Good afternoon and welcome to the SiTime Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today’s conference call, instructions will be given for a question-and-answer session. As a reminder, this conference call is being recorded today, Wednesday, November 4, 2020. I would now like to turn the call over to Ms. Leanne Sievers of Shelton Group Investor Relations. Please go ahead.

Good afternoon and welcome to SiTime's third quarter 2020 financial results conference call. On the call from SiTime are Rajesh Vashist, Chief Executive Officer; and Art Chadwick, 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 the anticipated or implied. Neither the company nor any person assumes responsibility for the accuracy and completeness of 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 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 10-K filed on March 2, 2020, as well as the company's subsequent filings with the SEC. Also during this call, we will refer to certain non-GAAP financial measures, which we consider to be an important measure of company 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. Please refer to the press release issued today for a detailed reconciliation between our GAAP and non-GAAP financial results. I'd now like to turn the call over to Rajesh. Please, go ahead.

Thank you, Leanne. Good afternoon. We appreciate you joining us today and hope that all of you and your families are staying safe and healthy during these unique times. Even with a challenging macro backdrop, SiTime continues to execute, demonstrated by a record quarterly revenue of 32.7 million for third quarter 2020 which was above our updated guidance range of 31 million to 32 million. Our results demonstrate the diversity of our end market segments, our customer base and the exceptional dedication of the SiTime team, all of which have benefited SiTime during the current environment. During this third quarter, revenue grew 52% sequentially compared to our second quarter 2020 revenues. We anticipate that continued strength in the fourth quarter will allow for SiTime to set another quarterly revenue record, and Art is going to discuss our third quarter financials and fourth quarter outlook later in the call. Now SiTime's fabulous model and multi-source strategy continue to provide a competitive advantage in this market, while at the same time providing added assurance of quality and reliability to our customers. In contrast, we believe that the quartz industry infrastructure has several points of failure, which can cause supply disruptions, some of which we have heard about through recent industry commentary. Additionally, within the timing market, responsiveness is becoming the key theme. And we believe that many competitors in quartz may not be set up to support industry needs and requirements for the future. In infrastructure applications, our speed of response to environmental disruptors such as temperature change minimizes the system level impact. In mobile IoT, our kilohertz products help reduce radio power by turning it on and off more quickly and precisely, something that's unique to SiTime. On the supply side, our programmability continues to enable the flexibility, speed and delivery required by our customers. With the recent introduction of our ApexMEMS family of resonator products, SiTime now offers all three categories of timing products: oscillators, clocks and resonators. As of the third quarter, we have cumulatively shipped almost 2 billion oscillators, all of them with an embedded MEMS resonator. Our combined knowledge of MEMS, analog chips, the package and the materials is unique to the industry and offers a system-level understanding for our resonator customers as well. We know that manufacturing MEMS products in high volume is not easy. MEMS product leaders in other markets, non-timing markets, maintain their leadership position because they invested early and focused on developing innovative solutions at a rapid pace. We believe today that SiTime is in a similar position for the timing market as we continue to build upon this market leadership. Our ApexMEMS resonators are ideally suited for high volume, space-constrained mobile and IoT applications, such as Bluetooth, wearables, high-speed connectivity interfaces, asset tracking and microcontrollers. In addition to these applications, other system-on-a-chip vendors can use our ApexMEMS resonators, which could be co-packaged with the chips, just like we do in our oscillators. Given our broad knowledge of timing market solutions across all three categories, we believe our system-level timing solutions save customer design time, increase their end products' performance and reliability, while also reducing their overall board footprint, creating value. Moving to 5G, the opportunities available to SiTime continue to drive the company's expansion into the communications market. Our products continue to see solid design traction in 5G applications at Tier-1 manufacturers of telecommunication equipment. In addition, we previously mentioned ORAN, Open Radio Access Networks, and we continue to see significant interest in ORAN hardware solutions that are being developed for greenfield operators as well as traditional carriers. ORAN is gaining traction because it provides operators with best-in-class equipment and performance, while driving better deployment economics. The need for successful interoperability of equipment from different suppliers is a driving factor for SiTime's success. We're getting significant traction with ORAN customers worldwide across the entire radio networks, including RRUs, small cells and distributed units. In the area of 5G optical transport, where we are engaged with 100 to 800G optical and SOC suppliers with our SiT9501 products, we find that we are able to offer unique value with high performance in the smallest form factor. In conclusion, SiTime is uniquely positioned to disrupt the market as the first company that continues to provide a system-level timing solution. That said, this is only the first step of a multi-year strategy to extend our market leadership in timing solutions. We remain a results-driven company with a culture that encourages creativity, leadership and a strong commitment to our customers, which continues to be reflected in our recent quarterly plans. I'd now like to turn the call over to Art as he will discuss our third quarter results and our outlook for the fourth quarter.

