Silicon Labs (SLAB) has reported a robust start to the year with first-quarter revenues surpassing expectations and a forecast for accelerated growth in the second quarter. The company's revenue reached $106 million, outperforming the midpoint of their guidance.
With channel inventory significantly reduced and a series of strategic leadership appointments, Silicon Labs is positioning itself for a stronger market presence in the Home & Life and Industrial & Commercial sectors. The company is optimistic about its growth engines, including glucose meters, smart meters, and shelf labeling, which are expected to ramp up in 2024.
Key Takeaways
- Q1 revenue was $106 million, surpassing the midpoint of guidance.
- Q2 revenue is projected to be between $135 and $145 million.
- Channel inventory has been reduced by 25% sequentially and 50% year-over-year.
- Leadership changes include Dean Butler, Bob Conrad, and Radhika Chennakeshavula in key roles.
- The company is focused on design wins and accelerating growth, particularly with Series 2 and Series 3 products.
- Customer inventory levels are improving, with a focus on stronger relationships and visibility.
- Silicon Labs aims for a 20% compound annual growth rate in revenue.
Company Outlook
- Expectation of revenue growth acceleration in Q2.
- Anticipation of increased gross margins as revenue increases.
- Unit growth and increased content in end-markets expected to contribute to revenue growth in the next 12 to 24 months.
- No specific guidance provided for the second half of the year but positive indicators include destocking, design wins, and end-market demand improvement.
Bearish Highlights
- Bookings in China have not yet translated into revenue.
- One competitor has become more aggressive in pricing.
Bullish Highlights
- Solid design win activity, with new wins expected to ramp up throughout the year.
- New Series 2 and Series 3 products are driving gross margins and pricing.
- Expectation of ASPs returning to pre-pandemic levels with new product features like AI/ML adding value.
Misses
- No immediate lift from Series 3 products on ASPs and gross margins.
- No detailed information provided on the size or scope of upcoming design ramps.
Q&A Highlights
- Matt Johnson discussed broad-based improvements in bookings across various markets and geographies.
- China's recovery is not factored into current revenue assumptions despite good design win activity.
- Operating expenses have been reduced during the downturn, with an increase expected at a slower rate as revenue recovers.
Silicon Labs has set a positive tone for its future, with strategic leadership changes and a focus on driving design wins to accelerate growth. The company has shown resilience in reducing channel inventory and is working on enhancing relationships with distribution partners and customers. While challenges remain, particularly in the Chinese market, Silicon Labs remains confident in its growth strategy and product innovation to drive future success.
InvestingPro Insights
Silicon Labs (SLAB) has indeed made a promising start to the year with first-quarter revenues that have exceeded expectations. To add further insights, InvestingPro data shows that the company holds a market capitalization of $3.67 billion.
Despite the optimism reflected in the company's outlook, analysts anticipate a sales decline in the current year and do not expect the company to be profitable this year, which is reflected in the negative P/E ratio of -105.08. This could be a point of concern for investors looking at the company's profitability in the short term.
InvestingPro Tips suggest that management has been actively buying back shares, which could be a signal of confidence in the company's future prospects and a potential positive for stock price support. Moreover, the company's cash position is strong, as it holds more cash than debt on its balance sheet. This financial stability is crucial, especially when navigating through uncertain market conditions.
For those interested in a deeper analysis, InvestingPro offers additional insights and metrics. There are more InvestingPro Tips available, including information about the company's shareholder yield and liquidity position. For readers looking to leverage these insights, remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. This offer can provide investors with a more comprehensive understanding of Silicon Labs' financial health and future prospects.
Full transcript - Silicon Laborator Inc (SLAB) Q1 2024:
Operator: Thank you for standing by. My name is Jonathan. I will be your conference operator today. Welcome to Silicon Labs First Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.
Giovanni Pacelli: Thank you, Jonathan, and good morning, everyone. We are recording this meeting, and a replay will be available for four weeks on the Investor Relations section of our website at investor.silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs President and Chief Executive Officer, Matt Johnson; and Interim Chief Financial Officer, Mark Mauldin. They will discuss our first quarter financial performance and review recent business activities. We will take questions after our prepared comments and our remarks today will include forward-looking statements that are subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future. We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company's earnings press release and on the Investor Relations section of our website. I'll now turn the call over to Silicon Lab's, Chief Executive Officer, Matt Johnson. Matt?
