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Edited Transcript of SLAB earnings conference call or presentation 24-Apr-19 12:30pm GMT

Q1 2019 Silicon Laboratories Inc Earnings Call

AUSTIN Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Silicon Laboratories Inc earnings conference call or presentation Wednesday, April 24, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* G. Tyson Tuttle

Silicon Laboratories Inc.

* Jalene A. Hoover

Silicon Laboratories Inc. - Director of IR & International Finance

* John C. Hollister

Silicon Laboratories Inc. - Senior VP & CFO

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Conference Call Participants

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* Alessandra Maria Elena Vecchi

William Blair & Company L.L.C., Research Division - Research Analyst

* Blayne Peter Curtis

Barclays Bank PLC, Research Division - Director & Senior Research Analyst

* Cody Grant Acree

Loop Capital Markets LLC, Research Division - MD

* Gary Mobley

* Matthew D. Ramsay

Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst

* Rajvindra S. Gill

Needham & Company, LLC, Research Division - Senior Analyst

* Sujeeva Desilva

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Tore Egil Svanberg

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

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Presentation

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Operator [1]

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Good morning. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to Silicon Labs First Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I will now turn the call over to Jalene Hoover, Director of Investor Relations and International Finance. Jalene, please go ahead.

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Jalene A. Hoover, Silicon Laboratories Inc. - Director of IR & International Finance [2]

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Thank you, Keith, and good morning, everyone. Tyson Tuttle, Chief Executive Officer; and John Hollister, Chief Financial Officer, are on today's call. We will discuss our financial performance and review our business activity for the first quarter. After our prepared comments, we will take questions. Our earnings press release and the accompanying financial tables are available in the Investor Relations section of our website at www.silabs.com. This call is also being webcast and a replay will be available for 4 weeks.

Our comments today will include forward-looking statements 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 financial results is included in the company's earnings press release and also in the Investor Relations section of Silicon Labs website. I would now like to turn the call over to Silicon Labs Chief Financial Officer, John Hollister.

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John C. Hollister, Silicon Laboratories Inc. - Senior VP & CFO [3]

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Thanks, Jalene. Revenue for the first quarter was in line with our guidance, ending at $188 million down 13% sequentially due to the broad slowdown in the semiconductor industry. We are pleased to report that we saw a sharp rebound in our Q1 bookings and expect revenue growth in Q2.

IoT revenue ended at $106 million, down 11% sequentially with declines in MCU and Wireless products resulting primarily from broad weakness in the industrial end markets.

Revenue for Infrastructure was roughly flat sequentially, ending at $46 million. This result was better than we expected with timing up slightly and nearly offsetting the decline in isolation, which was due to weakness in China and Industrial end markets.

Broadcast revenue for Q1 was down significantly to $26 million representing a 25% sequential decline driven by macro factors on top of typical consumer seasonality and a weak automotive market.

First quarter Access revenue also declined sharply in Q1, ending at $10 million and down 36% sequentially driven primarily by a slowdown in the China telecommunications market.

Looking at first quarter revenue by end market. All major end markets served were down sequentially with the sharpest drop coming from Industrial driven by IoT and Infrastructure followed by Consumer due to declines in Broadcast and, finally, Communications, driven by Access. Automotive was down slightly.

Revenue also declined across all geographies, with APAC showing the largest sequential drop driven by Broadcast consumer coupled with a broad slowdown in China, particularly in MCUs and isolation.

Distribution mix ended at 71%, and due to the broad nature of the downturn, our top 10 customer mix increased to 23%. No end customer accounted for more than 10% of our revenues.

Non-GAAP gross margin for the quarter ended very strong at 61.8% driven by favorable product mix.

We effectively managed our non-GAAP operating expenses in Q1, with OpEx coming in favorable to expectations by about $2 million, ending at $88 million with lower spending on travel and other discretionary items combined with some new product costs pushing to Q2. Non-GAAP R&D expenses were $48 million, and SG&A expenses were $40 million.

Non-GAAP operating income ended at $28 million, or 14.9% operating margin. This was better than we expected due to in-line revenue and favorable gross margin and OpEx results. Our non-GAAP effective tax rate was favorable at about 10% primarily due to updated regulatory guidance relating to federal R&D tax credits. Based on these factors, non-GAAP earnings exceeded expectations ending at $0.59 per share.

