Q2 2023 Silicon Laboratories Inc Earnings Call
Participants
Giovanni Pacelli; Senior Director of Finance; Silicon Laboratories Inc.
John Hollister; SVP and CFO; Silicon Laboratories Inc.
Robert Matthew Johnson; CEO, President & Director; Silicon Laboratories Inc.
Blayne Peter Curtis; Director & Senior Research Analyst; Barclays Bank PLC, Research Division
Gary Wade Mobley; Senior Analyst; Wells Fargo Securities, LLC, Research Division
Jeremy Lobyen Kwan; Associate; Stifel, Nicolaus & Company, Incorporated, Research Division
Matthew D. Ramsay; MD & Senior Research Analyst; TD Cowen, Research Division
Nicolas Emilio Doyle; Associate; Needham & Company, LLC, Research Division
Srinivas Reddy Pajjuri; Research Analyst; Raymond James & Associates, Inc., Research Division
Presentation
Operator
Hello. My name is Sarah, and I will be your conference operator today. Welcome to Silicon Labs' Second Quarter Fiscal 2023 Earnings Call. (Operator Instructions). I will now turn the call over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.
Giovanni Pacelli
Thank you, Sarah, and good morning, everyone. We are recording this meeting, and a replay will be available for 4 weeks on the Investor Relations section of our website at silabs.com/investors.
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 second 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 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?
Robert Matthew Johnson
Thanks, Giovanni, and good morning, everyone. Despite a challenging market environment, Silicon Labs' team delivered solid second quarter revenue and non-GAAP earnings per share in line with our guidance. However, during the quarter, we saw further market erosion and broad demand weakness and elevated customer inventory continue impacting both of our business units, although our industrial and commercial business showed resilience, achieving record revenue in the quarter. This demonstrates the strength of our position and the favorable impact of our strong design-win momentum. So far, in the first half of 2023, our design-win pipeline is up 23% year-over-year.
Looking ahead, we've continued design with production ramps in the second half of the year that will offset the ongoing market headwinds at some level. However, how much is difficult to call, given the dynamic market environment. It's important to note that even with these short-term market challenges, we are confident in our mid- and long-term revenue growth potential, and we are excited by the continued strong design-win growth and an expanding opportunity funnel, which now stands at over $18 billion up 17% over the same time last year. I'll now hand it over to John to cover the financials.
John Hollister
Thanks, Matt, and good morning. Second quarter revenue was $245 million above the midpoint of our guidance range and down 7% year-on-year. ASPs in the quarter declined slightly on a sequential basis. Unit volume was up sequentially. During the quarter, we saw strength in the Industrial and Commercial business unit, which ended at $165 million, up 15% from the same period of last year. All 3 segments of our I&C business performed well. In the Industrial segment, the connected equipment category was strong. In the Commercial and Retail space, we had a strong quarter. In Electronic Shelf Labels and in smart cities, we saw strength in smart metering.
The Home & Life business unit declined 33% year-over-year to end at $80 million. High levels of customer inventory continue to impact shipments for Home & Life. Geographically, during Q2, we saw the greatest strength in Europe, which was up 14% year-on-year. Revenue for APAC and the Americas was down year-on-year. Distribution revenue was 77% for the second quarter. That mix is down from the first quarter due to stronger shipments in Q2 to direct customers. DSI was stable in Q2 at 79 days. Our largest customer was under 4% of revenue in the quarter and our top 10 customers were about 24% of revenue, consistent with our historical results.
Non-GAAP gross margin ended lower than expected at 58.9% on product mix. There were no price increases in the quarter, and we experienced no major changes in manufacturing input costs. The sequential decline in gross margin from the first quarter is largely due to the onetime effect of price increases at the beginning of this year, combined with product mix. Non-GAAP operating expenses were lower than we expected for the quarter, ending at $104 million. This was primarily due to lower variable costs based on our expectations for the year combined with specific favorable items such as lower fringe expenses in the quarter in the United States.
Non-GAAP operating income was $40 million or 16.3% of sales. Our non-GAAP effective tax rate was slightly higher than we expected, the requirement to capitalize research and development costs for tax purposes continues to have an inflationary impact on our tax rate. We estimate that a normalized long-term non-GAAP effective tax rate without the effect of the R&D capitalization requirement would be in the high teens.