Thanks, Rajesh, and good afternoon, everyone. We are very pleased to be holding our fourth financial results conference call as a public company. During my review today, I will discuss third quarter 2020 financial results and will provide guidance for the fourth quarter. I'll 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 reconciliation of GAAP to non-GAAP results, which exclude stock-based compensation and related payroll tax expense. So first of all, Q3 was really an excellent quarter for us. We had strong revenue growth, significant gross margin expansion and very positive non-GAAP net income. As you know, at the end of August, we increased our revenue guidance for the quarter by more than 10%. I'm happy to report that actual results exceeded the high-end of that revised guidance. Revenue for the quarter was $32.7 million, up 52% sequentially and up 29% over the same quarter a year ago. To provide some color on end markets, our report sales by market group as I have in the past. The first is mobile IoT and consumer, which consists primarily of sales into mobile phones, wearable devices and consumer products. This was the segment most impacted by the global slowdown in Q2, but it came back strong in Q3. Sales were $20.9 million, or 64% of total sales, up 105% sequentially and up 19% over the same quarter a year ago. The second is industrial, automotive and aerospace, which goes into industrial, automotive, aerospace and military applications and includes broad-based sales. Sales were $6.4 million, or 20% of sales, a 5% sequential increase and up 23% over the same quarter a year ago. The third is communications and enterprise, which consists of wireless infrastructure, including 5G data centers and networking. This was the fastest-growing segment over the same quarter last year. Sales were $5.4 million or 16% of sales, up 3% sequentially and up 103% year-over-year. We had just one end customer where sales exceeded 10%, and sales to that customer were 45% of total sales. We've had a number of initiatives within the company to expand gross margins, and those initiatives are paying off. Non-GAAP gross margins during the quarter were 52.1%, up 530 basis points over Q2. Non-GAAP operating expenses were $12.5 million, up 5% sequentially, comprised of $7.0 million in R&D and $5.5 million in SG&A expense. Net interest expense was $0.1 million. This generated non-GAAP net income of $4.4 million or $0.23 per share, compared to a loss in the prior quarter of $2.2 million or $0.14 a share. Stock-based compensation expense related to payroll taxes was $5.1 million. This was higher than the $3.4 million in Q2 due to the higher stock price, some new higher stock grants and the establishment of an executive performance stock bonus plan. Trade receivables were $17.2 million, that was up from $13.0 million in Q2 due to the higher revenue. But DSOs decreased from 58 days in Q2 to just 49 days in Q3. Inventory was $15.2 million, up slightly from $14.8 million in Q2. We generated $4.2 million in cash from operations and used $2.5 million for the purchase of assets. We had $35 million in bank debt going into the quarter, but we paid this off entirely and finished the quarter with no bank debt. We ended the quarter with $69.2 million in cash and equivalents. I'd now like to provide some guidance for the fourth quarter of 2020. We expect Q4 to be another great quarter with continued sequential revenue growth, gross margin expansion and increasing net income. We expect fourth quarter revenue to be up 10% to 15% sequentially. At the midpoint, this would put revenue at about $36.8 million, or 30% higher than the same quarter last year. We expect continued gross margin expansion with non-GAAP gross margins increasing to approximately 53%, plus or minus a point. Operating expenses are expected to increase between 8% and 10% sequentially, which at the midpoint would be approximately $13.7 million. We will not incur any interest expense, since we no longer have any bank debt. Income taxes will be nominal and less than $50k for the quarter. The basic share count in Q4 will be approximately 17.0 million shares. In addition, the diluted impact of employee RSUs will add approximately 2.2 million shares, taking the total diluted share count used for our EPS calculation to approximately 19.2 million shares. Stock-based compensation expense will be approximately $5.5 million, up from Q3 due to the higher stock price and a few new higher grants. So based on the guidance just given, we expect fourth quarter non-GAAP EPS to be between $0.28 and $0.32 per share. So, in summary, we have an exceptional workforce that is performing extremely well working from home. We have truly differentiated products that address large and growing markets. We have a number of new products in the pipeline, an enviable list of Tier-1 customers, a strong balance sheet and we're looking forward to a very strong Q4. So with that, I'd like to turn the call back to the operator for Q&A.

