Hello. My name is Lisa, and I will be your conference operator today. Welcome to Silicon Labs' Third Quarter Fiscal 2023 Earnings Call. I will now turn the call over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead.

Thank you, Lisa, and good morning, everyone. We are recording this meeting, and a replay will be available for four weeks on the Investor Relations section of our website at investor.silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs' President and Chief Executive Officer, Matt Johnson; and Chief Financial Officer, John Hollister. They will discuss our third quarter financial performance and review recent business activities. We'll take questions after our prepared comments, and our remarks today will include forward-looking statements that are subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future. We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company's earnings press release and on the Investor Relations section of the Silicon Labs website. I'll now turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson. Matt?

Thanks, Giovanni, and good morning, everyone. In the third quarter, the Silicon Labs team executed well in a challenging environment, driving revenue and EPS to both exceed the midpoint of our guidance. The current market environment continues to be characterized by a difficult combination of weak demand and high inventory. Specifically, end customers continue to carry inventory levels that are too high. At the same time, our end customers' demand environment continues to be weaker than previously forecast. In particular, we see weakness extending further into the broad industrial end market. As a result of these factors, our fourth quarter will be negatively impacted across both business units. We have contained operating expenses thus far in the second half of this year by focusing on temporary reductions in discretionary and flexible spending. Given the duration and severity of this downturn, we have now proactively taken the difficult decision to make structural reductions in headcount and other spending effective immediately to manage our operating expenses further while maintaining investments in essential R&D projects to drive future growth. While the near-term outlook is clearly challenging, we are focused on managing what we can control and putting ourselves in a position to deliver strong growth and higher earnings power once this difficult market cycle corrects. Our design win momentum has never been stronger, and we are as confident as ever in our potential. To underscore this, our industry-leading Series two platform continues to perform exceptionally well, driving our design wins to an all-time record level in Q3 and up 25% year-over-year. Importantly, we are starting to see this design win momentum pay off with some exciting ramps that I'll share after we hear from John. Also, in Q3, we announced our next-generation platform called Series 3 that will further position us to lead this space. All of the items I've mentioned strongly position us moving forward. With that, let me turn the call over to John to cover Q3 results and guidance for the fourth quarter. John?