Earnings per share on a non-GAAP basis ended slightly above the midpoint of our guidance range at $1.04, primarily on the upside in revenue and favorability in OpEx. On a GAAP basis, gross margin ended at 58.7%. GAAP operating expenses were $127 million.
Our GAAP pretax income was favorable to the midpoint of our guidance range by around $3 million. However, due to the capitalization of R&D expenses and the timing of forecasted income for the year, our GAAP tax expense was unfavorable by about $5 million. Accordingly, GAAP earnings per share were $0.33 for the quarter, slightly below our guidance range.
Turning on to the balance sheet. We ended the quarter with cash and investments of $506 million. Our accounts receivable balance grew in the quarter to $98 million, with days sales outstanding of 36 days. We added about $12 million in net inventory in the quarter to a total of $146 million as we continue to leverage the software market to accumulate strategic (inaudible) based on the strong design-win momentum we've seen for the past few years. Inventory turns ended at 2.8x.
During the second quarter, we finalized the redemption process on our 2025 convertible notes. As expected, we funded the par value of the notes, which was $535 million in cash. We settled the in-the-money component with shares, the total shares issued around 900,000. We were also active in the buyback market in Q2, executing about $184 million, retiring around 1.3 million shares.
The net result of these activities in the quarter was a reduction of our share count our fully diluted shares outstanding in Q2 ended at just under 133 million shares, which is an all-time low share count since our IPO. On July 20, the Board of Directors authorized an incremental $100 million purchase of the company's common stock, bringing the total amount authorized through the end of 2023 to $116 million.
At this point in time, we have fully deployed the excess capital of the company from the divestiture of our I&A business 2 years ago and we are in a normalized pattern for capital deployment. To partially fund these various cash outlays in Q2, we drew $80 million from our revolving credit facility, and we also renewed the facility with the existing banking syndicate for a new 5-year term. Overall, the balance sheet remains very healthy, and we have ample financial capacity to execute the business strategy.
Before I turn the call back over to Matt, I will cover guidance for the third quarter. As Matt indicated in his opening comments. Over the past several weeks, we have experienced very low levels of bookings. This has impacted both of our business units. Accordingly, we are guiding revenue for the third quarter in the range of $190 million to $210 million, and we expect both business units to decline in Q3. Given the uncertainty in this market environment, we are temporarily expanding the range to plus/minus $10 million from the midpoint. We expect non-GAAP gross margin to be slightly higher in the third quarter at 59%. We are taking additional interim steps to control our OpEx in the third quarter. Accordingly, we are expecting non-GAAP operating expenses in the third quarter to decline to $95 million.
We expect the non-GAAP effective tax rate to be approximately 23% in the third quarter. The lower tax rate includes a onetime discrete benefit of approximately $3 million related to a pronouncement from the IRS last week, delaying the effectiveness of certain unfavorable rules related to foreign tax credits. Our non-GAAP earnings per share is expected to be in the range of $0.45 to $0.73. On a GAAP basis, we expect gross margin to be 59%. We expect GAAP operating expenses to be approximately $120 million, and we expect GAAP earnings per share to be between a loss of $0.08 and $0.20 income per share. I will now turn the call back over to Matt. Matt?
Robert Matthew Johnson
Thanks, John. Disciplined execution remains a top priority as we navigate the current environment. As John mentioned, we've taken deliberate but temporary actions to appropriately manage expenses in a way that doesn't impact our mid- or long-term potential or ability to service all the new business we've been secured. We are confident that our Series 2 portfolio of products is capturing market share, and we have invested in securing strategic inventory ahead of our expectation for a market recovery. In the second quarter, we continued to expand our industry-leading Series 2 portfolio products.
We announced a new dual-band FG28 SoC which addresses key customer needs for developing and deploying low-power wide area networks. The FG28's dual-band capabilities allow for multiple protocols on a single design, including radios for Bluetooth low energy and sub-gigahertz, which supports device communications over 1 month, and enables new edge applications in growth segments like smart agriculture, smart cities and neighborhood networks like Amazon Sidewalk.