Matt Johnson: Thanks, Giovanni, and good morning, everyone. Silicon Labs reported solid first quarter results with revenue and EPS exceeding the midpoint of our guidance. We are confident that Q4 represented the trough for us and we expect revenue growth to accelerate from Q1 into Q2 Based on a sampling of our top customers, we believe they have made further progress in reducing excess inventory in the quarter. We also continue to see steady improvements on our weekly bookings levels, although still below the level we'd like to see. On a unit basis, channel inventory remains very well decreasing again in the quarter. We are working closely with our distribution partners and key customers to manage lead times and increase order visibility as the demand environment begins to improve. I'm also incredibly excited about the senior leadership announcements that I will cover later in the call. Now I’ll hand it over to Mark for the financial update. Mark?
Mark Mauldin: Thanks, Matt, and good morning, everyone. First quarter revenue came in at $106 million, above the midpoint of our guidance and up 23% sequentially. Revenue was up for both business units. The industrial and commercial business ended at $65 million, up 9% sequentially with the broad Industrial category experiencing the largest increase in the quarter. Home & Life revenue was up 51% sequentially, at $41 million, driven by a rebound at smart home, particularly in home security applications. We are well positioned in the Home & Life markets as market initiatives such as matter-enabled ecosystems and Connected Health getting further traction. Overall, ASPs were about flat compared to the prior quarter and unit volume was up. Our regional revenue mix was also consistent in the quarter with EMEA and the Americas slightly outpacing APAC. Distribution revenue mix was about 66% for the first quarter, up from last quarter, but still below our typical levels. Channel inventory decreased to 61 days. On a unit basis, channel inventory was down almost 25% sequentially and 50% year-over-year. As Matt mentioned, we're working closely with our distribution partners and customers to bring order patterns within our standard lead times to improve demand visibility as the market recovers. Non-GAAP gross margin ended in line with guidance at 52%. As expected, customer mix was the largest headwind on our gross margin along with the impacts of fixed costs over the lower revenue levels. We expect gross margin to increase toward targeted model as revenue further recovers. Non-GAAP operating expenses of $94 million were better than expected largely due to slower than expected hiring and discretionary spending. Non-GAAP operating loss was $39 million and our non-GAAP effective tax rate was 20%. Non-GAAP loss of $0.92 was at the top end of our guidance range, mainly driven by the OpEx favorability. On a GAAP basis, gross margin ended at 52%. GAAP operating expenses were $114 million which was also better than expected. GAAP operating loss was $59 million for the first quarter. GAAP loss per share was $1.77 for the first quarter, above the top end of our guide. Turning to the balance sheet, we ended the year with cash and investments of $333 million. We repaid the $45 million outstanding on our revolving credit facility in the quarter and have no outstanding debt. Our DSO was approximately 30 days and we continue to see no customer credit concerns. Our internal inventory was up slightly in Q1 at $198 million. Inventory turns ended at one time and we expect this represents our peak inventory level for the year. Importantly, the die bank inventory we strategically built over the past year positions us to address the channel efficiently as in-market demand improves. Before returning the call to Matt, I will cover guidance for the second quarter. We expect revenue for the second quarter to be in the range of $135 to $145 million. We anticipate both business units to be up sequentially. We expect non-GAAP gross margin in the second quarter to be approximately 53%. The gross margin for this quarter continues to reflect a temporary customer mix shift away from the channel and toward direct customers as distribution partners worked to further reduce their inventory. We expect non-GAAP operating expenses in the second quarter to be approximately $102 million and the non-GAAP effective tax rate to be approximately 20%. Our non-GAAP loss per share for Q2 is expected to be in the range of $0.58 to $0.70. On a GAAP basis, we expect gross margins to be 53%. We expect GAAP operating expenses to be approximately $125 million and GAAP loss per share to be between $1.45 to $1.61. I will now turn the call back over to Matt. Matt?
