SITIME Corp Q2 FY2024 Earnings Call

Thank you. Good afternoon, and welcome to SiTime's Second Quarter 2024 Financial Results Conference Call. Joining us on today's call from SiTime are Rajesh Vashist, Chief Executive Officer; and Beth Howe, 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's 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 person assumes responsibility for the accuracy and completeness of 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 statements to actual results or to changes in the company's expectations. For more detailed information on risks associated with the business, we refer you to the risk factors described in the 10-K filed on February 26, 2024, as well as the company's subsequent filings with the SEC. During the call, we will refer to certain non-GAAP financial measures, which are considered 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. This GAAP to non-GAAP reconciliation includes stock-based compensation as well as acquisition-related items related to amortization of intangible assets, one-time acquisition-related charges, and expense or income related to changes in the estimated fair value measurement of acquisition consideration payable and sales-based earn-out liabilities. Please refer to the company's press release issued today for a detailed reconciliation between GAAP and non-GAAP financial results. With that, it's now my pleasure to turn the call over to SiTime's CEO. Rajesh, please go ahead.

Thank you, Leanne. Good afternoon. I'd like to welcome new as well as existing investors to SiTime's Q2 2024 Earnings Call. For those of you who are not as familiar with SiTime, we are the leader in a dynamic new semiconductor category called precision timing. In electronics, timing is ubiquitous and ensures reliable functioning. SiTime's precision timing solutions serve the needs of AI, data centers, automated driving, IoT, and 5G. We're in the early days of transforming the $10 billion timing market. Q2 results exceeded the high end of our outlook. Revenue for the quarter was $43.9 million which was well above our guidance of $40 million to $42 million. Operating profit and EPS were both higher than expected. Each of our reported end markets grew in Q2 at double-digit rates, both sequentially and year-over-year. The drag of excess inventory over the last few quarters has passed and we see that inventory is now at normal levels. Bookings for the second half of 2024 are strong, and we expect both Q3 and Q4 to grow sequentially as forecasted. From a geographic perspective, our 2024 revenue in every major region is expected to be strong. Revenue from each of Greater China, North America, and Europe is expected to grow by double-digit percentages. What makes SiTime unique apart from our technology is the diversity that we have built in applications, customers, and products. The growth across all of these occurs at different times as we have previously forecasted. For example, while all our end markets are expected to grow throughout the year, the CED or communications enterprise data center market will grow at the fastest rate, more than 50%. This is also a market segment with high ASPs or prices, margins, and significant architectural differentiation. Five years ago, SiTime laid out a CED strategy of investing significantly in R&D and customers, and we will continue to do so in the future. We are confident of reaching a $100 million mark in this CED market as previously forecasted. Within CED, we have made progress in our AI business over several quarters and I will spend time today to provide greater context on this. We have design wins with the precision timing products in all key applications of the AI ecosystem including GPU and CPU boards, interconnect switches, optical modules, NIC cards, accelerator cards, active cables, and switches. To provide a sense of scale in 2024, we will ship 70 unique part numbers across 14 product families to 30 customers, who are developing AI hardware. To provide greater specificity, we are focused on the revenue and growth from NIC or network interface cards, interconnected switches, and top-of-the-rack switches, where we deliver higher performance, smaller size, and higher reliability. The precision timing content in each of these systems can range from $8 to $25 and includes our highest-end products, such as Super TCXOs, OCXOs, as well as the network synchronized clock from a recent acquisition of the Aura products. SiTime is a preferred supplier in these applications because of our capability to customize our devices to the application requirements and deliver performance benefits. Also, as the only company to focus solely on precision timing, we offer the broadest portfolio of oscillators, clocks, and synchronization software, simplifying the customers' design and purchase decisions. Cloud service providers have been in a race to invest, and we expect that trend to continue at a level that helps fuel SiTime's growth. In fact, we now see a greater trend towards improving system bandwidth and utilization, which will require high performance and therefore, more complex precision timing from SiTime. Obviously, this bodes well for us as we have all the key technologies to service this trend. For example, as optical module and active cable bandwidth increases from 800 gigabits per second to 1.6 terabits all the way to 3.2 terabits in the next few years, we expect a corresponding increase in several performance areas of timing such as frequency, jitter, phase noise, stability, and environmental resilience. We are confident that SiTime has the products today and in our product roadmap to meet these needs. In data centers, we also see an increasing need for synchronization, for which we also offer a complete solution. To summarize, we believe that SiTime's strategy of increasing diversity across applications, customers, and products is paying off. By focusing on high-value applications, we're accelerating our customer acquisition. Our expanding portfolio is delivering superior benefits in new applications that need precision timing and as the only semiconductor company that's uniquely focused on timing, we're well-positioned to continue our success. I'll now turn the call over to Beth to discuss our financial results in more detail.