On a GAAP basis, gross margins were 61.6%. R&D expenses were $62 million and SG&A expenses were $49 million. Stock compensation expenses were $13 million and amortization of intangible assets was $10 million both in line with expectations. We had a $2 million GAAP tax benefit in the first quarter due to employee stock vesting with GAAP earnings per share ending at $0.12.

Turning now to the balance sheet. We ended the quarter with cash and investments of around $620 million, which was about flat to year-end. Operating cash flow in the first quarter was about $32 million. We had a $14 million cash tax payment in the quarter due to the vesting of employee stock incentives. We also executed $15 million in share repurchases and have $146 million remaining in our authorization for the year.

Accounts receivable ended at $70 million or 33 days sales outstanding. Inventory also closed at $70 million down sequentially and representing turns of around 4x. This is a good outcome in light of lower revenue and reflects effective inventory management. We expect turns performance to improve over the course of this year as we see stronger revenue.

I will now cover guidance for the second quarter.

While concerns around market volatility continue, we saw a sharp rebound in our bookings through the course of Q1 with a return to more normal ordering patterns combined with customer ramps in wireless. Accordingly, we expect Q2 revenue to be in the range of $202 million to $212 million with sequential increases in IoT, Broadcast and Access, with Infrastructure about flat.

We expect non-GAAP gross margin to be around 60.5%, and non-GAAP OpEx to increase slightly to $89 million. We expect our non-GAAP effective tax rate to be 12% and we expect non-GAAP EPS to be in the range of $0.70 to $0.80.

On a GAAP basis, we expect gross margins to be 60%, with GAAP OpEx at $112 million and GAAP earnings between $0.16 to $0.26 per share.

I will now turn the call over to Tyson.

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G. Tyson Tuttle, Silicon Laboratories Inc. [4]

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Thank you, John. We are pleased with our execution in the first quarter including revenue at the midpoint of guidance and gross margin, OpEx and EPS exceeding expectations. Our favorable OpEx performance reflects a company-wide effort to limit discretionary spending without sacrificing essential investments to continue to drive top line growth.

Based on our first quarter results, strong Q1 bookings and Q2 guide, we believe Q1 should represent the bottom of the downturn. That said, we've not seen material improvements in key macroeconomic conditions including geopolitical and trade factors, since our January earnings call. Our China exposure is lower than many of our competitors with less than 25% of total revenue designed into China-based customers. We also benefit from a fabless model, which allows us to scale our supply chain while maintaining a largely variable manufacturing structure.

In Q1, we saw the second highest quarterly bookings in our history. We are seeing increasing momentum in the sales funnel which has reached $11.4 billion with wireless leading growth and design win lifetime revenue up nearly 50% year-on-year in Q1.

Turning to IoT. In a recent KPMG survey, two-thirds of 149 industry leaders worldwide ranked IoT as the leading revenue-driving application over the next year, with 60% ranking wireless communications at the top.

In Q1, our IoT products achieved record design win lifetime revenue and delivered 3% year-on-year revenue growth with gains in wireless including the addition of Z-Wave offset by declines in MCUs. We are seeing a resumption of growth in the U.K. smart metering market, an uptick in ordering from a high-volume lighting customers and customer ramps into smart home.

At the Embedded World Conference in February, Silicon Labs showcased its latest Wireless Gecko connectivity solutions for smart home, lighting and building automation applications. Hands-on demonstrations highlighted easy-to-deploy Bluetooth mesh and Bluetooth 5 solutions, device-to-cloud connectivity with low-power Wi-Fi and, finally, Zigbee home automation and control. In addition, we demonstrated our next generation Z-Wave 700 smart home solutions now running on our Wireless Gecko platform offering extended range, enhanced functionality and longer battery life.

Earlier this week, we announced the first products in our next generation Wireless Gecko portfolio. Building on the industry-leading RF and multiprotocol capabilities of the first generation, our Wireless Gecko Series 2 platform delivers the industry's most versatile and scalable IoT connectivity solutions, featuring application-focused system-on-chip devices in a small form factor and delivering 2.5x longer wireless range than competing solutions.

IoT developers routinely face product design trade-offs around wireless range, power consumption, size, security and cost. Wireless Gecko Series 2 simplifies IoT product design with flexible SoC solutions and reusable software making wireless communications more dependable and energy efficient. Our first Series 2 products helped developers optimize system cost and performance for a wide range of IoT products including gateways, hubs, lights, voice assistance and smart electric meters.