The FG28's built into AI/ML hardware accelerator is the industry's first and a sub-gigahertz SoC, bringing artificial intelligence to machine learning to the edge. The FG28 also offers energy efficiency ideal for battery-powered and nodes as well as Silicon Labs' secure vault support, allowing designers to choose the level of security they need for their applications. Within our product portfolio, a standout feature is our industry-leading security and our PSA Level 3 certification serves as an advantage for Silicon Labs'.
The recent announcement from the Biden Administration about the development of a cybersecurity certification and labeling program, coupled with the commitment of numerous device manufacturers and retailers to enhance cybersecurity in their products positions us favorably to offer the most secure connectivity solutions in the market. We have already seen customers proactively adopting higher levels of security for their products, and we anticipate a growing trend of more customers follow to.
Also in the quarter, we opened registration for our fourth annual Works with Conference, which attracts over 8,000 IoT developers every year. A virtual conference will be held on August 22 and 23 and will feature more than 40 in-depth technical sessions covering every major IoT protocol and ecosystem. Conference is incredibly popular with our developer community will come away with practical knowledge and skills to accelerate their product development.
In my opening keynote at the conference, I'll share a preview of Silicon Labs' next-generation Series 3 platform. The Series 3 platform represents a major leap forward for the IoT and our already industry-leading Series 2 platform. The developer conference will also feature a keynote from our CTO, Andrew Cooley (sic) [Daniel Cooley] who will address what is needed to achieve the full potential of cloud-connected embedded computing and the challenges that lie ahead.
Silicon Labs', Senior Vice President, Manish Kothari, will also showcase real-world examples of the IoT being harness for the greater good, such as caring for the planet, caring for our health and; other novel use cases that we never would have imagined a decade ago.
In May, we hosted a highly successful grand opening event for our Connectivity Lab at our Boston site, bringing together a wide range of important customers and industry partners. Our Connectivity Lab serves as a cutting-edge simulation of a modern smart home, showcasing a diverse array of IoT devices, applications, ecosystems and networks. With the aim of existing developers and expediting the launch of their Matter products, the lab offers an ideal testing environment and allows them to assess prototypes within real-world scenarios accommodating a wide range of protocols and device brands. This invaluable resource empowers developers to refine their products efficiently, ensuring seamless integration into the market.
In closing, we are focused on maximizing the significant mid- and long-term growth potential ahead of us despite the current industry challenges. Our strong market positioning and incredible product portfolio allow us to capture this opportunity while maintaining profitability. Despite short-term headwinds, we are confident in our ability to outperform the market through the effective execution of our long-term strategic plan. I'll now hand it back over to Giovanni for Q&A.
Giovanni Pacelli
Thank you, Matt. Before we open the call for Q&A, I'd like to announce our participation in 2 upcoming conferences, Keybanc Capital Markets Annual Technology Leadership Forum in Vail on August 7 and Citi's 2023 Global Technology Conference in New York City in early September.
Question and Answer Session
Giovanni Pacelli
We'll now open the call for questions. (Operator Instructions) Sarah?
Operator
Thank you. (Operator Instructions). Our first question comes from Matt Ramsay with TD Cowen.
Matthew D. Ramsay
I guess for my first question, I'm just trying to -- I guess, first, I know you guys usually don't guide specifically by segment, but just given the delta and the outlook John, if you could maybe share the 2 segments and what you're embedding in the guide? And I guess the real part of the question is the Home & Life segment got up to $125 million a quarter, give or take, at the peak and it's pretty clear now in retrospect, that was maybe overshipping a bit. And you're going to be under shipping, I assume, sell-through for a bit here to try to get all this inventory cleared out.
So if you just kind of assess the end markets that you're serving in that Home & Life segment, any sense as to what sort of a steady state sell-through for your end markets looks like in that segment, a normalized revenue once all these perturbations on the inventory get sort of back to normal?
