SITIME Corp Q1 FY2021 Earnings Call

Good afternoon and welcome to SiTime's first-quarter 2021 financial results conference call. As a reminder, this conference call is being recorded today, Tuesday, May 4, 2021. I would now like to turn the call over to Leanne Sievers of Selten Group Investor Relations. Leanne, please go ahead.

Good afternoon. And welcome to SiTime's first-quarter 2021 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, 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 statement. 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 person assumes responsibility for the accuracy and completeness of the forward-looking statement. 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 February 16, 2021, 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 measure 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 US GAAP. Please refer to the press release issued today for a detailed reconciliation between GAAP and non-GAAP financial results. So now, I'd like to turn the call over to Rajesh. Please go ahead.

Thank you, Leanne. Good afternoon, and thank you for joining on today's call. I'm pleased to report that the first quarter was another solid quarter with revenues of $35.5 million representing growth of more than 63% year over year and above the high end of our guidance, coming off of a very strong fourth quarter due to increasing order rates for our timing solutions. There are several reasons for SiTime's tremendous year-over-year growth. First of all, we are the only semiconductor company that is solely focused on timing. As we have mentioned a few times, we are also the only company to offer all high-volume timing categories, oscillators, clocks, and resonators. Moreover, we are committed to developing the higher-value products that solve difficult timing problems. We use a systems-level approach that is supported by deep expertise in MEMS, analog packaging, and algorithms. As a result, our products like Elite and Emerald performed up to 20 times better than our competitors. Customers recognize our focus and the value that we bring to them, and they place their trust in us. An example of this trust during Q1, we secured more than 40 designers for Elite, Emerald, and the Endura product line, which is in communications applications, such as 5G, small cells, remote radio heads, and optical modules as well. In aerospace and defense applications, such as satellite communications, GPS, GNSS, and transponders, the SiTime device was chosen because it solved a very specific problem. We believe that this is only the start of our journey with these customers. As we have deep technical engagements with key customers, we understand their roadmap, which enables us to develop better major platform products. As leaders, we also uncover specific opportunities that can be addressed by a rapid release strategy, which we call derivative products—simpler modifications of our existing platforms driven by more stringent future technical requirements in communications, cloud infrastructure, automotive, and mobile IoT. We plan to expand into higher-value oscillators and clocks over the next three to five years, and we expect to deliver over a hundred platforms and derivatives in that timeframe. About a year ago, we reevaluated our pricing strategy and decided to change prices on our lower-margin business, primarily in the applications we had already offered shorter lead times. We've expanded that effort to more applications in 2021 where we'll see the full-year benefit of that. As an example, on one of our popular products, the average selling price increased by 20% from 2020 to 2021. All other gross margin improvement efforts, such as product exchanges, favor higher ASP products and lower product costs, continue strongly. Of course, in the current tight supply chain environment, SiTime's business model and product programmability continue to provide significant differentiation. As a reminder, SiTime's products are 100% programmable, and we can be more responsive than our competitors who rely on fixed frequency solutions. Customers also take comfort in having a non-overlapping supply chain from SiTime, and many of them have approached us recently to help in their supply chain environments. We have selectively engaged with about 25 key customers where we believe we provide exceptional value and are developing multi-year commitments with them. In anticipation of rising demand, customers are also placing orders much earlier. In fact, more than half of our bookings in Q1 2021 were for deliveries which were five to 12 months out in the future, providing us with unprecedented visibility into 2021 revenue. We believe that as customers experience the benefits of using SiTime's technology, they tend not to revert to their older quartz solutions, resulting in even more opportunities in the future. Looking at the entire semiconductor industry, I believe we are in a golden age, which we expect to continue for the next few years at SiTime. We believe we also have a multi-year growth opportunity in timing, specifically as connected devices proliferate in all parts of our lives. To pack more features and functionality in these devices requires timing chips with higher precision, smaller sizes, and higher resilience among other features. As the leading provider of high-value timing solutions, SiTime can only stand to gain tremendously from this key trend. With that, I now turn the call over to Art to discuss the first-quarter results in more detail and provide our outlook for the second quarter of 2021.