Silicon Labs new SoCs include a dedicated security core enabling faster hardware encryption, secured boot loading, a true random number generator and secure debug access control. These advanced features enable developers to deliver robust security in connected products, increasing consumer trust in the IoT. Series 2 leads the industry in delivering the highest levels of integration, RF performance, cost optimization, low power consumption and transformative functionality to drive mass IoT adoption.

Turning now to Infrastructure. Revenue was about flat sequentially and down approximately 7% year-on-year largely impacted by weakness in China.

We continue to diversify our timing portfolio outside of core network applications into Industrial, data center and wireless Infrastructure markets. We expect Silicon Labs wireless infrastructure revenue to more than double in 2019 with a promising new growth driver in 5G. Our broad portfolio of clocks, oscillators and buffers is well suited to serve the diverse planning requirements of 5G networks. Today, four out of the top five suppliers of wireless infrastructure equipment are using Silicon Labs' timing solutions in their initial deployments including a broad array of 5G wireless equipment from remote radio heads and baseband units to mobile backhaul and small cells. Based on the strength of our market traction and product road map, we believe we are well positioned to nearly double our timing market opportunity in the next 5 years.

During the quarter, we introduced a comprehensive portfolio of clock and buffer timing solutions for data center applications, providing best-in-class jitter performance to meet the new PCI Express Gen 5 specification, which increases interconnect speeds between the CPU and workload accelerators. Our PCIe clock generators and buffers provide up to twelve outputs in the industry's lowest power consumption.

Moving on to isolation. In Q1, we introduced new products delivering precise current and voltage measurements with ultra-low temperature drift. Based on Silicon Labs' third-generation isolation technology, these new products provide flexible voltage, current output and package options that help developers reduce BOM costs and shrink board space. The new devices target a wide range of industrial and green energy applications including electric vehicle, battery management and charging systems, DC-to-DC converters and motor, solar and wind turbine inverters.

Silicon Labs isolation products continue to replace traditional optocouplers and outperform competing digital isolators enabling superior surge performance, greater reliability, higher integration and best-in-class safety for system designs requiring protection from high voltages.

In closing, despite the uncertain macro environment, we're pleased with our execution in Q1, meeting expectations on revenue and exceeding expectations on gross margin, OpEx and EPS.

We remain bullish about our product portfolio, the markets we participate in and the trends they address. Our focus on long-term, high quality, diverse, strategic markets including the IoT, green energy and high-speed data communications will continue to drive revenue growth. We exited 2018 with strong design win momentum and leading positions in key secular growth markets. Q1 bookings were robust, signaling a Q2 rebound, and we believe we are well positioned to outperform the market.

Thank you for your time and attention. Before we take your question, I'd like to turn the call back to Jalene. Jalene?

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Jalene A. Hoover, Silicon Laboratories Inc. - Director of IR & International Finance [5]

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Thank you, Tyson. Before we open the call for the question-and-answer session, I would like to announce our participation in Stifel's Cross Sector Insight Conference in Boston on June 11.

We would now like to open the call up for your questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) And this morning's first question comes from Matt Ramsay with Cowen.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [2]

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Congratulations, guys, on seeing a turn in the business. I know it's been a bit tough out there, so it's great to see. Tyson, in the IoT business, you guys have talked about sort of the correction that happened from Q3 to Q1 being sort of in line with the industry and potentially under-shipping in sell-through. Maybe you could talk a little bit about where things are with inventory with your distributors and the record bookings or near record bookings and things that you saw during -- you expect to see during Q2. Is that sort of catching up with demand? Or is that back on sort of a trend back to that sort of 20% long-term growth target that you guys had talked about? Any color there would be helpful.

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John C. Hollister, Silicon Laboratories Inc. - Senior VP & CFO [3]

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Yes. Matt, this is John. Let me take the first question on days in inventory. We saw stable performance in our distribution days statistic into the high 40s at around 49 days as we ended Q1, bearing in mind that is a rearward-looking calculation on the quarter shipment rate. So obviously with a depressed shipment rate in Q1, the absolute inventory unit count declined in the first quarter, and that's not surprising. So we think that level of inventory is healthy and positions us well to grow in second quarter, so that is normal from our perspective.

In terms of the bookings, we saw very robust bookings through the balance of first quarter after we got through the first couple of weeks in January. And as Tyson indicated, that allowed us to achieve the second highest quarterly bookings rate in the company's history. Some of that is likely a snap-back from what was a depressed bookings rate at the end of Q4, but certainly, it also speaks to the secular growth drivers we're seeing particularly in the wireless portion of the IoT business.

