Silicon Laboratories Inc. (NASDAQ:SLAB) Q4 2022 Earnings Call Transcript
Silicon Laboratories Inc. (NASDAQ:SLAB) Q4 2022 Earnings Call Transcript February 1, 2023
Operator: Good morning everyone. My name is Jamie and I'll be your operator today. Welcome to the Silicon Labs fourth quarter 2022 earnings release conference call. All participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead.
Giovanni Pacelli: Thank you Jamie 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 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 fourth 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 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?
Matt Johnson: Thanks Giovanni, and good morning everyone. At our analyst day last March, I spoke about our singular focus on the IoT market and my confidence in our ability to lead and scale in this large and fast-growing market. In 2022, our strategy took hold. We achieved strong gains in market share and our growth accelerated. We surpassed $1 billion in revenue for the first time, which is a great milestone for the company. More importantly, in just two years, we've doubled our revenue organically and have significantly improved our profitability and earnings per share. I'm incredibly proud of the team for these achievements. We continue to secure major greenfield design wins and remain well positioned to outperform the market even amid macro uncertainty.
The IoT market has incredible potential with thousands of new applications on the horizon. Silicon Labs is unmatched in the breadth of our product portfolio, the depth of our wireless expertise, and our singular focus on wireless connectivity solutions for the Internet of Things. Our leadership is driving an acceleration of growth in our design wins. Our design in lifetime revenue for 2022 is up more than 50% over 2021's level, which is a leading indicator of future revenue growth. Design wins indicate that a customer has selected us for their socket and our metric requires us to have shipped at least $1,000 of parts into that design before it counts as a design win. Our opportunity pipeline is approaching $17 billion, nearly double the level of 2020.
We strengthened our customer and supply relationships by the way we navigated the supply crisis together. Our singular focus on the IoT market proved to be a competitive advantage. As supply and demand come into alignment, we are well positioned to scale and capitalize, serve an increasingly diverse customer base, and capture future market share. I'll now turn the call over to John to cover the financials before I make a few closing remarks. John?
John Hollister: Thanks Matt. Revenue for the fourth quarter was above our guidance range, ending at $257 million, up 23% year-on-year. Our industrial and commercial business ended at $157 million, up 36% year-on-year and establishing a new record for the I&C business. In terms of industrial end applications, we saw strong results in the fourth quarter in connected equipment and smart meters. As expected, the home and life business declined in the quarter on a sequential basis and ended at $100 million, up 8% versus the prior year. Smart home products had the largest sequential decline in the fourth quarter. Sales of products for life applications declined slightly. Geographically, we saw the strongest performance in the quarter in Europe, which grew slightly.
The Americas and Asia-Pac were both down sequentially from the third quarter. Distribution sales were 81% of our total revenue, consistent with prior quarters. The absolute amount of channel inventory declined in Q4 and we held GSI flat at 59 days versus Q3, which is an excellent outcome. As Matt mentioned, we are very pleased that revenue for the full year exceeded $1 billion for the first time in our corporate history. Revenue in 2022 grew 42% over fiscal 2021, exceeding the top end of the growth goal we established back in March at our analyst day. As a reminder, we raised prices in late fiscal 2021 in response to meaningful increases in input costs from our suppliers. We believe that our price increases have been in line with similar actions from our competitors and we have approached commercial terms with our customers responsibly and fairly.
I'd like to highlight that a significant portion of our ASP strength and top line growth is due to the strength of our Series 2-based product cycle and the growing diversity of our customer base and product mix which are durable, positive developments. We also continue to increase design win velocity. Fiscal 2022 design win lifetime revenue grew more than 50% across a broad range of applications, which is an important indication of continued growth and share gain. Q4 non-GAAP gross margin ended above our expectations at 61.3% due to strong product, pricing and customer mix. Non-GAAP operating expenses were in line with our expectations at $109 million. R&D expenses increased slightly in the quarter to $70 million, and SG&A expenses declined by about $4 million to $39 million for the quarter.
Non-GAAP operating margin was also above expectations, ending at 19% for Q4. Our tax rate was favorable in the quarter due to a combination of factors, including a lower than expected impact of capitalized R&D in the quarter and amplified by the catch-up effect within the fourth quarter. Our non-GAAP effective tax rate was 15% for the year--for the quarter, excuse me, and 23% for the full year. Our non-GAAP earnings for the fourth quarter ended strong at $1.31 per share, well above our guidance range. For the full year, our non-GAAP operating margin was 21%, which is above our profitability model for this level of revenue. Non-GAAP earnings for the full year were $4.72 per share, which is approximately a 230% increase over fiscal 2021. These results are truly remarkable and demonstrate the focus and execution we have been able to achieve following our successful divestiture transaction roughly 18 months ago.
On a GAAP basis, gross margin was 61.1%, GAAP operating expenses were $133 million for the fourth quarter, GAAP operating margin was 9% for the fourth quarter and 12% for the full year, GAAP earnings per share were $0.76 in the fourth quarter and $2.54 for the full year. Turning to the balance sheet, we ended the year with cash and cash equivalents of $1.2 billion. Operating cash flow for fiscal 2022 ended at $141 million, an increase of around 55% from the prior year. Our accounts receivable balance in the year ended at $71 million, representing days outstanding of 25. As expected, we increased our inventory balance to $100 million or about four turns. We expect to continue to strategically manage our inventory balances to ensure we have the supply chain capacity to deliver our growth objectives.
