that is at the core and the edge of telecommunications and networking. And I'm happy to report that SiTime won over 20 Emerald designs in 2019. In order to get a view into potential future revenue growth, we track design win dollars. Total design win dollars in 2019 were up by more than 50% over design win dollars in 2018. This growth was due to greater adoption of SiTime's products as customers embrace our value proposition of high performance and reliability. Additionally, design win growth came from our newer Elite and Emerald products. Finally, I'd also like to make a short comment on the coronavirus and the potential impacts of that on SiTime's business. So far, we have not seen any disruption to our business. From the supply side, we have talked to all of our major vendors, including wafer and assembly vendors, and they've all told us that their supply chain has not been impacted. None of our major vendors are located in Mainland China. On the customer side, we've talked to our distributors and major end customers, many of whom we do ship product to into China. To date, none of our customers have asked for any delays in shipments to their facilities. Many of our customers and vendors believe there will be more clarity on any potential business impact in mid-February after the end of the extended Lunar New Year holiday. We plan to closely monitor the situation and will provide updates if there's any material information to provide. With that, I'd like to turn over the call to Art Chadwick, our CFO.

Great. Thanks, Rajesh, and good afternoon, everyone. We are very pleased to be holding our first financial results conference call as a public company. So today, I'll discuss our Q4 2019 financial results and will provide financial guidance for Q1. I plan to focus my discussion on non-GAAP financial results and refer you to today's press release for a detailed description of our GAAP results as well as a reconciliation of GAAP to our non-GAAP results. First of all, Q4 was an excellent quarter for us. Revenue was $28.1 million, up 11% sequentially and up 23% over the same quarter a year ago. Revenue for the year was $84.1 million compared to $85.2 million in 2018. To provide some color on the breakdown of revenue by end markets, we have defined 3 major market groupings, and I'll report sales into each. The first is Mobile, IoT and Consumer, which consists primarily of sales into mobile phones, wearable devices and consumer products. Q4 sales into this end market group were $18.6 million or 66% of sales, up from $17.5 million or 69% of sales in Q3. The second grouping is Industrial, Automotive and Aerospace, which goes into industrial applications, automotive, aerospace and military applications and also includes what we refer to as broad based sales, which are shipments to numerous smaller customers, where it's not as easy to track end markets. Q4 sales into this group were $5.3 million or 19% of sales compared to $5.2 million or 21% of sales in Q3. The third grouping is communications and enterprise, which consists of wireless infrastructure, including 5G as well as data center and networking. Sales in Q4 were $4.2 million or 15% of sales, up from $2.7 million or 11% of sales in Q3. We had just one customer where sales exceeded 10%, and that customer comprised 33% of sales in Q4 and 35% of sales for all of 2019. Non-GAAP gross margins were 48.0%. Non-GAAP operating expenses were $11.1 million or 39% of sales, comprised of $5.6 million in R&D expense and $5.5 million in SG&A. Non-GAAP operating income was $2.4 million or 8.6% of revenue. Net interest and other expense were $0.4 million. So this provided non-GAAP net income of $2.0 million or $0.16 per share on a fully diluted basis. Accounts receivable were $17.7 million, up slightly from $17.3 million in Q3 with DSOs at 58 days. Inventory was $11.9 million, down from $13.0 million in Q3. Our major financial event during the quarter was, of course, our IPO. We issued 4.945 million shares of common stock at $13 per share. This generated net proceeds after fees and expenses of $56.4 million. Our stock started trading on the NASDAQ Stock Exchange on November 21, 2019 under the ticker symbol SITM. In the fourth quarter, we generated $7.4 million in cash from operations. We used $3.2 million for assets and investments, generated $56.4 million from the IPO, and we paid down $5 million in debt. As a result, we ended the quarter with $41.0 million in debt and a cash balance of $63.4 million. I'd now like to provide some guidance for the first quarter of 2020. First of all, we expect 2020 will be a strong revenue growth year. We have a number of new products and a strong design win funnel that we believe will ramp sales through the year. However, we did have seasonality in our business in 2019, primarily in Mobile, IoT and Consumer, and we expect similar seasonality in 2020. We expect revenue in the first quarter will be between $20 million and $21 million, which at the midpoint would be 38% higher than the same quarter last year. Non-GAAP gross margins are expected to be between 46% and 47%, which is down from Q4, but only due to the lower sales level. Non-GAAP operating expenses are expected to be between $11.8 million and $12.0 million, which is an increase from Q4 due primarily to beginning of the year FICA taxes, a full quarter of costs related to being a public company and new hires. Net interest expense in Q1 is expected to be approximately $300,000, a decrease from Q4 due to the lower debt balance and to a full quarter of earned interest from our IPO proceeds. Based on this guidance, we expect Q1 non-GAAP EPS to be a loss of between $0.16 and $0.20 per share. As Rajesh mentioned, we have not seen any impact on our business due to the coronavirus. And our Q1 guidance assumes we will not be impacted this quarter. However, if the contagion worsens, there is always a chance it could impact us. I would now like to provide a few additional comments for purposes of modeling anticipated stock-based comp expense, taxes and share count for the year. In regards to stock-based comp, we issued approximately 3 million restricted stock units, or RSUs to employees at the time of the IPO. These RSUs will generally vest over the next 4 years. The resulting stock-based comp expense will be approximately $2.7 million in Q1, $2.9 million in Q2 and approximately $3 million in each Q3 and Q4. For income taxes, the company has significant tax loss carryforwards, which means we will have no federal or state income tax expense in 2020. However, we will have some nominal income tax expense related to foreign subsidiaries, but it should be less than $50,000 a quarter. For share count, we had 10 million shares outstanding going into the IPO. We issued just under 5 million new shares on the IPO. So we finished Q4 with just short of 15 million shares. Because the IPO was mid-quarter, the average number of diluted shares in Q4 was 12.7 million. Our share count will increase during 2020, as employee RSUs continue to vest and with the addition of diluted shares associated with the accounting for unvested RSUs. Both the basic and diluted share count will increase to approximately 15.1 million shares in Q1 and 15.2 million shares by Q2. In Q3, the basic share count will increase to approximately 15.5 million shares. However, in Q3, the accounting rules regarding unvested RSUs will likely kick in. And this will increase the diluted share count by an additional 1.5 million shares or so. This will take the Q3 diluted share count to 17.0 million shares and the Q4 diluted share count to approximately 17.2 million shares. So in summary, we are looking forward to a robust 2020, and I'd like to turn the call back to the operator for questions and answers.