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G. Tyson Tuttle, Silicon Laboratories Inc. [4]

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Yes, to just to give you a little bit more color on the bookings that we saw, in particular in IoT. We saw strength in the metering market as the SMETS 1 to SMETS 2 transition is essentially complete, and so the U.K. smart energy and metering in general was quite strong in the bookings as we're standing right now. We also saw a lot of smart lighting applications, where we saw some delays in programs last year and those are beginning to ramp. And so we had a very strong position with our Zigbee products in lighting. We also saw strong revenue in Bluetooth and strong adoption of our Bluetooth 5 and Bluetooth mesh solutions and those are starting to layer in as well as just in general a lot of the smart home activity around Zigbee and Z-Wave. So we feel good about kind of the breadth of that rebound in the bookings in Q1. And in terms of the growth target long term, we'll have to see how the macro holds in through the year, but I think if you take it on the long-term basis, we feel confident in our ability to continue to grow the IoT business.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [5]

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Got it. No, that's really helpful color. I just wanted to ask a sort of a follow-up on the Infrastructure side, it's obviously encouraging commentary on your timing business with the kickoff of 5G build in earnest. Tyson, I just wanted to ask little bit longer term, I know there was a third leg of that vector of growth for your timing business and in terms of cloud data center and a lot of the technologies that you've had in wireline and now in wireless are applicable there as well. Maybe you could give us a little bit of maybe the next 24 months' update where things are on the cloud side because that's obviously a big TAM as well.

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G. Tyson Tuttle, Silicon Laboratories Inc. [6]

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We feel very good about our position in Infrastructure and in particular in the timing area, around 5G. We believe that the 5G opportunity sitting in front of us, which is really just starting right, now doubles our SAM over the next few years. We also believe that our -- just our wireless infrastructure revenue will be doubling from last year to this year, and that's off of a very strong 2018. We grew the Infrastructure business about 30% year-on-year, so we had a very strong performance. And then you saw a sequential -- essentially flat into Q1 and Q2, but that's reflecting some general weakness in the macro coupled with ramps on the 5G side as well as in our core optical networking area. So given the opportunity in 5G and the strong road map that we have and the market opportunities and the expansion of our SAM, we feel again very good about our opportunities, specifically in Infrastructure around timing. And also on the isolation side, we have a very strong road map there and despite the fact that we have seen some weakness in the China market, believe that we have a very strong road map and growth prospects on the isolation side as well.

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Operator [7]

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And your next question comes from Cody Acree with Loop Capital.

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [8]

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Tyson, with TI's comments last night about a continuing broad-based slowdown in the chip markets and then mix that -- share that with some of your comments here just on the last question about maybe a certain amount of snapback and a getting back to normalcy of order just as we go into Q2, do you think that as we progress into the second half that we benefit in the short term from that snapback to the normalization but then the second half is more macro-driven? Or do you expect continued growth sequentially through the year?

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G. Tyson Tuttle, Silicon Laboratories Inc. [9]

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Yes. I think if we break down what we've seen in Q1, I think that we've had, at our customers, a bit of an inventory correction that suppressed bookings and revenue there in Q1 that really the Q4 bookings going into Q1 and then a lift as we come back into Q1 bookings and then guidance into Q2. So we -- and we haven't really seen in our broad businesses. We still see a fairly muted demand in particular around China and around Industrial. I think that when we're referring to the snapback, we are returning to more normal operating patterns given the macro situation but also being driven by very strong design win performance and the ramp of new programs. And so I think that the increase in revenue that we're seeing here in Q2 is a result of both of those factors. And the design win traction that we've seen, in Q1, design wins up 50% versus last year, the very strong pipeline that we have up to $11.4 billion, that's really what we're relying on for growth. But no matter what the macro does, and certainly if the macro starts to improve, that will lift all boats but we're not counting on that to drive growth into the second half, and so we feel good given our design win traction and the visibility that we have in the bookings and a lot of these new programs that we're going to continue to be able to outperform the market.

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Cody Grant Acree, Loop Capital Markets LLC, Research Division - MD [10]

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And then for my follow-up. With what you said, the continued macro uncertainty, are you starting to see any willingness from your OEMs or your distribution partners to carry a bit more inventory? Are they still working down? And then what are your plans for your internal inventories given the backlog you're building?

