SiTime Corporation (SITM) Earnings Call Transcript & Summary

All right. Welcome back to the Barclays Tech Conference, I'm Tom O'Malley, semi and semi-cap analyst here at Barclays. Lucky enough to have SiTime CEO Rajesh Vashist with us. Thank you so much for being here. I think you want to kick off with some disclosures, and then we can...

It's my pleasure. Last time I did one of these, I was going to try to read this, but I'm not going to put you through that pain, but the usual disclaimers on this. That's it, right?

Perfect. All right. So again, great having you here today. It's been a busy couple of weeks for you. So I want to start out with the [ clock ] business that closed last week. You talk about why you did that deal from a strategic perspective? And why was this such a must-have asset for you?

SiTime, as You know, is focus and timing. And timing has 2 or 3 components to it. One is the Oscillators, which is most of our business, the Resonators, which is a business we are going to grow into, we know how to do that natively. But the clocking business is one that we've talked about since the IPO, the one we wanted to get into significantly. It is because Oscillators we sell and the clocks that we now will sell sit at the same mother board in the same system that customers consume. So it fulfills our promise of being a single stop purveyor of all timing-based products. And we found one of the best companies with the best technology under a fabulous price. So the rest of it is hard work of doing it.

So does this take you into another realm in terms of the competitive environment? When you're moving into more of a full solution, does the competition change? And does your go-to-market...

Absolutely. So as you recall, we've been competing against [indiscernible] vendors, people like Epson, Kyocera, TX, et cetera, mostly Asian. The quartz business is a 60, 70-year-old technology. So the lag - there's a general slowness of innovation in this business. We now move into clocking, which is a companion chip to oscillators and in clocking, our competitors are Renesas, TI, Skyworks and people -- customers like that are clearly a little bit more semiconductors, they're more aggressive. But at the same time, they're not very focused on timing, most of them are $10 billion plus revenue companies, and the timing piece of it is about $100 million, $200 million business. So this is not something of investment for them. So it gives us the edge in going to our customers in the networking telecommunication market, whether it's Google or an Infinera or it's a Nokia and giving them a full solution, fully integrated. It's a game changer for the customer.

When you look at the model and how that changes when you're moving to this full solution both from a spend perspective and from a margin perspective. Can you help just give us how your business changes? Your go-to-market seems like it has to change slightly because there's new competition, but it's easier for you, right, to bring more to the table. But how does it impact your P&L?

So at the top level is where the biggest contribution is. It's little bit slower to get to revenue because it needs some momentum, needs a design momentum, and we're not getting revenue so we're going to get the momentum revenue as we go, probably, call it, '25, '26. Gross margin is actually favorable. Most of clocks sell around 70% gross margin. So it's a more favorable business and on the OpEx side, because we're getting fully formed business or fully formed -- excuse me, products from Aura, 50 products by the early part of '25, it's going to be relatively low impact on the OpEx so that sounds like a pretty good deal, something that grows your topline, the gross margins are equal to or greater and the OpEx impact is relatively light. So that's another reason why I like this business.

Very helpful. So from a broader perspective, zooming out of it, you talked about the model, you talked about the strategy and the customers. You've done a very good job historically about talking about your TAM and SAM and both of which have kind of grown. What does this do to both of those? Does it expand your market? And do you think that your served addressable market is a bigger increase than your TAM, meaning you go into a lot more areas that you couldn't have previously.

Absolutely. So there are the numbers, then there's the actual customers we go. So the best part of this thing is that we go to the same customers. We go to the customers that we are already talking to and they've been underserved by some of our competitors because this does not mean any investment for them. So many of them are relieved to find us owning this part of the business, particularly in the area of networking, telecommunication, data centers, which is a big important piece of business for us, but also in Automotive, also in Aerospace and that portion of the market. Now as far as when we look at the impact on the business, I think all of that gives us a very strong impact on the business. It just takes a little bit longer, when we did the deal we had to do a sort of a creative deal. We can do a full acquisition because Aura had revenue coming out of an entity [ band list ] China companies. So we basically took the rest of the world for this business.

Helpful. Do you feel like this is the last acquisition that you need to complete the portfolio? If you look at just the 3 moving pieces that are in your industry, you cover them all now.

In this year.

In this area?

In this year.

In this year. Oh, excuse me.

No, just kidding.

So do you think that there is additional asset that is a must have? Or do you think that there is a direction that you see the business going where you need something that's organic.