John Hollister
Yes, Matt, I understand. It's hard to call it sitting where we are right now. We do think there's excessive inventory in the channel as you indicated. And I think that our market is in a period of digesting that and clearing it out. Suffice to say, over the mid and long term, as we indicated, we feel good about the business. I see a 20% long-term CAGR as the goal that we have for ourselves to see that as a very realistic outcome. As we talked about in the past, the Industrial & Commercial business has a market that in and of itself is growing slightly higher than the Home & Life business over time and we expect that trend to persist. But we do have some very exciting new wins and applications in the Life business, in particular, look in that, for example, portable medical applications as well.
Matthew D. Ramsay
Just to follow up there, John. Anything on the guidance split between the segments?
John Hollister
It's roughly split, Matt, in terms of what we're seeing sequentially for the third quarter.
Robert Matthew Johnson
The only addition I'd add to that, Matt, and what John said is as we've been saying, we're not immune to macro and we're definitely seeing that here, but we do expect that over time, that will definitely perform better. And that's what we're seeing in industrial and commercial. And that's what we saw in Q2. but we're definitely seeing each of those end segments have their own unique experience. Home definitely most impacted with that consumer exposure, Life showing itself to be, I think, more resilient.
And then within Industrial & Commercial, overall, performing stronger than Home & Life, but still within, it depends. The broad industrial is softer -- softening, I think, than the other spaces where you see more strength on big trends within those like metering continuing to grow, ESL continuing to grow. So each of those big picture, Home & Life weaker, Industrial & Commercial stronger, both being impacted overall by the market. And then underneath the next level, it varies by the subsegments, if you will.
Matthew D. Ramsay
Got it. Matt, maybe a bit longer term, you're going to be ramping all the Series 2 stuff, and you talked about strength in design wins. So what I'm trying to get an idea about is the inventory burn that needs to happen of current generation and maybe legacy products versus how quickly the design wins for the new programs can ramp and really contribute to revenue and what that balance looks like. So just kind of time to revenue across the different segments for the Series 2 platform as you've secured the design wins? Any color there would be helpful.
Robert Matthew Johnson
Yes, sure. So a few things. The Series 2 ramp has already started. So I think that's important. If you step back and look at the opportunity funnel of $18 billion, it's the driver of that funnel growth over the last few years easily. If you look at our design-win performance over the last few years, it's, Series 2 has been the driver of that design-win growth. And our revenue growth over the last couple of years, Series 2 has been the biggest contributor to that growth. So it's important to recognize that's already happening. That being said, it's still very early days in that rank. If you look at the funnel, if you look at the design wins, we're just at the beginning of that cycle, and there's many, many more years to come of that growth.
So I think it's important to frame it that way. It's already started. I think one of the difficult things that we're seeing is as we keep saying, we're not immune to macro but we think we can do better, it's hard when we have these different ramping businesses and design wins ramping and the soft macro environment and to synthesize those two things into the picture, that we're seeing. I think the two things that give us the most confidence are: one, if you look back over last year and even first half of this year, I think we've performed very strong relative to other IoT businesses out there. And if you look at that design-win performance, even this year in the first half, up 23% year-over-year versus last year, which was an incredible year for design wins. So that gives us confidence that not only do we -- have we been able to do that, but it gives us confidence we'll be able to continue to do that. It's just tough to reconcile with the current market environment that we're seeing right now.
Operator
Next question comes from Gary Mobley with Wells Fargo Securities.
Gary Wade Mobley
Bear with me as I set up this question. Ultimately, what I'm trying to understand is by how much we're expecting revenue to trend below the long-term trend line. And so as I look at your distribution inventory, it's about 29 days above the, I believe, your long-term target, which is about -- translates into about $50 million in revenue headwind about the same amount in terms of the expected sequential revenue decrease. And so my question is, is that expected sequential decrease in revenue in the third quarter, primarily rightsizing the distribution inventory? Or does it also have to do with just generally weak booking trends?