Matt Johnson: Thanks, Mark. We continue to gain share in both Home & Life and Industrial & Commercial end-markets with their industry-leading power efficiency, security and RF performance, as well as our leadership position in matter. Last quarter in our Home business, we highlighted the release of Matter 1.2 by the CSA, which expands matter’s reach to include smart TVs, white goods and gateways. Matter 1.2 also extends Wi-Fi connectivity to a wider range of home devices such as appliances, home security systems and automation products, including battery-powered cameras, switches, sensors and window shades. As consumer interest in interoperability intensifies, more customers are embracing matter-enabled ecosystems. Silicon Labs remains a trusted partner in this rapidly expanding market. Our commitment to building matter infrastructure has well-positioned both Silicon Labs and Thread Technology moving forward. As an example of this, we are actively working with 24 of the 26 major ISPs in North America and Europe that are integrating matter into their solutions. Earlier this month at Embedded World, we can continue to build out our Series 2 platform with the unveiling of the xG26, our most advanced multi-protocol wireless device family yet, engineered to future -proof IoT technology. This new family ensures that manufacturers’ current designs can keep pace for the escalating demands of sophisticated IoT applications. The xG26 enhances performance with advanced compute capability, embedded AI/ML acceleration for energy-efficient battery-powered devices, top tier security, 2.4 gigahertz wireless connectivity, twice the Flash and ram and support for wireless protocols such as matter, Bluetooth Low Energy and multi-protocol and threats. Additionally, with Amazon (NASDAQ:AMZN) Sidewalk moving through its initial rollout phases and are driving partnerships with manufacturers to facilitate their wireless development within this growing ecosystem. Though Amazon Sidewalk is still in the very early stages, we secured a design win in the quarter with one of North America's leading hot water heater manufacturers providing a Wi-Fi dual band solution with matter and Amazon Sidewalk capabilities. This win was directly related to our being a key Amazon partner in the development and rollout of Sidewalk enabling us to leverage our technology leadership as the Sidewalk ecosystem continues expanding. In our Life business, we are excited to see further global expansion of our continuous Glucose Monitoring Solution. As an example, we have secured additional APAC design wins in the quarter for more than a dozen total design wins n the region, a few of which are starting to ramp in the quarter. In the Industrial end-markets, the integration of machine-learning at the Edge is proving essential. As a reminder, we have multiple wireless SoCs in production with industry-leading integrated AI/ML capability. Our customers are enhancing the efficiency of connected equipment with wireless connectivity for applications such as predictive maintenance. We recently secured a design win with a leading connected equipment provider in the construction industry to facilitate real-time data analysis and location tracking. Similarly, AI/ML at the Edge is boosting efficiency in HVAC systems in smart buildings using motion sensing, while also enhancing vehicle safety with reverse [Ph] seat monitoring technologies. In the Smart Access sector, Chamberlain Group, a global leader in intelligent access has chosen our xG28 device for their 11 million plus myQ users because of its superior compute power and radio performance that delivers a more reliable user experience. Our position at smart cities remains strong, particularly in the metering sector where wireless communication is making electric grids more efficient and sustainable. We are actively involved in developing solutions for low disaggregation or non-intrusive load monitoring that are maintaining our leadership in smart metering across various regions. In the Commercial domain, we are tapping into the retail automation trends such as electronic shelf labeling where emerging technologies like shelf cameras and standalone sensors. While the overall market penetration for electronic shelf labeling is still nascent, our multi-protocol solutions and design wins in this area reinforce our belief that this market will be an additional growth engine for us driven by expanding deployments globally. Looking ahead, we're strategically allocating resources through initiatives that bolster our long-term growth and scalability. The roll out of Series 2 continues to progress well. Like the xG26 that we just announced and is contributing significantly to our current and future growth. At the same time, the development of Series 3 continues in parallel helping position us for an even stronger future. We will begin sampling Series 3 to Alpha customers this quarter. Series 3 introduces industry-leading wireless performance, compute and scalability on a multi-radio platform in a unified code base that will support over 30 new wireless SoCs. I want to thank Mark for stepping in as Interim CFO during the CFO transition. And I look forward to Dean Butler joining us on May 15th. We also announced two additional leadership appointments. Bob Conrad, a long-time industry veteran is stepping down from our Board of Directors to become our SVP of Worldwide Operations. Bob’s expertise and rapidly scaling semiconductor businesses will be critical as we position to scale even faster. Additionally, Radhika Chennakeshavula joins Silicon Labs as our new Chief Information Officer. Radhika will oversee IT operations, Enterprise Applications, Data Analytics and Critical Digital Transformation initiatives. I would also like to thank Sandeep Kumar for his role in leading our worldwide operations team for the last 18 years. Sandeep has been pivotal in leading Silicon Labs operational strategies including during the recent supply chain crisis. I would also like to express my gratitude to Karuna Annavajjala for her leadership in our IT organization over the last four years. Looking ahead, we remain laser-focused on executing on our new Series 2 and Series 3 products, driving design wins and continuing to accelerate our position. As excess inventory to our customers corrects, our design wins ramp and end-market demand improves, we're well-positioned to drive revenue and profit growth throughout 2024 and beyond. I'll now hand it back over to Giovanni for Q&A.
Giovanni Pacelli: Thanks, Matt. Before we open the call for Q&A, I'd like to announce our participation in JP Morgan (NYSE:JPM)'s Global TMT Conference in Boston on May 21st and Stifel’s 2024 Cross-Sector Insight Conference in Boston in early June. We’ll now open up the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question and one follow-up. Jonathan?