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John C. Hollister, Silicon Laboratories Inc. - Senior VP & CFO [11]

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Yes. This is John. We have had normal inventory levels in the channel. As we ended the fourth quarter, that statistic was in the mid-40s, which is reasonable. That's not a high level of inventory. And as we've moved to the end of Q1, of course that number declined but that's based on a reduction in the overall level of business. But we definitely have seen the distribution channel willing to carry an appropriate amount of days in inventory, and we believe they will continue to do that. As far as our internal inventory, we're positioned for growth. We see four turns of inventory. That's on the low side of where we like to manage the business, but that is appropriate given the level of growth we're projecting into Q2. And as we mentioned on the prepared comments, I would expect us to improve our turns some as we progress through the course of this year with continued growth in revenue.

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Operator [12]

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The next question comes from Blayne Curtis with Barclays.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [13]

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Just curious on the guidance. You mentioned all but Infrastructure growing. I'm just kind of curious, I know they're not growth businesses, but Access and Broadcast were down very sharply in Q1. So just curious to what extent those come back for you in Q2. So if you can give any color between the segments in Q2 will be helpful.

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John C. Hollister, Silicon Laboratories Inc. - Senior VP & CFO [14]

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Yes. Blayne, this is John. So as you look at Access and Broadcast, we clearly had an unusual amount of decline in the first quarter where you have seasonality in the Broadcast market that is typical that was compounded by the industry slowdown. So we see a resumption of performance there with growth returning in both the automotive and consumer areas of Broadcast, with a little more growth expected in automotive. And then on the Access side, similar comments. We see the drop in Q1 as being more unusual in nature, given the slowdown with some resumption of more normalcy beginning in Q2.

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Blayne Peter Curtis, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [15]

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And then just on gross margin in Q1, obviously mixed Infrastructure should help. Just kind of curious if you had any color as to what drove the outperformance?

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John C. Hollister, Silicon Laboratories Inc. - Senior VP & CFO [16]

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Yes. It's really mix across the categories, so strong Infrastructure led by timing helps that. There was also -- underneath that, there was favorable product mix within the categories which helped as well.

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G. Tyson Tuttle, Silicon Laboratories Inc. [17]

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I'd also say that the decline on the Broadcast consumer side, the seasonality and the decline there also helped to drive the gross margin in Q1.

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Operator [18]

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And the next question comes from Gary Mobley of Wells Fargo Securities.

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Gary Mobley, [19]

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I want to follow up on Blayne's question about gross margin, maybe looking more into the future. Your prior guidance has been 58% to 60%, and you're teetering on 61% for the first half of the year. I know mix is going to play into it, but are you going to continue to run about 60%? Should we rethink that long-term outlook of 58% to 60%? And in the operating margin side, I commend you guys for coming in below expectations for the quarter and holding OpEx flat here as we tread through some turbulent times, but you're still only at 15% and you're miles away from the long-term target. Can you reconfirm what the revenue level needs to be, to be at target? And how committed you are to getting to that level?

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John C. Hollister, Silicon Laboratories Inc. - Senior VP & CFO [20]

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Yes. Gary, this is John. So on the gross margin question, we're very pleased with the execution in the first quarter and it really reflects the differentiated nature of our technology and the fact that we are adept at managing our manufacturing costs very well, and so that's a testament to those factors. On the longer-term model, we're holding. We think 58% to 60% is the right way to view the business in the long term. As we may begin to ramp more and more programs that may pull that down a bit. So we want to hold that model at 58% to 60%.

As far as the OI, as we see this, with continued growth in the business in the next several quarters, we see the opportunity to come back to model, and we think the right posture for ourselves is to continue to make the critical investments we need to make for long-term success in the business while being judicious in our spending and allow the revenue growth to pull us back up to our target operating margin range.

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Gary Mobley, [21]

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Okay. As a follow-up I wanted to ask about the Gecko Series 2. You spoke in your prepared remarks to the benefits to customers as it relates to security, power, range, ease of design, whatnot. But how does it benefit Silicon Labs? What I mean by that is how does it benefit SiLabs from an ASP perspective and maybe as well cost optimizing the product versus the first generation?