Thanks, Rajesh, and good afternoon, everyone. Today, I'll discuss the details of our second quarter results and provide our outlook for the third quarter. I'll focus my discussion on non-GAAP financial results, which are reconciled to GAAP in our press release. In Q2, we delivered strong revenue and earnings growth that exceeded our outlook. Q2 revenue was $43.9 million, up 58% year-on-year and up 33% sequentially with growth in each of our end markets. Sales into the communications, enterprise, and data center market were $15.2 million, up 208% year-on-year and 55% sequentially. Sales into the automotive, industrial, and aerospace market were $14.8 million, increasing 20% year-on-year and 15% sequentially and sales into the mobile, IoT, and consumer market were $13.8 million, up 33% year-on-year and 34% sequentially. With sales to our largest customer totaling $7.9 million or 18% of sales. Non-GAAP gross margins were 57.7%, down 20 basis points sequentially. The impact of improved manufacturing absorption with higher volumes was more than offset by the higher overhead and other manufacturing costs as we continue to support our growth plans. Total non-GAAP operating expenses for the quarter were $28.1 million, with R&D expense of $16.1 million and SG&A expense of $12 million. Total operating expenses were up $0.7 million sequentially due to higher commissions on increased revenue as well as strategic hiring. The Q2 non-GAAP operating loss was $2.8 million, a significant improvement versus the prior quarter operating loss of $8.3 million. Interest and other income was $5.6 million, and Q2 non-GAAP net income was $2.8 million or $0.12 per share compared with a $1.9 million loss last quarter. Turning to the balance sheet. Accounts receivable was $21 million with DSOs of 43 days, down 3 days sequentially. Inventory at the end of the quarter was $70.8 million, down from $74.4 million last quarter. During the quarter, we consumed $0.2 million in cash from operations, invested $2.6 million in capital purchases, and paid $69 million to Aura as part of the transaction we announced last year. We ended the quarter with $453 million in cash, cash equivalents, and short-term investments. Let me now review our outlook for the September quarter. In Q3, we expect to continue to deliver strong revenue growth and to return to operating profitability. We also expect increased costs in both cost of goods and operating expenses as a result of higher costs associated with ramping our new products. Specifically, we expect revenue to increase 25% to 27% sequentially to about $55 million at the midpoint, gross margins to be stable to slightly improving, trending towards 58%, operating expenses to be in the range of $30.5 million to $31 million, and interest income of at least $5 million. As a result, we expect non-GAAP EPS to be in the range of $0.23 to $0.27 per share. In closing, we are executing on our strategy. Our product portfolio continues to expand with differentiated products that address large and growing markets, and our customers are clearly recognizing our value proposition. All in all, we are excited about our market position and our growth prospects ahead. With that, I'd like to hand the call back to the operator for questions and answers.

Our first question comes from Tom O'Malley of Barclays. Your line is now open.

Hey, guys, thanks for taking my question. I just wanted to talk about the recovery into the second half. So you talked in the last call about kind of expanding the opportunities that you were kind of chasing as revenue reaccelerated. Could you just talk about what you're seeing off the bottom here? Is it really just a return to accelerated demand in some end markets now that the inventory correction is kind of behind you, or are you kind of seeing that traction and the additional opportunities that you're chasing? I guess that's part one. And then part two is if you look at that guidance in the September quarter, you obviously talked about EV being the growth engine for the remainder of the year. But could you just give us a little color on those end markets and what you would expect from each kind of trending into the September quarter?

Right. So it's a bit of both, Tom. On the first question, inventory is down, as we said it would be a couple of quarters ago, and that happened. And demand is up. Now demand isn't up in a monolithic way. There are some places where demand is up a little bit less and others where demand is up a lot. So the demand is up a lot in the area specifically of AI, specifically in the optical markets, interconnects, and some of the NIC card business. In general, all AI is up, and we continue to see it grow. I know there's a lot of headlines around that, but we specifically believe that this growth continues over time as we progress. Now the nice part about SiTime, of course, is that everything else is also growing. Our automotive business along with the military, aerospace, and industrial sectors, all of that whole category grows, as does our consumer, IoT, and mobile category. So all of them are growing, but some are growing faster than others, just as I said. As far as what is exactly happening, we certainly see that the drive towards higher-performance solutions in optical and active cables is very critical, very important, and we see a lot of activity in that area including interconnects and so on. So just the general part of the data center is all growing, and we anticipate that the whole category of communications, enterprise, and data center continues to grow as communications start to catch up along with enterprise in the coming quarters. In other words, we also expect that to grow in the coming quarters as some of the newer products from SiTime get adopted in those markets.