Operator: Certainly. One moment for our first question. And our first question comes from the line of Matt Ramsey from TD (TSX:TD) Cowen. Your question please.
Matt Ramsey: Yes. Thank you very much. Good morning everybody. Matt, I wanted to – I mean, we are obviously going through the bottoming and now they're at the beginning of the recovery and you made some - I think you guys made some comments in the script about maybe a little bit more mix toward direct sales versus the channel for this interim period and I guess that makes sense as to customers that are supported by the channel drain their own inventory. So I guess my question is, in the prior few months, how much more visibility have you gotten to customer level inventories that are supported by the channel? And if you could give any anecdote as to what you are hearing by – either by end-market or by geo as to how that direct sort of the customer inventory behind the channel is trending? That’d be really helpful. Thanks.
Matt Johnson: Yes, sure. Well, thanks, Matt. So quick answer is, end-customer inventory and channel distribution inventory are both moving in the right direction and down, is the fastest way to say it. In terms of end-customer inventory, our approach has been to sample our top customers and pretty extensively now given what we've been through and we see a consistent trend there is the fastest way I can say that from December to January, January to now, we've seen both the average of excess inventory working down, as well as account of customers who have excess inventory. So, it is not fully corrected and easy way to say that is, this revenue level that we're guiding is not indicative of our consumption. But we continue to see it moving in a good direction and we like the progress for seeing and the same for this the inventory, I think this the inventory is, I don’t think we want that to go lower now. I'd say that's fully corrected. But the end-customer is moving in the right direction, but not there yet.
Matt Ramsey: Got it. No, that's - a couple of things to follow up there, Matt. I think the first one being, do you feel like coming out of this, you'll have built many deeper relationships, more visibility of relationships that you might have - the company might have over the next two, three, four years whatever, more visibility into customer level inventory levels behind the channel. I don't know. I am just trying to figure out if this whole thing you guys going through with your partners has led to any permanent difference in visibility? And I guess my last – the last question is completely unrelated. You mentioned you might sample Series 3 to a few lead customers in the quarter. Any thoughts or anecdotes about which industries or what type of applications or anything like that that we could get some insights to, because that’s a pretty big markdown? Thanks.
Matt Johnson: Yeah, so the first piece, Matt, quick answer is, absolutely yes on stronger relationships and more visibility. Easy way to say it is, going through these things, it's been a tough cycle and that builds the relationship. I guess, it can also work the other way, but what we've seen whether it's a supply chain crisis or if it's inventory crisis, relationships got stronger. And those partnerships got stronger. So that - I can say that with high confidence. And I also can say with high confidence our approach and visibility to understanding end-customer inventory has improved. As you all know, there's not an easy approach there to report like we can do with obviously internal or distribution inventory. But we've learned a lot through this cycle and we've gotten, I think, much better at being able to see it, understand it and navigate it. So, quick answer there is, yes. Series 3, we're not sharing those customers. We are sampling, which is exciting. It's a big milestone. I would encourage people to remember that Series 2 is still relatively early days in its cycle and ramp. And at the same time we're already introducing our next generation. So, it's going to be just to be blunt, Matt, it's going to be a difficult message for our investors that both are doing really well and both are progressing. And that the game is long for both. But at the end of the day, the combination positions us extremely well and we're happy with the progress on both.
Matt Ramsey: Thanks very much for the time, Matt. Appreciate it.
Matt Johnson: Yes.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Gary Mobley from Wells Fargo (NYSE:WFC) Securities. Your question, please.
Gary Mobley: Good morning guys. Thanks so much for taking my questions. Matt, you're on record in a public venue back in March was saying that you think your end-customer consumption level, I think in the - related to the first quarter was about $160 million. So perhaps you undershipped the channel by $50 million. It hopefully that $160 million end-consumption level is a target that's moving up into the right. And so my question is, based on the June quarter revenue guide of about $140 million, by how much are you undershipping end-customer demand in the current period?
Matt Johnson: Yeah, thanks, thanks Gary for reminding me of the record. So the quick answer is, what we said was, we see consumption at least $160 million as a data point there and we didn't say it was at $160 million. We said it was at least at that number. So, that was the data point we provided. So, easy way to think about it on - as I said earlier to the previous question, we are seeing revenue at $140 million is not indicative of consumption. And as we said in that conference, we think it's higher or at least $160 million as an easy way to think of it. So, I don't think you can get to the math based on that of exactly what consumption is and exactly how much end-customer inventory remains. But easy way to say it, that is going in the right direction. End-inventory is going down, revenue is going up, getting closer to consumption, but still a ways to go.