Robert Matthew Johnson
I'll start. I think you should add, John. Thanks, Gary. So a quick answer. It's more than just inventory. It's a market as well. As we were getting towards the end of Q2, we just saw bookings really slow, and there's just so much, I guess, uncertainty with customers visibility is low. So there's also a market component to that as well. But the other thing I'd add that's important, the DSI or those days of inventory, they're higher than historical for us but they're also not alarming for us either. We are going into ramps that are significant and substantial for us. They are not just one quarter of ramps, but it's quarters and years of ramps. And if anything over the last few years has taught us, we need to be better prepared for that. So while it is higher than historical and we're not trying to drive that up by design, we definitely -- it doesn't scare us that it's at a higher level than historical given the confidence we have in future ramping business. John, anything you want to add?
John Hollister
Yes, just one quick point. It's a point of clarification perhaps. But Gary, as we refer to bookings, we're talking about end customer demand. So that's really what we're referring to when we refer to weak bookings to round out Q2 and so far here in the third quarter, we are referring to end customers.
Gary Wade Mobley
Okay. With respect to some of the levers on the cost side, specifically OpEx. How much of the reduction -- recent reduction in operating expenses is structural or permanent? And how much is variable?
Robert Matthew Johnson
John, you go first.
John Hollister
Yes. Sure. Yes. Gary, it is variable and temporary. We did take some limited structural actions earlier this year. But that is not comprehended at the moment. What we are referring to for third quarter and second half is discretionary spending. We have frozen hiring. Our executives are reducing their base pay, and other similar items like that, but that is -- that should be considered temporary in nature. And as we hopefully get through this downturn and start to see more of an upswing heading into next year, we would revert those items back.
Robert Matthew Johnson
Temporary in nature and temporary by design. We keep saying the design wins that we're ramping, we need to be able to support them. That's why everything we're doing is setting ourselves up for that ramp, whether it's strategic inventory, having the resources to support these ramps. We don't want to do anything that diminishes that on the other side.
Operator
Next question comes from Blayne Curtis with Barclays.
Blayne Peter Curtis
Just -- I had 2. I just want to understand the -- just sitting on industrial, like Home & Life has been correcting now it's the fourth quarter. It always take kind of longer to work through things. Industrial being down the substantial double digits. I was kind of curious if you could just comment on the inventory position in Industrial & Commercial? And is this a start of a longer correction?
Robert Matthew Johnson
I would characterize it a little different on the Industrial & Commercial. We've seen and we've said this multiple quarters, Industrial & Commercial has definitely not been as impacted as Home & Life. I mean that's clear but it has been impacted. And it's been impacted consistently even, yes, we had a record quarter last quarter. That quarter would have been way better because it has design wins ramping and things that have been helping it have a record quarter, but it's still diminished from what it should have been if it wasn't for this market environment. So I think what's going on is not a new phenomena. It's actually been a long march, and we're continuing to see that going into Q2 -- I'm sorry, Q3.
Blayne Peter Curtis
Then I wanted to ask on the gross margin. So in June, top line was okay, but actually, you had a higher mix Industrial & Commercial margins, I think, were worse than your guidance. Just trying to understand, I know you mentioned the timing of pricing and cost, but I think that was something that you should have contemplated, I guess, when you gave the guidance. I'm just kind of curious what changed in June?
And then when you look at September, huge revenue downfall, but the margins are flat. So can you walk me through that? And is there any further headwinds. Does it take some time for the higher-priced inventory to flow through. Can you talk about what happened in June and kind of any perspective beyond September for gross margin?
John Hollister
Sure, Blayne. Yes, sequential explanation for the sequential decline was referring to the price increase activity. The variation against the guidance was really a result of product mix and in terms of specifically what we shipped out in the quarter, certain products have lower gross margins than others, and there was a slightly higher mix of that in second quarter, a stable trend in third quarter. But the top little comment here is this is very much in line with our expectations and long-time commentary that over time, we should expect to see some modest erosion of gross margins, and that's a message that we haven't talked about.
Robert Matthew Johnson
Yes. I mean it seems like a long time ago now when we're in the supply chain crisis and we were getting pressure to increase margin models and these types of things, and there was some commentary in the industry that this is new normal. Our view was it was temporary, and that's what we at least are experiencing playing out that if anything, the easiest way to conceptualize things is they're back to normal now on just normal pricing pressure that we saw pre-supply chain crisis, and that's what we're seeing now. And the supply chain prices was the anomaly. I think if there was a way to look at it. And it's steady, if there's no step functions or anything like that going on.
