Earnings Call Transcript - SLAB Q1 2025

Operator, Operator

Hello. My name is Deedee, and I will be your conference operator today. Welcome to the Silicon Labs First Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I will now turn the call over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.

Giovanni Pacelli, Senior Director of Finance

Thank you, Deedee, 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, Dean Butler. They will discuss our first quarter financial performance and review recent business activities. We will 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 our website. I’d now like to turn the call over to Silicon Labs Chief Executive Officer, Matt Johnson. Matt?

Matt Johnson, CEO

Thanks, Giovanni, and good morning to everyone. Silicon Labs delivered impressive results in the first quarter, aligning with our expectations and showing positive momentum throughout the business. As we emphasized during our recent Analyst Day, we are well-equipped to exceed the overall semiconductor market performance, which our Q1 results demonstrate with growth both sequentially and year-over-year, along with increased revenue in our business units. Our Home & Life segment experienced mid-single-digit growth sequentially and nearly doubled year-over-year, driven by market share gains and advancements in connected healthcare leading to production increases. Additionally, smart home applications showed robust performance this quarter. Our Industrial & Commercial segment continued to recover, achieving high-single-digit sequential growth and double-digit year-over-year growth, supported by design wins and ongoing demand in smart metering and shipments to electronic shelf labeling clients. Although the macroeconomic landscape is uncertain, we anticipate outperforming the market due to our leadership in high-growth sectors and our history of gaining market share. Looking ahead to the current quarter and the rest of the year, discussions with customers and distribution partners suggest no need to alter our forecast despite global trade policy fluctuations. Our expectations for growth in Q2 stem from ongoing improvements in our booking patterns and advancements in new programs, alongside secular growth in areas such as connected healthcare, smart home, commercial retail, and global metering implementations. We have prioritized supply chain diversification over several years, especially relating to our upcoming Series 3 platform. Currently, our operations remain largely unaffected by the changing geopolitical environment; however, it is premature to assess any indirect effects of tariffs on global demand. So far, we have not observed any significant repercussions on our customers’ projections. Our team is dedicated to providing innovative products, enhancing our breadth, depth, and singular focus on the IoT market. This includes our latest Series 2 device, the BG29 family of Bluetooth Low Energy SoCs, engineered to deliver leading performance, battery life, security, and memory capacity for compact Bluetooth devices. The BG29 family represents a significant advancement in our technology for connected healthcare applications, including blood glucose monitors and other wearable health devices. We also introduced the new BG22L and BG24L SoCs, optimized for popular Bluetooth applications, boasting a competitive mix of security, processing power, and connectivity suited for high-volume, low-power uses like asset tracking and small appliances. The BG24L SoC includes advanced AI/ML acceleration and state-of-the-art Bluetooth Channel Sounding, ideal for crowded environments like warehouses, smart cities, and residential complexes. Furthermore, our recently launched Series 2 multi-protocol SoC, the MG26, is now widely available, accelerating the development of future-proof Matter devices in smart home and commercial settings such as LED lighting, switches, sensors, and locks. The MG26 establishes a new benchmark for simultaneous Bluetooth and 15.4 wireless performance, along with superior security and machine learning features that enhance effectiveness for essential functions like predictive maintenance and anomaly detection. As Matter technology gains traction, we are witnessing an acceleration in our design wins for 15.4, reinforcing our position as a leader in thread technology while collaborating with internet security providers and ecosystem partners to build our Matter infrastructure. Lastly, at our Analyst Day, I was pleased to share that our first Series 3 device, which was in the sampling stage last year, has now transitioned to production. Series 3 will continue broader alpha sampling this year, and we are already witnessing robust design wins with the initial device, showcasing the excellent execution by the Silicon Labs team. We believe that Series 3 will have an even greater impact than Series 2 over the long term as we expand into the Wi-Fi, computing, and AI inference markets. Our ability to offer both Series 2 and Series 3 in a compatible manner is a significant competitive advantage. In summary, even amidst trade uncertainties, we are confident in our capacity to achieve sequential growth driven by improvements in our order trends and ongoing new product introductions across our business units. Looking forward, we are well-positioned to excel due to our growing market presence, unique product offerings, and ongoing share gains. Now I’ll turn it over to Dean for the financial update. Dean?