Gary Mobley: Got it. Thank you. And as a way to get a supporting metric for future revenue growth, hopefully add this number at your fingertips, but I am curious what the measure of lifetime value of design wins captured in the first quarter may have been? And then, embedded within that, what the pricing trends were like in those design wins on a like-for-like product basis or maybe even considering any sort of ASP shift associated with Gen 2?
Matt Johnson: Sure, yeah, I don't have all that off the top of my head. The quick answer is I think on actually in the - correct if I am wrong guys, in the quarter, I think pricing on a like-for-like basis was basically flat. On design wins, no changes there. Good progress and on track and in terms of pricing on design wins, as we've communicated, no changes there that that's where we see more pricing pressure is on new business not on existing business and we expect that to continue, but what we're seeing there is what I define is more typical and expected and it almost looks scary. I mean, I'm jumping ahead a little bit, but we're kind of getting back to kind of pre-pandemic type of behaviors on pricing which means low to mid-single-digits pricing pressure on an annual basis, which is what we've always had. And we've always opted that was new products, new features differentiation. So, I wouldn't say we're there yet. But that appears to be where things are going.
Gary Mobley: Thanks, Matt. Appreciate it.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Tore Svanberg from Stifel. Your question please.
Tore Svanberg: Yes. Thank you and congratulations on the continuous recovery here. So, Matt, obviously consumption is a number that we analysts have to decide at some point. But I just want to sort of understand now that you’ve gone through the up cycle and down cycle, and as we think about the consumption number is the thought to hear that the business would grow up about 20% going forward longer term? Just to sort of to make sure that nothing's really changed with the up cycle and the down cycle fundamentally?
Matt Johnson: Yes sure. So – so the quick answer is, no change to our commitment to the 20% compound annual growth on our revenue has not changed. That is our target, our model we see the path to doing that and we feel really good about that. So that's the fast answer. There is a couple things that’s worth mentioning. We're not doing a victory lap at a $140 million guide, right? But we are doing the things that we believe we said we do that we can grow revenue. We're improving gross margin, improving profitability. That happened in Q1. That's going to happen in Q2 and we can continue doing that. But we're far from out of this at $140 million right? There's still a big gap to our consumption levels and we also need to see a lot of design wins ramping, which is starting, which is encouraging and we need to see the end-markets show more strength. So, we're trying to reflect we're very encouraged by the progress. Things are going in the right direction. All signs are encouraging. But we're still in a pretty big hole and we got a ways to go. So we're not celebrating $140 million. We'll be celebrating at much bigger numbers.
Tore Svanberg: Great. And as my follow up, beyond the cyclicality stuff, you've sort of highlighted at least three big growth engines this year. You mentioned some of them on the script right? But the glucose meter, the smart meter and also the shelf labeling, any more details you could add on those three as far as ramps, types of customers, regions and so on and so forth?
Matt Johnson: Yeah sure. So, nothing meaningful beyond what the script Tory, has said I'd say to be clear. All three of those segments are ramping for us in 2024. That’s important. And that’s encouraging because that gives us growth beyond inventory destocking and whatever the end-market demand dynamic ends up being.
Tore Svanberg: Excellent. Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Thomas O'Malley from Barclays (LON:BARC). Your question please.
Thomas O'Malley: Hey guys. Good morning and thanks for taking my question. Just a model square away first and then a question off that. Just what was the percentage split between the two businesses in March? What do you guys assuming for June? And then can you talk to the linearity? Obviously, it looks like the disti channel is getting a little bit – disti is getting better, channel is getting better even end-customer is improving. Can you just talk about the linearity if, of what you see right now in terms of revenue as you progress on throughout the year?
Giovanni Pacelli: Tom, hey. It’s Giovanni. I’ll take the first part. Revenue has been a big use for Q1. That was $65 million for the Industrial & Commercial business unit, about $40 million, $41 million for Home & Life. You know what, more to pick up on the linearity as we get through the year.
Matt Johnson: But I think, what we said in the script that we would expect both business units to continue to grow during the year. And we're not providing specific guidance for each business unit for the second quarter.
Mark Mauldin: Yeah, I mean, maybe a way to think about it Thomas is, in general terms, I'd characterize Home & Life as further through the cycle. Industrial & Commercial still absolutely going in the right direction, but not as far through the cycle, I think that's important. And then, in terms of inventory, I would definitely say that Q1 represents the peak for us in internal inventory that we have intentionally built to be ready for what's coming and as we move forward from here. So that's one. And as we’ve said external inventory at our distributors and other end-customers is working down and continues to work down. So, I think the next piece is this the inventory, we've been assumed that that's going to be flat, but at some point distributors are trying to work it down, at some point that's going to start coming up as we see increases in demand in the channel as their end-inventory works down and as they just start to ramp new designs and market strength continues. But we're not assuming that in our guidance right now.