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G. Tyson Tuttle, Silicon Laboratories Inc. [22]

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So the Gecko Series 2, which this is the first set of products out of a whole portfolio of products. So we're broadening our product portfolio and adding critical features that customers need to drive IoT adoption, in particular security, which essentially enables payment grade security right down to the device level that's very, very secure and also easy to use and implement. And I think that that's one of the key things to drive additional adoption and that also increases our differentiation, and I think that as a company, we're quite good at selling the value of our differentiation and that's responsible a lot for the gross margin performance that we're able to achieve.

I think that also, there's optimization of these devices for specific use markets. We saw the first set of products optimized for gateways, hubs, lights, voice assistance and smart electric meters. And we have additional devices coming onboard that are cost optimized for the Bluetooth market, for the Z-Wave market and for higher levels of functionality which will continue to drive differentiation and our ability to take share from the competition.

If you look at the Series 1, those products were very, very strong but they were also very general purpose and carried some additional functionality for a lot of the segments. So as we optimize that cost, we believe that the competitiveness of the products as well as the enhanced integration and the lower energy consumption that we're able to achieve is going to significantly improve our ability to convert that very large funnel into design wins. So we are very happy with where we are on the Series 2. Those are very active developments in our R&D pipeline, both on the hardware side as well as the software side. We're very pleased to have Z-Wave now part of that portfolio and that suite of products and software, and we also continue to drive simplicity in our tools and software so that this makes it easy to design in and it helps us scale our SG&A investments and our sales investments to address an even broader range of customers and applications.

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Operator [23]

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And the next question comes from Tore Svanberg with Stifel.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [24]

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First question, Tyson, and maybe following up on Series 2. I assume that's sampling now. So what's sort of the feedback you're getting from the market as far as all the different wireless standards? I mean should we still assume this high level of fragmentation between Bluetooth and Z-Wave, Zigbee? Or are you starting to see some convergence at all when it comes to wireless connectivity and IoT?

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G. Tyson Tuttle, Silicon Laboratories Inc. [25]

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So in terms of the Series 2, the first set of products are actually in early production with customers. So those are -- those have been sampling now for over 1 year and we are now ready for broad sampling out into the market to more customers, but we do have those currently in production, and those are based on a new 40-nanometer process technology at TSMC. So it's a high volume, very, very robust process technology that's highly optimized for IoT applications. And the platform is also optimized across a wide range of standards. So we can talk a little bit about the deployment of standards. I would start by commenting that Silicon Labs has the widest range of wireless protocols available from any supplier in the market and we have leading positions in Z-Wave and Zigbee and the mesh networking as well as in the proprietary set of protocols where customers run their own protocols on our device in sub-gigahertz and 2.4 gigahertz. And that primarily addresses a lot of the Industrial markets where people want compatibility with legacy standards as well as upgradability into a new set of standards.

If you look in the smart home, the addition of Z-Wave last year really puts us in the driver's seat in terms of being able to drive the convergence of standards. And we see the advantage of having both Z-Wave and Zigbee and Thread as a competitive advantage and makes us a very good strategic partner for companies that want to be able to offer devices that are interoperable with as many standards as possible and to streamline their product development experience. So that puts us in a very strong position. And we also talked about Bluetooth and we're a leader. We were the first company to announce -- or to offer the Bluetooth 5, Bluetooth mesh technology that is out shipping and designed into a number of different applications. And that's an exciting new area especially in China and in the lighting market, in a number of new markets. And we believe that in combination with our new Series 2 devices where they have enhanced functionality and really leading cost in the market will enable us to really ramp our Bluetooth business. And we saw very good performance out of our Bluetooth business in Q1 as well as strong design win traction across Bluetooth.

So I think that from a wireless standards perspective, it really -- there's different standards that work in different parts of the market. We also have Wi-Fi that is now sampling out into the market. But Bluetooth, Z-Wave, Zigbee, Thread, proprietary, it depends on the application. It depends on the ecosystem that they're going into. And they each have their various strengths depending on what customers are looking for. But no matter which one of those standards you're -- customers are looking for, they're able to leverage our platform and the kind of unified software development experience to get those products to market as quick as possible. So we think we're in good shape. We continue to optimize, and with new standards and as the standards evolve and we're committed to being in this market for the long term. So I think it makes us a really good partner and we're really, really pleased with the progress that we're making in that area.

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Tore Egil Svanberg, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [26]

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That's very helpful, Tyson. And then my second question is on Infrastructure. So it sounds like it surprised you a little bit on the upside in Q1, but maybe some of that is going to come back down in Q2. And then how should we think about that bucket sort of linearly throughout the year? Because you're obviously talking about wireless infrastructure doubling in revenue and so on and so forth. So should we assume that in the second half that, that should be a fairly strong market? Because obviously in Q2, it's going to be more flat.