Thanks, Matt, and good morning, everyone. Third quarter revenue was $204 million, above the midpoint of our guidance range and down 24% year-on-year. ASPs in the quarter declined sequentially, primarily due to product and customer mix. Unit volume was down just slightly on a sequential basis. Revenue was down year-over-year in both business units in the quarter. The Industrial & Commercial business ended at $121 million, down 17% during the same period last year. All three product groups in I&C declined in the quarter with the broad industrial category experiencing the largest decline. Within the I&C business, our performance in smart metering, however, has continued to be an area of relative strength. Home & Life revenue of $83 million was down 33% year-over-year and was up 4% sequentially. We continue to see strength in Life applications, particularly in connected health devices. Geographically, we saw year-over-year decreases in all regions, with APAC being down less than Europe and the Americas. APAC, ex-China was up year-over-year. Distribution revenue was 81% for the third quarter, up slightly from the second quarter. Inventory in the channel was around 90 days. Our largest end customer accounted for under 5% of revenue in the quarter, and our top 10 end customers were about 25%, consistent with our historical trends. Non-GAAP gross margin ended slightly lower than expected at 58.5% due to product mix. We continue to see a generally stable pricing and input cost environment with no significant changes expected in the next quarter. Non-GAAP operating expenses of $95 million was in line with our expectations as we executed focused spending reductions in the quarter primarily related to variable compensation, contractor spending, and travel. Non-GAAP operating income was $25 million or 12% of sales, and our non-GAAP effective tax rate was in line with the quarter at 24%. Non-GAAP earnings of $0.62 were $0.03 above the midpoint of our guidance, primarily due to higher revenue. On a GAAP basis, the gross margin ended at 58.4%, and GAAP operating expenses were $107 million, which was better than expected and was $13 million below the midpoint of our guidance, primarily due to a change in stock compensation expense driven by the expected lower achievement on performance-based awards. Accordingly, GAAP earnings per share were $0.32 for the quarter. Turning to the balance sheet, we ended the quarter with cash and investments of $417 million. Our accounts receivable balance grew in the quarter to $102 million with days sales outstanding at 45 days. Customers, including distributors, have requested longer payment terms in this current market environment. Accordingly, we temporarily extended payment terms for certain customers from our standard early-day terms. We added about $22 million in net inventory in the quarter to $168 million as we continue to accumulate a strategic benefit based on the strong design win momentum we've seen for the past few years, with inventory turns at two times. We repurchased approximately $16 million worth of shares in Q3, targeting approximately 100,000 shares. Our fully diluted shares outstanding in Q3 ended up at 32 million shares. In Q2, we drew $80 million from our revolving credit facility. We repaid $35 million of that balance in Q3 and have an outstanding amount remaining of $45 million. Overall, the balance sheet continues to be very healthy and remains well-positioned to weather the current market environment and to execute on our strategy. Before I turn the call back to Matt, I will cover guidance for the fourth quarter. As Matt mentioned in his opening statement, the current demand environment is still quite challenging as customers are focused on reducing their excess inventory. Our bookings activity slowed significantly during Q3, and we believe many of our end customers still hold higher-than-normal inventory levels. As a result, we expect a decline in revenue for the fourth quarter with a guided range of $70 million to $100 million. We anticipate both business units to decline in Q4. Due to the uncertainty in the market environment, we are widening the guidance range to plus or minus $15 million from the revenue midpoint for this quarter. We expect non-GAAP gross margin in the fourth quarter to be approximately 53%. The lower gross margin for this quarter primarily reflects the impact of certain fixed cost developments in our cost of goods sold, which are being absorbed over a significantly lower revenue level. We continue to maintain discipline over our operating expenses, and the temporary reductions we discussed last quarter will remain in place to the fourth quarter. We expect non-GAAP operating expenses in the fourth quarter to be approximately $94 million. We expect the non-GAAP effective tax rate to be approximately 3% in the fourth quarter. Accordingly, our non-GAAP loss per share for Q4 is expected to be in the range of $1.22 to $1.66. On a GAAP basis, we expect a gross margin to be 53%. We expect GAAP operating expenses to be approximately $123 million, inclusive of an expected restructuring charge of around $6 million in Q4. We expect GAAP earnings per share to be a loss of between $1.95 to $2.39 per share. I will now turn the call back over to Matt.

Thanks, John. Despite the current economic challenges, we continue to execute on design win ramps and long-term growth markets such as smart cities and health care, which are driving significant deployments of devices with sizable ramps in the coming year. In smart cities, Silicon Labs has been the wireless leader in the smart metering market for many years. Like the leadership role we played in the successful rollout of smart meters in the U.K., we are now planning a similar and dominant role in India's rollout where 250 million smart meters are expected to be deployed in the coming years, with our production ramp starting early next year. In addition, we were awarded new designs with Landis+Gyr, a leading provider of energy management solutions to use our Series 2 SoC in its primary smart electric metering platform, ramping early next year. Also, within our Industrial business, we have been designed into multiple products at one of the top two EV providers in the world, which we expect to ramp over the next few quarters. Turning to our Life business, the health care space continues to accelerate and offer exciting new growth opportunities that are a great fit for our platform. We are starting to see our multiyear focus on this market pay off, having secured multiple designs globally. As part of this, we are excited to share our partnership with Dexcom, which will use our platform in its continuous glucose monitors, or CGMs, moving forward. Silicon Labs' ability to offer customizable and highly secure solutions with our Bluetooth SoCs was key in solidifying this relationship, and we expect these product ramps will begin contributing to our revenue early in 2024. At our fourth annual Works with Conference in August, which attracted thousands of IoT developers, I previewed Silicon Labs' fifth-generation platform called Series 3, which is on track to sample early next year. Series 3 brings three major new capabilities to the IoT. First, it brings new-to-industry performance through new levels of security, wireless performance, power consumption, and multi-band and multi-protocol capabilities, areas we have always stood out in. Second, our new levels of compute. Series 3 can support more than 100 times the processing capability of our current generation Series 2, including integrated artificial intelligence and machine learning accelerators, enabling the integration of system processing from stand-alone MCUs into our wireless SoCs. And third, the IoT is seeing new-to-world volumes and applications. Because of this, our Series 3 platform will offer new levels of scalability with a multi-radio platform and a common code base that will serve over 30 new wireless SoCs, a two to three times increase over the number of Series 2 products as well as extendable and scalable memory architecture, including support for external flash. As part of scalability, Series 3 is built on a supply chain that leverages multiple fabs and geographies to maximize the resiliency and reliability of supply. As part of the Series 3 announcement, Silicon Labs also announced the next version of its developer tool suite, Simplicity Studio 6, which will allow developers to utilize the most preferred integrated development environment on the market while giving them the latest tools to support their continued development on Series 2 as well as Series 3. As we told our developers, an investment in our industry-leading Series 2 platform is also an investment in our Series 3 platform. Importantly, Series 2 will continue to grow and be supportive of new silicon and software and will complement Series 3 with both platforms coexisting for many years to come. In closing, I would like to acknowledge that despite the near-term weakness in our end markets, our team is dedicated to overcoming this market downturn without hampering our long-term strategic and financial goals. The fundamentals of our story and the growth prospects for our end markets remain sound, and our position in those markets has only become stronger. Based on everything we're seeing, we believe Q4 will be our bottom, and we expect to return to sequential growth in the first quarter of 2024. I will now hand it back over to Giovanni for Q&A.