Dean Butler, CFO

Thanks, Matt. Good morning to everyone. I will review the financial results for our recently completed quarter, followed by a discussion of our current outlook. Revenue for the March quarter was $178 million, up 7% sequentially and in line with the midpoint of our prior guidance. Year-over-year, consolidated revenue was up 67%. In our Industrial & Commercial business, March quarter revenue was $96 million, up 8% sequentially and up 47% from the same period last year. Sequentially, the growth was driven by better-than-forecasted customer ramps in smart metering and continued electronic shelf label market growth. Home & Life, March quarter revenue was $82 million, up 5% sequentially, and nearly doubling with a year-over-year growth rate of 99%. As we anticipated, the sequential increase in Home & Life was driven by strength in smart home applications and shipments to connected health customers. Sell-through at our distribution partners continued to gain momentum with channel inventory decreasing by eight days to end at 48 days, which is down from 56 days in the prior quarter. This marks a new low level of channel inventory and is well below our targeted level of about 70 days to 75 days. Distribution made up approximately 66% of our revenue mix for the quarter. March quarter gross margins saw positive improvements as long-tail channel sales and industrial applications benefited our mix. GAAP gross margin was 55%, non-GAAP gross margin was 55.4%, which was up from the prior quarter, above the midpoint of our prior guidance, and ahead of our forecasted progression. GAAP operating expenses were $130 million, which includes share-based compensation of $20 million and intangible asset amortization of $5 million. Non-GAAP operating expense of $105 million reflects the normal uptick of the company’s annual merit cycle and reset of the employee bonus programs. GAAP operating loss was $32 million and non-GAAP operating loss was $7 million. During the quarter, we recorded a GAAP tax charge of approximately $2 million. Our non-GAAP tax rate remained 20%. GAAP loss per share was $0.94. Non-GAAP loss of $0.08 per share beat the midpoint of our guidance by $0.01. Turning to the balance sheet, we ended the quarter with $425 million of cash, cash equivalents, and short-term investments. Our days of sales outstanding was approximately 30 days. During the quarter, we further reduced our internal inventory by $22 million, ending the quarter at $83 million of net inventory, which contributed to our positive operating cash flow of $48 million for the March quarter despite operating losses. Days of inventory on hand improved to 94 days, another sequential improvement from 125 days at the December quarter end. I want to thank our supply chain team here at Silicon Labs for having successfully guided our internal inventory balance to our targeted level and you should now expect to see an uptick in working capital deployment as we maintain these levels to support the ramp of new customer designs throughout 2025. Speaking of supply chains, we have completed a review of our supply chain and find that there is almost no direct impact to us under the current tariff rules as we know them today. Given our wide berth of customers and applications, there are likely to be varying degrees of potential impact to customers. The two outstanding questions are, one, what will the indirect impact to demand be and when we’ll be able to measure that? And two, will the tariff rules change either positively or negatively as we go forward? As it stands today, our order patterns from customer bookings and distribution POS showed sequential improvement in the first quarter and have maintained this trajectory quarter-to-date into the June quarter, an indication to us that our end markets are progressing in their cyclical recovery. Additionally, our end customer surveys continue to report that excess inventory is not currently a concern. We are encouraged by these positive trends entering Q2, and as such, our confidence in above-market growth this year remains intact, anchored by new product ramps rather than on a reliance on robust end market demand. We anticipate revenue in the June quarter to be in the range of $185 million to $200 million, which at the midpoint would imply 32% year-over-year growth and an 8% sequential growth. Importantly, we have not witnessed any significant customer pull-ins and have kept our forecasting methodology consistent with prior quarters. We remain confident that Silicon Labs will outperform the broader semiconductor market this year, despite the shifting trade dynamics given our unique new program ramps. With improved mix of industrial applications and channel strength, we expect gross margin improvements in the June quarter with both GAAP and non-GAAP gross margins to be in the range of 55% to 57%. We expect GAAP operating expenses in the June quarter to be in the range of $129 million to $131 million. We expect non-GAAP operating expenses to modestly increase in the June quarter, driven by full quarter accounting of payroll-related items, including the company’s bonus plans and annual merit cycle, resulting in an expected range of $106 million to $108 million. Finally, GAAP loss per share is expected to be in the range of $0.55 to $0.95 loss on an assumed basic share count of 32.7 million shares. Non-GAAP earnings per share is expected to be in the range of $0.19 to a loss of $0.01 on an expected diluted share count of 33 million shares. That wraps up our prepared remarks. I’d like to now hand the call back over to the Operator to start the Q&A session.

Operator, Operator

Thank you. And our first question comes from Christopher Rolland of Susquehanna. Your line is open.

Christopher Rolland, Analyst

Hey, guys. Thanks for the question and congrats on the results here. I guess there is obviously some uncertainty in the back half here. You guys seem pretty comfortable around it and the variability there. But how are you thinking about the September quarter after a little bit of June upside here or perhaps just how the second half is shaking up overall?