[Operator Instructions] Our first question comes from the line of Blayne Curtis from Barclays.

Congrats on a great first quarter. You mentioned the new products, the Elite and Emerald and your comm business was up strongly. It's actually been up strong the last 2 quarters. I was wondering if you could just talk about what types of products are driving that, and as you look into 2020, any color on the ramps that you see there?

Yes. Basically, the products are all over. As I mentioned before, it's in the networking and the telecommunications. So we have design wins and ROUs for 5G. We have design wins in base stations. We have design wins in some of the satellite products. We have some design wins for Elite, in particular, there's a wider range. It includes some transmission line equipment. It includes data servers, which are wanting to true up high-performance data financial servers. We expect this trend to continue. And what we also expect, Blayne, is that over time, since most of the telecommunications enterprise data center business is not as seasonal as the IoT, mobile, wearables business, we expect that, that will flatten out the seasonality in subsequent years as we go forward.

Great. And then just kind of curious, obviously, new company for many people. Just you talked about normal seasonal into Q1. Kind of curious -- just curious what your perspective of kind of normal seasonal patterns for your company overall should look like?

So Blayne, I'll take that. If you look at our revenue by quarter in 2019, you'll see that seasonality, right? Sales were much lower in the first half of the year, higher in the back half of the year. And that seasonality is, for the most part, driven by our Mobile, IoT and Consumer business. We go into a lot of wearables, for example. Sales of wearables increased in the back half of the year versus the first half. I think over time, as more of our sales go into the communications, enterprise, auto, aerospace types of markets, you'll see less seasonality in coming years. But for 2020, as I mentioned in my comments, we do expect to see seasonality, which we've seen in the prior year. And I think our guidance reflects that. And again, the decrease, for example, from Q4 to Q1 is based almost entirely on our Mobile, IoT and Consumer business and the seasonality associated with that.

Our next question comes from Tore Svanberg of Stifel.

Yes. Thank you, Rajesh and Art, and congratulations on the IPO and this first quarter out of the gate. A few questions, if I could. First of all, how should we think about gross margin progressing throughout the year? I know gross margin sometimes is a function of the revenue mix. So as we continue to move throughout the year, and obviously, as your nonmobile segments become a higher percentage of revenue, how should we think about gross margin?

No, excellent question. So I'll start with our Q1 guidance. So I am guiding gross margins down from Q4 to Q1 but the only reason for that is because of the lower sales volume. One of the items that go into our gross margin is a fixed component of manufacturing overhead. And that runs about 10 points. So as our volume goes down from Q4 to Q1, that impacts blended gross margins. The upside to that is, I would expect the dollar expense associated with that fixed overhead to remain relatively flat over the next couple of years. So for example, if our sales were to double in the next few years, for example, we would pick up 5 margin points. So that works -- it works both ways. The other components of gross margin that will drive improving margins next year have to do with -- and you mentioned this, the segments and our products. The good news is our newer products, the Elite products, the Emerald products have substantially higher ASPs and substantially higher gross margins than some of our traditional products. So as those products become a larger percentage of our sales over time, that will improve gross margins. The other thing that we want to do that will improve gross margins is our -- on the sales side, right now, all of our sales go through distribution. But we're going to, in 2020, start taking some of those sales direct with our larger customers. We already have the direct relationship with our larger customers, but we want to start fulfilling those sales directly, and that essentially cuts out the middleman and improves gross margins. So over time, we expect to be able to expand our gross margins. Our longer-term target is to get gross margins to between 55% and 60%. And just again, to quickly summarize that comes from the higher margins on newer products. It comes from the leverage on our fixed manufacturing overhead. It comes on changing our sales distribution to go more direct. And if you just look at the market segments that we're selling into, our fastest growth market segments are our higher margin segmentations, engineering, automotive and aerospace. So over the next couple of years, we do expect to see some very nice gross margin expansion.