Thank you, Matt. Before we open the call for Q&A, I would like to announce our participation in three upcoming conferences. Stifel's 2023 Midwest One-On-One Growth Conference in Chicago on November 9, Wells Fargo's Seventh Annual TMT Summit on November 29 in Rancho Palos Verdes, and the Barclays Global Technology Conference in San Francisco on December 7. We'll now open up the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question and one follow-up. Lisa?

Our first question will be coming from Matt Ramsey of TD Cowen. Please go ahead.

Thank you very much. Good morning, everyone. I appreciate your efforts in this challenging environment. Matt, I'd like to begin my question by revisiting some fundamental assumptions in our model related to the current situation. It appears that we have pricing stability, promising developments with Series 3, and ongoing strong design win traction. At first glance, this suggests to me that we're experiencing a significant inventory correction. I'd like your thoughts on this. As you consider the design wins you're accumulating, are you worried that the volumes and revenue associated with those wins may have declined, indicating that the total addressable market for your business is shrinking? Or is this just an inventory issue that we need to navigate before returning to normal? I’m trying to understand how you are reassessing the actual total addressable market in terms of units and revenue in light of the decline in revenue compared to the design wins. Thank you.

Yes. Completely understand. Thanks, Matt. Yes, let me do my best to answer that. Just to start with, before we get into the inventory and the demand, it's important to point out that we really essentially indexed to a couple of major end segments, consumer, which has been down for a year now pretty significantly. And Industrial, which had been more resilient but we've been seeing signs of that, and that really came through as we were leading in Q3 and going into Q4, the weakness in that space. But the end inventory is really important to talk about, right? So, we've really, when we sample our top 40 or 50 customers, they're carrying more inventory than they normally do by at least a quarter. I'd say it's an easy way to think about that. And on top of that, I think their expectation for demand and growth and strength was higher. And when those two things converge and the demand is less and that inventory is high, the impact is profound, and that's what we're seeing. So that is the first piece of it. And in terms of the second piece, in terms of end markets and design wins and all that, a few things. One is we don't see share loss here. When we look at it on a socket-by-socket basis, we see gains. And that's reflected in our design win numbers and strength with a record Q3 that was, I think, up around 25% year-over-year. But what we do see is while some of those have ramped, we see those ramps being impacted by the overall market. Maybe their volumes are less than they thought, ramps might be pushed out as they work through inventory, et cetera. But the big ramps are solid and there, although some might be delayed. And so, we shared some of those in the prepared remarks that are pretty substantial and coming very soon in Q1. But I don't see anything on share loss; I want to be clear about that. And your question about the TAM, I mean, I think there's an argument being made that when the market is down, the size of the market is significantly less, but the fundamentals in terms of the long-term size of the market, the growth of the market, none of that's changed at all. So, what we really see is that confluence of end inventory and demand being much softer than expected coming together, and we got to navigate that. But the fundamentals haven't changed, and that's what gives us confidence moving forward.