Matt Johnson, CEO

Yeah. I’ll start that, Christopher. So first, we’re only guiding the quarter at a time. But I think the pieces that are important to think through, and some of them were covered in the prepared remarks, everything that we look at or see, whether it’s customer forecasts, bookings, billings, inventory level at our customers, at our distributors, all these things are behaving very well linearly and as expected. So right now, there’s not anything out there to indicate that there’s a big shift coming, which is important. Now, obviously, we’re being hyper vigilant, watching all these things all the time, as I think the rest of the industry is. The other thing that’s really important as you’re thinking through this, as we’ve said consistently, we’re not looking for broad market strength to drive this year for us. We’re looking for the performance this year to really come from the design ramps that we’ve been talking about, and that’s what we’re seeing here. So we’re encouraged by that, happy to see the ramps. They’re not singular. They’re broad. And that’s really what’s driving our growth, not a broad market recovery right now.

Christopher Rolland, Analyst

Great. Thanks so much, Matt. And then I believe you thought maybe last quarter that Home & Life would outperform I&C, but it seems like there was more I&C strength than Home & Life. It was kind of flipped. So perhaps you can talk about what was kind of unexpectedly good and bad between the segments and how they shook out?

Dean Butler, CFO

Yeah. I don’t know if there was necessarily unexpected good or bad. A little bit of timing change, maybe between the two of them. I would note that on a year-over-year basis, our Home & Life business was almost double, up 99%, and the Industrial & Commercials up 47%. I think our expectation is, hey, could I&C grow that fast, given sort of the sequential change that it had of about 8%, 9% in the quarter? The metering business, which we’ve said before, India specifically, that business has been ramping faster than what we’ve historically seen. And I think we were a little cautious whether that was able to continue and that metering business continues to ramp and actually ramping better than we originally anticipated, Chris.

Christopher Rolland, Analyst

Thank you very much, Dean. Appreciate it.

Operator, Operator

Thank you. And our next question comes from Thomas O’Malley of Barclays. Your line is open.

Thomas O’Malley, Analyst

Hey, guys. Thanks for taking my questions. My first one’s just on inventory in the channel. So you guys have obviously worked that down pretty significantly. I think you said 48 days of inventory in channel versus the target of 70 days. When you look at your June guidance, what’s your target for channel inventory there? Are you going to refill that or take that to new high levels? Like, just given the stronger demand environment, I’m curious what the strategy is for June?

Dean Butler, CFO

Yeah. Tom, the general expectation for the June quarter, we do not want to end June again at 48 days or, heaven forbid, even lower. I think if we look at the way that we’re running our forecast, we would expect the channel forecast to come back above 50 days for the quarter, but certainly below 60 days. So I think low 50 days is probably where it will likely stand when we forecast into June. Eventually, we want to drive it back to the target level, 70 days, 75 days. That is a multi-quarter progression. I would not expect to see us fill the channel in the June quarter. Really, we’re almost hand-in-mouth in a lot of these smaller, long-tail customers, but you won’t see any big step-up progression, at least the way that we see it today, Tom.

Thomas O’Malley, Analyst

Helpful. And then you guys have talked for a long time now about specific company wins driving the growth versus broad market recovery. For just context, can you help us understand, as a percentage of your revenue today, how much kind of in the March quarter and the June quarter maybe, if that snapshot is easier, is new product versus stuff that you would deem like broad-based product? And then can you try to walk us through what the pricing difference is between some new products and something that you would sell on a broad basis? I understand it needs to be probably loose commentary, but I think that’d be some helpful perspective, just given how focused you are there?

Matt Johnson, CEO

Sure. This is Matt. I’ll take a shot at that. I mean, quick answers. Easy way to think of it. We don’t break out the total revenue that way, but I can say a majority of the incremental revenue you’re seeing is definitely coming from those new ramps. That’s a very easy way to think of it. And on pricing, not meaningfully different. In fact, I think you’re seeing our gross margins progress each quarter, even with this new ramp growth. So not meaningfully different. And we see a path to being able to drive sequential revenue growth on design win ramps and sequential gross margin progression as well. So hopefully the sum of those two things gives you the full picture.

Operator, Operator

Thank you. And our next question comes from Tore Svanberg of Stifel. Your line is open.

Tore Svanberg, Analyst

Thank you and congratulations on the results. Matt, in previous discussions, we mentioned three new segments, each potentially accounting for 10% of revenues this year: the shelf label, glucose meter, and smart meter. Are we still on track to reach those figures?