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G. Tyson Tuttle, Silicon Laboratories Inc. [27]

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Yes. So we had flat revenue from Q2 or Q4 to Q1, which we thought was a very good result with some of the 5G applications as well as return to more normal patterns on the communication side. We did see some weakness on isolation with automotive and just broad Industrial in China down. And we think that just in combination, those are going to be flat coming into Q2. That being said, we see ramps in 5G and also ramps of new programs and design win traction in the Infrastructure area which should drive some growth into the second half versus the first half run rate but it really remains to be seen where the macro -- we're being careful about projecting a lot of things out into the second half. But given a stable macro situation compared to where we are now, we would see growth in Infrastructure in the second half.

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Operator [28]

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And the next question comes from Suji Desilva with Roth Capital.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [29]

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So congratulations on the recovery here. I was curious -- I have a couple of questions. First of all, I was curious to hear smart lighting kind of perk back up or maybe perked up after being muted for a while. Can you talk about what the drivers are that are getting that going? And if smart lighting's recovery is a sustainable one at this point or kind of a near-term pattern?

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G. Tyson Tuttle, Silicon Laboratories Inc. [30]

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Suji, this is Tyson. In terms of the smart lighting market, we have a very strong share in that market with our Zigbee devices as well as Bluetooth mesh, and it should be noted that with the Z-Wave 700 series, we now have the temperature performance to operate in lighting applications as well. We've had a lot of design wins with customers where they were moving from an older solution into newer solutions and that the delay in the rollout of those products with our devices inside was really due to some inventory issue that they had on their end that delayed the ramps that we're now starting to see here in Q1. If you look at the drivers in the market, having smart lighting -- and this is a variety of different bulbs as well as fixtures. You just see the broadening of portfolios of different types of fixtures and different types of bulbs as new building construction happens and as consumers retrofit existing devices with smart lighting. These provide not just convenience features but also security as well as health, being able to adjust the colors and the brightness as you go through the day.

So there's a lot of benefits. I mean especially in new construction where these LED fixtures are being deployed and the addition of connectivity and control into those in a fine-grained manner allows both commercial and residential builders to deliver additional value to their customers. So I think that there's a strong market pull. There's a broadening of the portfolio of devices that are available and a growing adoption of smart lighting. So we see this as a very positive long-term trend and we have from the get-go optimized our solutions for the requirements and, with our Series 2 devices, are further optimizing those in terms of functionality and cost.

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Sujeeva Desilva, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [31]

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Sounds promising. And then my other question is on the Infrastructure side, 5G timing. Can you just talk about your competitive differentiation there and what the competitive landscape is like? And what kind of share you think you can achieve in 5G versus 4G, maybe your products are better positioned given the requirements of 5G being more stringent?

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G. Tyson Tuttle, Silicon Laboratories Inc. [32]

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So our Infrastructure products have always been the highest-performance devices on the market, and we continue to invest in new devices to drive lower jitter and better functionality for various applications. For instance, synchronous Ethernet, which is used in a lot of Infrastructure applications, we have some patented technology which allows us to synchronize better than conventional types of architectures. So in addition to delivering the best jitter performance, we offer the highest flexibility, the highest integration. We have additional patented technology which allows us to have a variety of outputs at different frequencies that are very, very flexible, and that is also very difficult to achieve with conventional architecture.

So our differentiation has always been very strong, which is why we had such a high share on the communications side, the optical networking side and we've been able to take that -- those features and functions and adapt those to the wireless infrastructure for 5G where you have again higher and higher speeds, more performance requirements, lower noise. And those -- our devices are perfect for those types of applications. And the evidence of that is four out of the five -- and hopefully the fifth one will land at some point. But the major vendors of wireless infrastructure equipment have adopted our solutions in their initial rollouts and continue to design-in both those parts as well as parts that we have on the road map into the mainstream 5G deployments that they're going to be rolling out here over the next few years.

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Operator [33]

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(Operator Instructions) And the next question comes from Rajvindra Gill with Needham & Company.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [34]

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And I echo my congrats in this uncertain environment. Just a question on the IoT segment, particularly around the U.K. smart metering program. By my math, that program accounted for about -- that opportunity accounted for about $40 million of annual revenue opportunity and I believe that because of the delay that impacted your IoT business by about $25 million to $30 million. Should we expect that to kind of full opportunity to throw -- flow through the model this year? And should we make the conclusion that that's -- that will be a main driver of the IoT growth this year plus the wireless Bluetooth components?