Thank you for all that perspective, Matt. I really appreciate it. John, just as my follow-up, two things. One, it looked like you guys burned $50 million or something like that in cash, and you're guiding to, obviously, negative P&L for the December quarter. So, I just wanted to do a check on cash balances, liquidity, the revolver, stuff like that, just to see how you're thinking about it. And then you spent a little time on some OpEx reductions in the script. Maybe you could quantify how we should think about that for 2024? Thanks.

Sure, Matt. So, on the cash balance, we continue to have a strong cash balance. Our revolver that's outstanding is really around optimizing between short-term investments and interest, etc., to optimize that portion of our cash flow and P&L. So, we're not concerned about the liquidity of the company, and we continue to have a robust cash balance. In terms of the OpEx actions, remember that in the second half of 2023, we undertook temporary non-sustainable OpEx containment actions, such as travel, contractor spending, some of our bonus programs, etc. These things need to come back heading into next year. Unfortunately, we are taking some structural reductions in the business. From a quantification perspective there, Matt, the way to think about that is first quarter OpEx; we see is roughly flat to the second half run rate as these two things basically offset each other. And then we'll monitor this as we move through the rest of next year based on the rate pace of revenue improvements, which we do anticipate happening through the course of next year. We just need to see how strong the recovery is based on the ramps and recovery of the general market.

Very clear. Thanks, guys. See you next week.

Yes. Thank you. I wanted to zoom in on your comment about Q4 being a bottom and seeing some growth sequentially in Q1. It sounds like you have some design wins ramping. That's pretty clear. But can you also talk about the inventory correction? I mean, obviously, given the size of the Q4 guidance down here, obviously, one would think that, that's clearing out of inventories. But any more color or visibility you have on the inventory situation as you go into 2024, that would be helpful.

Sure. Yes, Tore. This is Matt. A few things on that. We are definitely not indicating that we’ve reached the market bottom, and we want to be clear about that. It’s evident that there are also challenges ahead. It’s uncertain how much more correction the Industrial sector might face. Regarding end customer inventory, it would be great if it was completely resolved at the end of the quarter, but it isn’t. It varies across our customers. Our discussions with our top 40 or 50 customers show that they are holding more inventory than they should by at least a quarter. Some customers are better at managing inventory than others; some are extending their inventories into Q1 and Q2, while some are in a better position now. However, overall, the majority are carrying more inventory than usual by about a quarter. This is significant. We are not suggesting that the inventory challenges will disappear, but the largest part of it should hopefully be managed. There are existing challenges, but we expect the inventory situation to improve. On the positive side, we are starting from a very low revenue point and expect our customers’ inventory levels to decrease and leverage our strengths in design wins. None of those opportunities have disappeared; we continue to gain them, with some major ones nearing. It’s the combination of these factors that gives us the confidence to state, based on our observations and beliefs, that this will be our bottom and we can achieve sequential growth from here.

Yes. That's very helpful. And as my follow-up, I know this is always a very tricky question given cyclicality, inventory management, and so on and so forth. But your revenues peaked at $270 million; you're guiding $285 million at the midpoint. Where do you think the true consumption is of your business, whether on a quarterly or an annual basis, just so we can get a sense of where you will eventually go back to as we get through this inventory adjustment period? Thank you.

Yes, Tore, this is John. Yes, it is a hard question to answer, given the lack of visibility we have into the inventory level and how that relates to our revenue run rate as we are seeing the effect of that right now. But suffice to say, we think it's meaningfully higher than where we're running and guiding right now. That is clear. But clearly, we do need to take some action around our operating expenses, and we're reacting and executing importantly.