Great. Thanks, Rajesh, and good afternoon, everyone. Today, I'll discuss first-quarter 2021 financial results and provide some guidance for the second quarter of 2021. I will 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 non-GAAP results, which excludes stock-based compensation and related payroll tax expense. As Rajesh mentioned, the first quarter was another great quarter for us. We had strong year-over-year revenue growth, continued gross margin expansion, and strong year-over-year growth in non-GAAP net income. Revenue for the quarter was $35.5 million, up 63% over the same quarter a year ago, with revenue growth in each of our major market segments. Sales into our mobile IoT and consumer segment, which consists of sales into mobile phones, wearable devices, and consumer products, were $22.4 million, up 81% over the same quarter last year. Sales into our industrial, automotive, and aerospace segment, which includes sales into automotive, industrial, medical, aerospace, military, and broad-based sales, were $7.3 million, up 31% year over year. Sales into communications and enterprise, which consists of wireless infrastructure including 5G, data center, and networking, were $5.8 million, up 33% year over year. Our largest customer accounted for 37% of sales this quarter. Gross margins continued to expand; non-GAAP gross margins were 54.1%, up 60 basis points sequentially, and up more than 700 basis points over the same quarter last year. Non-GAAP operating expenses were $15.3 million, comprised of $8.2 million in R&D and $7.1 million in SG&A. This was up from $13.3 million in Q4, as we expanded our workforce by more than 10% this quarter, primarily in R&D as we continue to invest in advancing our technology and expanding our product portfolio. Non-GAAP net income was $3.8 million, or 19 cents per share, compared to a $2.2 million loss in the same quarter last year. Stock-based compensation expense and related payroll taxes were $7.4 million, up from $6.2 million in the fourth quarter due to new employee stock grants and our performance stock-based bonus plan. Our significant financial event this quarter was the follow-on stock offering. In February, we sold 1.5 million shares of stock at $127 per share, netting $181.6 million after fees and expenses. MegaChips also sold 1.5 million shares, which increased the public float and liquidity of our stock and reduced their ownership to just under 32%. Trade receivables were $22.2 million, with DSO at 59 days. Inventory was $15.0 million, up from $12.4 million at the end of Q4, as we ramped production this quarter in anticipation of higher Q2 sales. Regarding cash flow, we generated $6.0 million in positive cash flow from operations. We invested $4.2 million in equipment and assets. We added $181.6 million from our stock offering. As a result, we ended the quarter with just over $0.25 billion in cash and no bank debt. Now, let me provide some guidance for the second quarter of 2021. The trends driving the need for high-performance timing solutions continue to drive significant year-over-year revenue growth. Additionally, as Rajesh mentioned, many of our customers are now placing orders up to five to 12 months in advance, giving us the best visibility we have ever had. For the second quarter, we expect sales to increase 10% to 15% sequentially. At midpoint, that would be about $40 million, or 85% higher than the same quarter last year. Sequential growth will come primarily from communications, enterprise, and industrial markets, while sales into mobile IoT and consumer will be essentially flat quarter to quarter from Q1 to Q2. We expect continued gross margin expansion of at least 50 basis points sequentially. Operating expenses will increase due to an expanding workforce. We expect Q2 non-GAAP operating expenses will increase about 10% sequentially, to approximately $17 million. Although we have a significant cash balance now, interest rates are low, meaning our interest income will be relatively nominal, expected to be about $50,000 for the quarter. The basic share count in Q2 will be approximately 19.0 million shares, and the dilutive effect of employee RSUs will add approximately 2.0 million additional shares, taking the total expected diluted share count to approximately 21.0 million shares. Stock-based compensation expense is expected to be approximately $7.5 million, and based on this guidance, we expect second-quarter non-GAAP EPS will be between $0.21 and $0.25 per share. On a slightly different topic, ESG, which stands for environmental, social, and governance, is getting more investor attention these days, and I'd like to make a few comments. We believe the culture here at SiTime aligns very well with basic ESG principles. We promote an inclusive environment by valuing the contributions of all employees and work to ensure our employees feel seen, heard, valued, and respected. We believe diversity makes us stronger. A diverse workforce supports creativity, problem-solving, and better decision-making. We also believe it's important to minimize the environmental impact of our products and operations to ensure a sustainable future. We are enhancing our sustainability practices by developing and implementing policies to reduce our carbon emissions and consumption of energy and water. We recently went live with our ESG and corporate governance website and encourage interested investors to visit. In summary, our workforce continues to perform extremely well while working from home. Our product portfolio continues to expand with differentiated products that address large and growing markets. We have an enviable list of Tier 1 customers and, now, an even stronger balance sheet. We believe 2021 will be a great year for us. With that, I'd like to turn the call back to the operator for Q&A.

Your first question comes from the line of Tore Svanberg with Stifel. You’re live, Mr. Svanberg?

Hey, guys. This is Michelle on for Quinn. Congrats on the great results. For my first question, I think it's been about a year since your first clock IC solution was launched, your Cascade product. I'm just wondering if you can give us an update on the progress you're making with that product family in terms of design wins, or what customer reception has been like relative to your expectations, or whatnot? So just any color there would be helpful.

Sure. Our Cascade product line is really intended for our communications product line and enterprise. In that area, in particular, we have been doing great business with Cascade in the small cell, in the distributed unit, in the edge server market, and also in the smart mic guards and front hall and mid-haul switches. Some of the customers we've talked about in these areas include Nokia, we've been involved with Samsung networks, Intel, Xilinx, Dell, HP Enterprise, and DASAN. I think we've done really well with that product and we fully expect to come out with more products in that space as we go forward because, as we've mentioned before, we use a companion approach where we get the Cascade product line and other future emerging product lines to join with our alternator products and basically work as a mini-subsystem for our customers, which is of immense value to them.