So the fact is that you're absolutely right. We did fill in a gap with 50 products to come in our business that was the clocking piece. The other part of it is that we didn't get any revenue with it. So it's a slower ramp to revenue. So if by chance we could get a clocking business that was already -- had revenue, that would be a pretty good deal, right? In the area of MEMS technology, we don't see anybody. But we do see that timing is becoming more important. People continue to buy timing as IP, there are people who sell timing-based software. There are people who sell timing modules. There are people who sell timing-based systems. Some of these systems, for example sell for $100,000, $200,000. So I'm not saying that SiTime is going into those tomorrow or even day after tomorrow. What I am saying is SiTime is focused on timing. SiTime is focused on delivering the world's most innovative new products and so that's what is my eye looking for companies to buy or not buy or partner it.

So yes, I think -- we covered the M&A portion early. I want to move to a topic that I think I've started most conversations with this week. So you've clearly seen this exacerbated cycle. You guys experienced it as everyone else did, but I think you're talking about a first recovery here in December which is a good sign. How are things trackings since earnings and what areas of your business are you seeing that turning on, that are leading to you being confident about the recovery from here?

So the general message for anybody, ourselves included internally is that when a downturn happens, there's no place to hide. We, as management team of companies look places to hide, but there isn't any. So we embrace that early on. Last year, we saw the downturn coming in consumer, then we started poking all the businesses, and we saw that there was no running from that. We embraced that, called a down on network telecommunications, on data center, on automotive. The only one which hasn't turned that much is Aerospace and Defense, but even that has not gone down, but that's flattened out. On the other hand, we called the up, which happened to us in Q3. The consumer was, as you would expect to be up. And it's leading to some increases in data centers, it's leading to some increases next year in electric vehicles, particularly in China. So we see all of this coming around the fact that we are coming -- our customers and specifically their CMs are digesting all the inventory. We think that, that is done by the middle of the year, coming year '24 and that we start to get normalized in Q3, Q4, and we're looking for 2025 onwards for the next few years to be significantly growth years beside that.

Do you think there is a different inventory levels between the CMs and your end customers? Is there a worse behavior in a certain end market another versus another? I know that you had called out the consumer downtick prior to some of your other core end markets. But I thought what was very beneficial to you is that the areas in what you said that you originally going to win back from the IPO started to recover too. So can you just talk to -- what strengths are you seeing in those core markets? And are those the big customers coming back? Or is that across the board?

So the consumer business is coming back. We see our biggest customer come back. We see some pickup in some of the other consumer products on the light industrial. But in general, I would say sometimes that those companies are -- because deliver similar margins, they pay greater attention to operational issues such as inventory. Sometimes companies that are consuming $5,000 chips and $20,000 chips, $40,000 chips. They are less focused on a $5, $10 chip and we know what type of companies, those are. So our job now has begun not only to pay attention to the OEM, but also to the CM. Our top 50 OEMs represent 150 -- or 150 CMs represent the top 50 OEM. So we're trying to get as high a level of clarity on an ongoing basis and trying to build reporting structures, nothing fancy, just salespeople pushing hard and trying to figure out where CMs are and we think that's going to be very valuable.

One unique feature of this cycle other than the rapid build of inventory at the end was just the pricing on MA. And I think companies, both because of wafer cost increases as well as the ability to pass through cost to customers without demand deteriorating, saw a massive increase in both their gross margin as well as their ability to kind of hold price. Where is pricing today for you guys versus where you started at the beginning of the cycle? And do you think that these levels of pricing are sustainable?

So as far shortly as Q3, we said that we have seen a steady growth in ASPs. And even in the results in Q3, we talked about ASPs are holding or not declining or increasing. So one of the features of SiTime is that we're accessing a $10 billion market, and we have as of now a $2.5 billion SAM and as of now, analysts, such as you have us at $200 million for the coming year. And that level, it allows us to have a huge playing field, for us to pick and choose the differentiated business that meets our differentiated product and the buy side of the aspect of that is that high-priced product. So we have started to lead with premium pricing since the pandemic. We found that not only do customers buy us because of performance reasons and there's about 15 different reasons to buy us on performance reasons, but they also buy some supply chain, and there's about 6 reasons, which have to do with programmability, capacity, quality, reliability and focus on that. So we're finding that 80% of our business is single store, you can imagine that gives us significant pricing ability. And we're not gouging price, we think our price premiums are fair price premiums for what we deliver.

And I think that's something that's very unique is the resilience of your margin profile. You guys are talking about a recovery back to that 60% range by the end of the year. How do you get confidence in that? Is it just because you can go out and lead the price? or are there any other factors that help build that company?

Some of it comes mechanically, as we get back on revenue, we get to pull back a few percentage points, about 5 percentage points with the overhead. If you go back to $60 million a quarter, all of that takes -- we get back 5 points just through that. But then we do have the pricing. The other thing is the pricing mix has shifted. So we are shipping more and more higher performance products, which are -- seem to be higher priced. But we've also taken this opportunity to focus on cost. And even though we still have high-cost wafers, particularly in the MEMS area, we are paying attention more to yields. We're paying attention more to spending minor CapEx for better enhancement of product costs.