We have your first question from Blayne Curtis from Barclays. Your line is open.

This is Tom O'Malley on for Blaine Curtis, congrats on the really nice results. My first question was around the improvement throughout the quarter. Obviously, you updated guidance in late August, possibly. And then you're now coming ahead of that range now. What most materially improved between now and then? And then if you could look out into December, you're obviously guiding for some more expansion there, could you give us a little color on segments between the three where you're seeing that growth sequentially?

From the second quarter to the third quarter, the most notable growth was in our mobile IoT group. While part of this was due to seasonality, we also experienced significant strength across the board with our customers in that area. In our August press release regarding our updated guidance, we mentioned that we secured a phone design win that contributed to this growth. Although we can't disclose specific revenue from that phone, I can share that approximately half of our guidance increase in August was related to this new phone design win, with the remainder attributed to robust performance in non-phone areas. This sums up the developments in the third quarter. Looking ahead to the fourth quarter, we anticipate strong revenue growth, with our guidance indicating an increase of 10% to 15%. The phone segment will likely represent about a third of this sequential improvement, while the rest will come from non-phone sectors. We expect growth across all of our market segments when comparing the third quarter to the fourth.

Great. That's super helpful. And then my follow-up is just really around the largest customer for you guys that obviously stepped up materially into September, along with that margins clearly stepped up as well. Can you talk about what's driving that better margin performance? Clearly, you're seeing some accretive gross margin dollars as that customer steps up. But can you talk to your other segments as well? Is there a material part of that uptick that's also coming from the communications, enterprise and the auto industrial space as well as those products move a little?

Absolutely. We've talked for a long time about the gross margin drivers in our business. Our newer products generally have higher ASPs and higher performance as those newer products become a larger percentage of our sales, that drives higher blended gross margins. That's one. Two, we're taking more of our sales direct that cuts out the distributor, which improves our gross margins. We've made a lot of progress in reducing our product material costs; that would be wafer costs, and that improves gross margins. Our ops group has done a great job of improving sort and test yields and package costs, which improve gross margins. Volume helps us, our manufacturing overhead even though we're fabulous, we have a certain amount of manufacturing overhead that's relatively fixed. So as the volume goes up, that manufacturing overhead as a percentage of sales decreases, that helps gross margins. And so, we've been working on this now for a while and we saw very significant gross margin expansion from Q2 to Q3, as I mentioned, gross margins increased 530 basis points from Q2 to Q3, and I've guided for at least another point of improvement plus or minus going from Q3 to Q4.

We have your next question from Tore Svanberg from Stifel. Your line is open.

Yes. Thank you. And congratulations on the record results. Rajesh, you called out some challenges in the quartz industry, your competitors. Could you elaborate a little bit more on that? And what does that really mean for sort of new engagements and new design leads for SiTime?