During fiscal 2022, we repurchased approximately $880 million of our common stock, bringing our total share repurchase activity to more than $2 billion since we announced the divestiture in April 2021, retiring more than 25% of our outstanding shares. This outcome will provide a long term benefit to our earnings power going forward. We expect to continue our share repurchase program, and today we have about $200 million in remaining authorization through the end of this year. Our debt balance remains unchanged with our 2025 convertible notes outstanding with a par value of $535 million. Overall, our balance sheet continues to be very healthy. Before I turn the call back to Matt, I will cover guidance for the first quarter. We expect revenue for Q1 to be between $242 million to $252 million.
We expect both business units to be down sequentially. We expect non-GAAP gross margin in Q1 to be approximately 63%. Late in the fourth quarter, we implemented limited price increases on a subset of our portfolio in response to ongoing input cost increases. We view this as a one-time phenomenon in the first quarter and do not have plans to raise prices further. We expect non-GAAP operating expenses for Q1 to increase slightly to $111 million with the increase largely attributable to the payroll tax reset in January. We continue to closely manage our operating expenses by leveraging flexible non-structural spending and carefully pacing our hiring. We will also have take steps to optimize our investments across certain areas to achieve further operational efficiencies.
We expect our non-GAAP effective tax rate to be approximately 23% and non-GAAP earnings to be between $1.07 to $1.17 per share. On a GAAP basis, we expect gross margin to be 63%, we expect GAAP operating expenses to be approximately $139 million, and GAAP EPS to be in the range of $0.36 to $0.46. I will now turn the call back over to Matt.
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Matt Johnson: Thanks John. In addition to our outstanding financial results in fiscal 2022, we also made tremendous progress in our business and technology initiatives. From a business unit standpoint, the industrial and commercial business achieved its ninth consecutive quarter of record revenue in Q4, demonstrating resiliency amid current economic uncertainty. The value of wireless connectivity is increasingly clear in industrial applications such as connected equipment, where we hold a leadership position and grew revenue at double digit pace, both sequentially and year-over-year. Smart pallets are an example of a connected equipment application, and our FG23 sub-gigahertz SOC enables long range communication for logistics use cases.
The FG23 is a single die, multi-core solution that offers industry-leading security, low power consumption with fast wake-up times, and an integrated power amplifier. Additionally, revenue from smart city applications grew by over 50% year-over-year with smart metering as a standout. We secured a significant design win with an industrial customer in the smart metering space, also using the FG23. Our chips RF range of performance and energy efficiency were key factors in winning the socket. Despite market softness in home and life attributable to certain consumer-oriented end markets, we remain bullish about the long term growth prospects in home and life. Specifically, we are seeing strength in the healthcare space with double-digit increases on a quarterly and annual basis.
We recently secured several important design wins for portable medical devices, further bolstering our position in the life segment. We are also very excited about the launch of Matter 1.0, a significant industry achievement. Matter enables interoperability across major IoT ecosystems to offer developers and consumers a simpler, better experience which should boost demand for connected devices. Silicon Labs has played a significant role in Matter's development. There from the start, we have contributed more code than any other semiconductor company. As of the end of the year, 87% of the products certified for Matter over thread are built using Silicon Labs' SOCs. Another promising development related to Matter is the momentum we are seeing with our previously announced 917 SOC, with dozens of alpha customers currently sampling.
At this point in the launch cycle, the 917 has the largest opportunity funnel of any product we've ever released. The 917 is the first Wi-Fi 6 combo chip in the Silicon Labs portfolio and is a Matter-ready, fully integrated single chip solution. It's ideal for ultra-low power IoT wireless devices with secure cloud connectivity. We believe that its combination of exceptional compute power, best-in-class security, and ultra-low power profile will be instrumental in developing new use cases and applications. Matter will be a huge growth catalyst for our industry and we are proud to play a large part in it. I want to conclude by thanking the entire Silicon Labs team for their great execution amid economic and geopolitical uncertainty. I'd like to give special recognition to our operations and sales teams, who navigated complex supply chain challenges, allocations and escalations with transparency, grace and perseverance.
We also want to express our gratitude to our partners and suppliers who navigated unprecedented market conditions with us. While we are certainly not immune to macro risks, our impressive design win momentum gives us confidence and conviction that we will come out of the cycle ahead and well positioned to continue leading the IoT market. We have now delivered back-to-back years of more than 40% revenue growth and believe this is just the beginning. The strength of our Series 2 product cycle has helped accelerate our design win velocity, positioning us to continue outperforming the market. We continue to strategically manage our day-to-day operations while making the investments necessary to drive innovation, long term profitable growth, and solidify our leadership position in the IoT.
Giovanni?
Giovanni Pacelli: Thank you Matt. We'll now open the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question with one follow-up inquiry if needed. Jamie?
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