And then at the same time, you also are introducing new products, which I would imagine very easy to lead with the price on these projects as well. So can you talk about or at least refresh the audience for a couple of new products that you've announced. And then can you give us the timeline of when you're going to announce our first integrated product? I think you gave some timeline on that when you did the deal.

Right. So today we introduced the Endura [ EPIC ] product line. Endura is our mill aerospace, especially hardened product lines. And in that, we introduced our highest price oscillator for the commercial market, in commercial market, the [ EPIC ] product goes for $30. So it wouldn't be hard to imagine that it Military, Aerospace, Defense, that would be 5 to 10x higher price. So that's an example right there of the higher price. And other products that we introduced some time back was the Cascade product line, which was our first actually auto product in a sense. We didn't share it openly, but we OEM-ed the Aura clock, we integrated it with our oscillator and we have won about 10 design wins -- excuse me, 100 design wins, and we hope to have solid revenue around the $10 million range for that in the coming year. That, in fact, answer the second question of the integration. Integration is not that hard to do. It's not that easy, but it's not that hard. So -- and we're already selling this integrated products. So we have the 1 plus 1 equal 3 between the clocks and the oscillators already demonstrated.

I want to pivot to the competitive environment. So you've talked about the new competition that you're getting into with the acquisition. But historically, the quartz competitors had capacity issues during this period. And so if someone comes to you and says, hey, I think that most of those customers would actually go back to cheaper option, at least at the lower end markets? How would you respond to that. And two, in your higher end markets that you've always outlined as core to your business and the differentiation from a technology perspective, why do you keep them using your product versus moving to a cheaper solution?

So the quartz issue of quartz supply becoming easier already happened in the first half of '22. So we've now been for more than a year in the regime of having easy supply of quartz crystals. Now a side point on quartz crystal is that there's no such thing as easy supply, they still have 22-weeks lead times, in some cases they have 35-week lead times and the so-called ordinary lead times such as 14 to 15-weeks just to pick on something. So it's never a great supply situation in the world of quartz. But the point is that we've already experienced that. And in my opinion, we hardly lost any revenue as a consequence of that. Primarily because those came to us at that time, all appreciate the quality, reliability, supply chain aspects of it, even if they didn't want the performance aspect of it. Now switching to the people who want the performance aspects -- it's our job, it's our engineering job. It's a marketing job, deliver products of such exceptional value that both customers just got to have it. So that's what we lead with. And if it takes 6 years to develop, like it took us to develop, the EPIC product took 6 years to develop it, to get it to a level where on 9 metrics with quartz crystal, we beat them on 8. That's kind of product we want to win. I'd like to join battle where the battle is already won before the battle is joined, right? So we do that by defining the products early, we're winning.

So you talked about that $200 million mark, and you also talked about being selective and where you win with your product because you have that ability to meet the price. When you have that capability, you oftentimes steer some of the revenue goes into market you want to go because you have that luxury. When you look at your end markets into '24 could you just walk through either rank order or just give some comments on each about where you see the most growth in getting to that $200 million range?

So I think that data centers continue to do well for us. I think that even in the radio access in certain markets, India, Turkey, the Balkans. So these are small markets, small revenue, but they look like positive bases for us. We see industrial and in industrial, there's robotics. There are farm equipment that we see doing well for us. Consumer continues to do well and automotive, in particular, automotive out of China continues to do well, continues -- starts to do well to be more accurate. And also, finally, the aerospace business Viasat or [indiscernible] satellite, the SpaceX, where we think that, that's a good business to be had. So we see in the second half of the year in the year, we see a nice steady growth of pretty much every piece of business. And that's why we think we get to exit Q4 at -- for the normalized run rate, maybe not at the levels of '22 still very healthy, setting us up at '25 because my eyes are on the '25 price we want to do well in '24, but normally expect it in '25.

And is it just the rolling on of new products from the acquisitions you just did that add to that '25?

And the fact that we would have had 2 years with our own native developed products. Products like EPIC, products like Elite RF, products like Elite X, they will have greater time to design wins. And by the time they will be in full flight.

So I just want to dive a little more into the consumer end market just because that market moved the most and that market would also be subject to some of the customers that were most at risk to switch from quartz than switch back, right? What do you think is the right run rate of that business and then with the largest customer that you have in that business, you guys have gone through a variety of different content changes there. What are your expectations there?

Well, we think that our largest customer continues in the consumer products where we add value in the watch, in some of the audible products in the computing products. I think we reached a base level of keeping us around the 25%-ish mark. So I think that's a good number for us for next year. Consumer is -- gets us to the 30%, 35%, depending on how things go.

And then in terms of the enterprise Mil/aero et cetera, could you point out one particular area that you think as an end market is going to offer the most growth for you? Because you've talked about content of those customers being very strong and the desire to have a higher end of technology. But if we could take one area into the '25 time period, which you're the most excited about, you're bringing these new products to the table. What end market are you marrying that with? Is that across the board? Or can you pick a couple?