Yes. So you're referencing the newer products. And I think in your prepared remarks, you talked about both the COGS and some of the spend being a little higher as it relates to those newer products. If you look at gross margin for the remainder of the year, you're kind of guiding to flattish into the September quarter trending more towards 58%. How should we be thinking about the gross margin longer-term? I'd assume that new product integration and launch is kind of a 1- to 2-quarter event and then you start to see growth after that. But could you help kind of give the cadence you've been helpful in the past getting back to that 60% mark? Are we still thinking about the same time frame, kind of early next year? Or are the new products changing that outlook a bit?

Sure, Tom. Thanks for the question. We still expect gross margins to remain above 60% in the long term, so there’s no change there. However, we are experiencing benefits from manufacturing absorption due to revenue growth. In the coming quarters, while we anticipate some improvement in gross margins, they may not increase as rapidly as we support our growth plans and transition new products into mass production. It will take a few quarters for yields to improve, and we expect to see progress over time, but this process will require some time as we ramp up different products. Additionally, in the past, we might have launched one product or platform each year, but recently, we have invested a significant portion of our profits into research and development, leading to several new products entering mass production now. In the long run, we still aim to bring the margins back to around 60%.

And then, Beth, just circling back on the first question, just the trajectory of those businesses into the September quarter. Any color on what's generating the uptick, the kind of growth among all of the different segments? Or any particular details there?

As we look ahead, we expect all three segments to grow year-on-year. We anticipate that the data center, driven by AI, will be the fastest-growing segment next quarter, just as it was this quarter.

Our next question comes from the line of Chris Caso of Wolfe Research. Your line is now open.

Yes. Thank you. Good evening. My first question relates to your previous call where you mentioned the potential for 30% growth this year based on the guidance for September, which seems more achievable now. Could you share any insights on what you might anticipate for December, understanding that you may not want to provide specific guidance at this time? Is there any seasonality to consider, or any irregularities with the AI-driven factors in the CED segment as we approach the December quarter?

Yes, we still believe in that 30% growth for SiTime. We do expect that growth to continue. I don't see any particular inconsistencies in delivery apart from SiTime's capability to provide the product, which we think is robust. Therefore, we don't anticipate any irregularities in the December quarter or throughout the year due to the substantial pent-up demand for these products in data centers. This is evident for both U.S.-based and China-based companies. Many of the China-based companies also supply the major data center firms, and we expect strong performance in those markets.

Got it. Helpful. I guess as a follow-on question, if perhaps you could provide some color on the impact of some of the new products on what's going on right now. And just using CED as an example, we obviously gone through an inventory correction. And we're kind of getting back to run rates that we're seeing kind of late '21, '22 before some of the shortages emerged. And I guess as we compare now to then, how much do some of these new products come into play in terms of driving the growth that was independent of some of the supply disruptions and inventory correction?

Yes. These new products are significant. In fact, they are very much part of it, all across the board, whether it is the oscillators that are used in the optical products from customers. Those did not exist in 2021 in volume, and they exist now. So we are good with that. There are the higher-end TCXOs, super TCXOs, OCXOs and then not to mention our products from our Aura acquisition. I think those are all coming together to not only get us numerous design wins but also allow us, as I mentioned, to achieve 13 to 14 product families. So it's safe to say that at least half of these product families are new, maybe even more than half of these are new.

And just one more follow-up, if I could. With those new products, I understand what you're saying now that as you're ramping new products, there's a learning curve, the yield, and such. But structurally, as you ramp some of these new products with higher precision, should we expect that structurally those represent higher margins than what you've seen in the past?

We have emphasized that the CED business has been crucial for us for quite some time because it offers higher average selling prices, better margins, and stronger customer loyalty. It also provides architectural differentiation and a clearer definition of performance in collaboration with our customers. While we have other areas with higher average selling prices, such as military and aerospace, those markets are not as large as the CED market. This is why we have prioritized the CED business as we have in the past and will continue to do so in the future.

Our next question comes from the line of Tore Svanberg of Stifel. Your line is now open.

Yes, thank you, and congratulations on the solid recovery here. Rajesh, I had a sort of a clarifying question on the communications and enterprise business. I think you said that you expected to grow 50% plus for the year. I mean, based on the current run rate, it's tracking significantly above that. So I mean, are we talking about much more than 50%? Any color you can add there, please?