Thomas O'Malley: Helpful. And then, just on the gross margin side, as you see a normalization of your percent sales to kind of just to interact with direct coming back a bit down. How much do you have baked in for that normalization in the June quarter? And how quickly do you see that happening? Obviously, it's a tougher thing to kind of understand it's a lot of different customers. But just in your base case assumption, we're kind of at the midpoint of your margin guidance which is something like 80 BPS? What do you think that split looks like?
Matt Johnson: Yeah, it's tough to call, because part of that includes the call in the market, which is not good business. So I think, the way to think about it is, we have been absolute in our commitment to our gross margin model, as well as our total model for the company going through the peak end of trough of this cycle. We didn't increase our gross margin targets in the peak and we're not decreasing our gross margin targets in the trough. And what we've said is, as we go through each quarter, as revenue increases, gross margins will increase. That's what we've seen in Q1. That's what we're sharing that we expect to continue in Q2. And we expect simply said, as revenue increases, gross margins will continue to increase back to those levels that we all know and love. So that's an easy way to think about it. It's also worth mentioning that as the revenue goes up, the component of the fixed cost absorption goes down. So we're seeing that. And right now the predominant factor is the mix. And that's what we shared in the script and that's what we're looking at right now. So, easy way to think about it each quarter as that revenue increases, you'll see that gross margin increase with it.
Thomas O'Malley: Thanks, Matt.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Quinn Bolton from Needham and Company. Your question, please.
Quinn Bolton: Okay. Hey guys. Thanks for taking my question. Just want to follow-up first on that that mix issue for gross margin. You kind of said that the mix shift is more to direct here in the near term. And it sort of feels like you're implying that that's a gross margin headwind. Just wanted to confirm that the disti sales to carry higher margin than direct sales and not sure if you will, but I'll ask if you could quantify, how much of an impact is that channel mix having on near term gross margins? And then I've got a second follow-up question.
Matt Johnson: So, Quinn, this is Matt. Quick answer is, generally, you do see channel or distribution gross margins was higher than direct. But that's fairly typical. And for us, what we've also said is, mix is now the major driver, predominant driver of the gross margin being at the levels it is versus where that it shouldn't will be. So those are the two, I think answers to your question or hopefully helpful.
Quinn Bolton: Got it. Yeah, I know that helps. And then I guess, I know you guys obviously aren't guiding on the current quarter, but given that you've stated that that consumption level of $160 million or higher I guess, kind of looked out to the second half of the year. The streets got revenue close to $190 million in September, $220 million plus in December. That's significantly higher than that consumption level. And so I guess, these aren’t your numbers, but what has to happen for the business to get back to kind of where the street is looking in the second half of the year do you think consumption can increase at that rapid of a pace? Is it really the three growth drivers that you’d talked about the smart metering, glucose monitoring, the electronic shelf labeling that gets you there? Or just any sort of thoughts on sort of that second half?
Matt Johnson: Sorry, Quinn. Can you just say the key question is what are the drivers for the…?
Quinn Bolton: Yeah, I mean, I just, obviously, you’ve kind of stated this consumption number of $160 million and I know that that's a kind of a floor not necessarily where you think consumption is, but the street numbers for the second half have revenue in September up at like $190 million and $220 million. And I know these aren't your numbers, but I guess, to the extent the company were to hit that kind of revenue in the second half. What has to - what's drives that? Is it, do you think consumption can get up to that kind of level in the second half? Is it driven by some of these new product opportunities that are ramping this year? I mean, just what's - how would you get there in the second half given that $160 million consumption number you’ve discussed?