Yes. I think we talked a little bit about it last time. Basically, the quartz industry, as we know, has done a stellar job in the last 70 years of providing products to everybody in the electronics world. But I think that it is still a batch process. It is a fab process. It's a factory process, where everybody has to invest in factories, and these factories are purpose-made. So they can't be used together. So they don't have the scale and they don't have the flexibility that a fabless company like SiTime can get. I mean, as a reminder, when we build our MEMS resonators, a million wafers should give us about a billion units, and these 180 nanometer technology wafers are not really that difficult to acquire. Fundamentally, their supply chain is batch-made. I think it has these issues with it. There were some reports of some stumbles in fabs in the Asian markets. I think we saw a spike in demand coming that didn't impact Q3, by the way, I'm just talking that we saw spikes in people because people get nervous when that happens. And this is not the first time; 10 years ago, there was a big problem with ceramic packaging. As you know, all quartz products, including the oscillators, our resonators are quartz packaged because they're fragile and they want to keep a very strong packaging. Those quartz packaging ceramic packages come from only two suppliers in the world. Sometimes there's a shortage. I think they have multiple points of failure potentially. And that's what I was pointing out. It doesn't significantly change our revenue but in the medium to long term, it reminds our customers that they are probably better off moving to more stable supply chains.

Yes. That's great perspective. Thank you for that. And that's my follow-up. Congratulations on entering the resonator market. Now that you're covering the entire gamut of the timing market, in the past you've talked about targeting a $10 billion opportunity if you combine all three sub-segments. Could you update us where your SAM is now with your penetration with new products into the resonator market?

Yes. Our SAM is still around $1 billion to $1.2 billion. It might be a little bit higher depending on when we introduce products and so on, but it's certainly less than $2 billion. It's also mostly concentrated right now in oscillators. While we do have resonators that have been introduced, while we do have analog clocking solutions that have been introduced, our ramp into that from a revenue point of view, we have already set expectations that it will be relatively slow. I think our entry into these markets is significant for customers in the following way, in the way that they can then come and have conversations with us on all of these products. Not every customer wants to talk to us about every one of them. Sometimes they want to talk to us only about resonators or oscillators or clocking, and then that becomes an entry point to discussing other products. From a TAM point of view, we're still pretty tiny, at $1.5 billion in TAM out of an $8 billion total market. SAM is around $1 billion to $1.5 billion out of an $8 billion total TAM. Of course, SiTime's revenue is still pretty small in comparison at around $100 million. We still have a long way to go before we fill out those boots even if we maintain and do not grow our SAM very much.

We have your next question from Quinn Bolton from Needham. Your line is open.

Congratulations on the nice results. I wanted to start with the supply chain issues you talked about with quartz. I believe that was one of the factors that led to the phone win that you announced last quarter. Do you think that those quartz supply chain issues are positioning you to potentially win additional SKUs, either at that customer or other large smartphone vendors?

I think that'll have some impact Quinn. But I don't think that it's forecastable. I think it's a general slow trend. And I've talked about this several times. It's a general slow trend. It's not at the point where it's gotten that snowball has become very big, but it's a trend that we see. We've always said that people design us in for performance reasons as well as the supply chain. Overwhelmingly, the designers choose us for performance reasons. I would say less than 15% of the time we get designed in for supply chain reasons. But those supply chain reasons are important; when people look at their supply chains and see these perturbations that happen from time to time, and these perturbations aren't new; they have been going on for a long time. But customers did not have an alternative. Now that they do have an alternative, it just becomes one more factor in their thinking, particularly when they're looking further out in time, especially in automotive or military or other long-term industrial products that have a slow ramp in multiple years. Many of them start to think it might be prudent to do that. I would still assert that our performance benefits are the primary reason for adoption.

The second question, I know with the recent introduction of the ApexMEMS family, you're moving into the resonator market. Are you targeting select frequencies, high volume frequencies with the initial resonators? And related, do you need new mask sets every time the frequency changes in those resonator structures? Thank you.