That's great color. My second question is on your relationships with your customers. So obviously, you have disruptive products in fairly substantial market and I know you talked about the IPO probably lifting the profile of the company. I was just wondering, ever since the company has gone public, how has that profile kind of changed with some customers and especially some of the larger ones that you may consider going directly?

Yes. I think, Tore, that's actually a great question. My observation is that I was expecting it to be a good lift, but I think it's a better lift than I expected. I think that we have gone -- we have 2 things that we are doing that are different. One is timing products, as you know, are not much of a category on their own without SiTime. There aren't too many timing companies in the United States that just are pure play timing. In fact, there are none. There are a couple overseas in Japan and so on, but that's about it. So I think by giving this being this pure play timing company and being a public company, which, of course brings tremendous credibility, our customers particularly our mil, aero customers, our networking, telecommunications customers and actually, for that matter, I would say, consumer customers, we have large consumer customers, who are looking at us very differently now and our ability to deliver higher-value products and, in fact, commit to us more of a single source. If you recall, I mentioned during the whole IPO process and at the Needham conference that we get about 65% to 70% of our revenue from single-source products, which is a very unusual thing in the world of timing. So we think that that's increasing now because people believe they have the transparency of the company, they can see the company, they can see the strength of the company, they can see everyone from the Board, the management, the technology all down. So I think it's just been a fantastic opportunity. And as I mentioned, it's been better than what I thought in terms of getting more opportunities at new customers, but also much more single-source opportunities of the existing customers.

Very helpful. Just one last question. You talked about, obviously, tracking design wins. I was just hoping you could elaborate a little bit on the geographic mix of those design wins. I mean, I assume they are pretty global in nature. But if there is any concentration, if you could elaborate on that, that would be great.

Yes. Couple of years ago, we started a trend that the highest performance products like Elite, Emerald, the OCXOs, the TCXOs, were happening more in the United States than anywhere else. So that was a new trend for us. So if you look at satellite, if you look at GNSS for transmission equipment, if you look at oil exploration, of course, networking, telecommunications, I would say that the U.S. is probably the preeminent place where most of the innovation is happening. After that, it's a little bit of a jump ball. We see a lot more happening out of Korea recently and of course, out of Europe. China has not been significant in this regard for us at the very high end of the business. And Japan is generally more conservative, for example, places like Fujitsu and so on, a little bit more conservative in going down this path. But that's how I would rank it. A strong #1 contender United States, followed by about equal between Korea and Europe and then Japan.

Very helpful. Congratulations again.

Next question comes from Quinn Bolton of Needham & Company.

Congratulations on the nice results in the first quarter post IPO. I wanted to come back, obviously, you've got the 3 segments. Wondering if you might be able to give us your expectations on kind of the rank order for which segments grow fastest this year and which may grow more slowly. And then sort of a related question, you talked a lot about Emerald and Elite on this call. Those 200 wins for Elite and 20 for Emerald, do they start to ship in the second half of 2020? Is it a little bit more back-end loaded with those design wins?

Yes, they are. On that one, I'll answer and then I'll let Art answer the first one. The Elite has been around since '18. So we've had design wins starting in mid-ish '18. So we actually started shipping in '19 with Elite. But Elite is definitely going to be generally slowly growing between Q1 to Q4, but there are a couple of design wins that if they really hit as big as they say they would, that could start as early as Q2, but we don't -- it -- obviously, we have to wait and see on that. On Emerald, it's definitely back-end loaded because the shipments are definitely going to be relatively small shipments in the first half and significantly higher in the second half. In any event, Emerald volume would be still pretty small. But then the ASPs are, as we have talked about in the past, are anywhere from $17 to $35, so significant price.

Great. And then in terms of growth rates for these different market segments, first of all, all 3 of these market groupings are important to us. But in terms of growth rates probably the smallest segment today, which is communications and enterprise, and as I mentioned, that includes wireless infrastructure, especially 5G, including data center and networking, that was $4.2 million in Q4. This is probably our highest growth market that we're addressing today, partly because that's where we provide the most value add, the newer products that Rajesh talked through, go into these particular markets. So our highest growth market is -- I would say, is the communication and enterprise market, followed probably by the industrial, automotive and aerospace market, kind of for the same reasons and then followed by the Mobile, IoT and Consumer market. But I don't want to put down any of these markets, they are all important markets to us.