All right. Thanks. And here's just one quick one for Art. I think last quarter, there was a mention that the first half of '21, revenues were probably going to be a higher-than-normal percentage of the annual revenues. So I'm just wondering as you look out to Q2, do you still see the first half being a higher-than-normal percentage of annual revenues, or is there an update to that outlook? And also, if you don't mind, just quickly on the gross margin guidance, did you say expansion sequentially 50 basis points? If you could just clarify that.

Yeah. So great questions. I'll start with the latter. Yes. At least 50 basis points from Q1 to Q2. Our gross margins have expanded dramatically over the last year. To answer your other question, yes, we are expecting less seasonality this year than we've seen in past years, and I think that remains true. If you look at our sales growth in Q1, it was up 63% over the same quarter last year. At the midpoint of my guidance, Q2 would be up 85% year over year. I expect very nice growth in Q3 and Q4, but the percentages year over year will not be as high as what we saw in the first half of the year primarily because we're just seeing less seasonality. It's not going to be back-end loaded this year as it was in past years.

Got it. OK. Thanks. That's all for me. And congrats again.

Yeah. Thanks.

Thank you. The next question comes from the line of Alex Vecchi with William Blair.

Hi, everyone. This is Jake on for Alex. Congrats on the great quarter. So you discussed 40 design wins, which is up from 30 last quarter. Can you walk us through what's contributing to the healthy increase in these win rates versus the competition and how are you expecting that to progress throughout the year?

Yeah. At the highest level, it's the introduction of new products. We've announced the Cascade product line and the Etna product line. Those have helped us, and we have maintained traction with Elite, Endura, as well as our Emerald product line. New product introductions and traction with older products that have been in the market for a while have also led to this increase. The second reason is the overall situation of a shortage in semiconductors in general and timing in specific, which has given us a boost as well. Many of our design wins come as a result of higher performance. However, I've maintained that because of our business advantages—including supply chain benefits, quality, reliability, and a robust semiconductor supply chain—customers are noticing the value proposition securing their business with us. All in all, it’s a combination of our products and specific conditions that we bring to the timing market.

Thanks for the color. Congrats again on the great quarter.

Great. Thanks.

Up next is Chris Caso with Raymond James.

Thank you. Good evening. I wonder if you could expand a little bit on the comments you made in the prepared remarks on pricing and the extent to which you're able to get some higher prices from your customers? Is this a function of new design wins perhaps raising prices? Are you able to raise prices on existing customers given the environment?

Yes. We took a close look at some of our lower-margin revenue last year and this year, and decided that it was time to move some of that up closer to our corporate levels. Most of these products were in the consumer space, some in mobile space, and some in lower industrial space. As we rolled out our pricing in a coordinated way with our customers, we were able to retain most of them because they saw the value proposition we had brought. Regarding new business, most of our newer products tend to be in networking, industrial, automotive, and enterprise data center space, which are typically higher priced due to being premium parts. This process brought some of our legacy business in line with our corporate pricing levels as well.

All right. Thank you. As a follow-up, obviously, there are a lot of supply constraints around that you use foundries for the analog portion of your product. Are there any constraints within your manufacturing network which would tend to cap revenue opportunities for you?

While we haven't had any specific timing constraints and we've been well-served by our suppliers like Bosch and TSMC, it is fair to say that we do juggle some of the new business coming in due to the tightness impacting everyone. It has not curtailed our revenue growth, but it has added some burden on the operations and sales operations teams in managing the business. However, we feel confident, given our relationships with our suppliers and our position as a net add to the TAM, we are continuing to secure all the wafers we need.

Got it. Very helpful. Thank you.

Great. Thanks, Chris.

Your next question comes from the line of Blayne Curtis with Barclays.

Hey, guys. Thanks for taking my question, and congrats on the great quarter. Maybe just from a very high level, can you help us with the June guidance? If 50% of your business is flat, you're seeing sharp sequential growth. You mentioned comms, enterprise, and industrial. Can you speak to the products or applications driving that growth?

Sure. Regarding comms and enterprise in Q1, as Rajesh mentioned, we worked diligently to ensure that we don't have supply constraints to satisfy our customers. However, some customers faced challenges from other vendors and could not secure enough parts. Therefore, our comms enterprise revenue in Q1, while up 33% year over year, was slightly down from Q4 due to that. However, we expect a strong rebound in the second quarter across all areas, including data center, and 5G applications.