Yes, absolutely. To answer your second question first, we do need a new mask set. But sometimes, those are very similar. They're not drastically different. For example, between a 24 megahertz and a 26 megahertz, it's not going to be very different. However, between critical megahertzes like 76.8 megahertz, I think it could be different. The good news is that the resonator industry has worked around the quartz limitations in the past. There are basically only a handful, maybe two handfuls, so call it a dozen, popular frequencies that exist. I think that makes our task easier as we go from one frequency to the other. You are correct; we will not only target the most popular ones but also those where we bring the combination of size, resilience, environmental stability, and of course, high volume because these are low-priced products. They are sub-20-cent products in price. Therefore, the volume opportunity has to be in the tens of millions of products to be interesting for us. Those are some of the key reasons to do it. Another factor that's going to happen over time as frequencies of SOCs increase is that the requirement for frequency, beyond 75 megahertz increases, and that’s an area where we think quartz technologies have difficulty getting to a high volume, high frequency, high reliability, small size product, and that's where we would also shine. I'm thinking 2, 3, 4 years out, particularly in consumer products, perhaps in phone applications.

Got it. Great. Thank you for that additional detail. Then just quickly for Art, you mentioned each of the segments would grow in the fourth quarter, just wondering if you might be able to rank order, if one's growing much faster than the others, how you expect all of them to grow about the same rate.

Sure. Fair question. I don't think we wanted to get that detailed in our guidance. We do expect growth in each one of those segments. I'll leave it at that. We'll announce that segment growth in more detail when we actually announce fourth quarter.

We have your next question from Suji Desilva from ROTH Capital. Your line is open.

Congratulations on strong results. Perhaps for Art with the increasing mobile content you have now, can you miss a framework we are thinking about seasonality going forward? First half first or second half, first Q versus maybe before, coming into this year?

Sure. If you look at the seasonality in our business, and we do have seasonality, going back to last year, 2019, the second half of the year was much stronger than the first half. This year, we saw pretty much the same thing. The back half of this year is much stronger than the first half, especially Q2, which was somewhat depressed in our mobile and IoT segment because of the global slowdown and the fact that so many retail stores were closed. I think next year, it will be somewhat similar in terms of first half versus second half. Obviously, we expect year-over-year growth; Q1 next year should be nicely higher than Q1 of this year, and Q2 over Q2, and so on. So we expect good growth for next year, but we are not quantifying that at this point. In terms of the seasonality, it's going to look similar to how it looked last year and this year.

Okay, Art. That's very helpful. Then perhaps on the infrastructure side, 5G, wireless infrastructure in particular, are you having design wins kind of showing up every quarter that help to drive steady growth or might you ebb and flow with the 5G build-out put and takes?

Yes. I think it's a slow steady drumbeat of products. Our products are also showing up; we talked about the SiT9501. In the optical module business, that's clearly showing up with the ORAN that I referred to earlier. We have tens of design wins that showed up in the last few months. Yes, so it's just a steady growth. What I'm excited about is the breadth of 5G's impact. As I've said before, it's not just the digital unit or the RRU; it's the mid-haul, the backhaul, the microwave, the servers, and so much of that infrastructure. This is probably a five to seven-year rollout and should be very solid for SiTime.

We have your next question from Alessandra Vecchi from William Blair. Your line is open.

Yes, sure. Maybe a quick question for Art, just on operating expenses. Can you update us on the long-term operating margins model and how we should be thinking about it? You guys have really done a tremendous job growing revenue in the last couple of quarters with very little OpEx flow-through. So wondering how to think about it?

Yes, great question. Well, revenue kind of got ahead of our expenses, so that's a good thing. Our kind of stated long-term goal is to grow OpEx at about half the rate of top-line growth. For sake of mathematical example, if we were to grow revenue year-over-year by 20%, then I would expect OpEx to grow by about 10%. So that's kind of a generalized long-term goal. If you look at the last few quarters, in Q2 our revenue went up 52% sequentially, but OpEx only increased by 5%. So, we couldn't ramp expenses quite fast enough. My guidance for Q4 is that revenue will go up 10% to 15%, while I'm guiding OpEx to increase 8% to 10%. That's a little more than half the top-line rate, but that's because we were so low in terms of OpEx growth in Q2. So does that kind of frame it for you?