I would pick the data because whether it's in the rack or top of the rack, whether it's in optical, whether it's in switching, whether it is in computing, whether it's acceleration. I think, SiTime particularly with the Aura products is in an exceptional position for getting revenue on those markets. So I think it will do well. I think it will really do well for us.

Generally, the timing you scale with the market as a whole just because you have so much exposure to almost every digital voice, right? When you look at a theme that we're talking about with all our companies here, which is AI, when you assess what could that do for your company? Do you have some specifics on what you think that could add to growth? Or do you just think broadly, more servers, more GPUs, more success for us?

Yes. So more -- that has in fact the right-answer for now, more servers, more GPUs, more performance-based products SiTime, but what we haven't quite understood fully is what does AGI do? What is the level of synchronization? What does latency do in that business? And it's such early days that we have given ourselves about couple of quarters to figure it out. But I just have a hunch. So that's a big growth market for us. We just have to identify in what way and what time, with which customers.

One thing that is more of a CFO question, but I will give it to you as you're well versed. Inventory levels on your own balance sheet picked up during this period of time. And I think to the questions on the call, you said most of the stock was wafer stock. You wanted to make sure that you had supply. Could you talk about, one, where is the target for inventory for your business? Or where should -- from a days perspective or even dollars, would be helpful? Where should that go and then other than that wafer stock, are you holding any other product there that is the problem or is it really just...

It's almost all wafer stock. And in that, I would say, 70% of that is particularly [ men's wafers ], which have a 8 to 9 months lead time. And given that the 80% single-source some very critical customers, we think it's prudent to have inventory. Now the other factor because even based on that, I think it's a little bit higher for what I would like, but there are 2 other reasons for having done this. One is we have a very reliable supply chain, and it pays to keep it running smoothly. It pays to keep Bosch and TSMC and all our back-end guys running smoothly, keep our testers up. So to some extent, we overbuilt just to keep the supply chain lubricated as it were. The second reason is more mean, which is that I think that if we didn't understand what speed the market would go down at, I think you're not going to understand what speed the market will go up at. And therefore, that's an opportunity for us because we'll have the product, we'll be able to satisfy demand. And I see that as a prudent use of resources. Having said that, I think where we are is pretty much the height of absolute dollars, which would probably be about $10 million or less on a running basis.

I wanted to leave a couple of minutes left. I want to open it to the crowd if there was anything here. I have a couple more if there is none. Something that's also coming up in terms of companies that saw pricing increase is just wafer costs? so you clearly saw the ability for TSMC and others to raise pricing. That led to companies raising pricing. If you see and I think there's been a resilience from the foundries to keep pricing high despite falling utilizations. I think that many think the next step is some leniency on pricing, such that they get utilizations back higher. If you see your foundry partners being more lenient on pricing, do you feel like you're in a position where you need to give that cost break to your customers?

When the cost of goods went up and the cost specifically of TSMC wafers went up or Bosch wafers went up. We didn't pass it all on. We passed some of it on and some of it we ate. Therefore when it goes away, it's unlikely that we're going to go back and offer anything substantial for price reduction as a consequence of that. The other part is that as you rightly point out, some of these guys are sticking, these guys, the wafer foundries are sticking with their prices because they -- why not they like that and they can sort of get away with it. And foundry business is now the new oil business, right? So I think we're here to stay with these price increases. I don't see them going away.

I had one more on the acquisition. When you look at the earn-outs, could you give us a little color on what those are based on? Is it to standard revenue hurdles or the product hurdles? Any color there?

Yes. So we have 2 kinds of we call only one of them an earn-out, but the other one, $148 million plus $2 million, [ SLA ] of $150 million is also in a way, not quite earn-out but it's based on performance. So it's based on delivery of products as they go. So that $150 million -- for example, we paid $36 million because we got 20 products right away at the close on Friday. As the year progresses, we're going to pay something at max, something like $70 million to $75 million, if we get all the products that they were supposed to get in the remaining first quarter of 2020. And that's also in a sense of kind of kind of earn-out. But the earn-out, earn-out is based on revenue that SiTime produces with those products. And based on the goodness of those products, based on the goodness of the performance of the products, we think that will be accepted -- if there's accepted fast, we give them revenue. We give them the earn-out and it's over 5 years, and it has a cap of 120, most of it because it's based on revenue, probably due to the last 2 years, '28 and '29. So probably almost nothing gets paid in '24 and some smaller amounts get paid in '25 and then increasingly onwards.

Very helpful. It sounds like exciting times ahead. Thank you Rajesh for being with us.

Thank you, and welcome to your new job.

Thank you very much. Appreciate it.