Hi, guys. Thanks for taking my question. I wanted to make sure I have the impact of the inventory reduction squared away in my head. So, you talked about $200 million worth of perhaps excess inventory or, said differently, roughly a quarter's worth of revenue. And you're guiding the fourth-quarter revenue down $120 million sequentially, roughly. So that is what, roughly 60% of it being digested in the fourth quarter? And then maybe 40% digested into the first quarter? And to what extent does this $85 million revenue guide reflect lower turns assumption just given the lack of visibility as your lead times have shortened?

Yes, Gary. We're working through this as best we can to navigate the inventory situation at our customers. I guess on your question long-term, we duplicate. So, we definitely have seen very low turns in the business. That's really at the roots of what is going on here. Turns have been quite low for multiple weeks, and that is really underpinning the weakness in our guidance. And it is exactly that. That we look to first as the first indicator of a recovery emerging as customers clear inventory that should lead to better inventory turns. I hope that's answering your question. That's kind of the best halfway right now.

Okay. Fair enough. All right. And so, I wanted to ask about the flexibility of the buyback. I think you have listed in your PowerPoint deck on your Investors section of your website, $100 million left in the buyback. How much flexibility do you have to ramp that up, considering the cash on the balance sheet, the lending capability, and whatnot? And to what extent are you willing to borrow at today's interest rate environment to buy back stock at these levels?

Yes. We do have flexibility up and down, Gary, to the point of being opportunistic on it but also being mindful of our overall liquidity. These are all factors at work as we cover in the best way to approach that. But we're not locked in, so to speak, we do have flexibility.

Thanks for taking my questions. Just wanted to follow up on Gary's question there. You kind of went through the math of the inventory clearance, maybe a clear 50%, 60% in Q4. It would seem that Q1, while you're guiding it up, is still going to have a significant inventory effect. And then hopefully, by the end of Q1, maybe you've cleared most of that and you start to get back to better sequential growth rates. Just wondering if I'm thinking about the shape of the trajectory, right, or if you would think it's a different trajectory off the bottom?

Yes, I understand the question now. The simplest way to express this is that we're not specifying when we'll completely resolve the situation, and it is certainly an imperfect process. There are no formal reports; it's mainly extensive discussions with customers over the phone to gauge their expectations and target timelines. However, we anticipate in Q4, based on their feedback and levels, that we will get through most of it, although some will still remain. This provides us with confidence in our assessment of the situation as our lowest point. It's not just the inventory that matters, but also the improvements on the other side that contribute. Q4 will see a significant impact from this inventory, which is a critical aspect to understand. The data indicates that we will be able to address a substantial portion of it.

Thanks, guys. Thanks for taking my question. I guess, John, Matt, if you can maybe speak to your order linearity over the last quarter, the last few months. And maybe how are you looking at your forecasting methodology, just adjusting how you're expecting to predict going forward?

Sure. I'll start. I wouldn't say there's any linearity to begin with. It's somewhat remarkable to see bookings decline, followed by a pause or a bit of calm, and then a further decline. The same applies to turns, which continue to drop. Forecasting has been extremely challenging. We have tens of thousands of data points from customers, and our forecast is an effort to accumulate their perspectives. The biggest challenge arises from the rapid changes in the market and the lack of visibility, making it difficult for our customers to forecast as well. As we navigate through these quarters, we aim to reflect this situation, communicate openly, and be transparent. Each time, it feels a bit more conservative, given our current experiences, until we observe strong indicators of market recovery, which we haven't seen yet.

Yes, Cody. Like I said, first quarter, we expect to be roughly flat to the second-half run rate in the mid-90s based on the best available information we have as of yet. And beyond that, Cody, we just have to monitor this and see how the recovery goes. Our model remains our compass, how we want to operate the company, and that's what we would seek to get back to as soon as we can. So, we're going to maintain some flexibility on operating expenses as we head into the second quarter and second half of next year based on how things are tracking.

Thank you. Good morning, guys. John, on the inventory, especially the disti inventory, I think you said roughly 90 days. I'm guessing that's about $200 million. So, as we go through, I guess, the next quarter exiting December heading into March, I'm just trying to understand how we should think about the absolute inventory? How much of that disti inventory are you hoping to draw down? And if you could maybe give us some color on when and where I think it normalizes. I guess what is a normal level for you at this point?