I have a comment on that. That comment is to remind you that SiTime is an analog semiconductor company. When you think of other semiconductor companies that are using seven-nanometer tape-outs, we're doing 180, 130, 65-nanometer tape-outs. Think of other companies doing a bunch of software, in OpEx, in scaling; we're not in the software business, or not meaningfully involved. On the other hand, the number of opportunities that are coming at us are occurring pretty thick and fast. We always would like to retain the ability to invest at a great rate within reason, or to the model that was put out by Art.

Understood. That's helpful, and a helpful reminder on the geometries. Just one more question, I believe, last quarter, when you announced the cascade product, the clock IC product, that you expected revenue to be significant in 2021, eventually ramping beyond that. As we look at the standalone resonator product, should we be thinking about the timeframe to revenue in a similar fashion? What are the puts and takes from the customer standpoint?

Yes. I would say that's even slower, Alex. The gestation period for standalone design wins will generally be more prolonged than clocking products. We have to go to OEMs and sell them resonators, and then there are also SOC vendors that we can design in. Both processes, particularly the SOCs that we target for, take some time. So the gestation period for meaningful revenue is easily twice as long as clocking business. There can be instances where things happen very quickly; but generally, that's a good rule of thumb.

We have your next question from Chris Caso from Raymond James. Your line is open.

Yes, thank you. Good evening. I guess a question on margin. And as we go forward into next year, there are many different factors with seasonality that will affect some of the different margin profiles of the different segments. Could you give us a sense of what to expect, particularly in the first half of next year as some of the consumer-related products typically will be seasonally weaker?

Yes, great question. Our long-term goal for gross margins that we've discussed is to achieve a gross margin somewhere closer to 60%. That's going to take us two to three years, give or take. Just to do the math on that, we're targeting gross margin expansion of maybe three points a year. We did much better than that going from Q2 to Q3. Just for the next couple of years, if we can add three points, we get to a 60% margin in two to three years. Within a year, there are some dynamics that affect gross margins by quarter. In the first half of the year, our mobile IoT and consumer business, which has somewhat lower gross margins—though not that much lower—could mean that gross margins would be a little higher in the first half of the year due to mix. The counter to that is that we have leverage on our manufacturing overhead, so the lower volumes will hurt us. Taking all that into account, just like we saw our gross margins being nicely higher in the second half of the year versus the first half, I would expect the same pattern next year. So, if you're modeling this, I would model margins to be higher in the second half than in the first half.

And that poor mix is offset by the higher manufacturing efficiencies in the second half of the year?

Right. The volume is a little heavier, weighing in, so I would expect gross margins to pull back slightly in the first half of next year, but to be much stronger in the second half, even stronger than they are in the second half of this year.

All right. That's very helpful. Thank you. As a follow-up, could you talk to us about what you're targeting for next year? There are a lot of opportunities in front of you. What do you expect to drive growth next year, and what should we be paying attention to closely as we go into next year?

I think the market trends that we have outlined continue. Clearly, communications enterprise, data centers are a big play. We continue to find more traction in automotive, as more and more electric vehicles emerge due to automated driving. We have a nice little story growing in the middle aerospace market. Finally, the mobile IoT segment, excluding consumer, is always a natural place for SiTime's growth because of the size, resiliency, and performance. We are also continuing to expand our customer base; five years ago, we were addressing about 2000 customers. Today, we’re about five times that, maybe a little more. The expansion of our customer base isn't just with big customers; these are smaller customers, where we are working in the channel to connect with them. That I think will be a good initiative for SiTime as well. Those are some ways we think about our growth.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Art Chadwick. Sir, please continue.

Great. We want to thank everybody for joining us today on the call. We hope you have a great day, and thanks again for all your support.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.