And the other dynamic that's worth pointing out that is substantial, is the strength of the product portfolio and Series 2 that we keep talking about. We're going to be announcing Series 3 in a few weeks. But Series 2 is still early days in this ramp and the strength of it's product cycle. And I just mentioned the FG28, a new part that came out. Just to give you all some perspective, that part is -- it's a solution that integrates both sub-gigahertz and Bluetooth, and it brings new to industry capabilities, AI/ML capability, industry-leading security that has an incredible effect in helping us navigate the market while there is normal industry price pressure.
John Hollister
Blayne, this is John again, one more comment. The point of emphasis again is that we see ourselves delivering a premium gross margin to the IoT market and that just felt it was important like that.
Robert Matthew Johnson
That hasn't -- that's been consistent throughout and hasn't changed.
Operator
Question comes from Srini Pajjuri with Raymond James.
Srinivas Reddy Pajjuri
John, just to clarify, the -- I guess, the 79 days of DSI, are you thinking that's going to be the new normal? Or do you expect that to come down a bit over the next few quarters?
John Hollister
Yes. Srini, we'll monitor that over time here. Certainly, it may come in. It may go up a little bit. We're just monitoring that and not really -- I don't know as Matt said, not overly concerned about where that is setting. Our focus is more on the end demand, and that's really the basis of our commentary on the state of the market.
Srinivas Reddy Pajjuri
Okay. Got it. And then, Matt, maybe you can talk about the environment. It looks like the units are actually up sequentially. So obviously, you said demand is weak. Is it more of a pricing commentary? Because in a cyclical correction, we tend to see units come down quite meaningfully. So I'm just wondering, as we look through the September quarter, what does your guidance, I guess, contemplate in terms of units and ASPs? And how are you thinking about just the unit correction over the next, I guess, a quarter or 2?
Robert Matthew Johnson
Yes. I think. But the easiest way to think about it is we're now in a demand-challenged environment, so that's the primary driver. We just mentioned the pricing dynamics are pretty much as we expected, and we're not seeing anything new or anomalous there. So it's really a story of end demand, which is really a story of units ultimately that we're navigating. If that helps frame it.
Srinivas Reddy Pajjuri
Yes, that's helpful. And then maybe one last one for me. Matt, obviously, you've been in the market for a few quarters now with your Wi-Fi solutions. And just curious if there's any update on the progress there? How you're thinking about that particular product line.
Robert Matthew Johnson
Yes, sure. So I guess we didn't mention that in the remarks, but if you go back a big picture, quick answer is good and strong, and we're happy with the progress. Let me be clear, it's never big enough, fast enough, that's the world we live in. But ultimately, as we've said, we made a focus years ago to increase our focus on Bluetooth. We've loved our progress there, fastest-growing space for the company. We expect that to continue. We have the design-win momentum to continue that. And then we added the Wi-Fi piece. And now we have the benefit of Wi-Fi being one of our stronger growth areas as well. So we are seeing the progress that we wanted to see there. Even with the market environment that we're in, we're still seeing strong Wi-Fi performance, and we're happy about that.
Operator
Our next question comes from Jeremy Kwan with Stifel.
Jeremy Lobyen Kwan
Yes. Sorry, can you hear me?
Yes.
Jeremy Lobyen Kwan
Great Yes, I guess a couple of questions. First one, I guess, if you look at the new cybersecurity labeling, what kind of impact do you see or when -- is this something that is expected to impact over the next couple of months? Or when do you see customers really kind of clamoring for this type of solution. When can we expect to see more of an impact on the top line here from that initiative?
Robert Matthew Johnson
Sure. Quick answer is it will be a while. I'd love to say short term, that would be awesome. But I don't think that's realistic the way these things usually play out. For anyone who's not familiar Biden Administration as cybersecurity labeling program really creates, for like better terms, some standardization or for end markets, for consumers and companies around securing on these devices, which is exactly what you'd want to see and what's needed.