Yes. Tore, your math is always right. It is significantly above 50%, might even be closer to 70% plus.

Perfect. And as my follow-up, you talked about how diversified the AI business or the data center businesses are. You mentioned the number of customers and so on and so forth. But can you also talk a little bit about how the design-in process works here? You mentioned that you are a preferred supplier in many platforms. I also believe you have some reference designs with the processor company. So help us just understand a little bit how the design-in process works as you continue to ramp this business.

Yes. The design-in process obviously can happen either with the semiconductor company that's a supplier of GPUs, CPUS or it can be directly with people who do accelerator cards, active cables, and so on. It is with those people. But then it's a complex supply chain, as you know. There are ODMs and then there are contract manufacturers. And then there are the consumers of the product itself, whether they're AWS or whether that's Google. So for SiTime, even though the design win occurs at one place, we have to support everybody along the way. And that's what makes it particularly complex selling the value proposition of SiTime or articulating the value proposition of SiTime all through the supply chain. And it's gratifying to be able to see that that value proposition is understood and accepted for SiTime. The value proposition, of course, is around performance, environmental resilience, but it's also around supply chain. One of the things that we see quite clearly is that quick ramp, as you have seen some of the providers like AMD and NVIDIA have mentioned that they have a particularly aggressive rate of new product introduction. If SiTime is to be a major supplier in this, we have to match that. That means we have to accelerate even further our product development in these markets. And so that's exactly what we have decided to do, and that's exactly what we're doing.

That's great. I just have one last question about Aura. It seems that Aura is beginning to contribute to your revenue growth. Does this affect the payment terms for the acquisition, or can we assume that the timing of the payments remains unchanged?

Yes, I think the timing of the payments remains the same. I think what the Aura products do, for example, the network synchronizer that I mentioned in my prepared remarks, that is a very complex product, and it has a long design win, design-in cycle, and it takes a while to ramp up. I mean, we're not in any significant volume with that of any particular note and will not be outside of the payment cycle. So in other words, whatever we have indicated in the past, payouts to Aura based on revenue will probably likely still be the case.

And Tore, just to add to that. The $69 million I referenced this quarter is overwhelmingly the next payments for the assets. As you may recall, when we did the deal back in December, we said we would be acquiring the die over time in '24 and actually in '25 as well. So many of the deliverables for '24 occurred in Q2, hence the cash payment. We've got one more small one in Q3 beyond just the earn-out. So the vast majority of that was part of the transaction that is expected to occur in '24.

And to just put in a plug for the Aura acquisition, all of it is integrated. All the products are coming over as we expected. I really must commend the Aura team; I think they have shown exceptional professionalism and cooperation in transferring these products. And with the team integration, I think I honestly can't believe that it could have gone any better, and the performance of their products is equal to or better than we expected. All of this, we understood when we did the acquisition, but now we see clear evidence that it was clearly the right thing to do with the right group of people.

Our next question comes from Suji Desilva of ROTH Capital.

Congrats on the progress here. Just to follow up on Tore's last question somewhat. Just to clarify, these Aura wins that you have in CED. Were those secured post-acquisition? Or did those design wins pre-acquisition? I'm just trying to understand pre-acquisition any wins been secured post-acquisition? Or is it the combined product? Any color there would be helpful.

Yes. I think those are definitely post-acquisition because the network synchronization product, for example, was an important one that came across. There are some buffers in there that were pretty important in different markets, not the data center market necessarily. So all of these have been very quick and very brief, but the revenue, of course, still takes a little bit of time.

That's fair. I just wanted to clarify that part. More broadly, I think you're gaining traction in the data center. I'm presuming reliability and the time between failures are probably the main factors attracting these data centers. Please clarify if that's accurate. Do you have any metrics on how much less frequently you fail in, for example, quartz space solutions?

Yes, we do. In general, we have a fit rate, which is about 100 times that of quartz in general. But in specific products, it may vary because, for example, OCXOs in the quartz world have a particularly more difficult time in performance across changes in the environment. But to be very specific about your question, it's less the reliability, which always, of course, comes into play as does the supply chain, but it more has to do with performance. At the end of the day, everybody is performance-hungry. I threw out a number of performance areas: frequency, jitter, phase noise, stability, and of course, environmental resilience, which doesn't sound like performance, but it is the environment. It's the cloud under which all these products must work. So you can always get a phase noise at a certain stability, but under a tough environmental condition of, say, temperature spiking or airflow that may degrade dramatically, unlike SiTime's products. So that's where we win. That's where our customers have agreed that we are superior, and some of them have decided to exclusively deal with SiTime, and some of them have gone a step further and have decided to define products with us for coming generations. So that, of course, gives us a significant viewpoint into the customer. And it was always us. This is what we always wanted. This is what all semiconductor companies do. This is what typical SoC companies do, and that's all we're doing. We're connecting with our best customers and solving tough problems for them, which otherwise they would not solve.