Matt Johnson, CEO

Yeah. So big picture, Tore, those are the three areas we’ve talked about the most and we’re seeing good progress in all three, is the quick answer. And one thing that we covered at our Analyst Day that I’d also like to reinforce, not backing off of those three areas at all. Those are going to be growth engines for us for many, many years to come. And we also have introduced additional growth engines such as Matter. We mentioned that Wi-Fi is growing 40% for us, DLE growing 80%. Both of those represent significant share gains. And we’re really starting to see AI/ML start to increase as well. So the quick answer is those areas are going well. And you heard Dean mention maybe a little faster than expected in areas like metering in India. And we’re also seeing additional growth vectors come online as well. So the combination is what’s giving us that confidence to say we see a path to outperform the market and drive this growth independently of how this all plays out with tariffs.

Dean Butler, CFO

Tore, let me just give you one quick modification on a quantified number. You said 10% across all three. We had previously said the blood glucose is expected to be a 10% application. We had not quantified the other two just so you have the right data point.

Matt Johnson, CEO

So 10% for one of them, not all three combined.

Tore Svanberg, Analyst

Got it. No. That’s fair. And my follow-up question is on Series 2 and Series 3. Obviously, Series 3 is still very, very small. First of all, is Series 2 now more than half of revenues? And how should we think about ASP increases as Series 3 starts to ramp more meaningfully?

Matt Johnson, CEO

Yeah. So we haven’t broken out the Series 2 specific, but it’s increasingly larger and larger piece of the total revenue, and it’s what’s driving the incremental growth you’re seeing. All these design ramps right now we’re talking about are Series 2 ramps, which is worth pointing out. As I mentioned in our Analyst Day, we have shipped over a billion units in Series 2 lifetime to date. And we’ve secured or won 5 million or 6 billion more units that we’ll be shipping in the coming years and quarters. So there’s still a lot more to come out of Series 2. At the same time, we’ve already started production shipments on Series 3. And to answer your question on ASPs and expectations there, content’s higher with increased wireless performance, increased compute, AI/ML, and more memory scalability. So I would expect overall higher ASPs on Series 3, Tore. So the most important thing for people to take away, Series 2 is doing just fantastic in the marketplace and still has a lot to go. Series 3, our goal is to meaningfully outperform Series 2. And we’re liking what we’re seeing right now. We’re already ramping production with a lot of products to follow. So that combination of current gen, next-gen, just bringing what it brings, we like our positioning is the best way to say it.

Tore Svanberg, Analyst

Excellent. Thank you for all that color.

Operator, Operator

Thank you. Our next question comes from Cody Acree of The Benchmark Company. Your line is open.

Cody Acree, Analyst

Thanks, guys, for taking my questions and congrats on the progress. Maybe if you can just give me a bit of a split for your expectations for the June quarter between your Home & Life and Industrial & Commercial?

Dean Butler, CFO

Yeah. Cody, we expect that the mix between those will probably be pretty consistent over the last couple of quarters. Last quarter to a first order, it landed Industrial & Commercials about 55% and Home & Life about 45%. And that’s been plus or minus a 1% to 2% for the last sort of three quarters in a row. I would expect that to also be the case as we go into the June quarter. And it’s going to depend a little bit as all these new programs ramp. We might be off a point here or there, but to a first order, kind of 55, 45.

Cody Acree, Analyst

Excellent. Thanks for the help. And then maybe just back to the tariff situation. Can you just talk about some of those end markets, those end applications that you believe are more exposed to tariffs than others? I have a hard time thinking through your end application mix and finding a lot that have tariff sensitivity, but maybe I’m just missing something?

Matt Johnson, CEO

Yeah. I think, well, I think the quick and honest answer is, it’s difficult to answer because we really cover so much in terms of geos, end customers, applications, markets, et cetera. So extremely broad across tens of thousands as we’ve said before. But maybe a way to abstract it up and Dean just talked about it. We do have an Industrial consumer split of around 45, 55 with Industrial being the larger piece. So that’s one way to think about it. But big picture, we haven’t found any one of our end markets or major markets that’s uniquely susceptible or exposed to this, at least as they are presented and out there so far. But obviously, we’ll keep watching that closely. It’s dynamic.

Cody Acree, Analyst

All right. Thanks guys.

Operator, Operator

Thank you. Our next question comes from Quinn Bolton of Needham & Company. Your line is open.