So to answer the question directly, I think you're going to see this take time to ramp as the industry starts to deploy it, you're talking quarters and years of impact here. And easy way to frame the positioning, we've been betting, focusing on security now for a long time, have the strongest portfolio and capability out there in the industry, and this is good for us. This serves us well. And we're already known for this for our customers. We win business because of this by our customers. And this will only help. It gives us a tailwind, but it won't be short term as much as I'd like it to be. And it will be a long game.
John Hollister
Yes, Jeremy, this is John. Just -- it's a good example, once again of Silicon Labs' advancing the state of the art in an important area for IoT and being known as a thought leader for our space.
Robert Matthew Johnson
I would think of it the same way as -- think about security. Years ago, we were offering these features and capabilities and some people are scratching their heads. Now we win designs because of it. Look, the administration is updating policies to help enable these things that are already built into our inherent capability of our entire portfolio. think the same of AI/ML. We're introducing capability in devices that today, some people say, how is that going -- that is the same concept just a few years later down the road, where you're going to see multiple applications and devices taking advantage of these processors and their efficiency to enable new capabilities on the edge. So same way, just further down the road.
Jeremy Lobyen Kwan
Great. It's very helpful. Maybe just a quick question on geographic expectations. It sounded like Europe was quite strong in the second quarter here. How do you see this playing out in the third quarter? Is there any areas of relative strength or weakness that you can call out?
John Hollister
Sure, Jeremy. I think the first thing to note, and we did not talk about this in the prepared remarks, is China. Our China revenue, again, has been weak and impacted by the Chinese economy in the second quarter remaining at about 10% level for the full first half of the year. And we have not seen signs of recovery there. So that said, the weakness we're seeing really is global at this point. There's a widespread overall weakness in demand, and it's not isolated to any particular geography.
Operator
(Operator Instructions). Our next question comes from Nick Doyle with Needham.
Nicolas Emilio Doyle
Nick Doyle for Raji Gill. I just wanted to focus on the September margin guide again. And just kind of ask more directly how you're able to keep the margin declining -- from declining when we're seeing such a sequential revenue drop? And is that an indication of mix or ASP strength?
John Hollister
Yes. Sure, Nick, it's John. As a fabless company, we really operate strictly on a variable manufacturing cost model. We do have a limited amount of internal fixed costs, but it's pretty modest as compared to a full arm of chips. So best to say that our gross margin really is not influenced by the revenue level that's variable based on what we're seeing at that point in time. That's really the main explanation to your question.
Nicolas Emilio Doyle
Okay. Got it. For the bookings commentary, can you just expand on which markets or applications you're seeing more of that slowdown? And then also, do you think the customers are maybe hesitant to order related to this new intra-quarter cancellation policy? And could that be a positive in terms of over-ordering on the next up cycle?
Robert Matthew Johnson
Yes. I'll start, and it would be good for John to add as well. The bookings pattern right now is pretty broad. You have to remember, we don't have any 1 or 2 major customers that make up big chunks of our revenue. I mean less than 5% are our biggest. And what we're seeing is broad across customers, broad across the channel, broad across segments and geos. It's really difficult to distill out or tease out a clear pattern there. What you can see is a clear pattern is a customer, their certainty, their visibility, their confidence is not strong in terms of current demand and their ability to work through inventory. I don't think their confidence in the long term is shaken, but they're trying to navigate this as well and ordering with very short lead time.
I mean, very short. Just -- the easy way to think about it is our current backlog position has now reverted all the way back to pre-supply chain, prepandemic where in that pre environment, tons of backlog work to navigate, supply it. Now we've gone all the way back to that, but ordering with even shorter lead times because of their lack of visibility and certainty as well. So I know it doesn't help answer what you're looking for, but that's what we're seeing.
John Hollister
Yes. And second part of your question, Nick, is not really -- I don't see the policy affecting things overall. Our approach is to try to gain as much visibility and confidence we can in short term. But the customers are managing their inventory levels and their own experience over a longer horizon trying to position...
Operator
This concludes our question-and-answer session. I would like to turn the call back over to Giovanni Pacelli for any closing remarks.
Giovanni Pacelli
Thank you, Sarah, and thank you all for joining this morning. This concludes today's call.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