Our next question comes from the line of Quinn Bolton of Needham & Company.

Just wanted to add my congratulations. I wanted to come back to the gross margin, just trying to get a better understanding of sort of the new product ramp issues. Are these new products as a kind of new analog die, new MEMS die that you just have to come up the yield curve? Are there new package types, sort of surprised given how much revenue is increasing quarter-to-quarter that you're not seeing a higher margin lift? And I guess a sort of follow-up to that is I just wanted to make sure you guys aren't seeing any changes in pricing at the customers. There's no particular mix shift to say, mobile IoT or no new product ramps from large consumer companies that may be skewing the mix here in the second half of the year?

Quinn, this is Beth. As we evaluate the situation, you mentioned MEMS and CMOS packaging, and it's really all of those as we consider these new products across multiple markets. Rajesh has discussed the AI markets, and we are clearly launching many new products in that area. I expect that over time, we will see improvements in yields. We are also examining the mix of equipment purchases, whether we buy the equipment or the OSAT does; either way, the costs are incurred. We take into account this mix as we assess the costs associated with bringing each product to market, weighing our investment in equipment against that of the OSATs. Typically, both parties invest in this area. However, there is nothing out of the ordinary. The influx of new products entering mass production is primarily what is influencing this.

It seems that if you're buying some of that equipment, there might be slightly higher fixed costs affecting the cost of goods in the short term. As you grow from here, you will benefit from absorption, but in the near term, this presents a challenge due to the introduction of those new products.

I think that's a fair assessment. And we look at that and evaluate the economics on a product-by-product basis where we think it makes more sense to make some investments or share the investment versus have it come through on a unit basis as the products are assembled by the OSATs.

Got it. And then a follow-up for Rajesh. You've mentioned the strength in the CED for a couple of quarters and provided some insight on content per application. I wanted to revisit whether you could clarify the dollar content for some CED applications, which you previously indicated could range from $8 to $25. Would this apply to an AI server? What about a switch? You've mentioned optical modules and AEC cables as well. Could you give us an estimate for the content of an AEC cable or an optical module in relation to TCXO? Additionally, could you provide some details on typical NIC card content? I'm trying to gain a clearer understanding of the timing content in these high-volume applications.

Yes. So typically, the optical products tend to be lower in pricing. So they're closer to that $1 pricing rather than the $5 price. But when we, in an ethernet switch, sell a clock, which is anywhere from $5 to $10 and an OCXO, which is anywhere from $15 to $25, it kind of adds up pretty quickly. And then it depends upon the consumption amount of these. For example, some of the switches sell in tens of thousands, but we believe that the NIC cards, which may have a total content of $5 to $10 will probably increase at a faster rate in units over time. The GPU boards, of course, and the CPU boards, we do well at in the $10-plus range. But then those are relatively limited in units. So where we flourish is when you get the sweet spot of higher ASPs and highest volumes rather than the lower volume and high number. Either way, when we look at the breadth of our design wins, CPU boards, GPU boards, switches, ethernet switches, NIC cards, accelerator cards, optical modules, CE cables, or active cables, I think it's astonishing that when AI sort of started to take up about a year ago, many of you asked us how we would perform in that. And if you recall, I said these are early days. We're trying to see the market ourselves. What I'm gratified to see is that exactly what we saw happening has happened, which is that our customers' customers make huge hundreds of billions of dollars, tens of billions of dollars of investment in their data centers. But then they want to keep on extracting more bandwidth, more utilization, more uptime, more synchronization, and that's where timing comes in. And that's why I'm very confident that even when the overall market, there's been a lot of talk about commitment to dollars and CapEx by these large companies, I'm very confident that SiTime will continue to grow even if it slackens off a bit because this portion will always get more money, and we will benefit from that.

At this time, I'm showing no further questions. I would now like to turn it back to Rajesh Vashist, CEO, for closing remarks.

Well, thank you all very much for joining us. Very happy to see the upturn in SiTime as we promised it would happen in the second half, and we'll continue throughout the year and hopefully in the coming years; that's certainly our design. Look forward to meeting you guys on the road. Talk to you soon. Thank you very much.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.