Quinn Bolton, Analyst

Hey, guys. Let me offer my congratulations on the nice results and outlook. I wanted to follow up on the inventory question, Dean. It looks like you’re going to modestly increase channel inventory in the June quarter. You said it would take several quarters to get back to the 70-day, 75-day target. Is that something you would anticipate getting back to say by the end of the calendar year? Is that a good timeframe for us to be thinking about when you would normalize or look to normalize channel inventory?

Dean Butler, CFO

I think that’s without a stake in the ground directionally, right? I mean, I think the problem that we face, Quinn, is as POS continues to grow as the channel outflow, the sale to all the sort of long tail end customers, we’re sort of chasing a catch up, right? So as outflow increases, inflows sort of need to increase in addition to that. And I think we are likely to pipeline material in there to slowly grow it over the next few quarters. Is it get to 70 days by the end of the calendar year, maybe it could take a quarter or two longer than that. Just depends on how the POS side of that equation is going. If that makes sense, Quinn.

Quinn Bolton, Analyst

It takes some time to stage the inventory as it comes in. If point of sale performance is better or worse than expected, that will obviously impact inventory. I think that makes sense. Matt and Dean, there has been some talk about pricing remaining quite aggressive as we seem to be at the bottom of the cycle. You are showing good margin expansion, so it doesn’t appear that you are experiencing any negative impacts from pricing. Could you share what you are observing in pricing on a like-for-like basis? While the shift to Series 2 and Series 3 is beneficial, are your competitors in the fabrication space becoming more aggressive with pricing as we approach the cycle's low point?

Matt Johnson, CEO

The quick answer on pricing is that nothing has really changed. It has remained consistent with what we have been seeing for a while, where many companies are seeking to increase revenue and are trying to use pricing to achieve that. We have not observed any significant changes in market share or other factors in our industry. While it is important for us to stay competitive on pricing, our true strength lies in differentiation, offering features and performance capabilities that no one else provides. This is how we maintain superior gross margins compared to our competitors. We have been able to follow through on our commitment to gradually improving our gross margin throughout the cycle. So, to sum up, there is no meaningful change. The market is functioning as expected, and there has been no shift in our statements or our outlook.

Cody Acree, Analyst

Got it. Thank you.

Joe Moore, Analyst

Great. Thank you. You sort of talked about customers. You haven’t seen any evidence of pull-ins. Seems like inventories are still under control. Can you talk about what those conversations are like? Because I just imagine, we’ve seen two years of inventory leaning out and now we’re dealing with on-again, off-again tariffs all over the world. It seems like if I were running a customer’s business, I would want to hold more inventory. I would want to build ahead of some of that. So can you just give us some sense of, what the interaction with customers is like during all of this?

Matt Johnson, CEO

Yeah, Joe. This is Matt. I think the quick answer is, and I’m not being wise about this, but fortunately, just having been through this inventory cycle, those numbers are all fresh and we’ve been taking the inventory assessment of our end customers all along and we had to stop that. So, this has just been a continuation of coming out the other side of the inventory correction cycle. And I think the fast way to answer what you’re asking, no meaningful changes in end customer inventory, no one trying to build positions, that type of thing. But what we do see is a lot of people saying the same thing, wondering what the trade policies will do over time, what will stick, what will go away, what the implications will be over time and the honest answer is no one knows. So, I think, uncertainty is the easy way to define it. So what that uncertainty hasn’t done is driven behavior around inventory and we’re watching that super close.

Joe Moore, Analyst

That’s very helpful. Thank you. And then when I follow up, at the Analyst Day, you had talked about sources of inorganic growth that you would be willing to think about larger M&A, things like that. How do you see that in the current environment? Are those deals, you know, more difficult to do in this kind of global tension or just how are you thinking about that?

Matt Johnson, CEO

Yeah. No change in our strategic desire there or direction. I think the quick answer is, right now, there’s just a lot of uncertainty around trade and where this will land and how it will play out. So I haven’t seen any move, meaningful changes as a result of that and I think it’s probably too soon to say.

Operator, Operator

Thank you. I will now hand the call back to Giovanni Pacelli.

Giovanni Pacelli, Senior Director of Finance

Thank you, Deedee. And thank you all for joining this morning and your interest in the company. Before concluding today’s call, I would like to announce our upcoming participation in JPMorgan’s 53rd Annual Global Technology, Media and Communications Conference in Boston tomorrow, May 14th. We’ll also be participating in Stifel’s Cross Sector Conference in Boston on June 4th and Baird’s Global Technology Conference on June 5th in New York City. Thanks again, and this concludes today’s call.

Operator, Operator

This concludes today’s conference call. Thank you for participating and you may now disconnect.