In terms of specifics, the data center market, whether on the server side or the switch side, represents about a $100 million market for us, continuing to deliver many design wins. Additionally, we've seen substantial design wins in the optical modules market we've mentioned before, and the market for switches, as well as servers in the edge, also continues to be strong.

I want to ask about the 25 key customers—are these existing customers? And what's driving these multi-year agreements?

Some of them are indeed new customers that came to us because they recognized the tightness of supply. They had been considering our products for some time, and the supply chain tightness prompted them to accelerate their decision. We were diligent about ensuring that we were providing value, maintaining long-term relationships instead of gaining customers based on panic buying. Some customers are coming to us for performance, while others have recognized the benefits of diversifying their supply chains—and moving away from quartz, which has some choke points that became evident due to recent events. They’ve found that our MEMS or semiconductor-based supply chain is more robust and reliable. Once they come to SiTime, they rarely leave.

Finally for Art, regarding OpEx, you're bringing it up in line with revenues. Are there particular areas that you're investing in? Any insights on the rest of the year?

We are stepping up our operating expenses mostly in line with revenue growth. For the guidance of Q2, for example, revenue is expected to be up 85% year over year while OpEx is expected to be up about 28%. We are hiring primarily in R&D across the board to improve our technology and expand our product portfolio. This is crucial due to the 100 platforms and derivatives we intend to offer.

We've indeed given our platform development a significant boost recently due to the successes we've had and the opportunities we see.

Great. Thanks.

Thanks, Blayne.

Your next question comes from the line of Tore Svanberg with Stifel.

Thank you. Congrats on another great quarter. I apologize for my technical issues before. My first question is on your programmability. How is that helping you manage your own inventories and also help customers increase their resilience in their supply chains, considering the extended lead times they are likely facing?

Customers have a couple of things going on. One is that there’s a tightness of supply and so they can't get as much. The second aspect is the unpredictability of supply, where they may not have product available and then suddenly have product. In these times, programmability helps customers significantly because they urgently need a product. If they change their expectations, the programmability allows them to modify the product's frequency. The second advantage of our programmability is that while our lead times have increased, they remain relatively reasonable compared to competitors. So customers are naturally gravitating towards us for a more reliable supply of products.

As a follow-up, could you elaborate on the pricing increase for the legacy product family? What drove that decision?

We considered our legacy products that were not significantly differentiated across performance but we believed several of our lower-margin revenues deserved better pricing given the supply tightness. We initiated price increases, and the response was primarily positive from customers who appreciated the historical support. This appreciation has led to long-term contracts and relationships.

Great color. Thank you, and congrats again.

Great. Thanks.

Thank you.

Your next question comes from the line of John Pitzer with Credit Suisse.

Good afternoon. Thanks for letting me ask the questions. Congratulations on the solid results. I'd like to revisit your comments about bookings. Approximately half your bookings are for durations five to 12 months, indicating great visibility. Can you compare this to typical bookings patterns and providing context for how much is a result of the tight supply environment versus company-specific demand drivers?

Typical durations in the past were more like three to eight months out, now extended to five to 12 months due to the current environment. I believe this trend will continue for some time, possibly a year and a half or even two years. Our products should maintain longer-term visibility and we expect to sustain this as customers recognize the value in diversifying their supply chain. It's a promising outlook.

That's helpful. For my follow-up, could you share insights about your largest customer compared to others? How are they performing?

I expect our largest customer in Q2 will account for somewhere less than 25% of revenue, down from 37% in Q1. This indicates good growth in our consumer IoT segment excluding this customer. However, I want to clarify that our largest customer is not going away and we expect sales to them to significantly increase in the back half of the year as it has in previous years.

Perfect. Thank you.

Sure.

Your next question comes from the line of Suji Desilva with ROTH Capital.

Hi Rajesh, hi Art. Congratulations on the progress here. To follow up on the lead time question, can you discuss whether the lead times are extended equally across all segments, or are some markets particularly more impacted?

All segments are experiencing tightness, but they differ in degree. The consumer segment is tight. IoT is tight, comms, enterprise and data centers are tight, as is automotive. Automotive has made headlines recently. However, military is performing steadily and robustly, which is consistent with its nature. Overall, I would say all segments are affected across the board.

Thanks for the color. On the infrastructure side, regarding global 5G build-outs, have you noticed any delays? Or is your positioning buffering you from these issues?

The rollout has been steady. When we reference comms, we sometimes use that term broadly because 5G is just one component. The rollout is consistent and doesn't exhibit conspicuous scalability yet, but we enjoy serving the mid-haul, core, and data center markets consistently, which aids our portfolio of products.

That’s very helpful. Thank you.

Thanks.

There are no further questions, so I will now turn the call back over to Mr. Art Chadwick for closing remarks.

Great, thank you. That concludes our conference call today. I want to thank everybody for joining us. We appreciate all of your support and hope you have a great day. Thanks again, everyone.

Thank you.