Matt Johnson: Got it. Got it. Okay. So, yeah, a couple things. I mean, obviously, the first starting point is and you all know this, we don't guide beyond the current quarter. But I can definitely talk about some dynamics that might be helpful towards that end. And just a reminder on that $160 million number, that was to give people context around kind of what we - as we were going through our OpEx reductions last year, that was kind of a rough estimate of a breakeven point. And obviously, our point was you do your reductions around something that you believed was indicative or better of our consumption. You wouldn't make OpEx reductions on what you thought your go forward steady state was if you're losing money there. So that's important. But to your question, so easy way to think about it is, if you oversimplify the three major buckets, we have the destocking phenomena where there's excess inventory at customers. You have design wins ramping in end-markets. Right now, the bulk of what we're seeing in Q1 to Q2 is really destocking. There's some ramps in there. But it's not the primary driver. So, as we've said, even at $140 million, that's not indicative of consumption. So there's still a ways to go which is encouraging and we see that destocking continuing. There's two other factors there, which are the design wins, which I just shared earlier that we do see good design win progress and ramps this year on some pretty major trends and areas including CGMs, electronic shelf labels, metering, where strong positions and those are ramping. So that gives us an additional lift in addition to revenue approaching consumption. The end-market piece, end demand is more difficult to call. There's just a lot of uncertainty out there in the marketplace. There's conflicting signals and not - for sure not trying to call that. But, if and when that does improve, that's an additional tailwind. But obviously, you can't bake on that or assume that at least right now.
Quinn Bolton: Understood. Thanks, Matt.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Srini Pajjuri from Raymond James. Your question please.
Srini Pajjuri: Thank you. Good morning guys. Matt, on the year bookings front, I think you said the weekly bookings are getting better. So, I was just hoping you could give us some additional color as to whether the bookings improvement you are seeing is fairly broad-based? Or if it's - if one particular end-market is doing better than the others and also from a geography standpoint, if you're seeing any noticeable differences in terms of the bookings improvement?
Matt Johnson: Yes. Understood. Quick answer is, bookings have - are improving in a pretty broad and consistent pace. And so what I mean by that is, this isn't one or two or three good weeks. This is many weeks and months of consistent improvement, which is what you'd want to see. As I mentioned, it's not at the levels we want to see to say we're fully on the other side of this. But the trend is undeniable and encouraging. To your other point, definitely brought by technology, geo application space, which is what you want to see. As I said, I think, Home & Life is a little bit further through than Industrial & Commercial. But we're seeing improvement and strength in both. And the last thing is it just a caveat to all of that, maybe the exception is China, where to be clear, where APAC we're seeing improvement. But in China we're seeing encouraging signs in terms of the design win activity, signaling that there's improving strength. PMI is improving all of that. But we're not seeing that manifest in terms of revenue yet. So that that would be the one place and we're not - we haven't baked it in, we're not assuming it improves. So there's some encouraging signs. But no, it's not coming out in results yet. So hopefully that's helpful.
Srini Pajjuri: Yeah, yeah, great. Thanks for the color. And then, you also kind of talked about ASPs kind of returning to the pre-pandemic levels or at least the trends in terms of annual ASP declines. I just want to kind of given your new product pipeline, of course the market does what it does. But can you talk about in terms of as we go from Series 2 to Series 3 and there's a lot of talk about Edge, et cetera, of your own ASPs on a mix-adjusted basis. I guess, what I'm trying to get at is, that as we look out to the next 12 to 24 months, should we kind of bank on unit growth to model your revenue growth or do you see kind of content increasing for you as well? And if content is increasing, what are the end-markets and what are some of the applications that will drive that content? Thank you.
Matt Johnson: Sure. So a big, big, big picture if you step back. Series 2 is obviously helpful for us from a gross margin perspective and pricing perspective in that – these are new products with new features, new capabilities that are in demand. And easy way to say as we mentioned AI/ML. So artificial intelligence machine-learning, so having products that are in production that have the ability to very efficiently provide machine learning inference at the Edge on a battery-powered device is a pretty powerful capability and feature. And obviously helps us in terms of being differentiated in driving value with our customers. So Series 2, as it continues to come out with the features, capabilities that are best-in-class that is obviously helpful against that dynamic. And to be clear, not fair, that it's not a new trend or dynamic. That's always how we've operated and traded, but it's Series 2 is still introducing new products even put in the last few days and in the last few months. So that helped. And then the second piece is Series 3 obviously will as we've shared, brings new industry capabilities features and performance, which will again allow us to work on that dynamic. But I do want to set expectations according or appropriately that won’t be an ASP lift for the next couple of years. I mean, that's Series 3 will ramp over years. And I wouldn't look there for an ASP lift. I've looked more to a Series 2 and how is that doing and then Series 3 is more of a mid to long-term play. But both help on differentiation, performance features, which helped on ASPs and gross margins.
Srini Pajjuri: Got it. Thanks, Matt.
Operator: Thank you. One moment for our next question. And our next question comes from the line of from Cody Acree from The Benchmark Company. Your question, please.
Cody Acree: Yeah. Thanks guys for taking my questions. Just quick thoughts on operating expenses as you’re heading off the bottom here?