Yes, Srini, sure. Roughly, 90 DSI at the end of the third quarter is in the neighborhood of more like $100 million of value, roughly, not $200 million. Yes. We do expect that to moderate and decline in the fourth quarter based on what we're seeing. I mean, that's part of the challenge here is the very weak POA or sell-through demand is what's behind our guidance here. Over time, I think we can see some further reduction of that with the market recovery. But landing in the 60 days, 70 days DSI is normal that would be fine from an operating perspective as we look ahead.

Yes, it's tough. Yes. I think that really, in the second half of this year, the Industrial impact has really been significant where it had been so much more resilient and durable prior to that. Consumer has been hit all over the last year, significantly, but it's also worth pointing out, both are down in Q4 not only in industrial. So, new low levels for both of those Q3 to Q4. Yes. I'm going to reiterate that I'm in a challenging environment, and as an example, we're up significantly in design wins, particularly with our Series 2 platform, which continues to perform exceptionally well. And we are very confident in the future potential of our new Series 3 platform that will help accelerate our long-term growth.

Hi, thank you. I wonder if you guys could address like-for-like pricing. You saw the prices go up the last couple of years when foundry costs went up. Are you seeing any change there? And if you're not, I guess, to the extent that you're thinking about next-generation design wins, you're building your pipeline, do you see more price competition for those new sockets?

Yes. A couple of comments, Joe. This is Matt. Yes, what we've seen is the market kind of return to pricing behavior that is typical for this type of market and really, I'm going to call it typical of pre-pandemic and now kind of post-pandemic. So, an easy way to think about it is the price pressure is really on design wins, more than anything, as you pointed out, not on our existing business. That existing business tends to cross thousands of designs and customers tends to run as it does. And where we see kind of the leading edge of price pressure is on those design wins, which, as I said, are at record levels the last few years, including this year, including Q3. And what we're seeing there is price pressure that is typical, not anomalous, and we are still winning at an accelerated pace.

I just had two quick follow-ups. First of all, I'm back to the run rate. So, if we go back to Q1 of '21 before you had obviously very strong growth through the pandemic years, the revenue run rate was around $158 million, if I'm not mistaken. I understand sell-through is deteriorating. I understand there's cyclicality about inventory and so on and so forth. But it would just seem that a number around that level is probably where the consumption is of your business. Just wondering if you have any comment if you think that is completely off? Or could that potentially be in the ballpark?

The only thing I understand, Tore, this is Matt, the logic, and the approach. The only thing I'd add or say is to think of the design win momentum and share gains over that timeframe. So even when you consider the entire pandemic as a build of inventory, which we don't believe that's all it was. Even if you did, there are gains and stronger business underpinning that exiting than entering. So, that's an important component to add to your question. Yes, let me step back. Big picture, we talked about an increased focus on Bluetooth, and we are incredibly happy and excited about the progress we’re making in that area. We are gaining market share in Bluetooth, and that trend continues. Wi-Fi is earlier in that investment and initiative, but it is one of our fastest-growing areas this year and moving forward, so that’s exciting progress as well. When looking at it by segments, we discussed digital retail and shelf labels, where we continue to see good progress. We also mentioned the metering space, which has always been one of our strongest positions and is becoming even stronger. There are many rollouts and tenders that will boost us not just starting next year but for several years to come. We have talked about health care as an increased focus, and we’ve made a lot of progress there, some of which we just shared in the prepared remarks, including our partnership with Dexcom, which we are excited about. Additionally, our position in Matter is worth mentioning, as it is progressing well and is also exciting. For those who might not be familiar, one of our historically strong positions has been at 15.4, which is being drawn into the mainstream. Over 80% of the certifications in Matter are coming from Silicon Labs. The latest iPhone supports Thread, which is great and will help integrate Matter further into mainstream products where we have a strong presence. Overall, the fundamental end markets and trends are favorable. We are just facing a challenging end-market environment and inventory situation that we need to navigate to fully realize the benefits in those other areas moving forward.

Thank you, Lisa, and thank you all for joining this morning. This concludes today's call.

Thank you all for joining. You may all disconnect.