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G. Tyson Tuttle, Silicon Laboratories Inc. [35]

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So if you look at the U.K. smart energy market just in general, it's a 5-year deployment. We're into now year three, essentially, of that deployment, and about one-third of the units have been deployed so far. We saw a reduced shipment into that market last year due to the transition from the first-generation standard called SMETS 1 into the second-generation standard called SMETS 2, and we now see a resumption of shipments into the market using this new standard. And we've supported both of those standards. Out of that 110 million units or so, we've got about 90% share of that. So we -- and that's broadly across all the suppliers of equipment into the market. So we do believe that the smart energy and metering market, in particular the U.K., is going to be -- we'll have more revenue from that this year. But if you look at the IoT growth in wireless, we have growth across the board in Zigbee, in Z-Wave, in proprietary and in Bluetooth.

And so it's not just the metering market. We talked about the lighting market. There's Industrial applications. There's a variety of smart home applications and home security, which are ramping through the year which are going to drive more broad growth in IoT. And this is both at higher volume customers in the millions of units as well as the long tail that we've been working on, making our devices easier to use in developing our sales channel and being able to convert that large pipeline. If you look at our -- that pipeline of opportunities, that $11 billion, about $8 billion of that is in IoT with the vast majority of that in wireless applications. So the number of wireless applications, the competitiveness and breadth of our portfolio and our ability to convert those opportunities continues to get better as we scale our support network and drive our road map. So it's not just the metering that's driving the growth but that's certainly a very positive factor into the growth here in 2019 for Wireless.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division - Senior Analyst [36]

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And just to follow up on the IoT business. So MCUs is still a significant percentage of the overall IoT business, particularly in China. I'm just wondering how you think about the 8-bit, 32-bit market, particularly in China industrial, which was hit hard, as you know, in Q4 and continues to be soft and with limited visibility? I'm wondering how do we think about that portion of the business affecting the overall growth of the IoT business and the company.

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G. Tyson Tuttle, Silicon Laboratories Inc. [37]

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So, if you take the IoT category, roughly microcontrollers are about one-third of that revenue, and those were down here in Q1. We do anticipate a modest growth in MCUs here as we progress through the year, and that's again factoring-in kind of a neutral outlook to the relative performance of China in the Industrial market versus where we are right now. You also have to remember that a number of our MCUs are sitting next to wireless devices or are in devices that are becoming wireless enabled. So we have a strong conversion of those microcontrollers which are in that microcontroller category into wireless because they move from a stand-alone microcontroller with a discrete wireless solution or no wireless solution into an integrated SoC which includes wireless connectivity as well as microcontroller functionality, energy management and all of the sensor interfaces and that sort of thing. So that is the place where we have true differentiation, and that's where we're able to deliver additional performance and integration benefits and where we're seeing the strongest traction. But certainly, the MCU market, while challenged, is one that we continue to participate in.

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Operator [38]

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And the next question comes from Alessandra Vecchi with William Blair.

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Alessandra Maria Elena Vecchi, William Blair & Company L.L.C., Research Division - Research Analyst [39]

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Congratulations on the great performance. Just circling back on operating expenses, acknowledging your earlier comments that sort of as the macro improves and some of these new design wins, we should start to be thinking about your operating margins getting back to the target rate. If I look sort of historically at your normal OpEx seasonality, Q3 has tended to trend down a bit and Q4 has tended to trend up. Should we think of sort of a similar situation this year? Or given the depressed levels in Q1, Q2, is it more a little bit of a step function up as we progress through the rest of the year?

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John C. Hollister, Silicon Laboratories Inc. - Senior VP & CFO [40]

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Yes. This is John. We'll see how the year plays out. If macro holds and as we continue to see ramps in the business with continued growth into the second half on the revenue side, I would expect us to step up a bit with the OpEx level as the year progresses here. But we'll have to see how it plays out.

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Operator [41]

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And I would like to return the conference back over to Jalene Hoover.

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Jalene A. Hoover, Silicon Laboratories Inc. - Director of IR & International Finance [42]

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

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Operator [43]

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Thanks for attending today's presentation. You may now disconnect your lines.