Matt Johnson: Yeah, sure. So I mean, a reminder for everyone. As we were going through this cycle as revenue is decreasing, we decreased our OpEx every quarter along with that. And then, as we've shared, as revenue starts going up, we will increase our OpEx although not at the same level moving forward. And some of those changes last year were structural, right, with reductions that we've shared in prior calls. That being said, the increase from Q1 to Q2 would be faster than that. And part of that is, just one-time dynamics. For example, as we've added annual merit cycle back for our employees that drives increases from Q1 to Q2. And then some of the temporary things from last year that has to come back such as bonus accruals or travel that’s driving an unusually high increase as well. But to be clear, as revenue is going down, we reduced OpEx every quarter. As it goes up, we will increase it at a lower rate Q1 to Q2, a little bit higher than normal because of those one-time effects.
Cody Acree: Thanks for that. And maybe just continuing on there. What were the processes that you went through as you’re going through the OpEx reductions during this cuts to make sure that you weren't impairing revenue growth?
Matt Johnson: Oh, yeah. Sure. That's – so, big picture. That's hard and not easy to do with - for being honest about it. So what we've done is some of the changes were things obviously prioritization where you take class of things, things that are at the bottom. And you do less of those and make sure you're feeding the things at the top that have the biggest impact, biggest returns. There's also going after shifts when using the environment it's difficult as it is for doing strategic initiatives and shifts where you need to reshore or move resources from one geo to another or do leadership changes. So, as an example, we shared the CIO announcement with Radhika, that was one of the changes that came out of last year where we said strategically how do we approach IT differently. So, there's employees moving across Geos as part of that. But also leveraging - rebalancing internal external capabilities and make versus buy as a classic way to say it. So, it’s the combination of all those things, saying look it hurts and it's difficult to make these decisions. But look at it through a lens of managing the portfolio and how do we use this difficult environment not just to cut and have less revenue, but to cut and use it to transform and restructure rechange how we approach things. Because easiest way to say it, Cody, is if we do these cuts and we don't - we come out the other side and say let's just add them back the same way horrible inefficiency. The model and approach is make these difficult changes and use them to make us better use them to transform to reconstitute our capability. And that’s the approach is taken. So I really do see that this will be transformative even though it was difficult. But obviously, too early to see the signs of that. But you're starting to see early things like the CIO announcement.
Cody Acree: Great. Thanks, Matt.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Peter Peng from JP Morgan. Your question please.
Peter Peng: Hey, good morning. Thanks for taking my question. Just want to follow up on the China point where it seems like you guys are not seeing any improvement. How important is China recovery to that $160 million number that you guys talked about?
Matt Johnson: Right. It’s the quick answer is it's not in there is, China, I think, right now for us is roughly around 13% of our revenue and we are supporting the region as I said, good design win activity. But the revenue hasn't meaningfully moved. And we're not assuming that it will. So if it does, that's fantastic, but not baked into an assumption in recovery for us.
Peter Peng: Got it. Thanks. And maybe just on some of these new design wins when as they talk about potentially coming in the second half, but maybe you can help us understand maybe the size or the scope of these ramps and how meaningful is it just to revenue in the second half of this year?
Matt Johnson: So, we haven’t provided that that context and we're not guiding beyond the current quarter. But easy - easy way to think about it is, we've shared over previous quarters all of these ramps are one, not single customer. They are end-market across multiple customers and they are meaningful end-segments for us and ramps. And I would characterize each of them also as relatively early phases for us in terms of their ramping potential. But they will all ramp this year, which I think is important and will give us a tailwind as I said earlier to whatever - whatever that consumption number is as we approach that it gives us lifts beyond that. And then, as I said, the end-market as well when we see strength there. But no more color on the actual magnitude or size of those that we haven't provided that.
Peter Peng: Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Joe Moore from Morgan Stanley (NYSE:MS). Your question please.
Joe Moore: Great, thank you. Last quarter you had talked about one competitor. I think it was isolating things better than that had been pricing a little bit more aggressively. Can you give us an update there any changes that just the new normal or is there anything to report there?
Matt Johnson: Hi Joe. I don't think it's - I think that's been consistent that most of the industry markets have been behaving as we’d expect in this type of market environment. As we said, we did see one competitor who as we thought being more aggressive and that hasn't changed. But not signaling anything there. Not kind of convey anything. I just wanted to answer with integrity which is why I called it up.
Joe Moore: Okay. All right. Thank you.
Operator: Thank you. This does conclude the question and answer session of today’s program. I'd like to hand the program back to Giovanni Pacelli for any further remarks.
Giovanni Pacelli: Thank you, Jonathan, and thank you, all for joining our call this morning. This concludes today's call. Thanks.
Operator: Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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