All right, welcome back to the Barclays Tech Conference. I'm Tom O'Malley, semi and semi cap equipment analyst here. We're lucky enough to have Silicon Labs, Matt Johnson, Chief Executive Officer, and Giovanni Pacelli, Senior Director of Finance. So thank you both for being here today. Thank you for having us. Thanks for having us. So I'm gonna start with, you know, a topic that I've introduced with from multiple companies, which is just the current cycle. And I'd say that many here have seen cyclical downturns, but I think you guys have seen one that's, you know, very sudden and very steep. Yes. Could you just walk through, you know, what you got into, why was it so extreme? What were the first signals that you saw? Just give us some color on the progression from the time when things started to turn and kind of where they are today. That's a big one. Be good to hear from both of us on that. Yeah. I think, you know, we were just mentioning earlier, one of the things that is definitely stand out for this cycle compared to all the other semi ones we've been through, is the pandemic certainly injected, different dynamics and I think new to industry dynamics, into the cycle. For us, specifically, you know, the biggest shift was going from, you know, this continued, and by the way, we still see it, but this continued expectation of, you know, recovery and pretty aggressive recovery to us, you know, really having to question that and the injection of massive amounts of end inventory. Because, you know, we've been through this before where, you know, the forecasts are wrong. That happens quite often... Mm-hmm E very day. But to have it be, you know, so different from expectation, at the same time, to have so much inventory out there, the combination or confluence of those, really, you know, set us on a reduction that was bigger than we ever would have expected, and, and honestly, caught us off guard as well. That being said, you know, where we're at right now, we feel extremely good that we are working down all inventory, you know, as we go through this quarter. And, you know, for us, the internal inventory is very strategic and by design, we feel very good about that. Channel inventory doesn't scare us at the level, but we can bring it down some, and that's gonna happen. It's really the end inventory at our end customers that we're, you know, way bigger than it should be. You know, we're sitting on, you know, a quarter or so that needs to work down. Mm-hmm. We see that happening. That's what gives us confidence to say, you know, we don't see... You know, we're not calling the cycle bottom, but we definitely feel confident we can call our bottom and drive sequential growth from here. Couple. Do you want to comment as well? Yeah. You know, what's been interesting is kind of the sectoral nature of the downturn, right? We've been seeing the signs in Home and Life for four or five quarters now. And industrial really was quite resilient, you know, even into the middle of this year. And then as we got into later part of third quarter, it just, the fall was precipitous. Yeah. And to the factors that Matt described, you know, definitely, notable. One helpful way to think about it... Yeah I s two things. The confluence of, one, consumer had been hit for a long time, but I think there was a building view that consumer was starting to bottom, it would start to improve. That's what we were seeing in the forecast. And at the same time, industrial, you know, had been showing signs of weakness, but it's always more tame and moderated. And two things happened: One, consumer wasn't done. Yep. And two, industrial took it way harder than we'd ever seen industrial go down. So the combination of those two was definitely a surprise. Is there a reason when you look at end markets correcting, more commodity industries like memory tend to, you know, bottom first and are more extreme? Consumer tends to be near that end of things as well. Mm. When you talk to your customers post this correction, and they're sitting on a bunch of connected MCUs, do they say, "Oh, well, we got it wrong here because we were scared we couldn't meet our order trends?" Or do they get it wrong because they were... Oh R eally protecting themselves for, you know, six or 12 months? Well, there's speculation in my answer, so. But, you know, I think if you go up, you can definitely see that during the, you know, pandemic and supply chain crisis, people couldn't get what they wanted and were doing anything and everything they could to build inventory. Yeah. Right? Take it, just take it. Which also put a lot of our industry in a position of managing and understanding their inventory at a level they've never had to do before. So that's really important for people to understand. I mean, we have customers with more inventory and having to understand their supply chain at a level that never happened in the past. So I think that definitely hit. And then there was, at the same time, you know, take as much as you can, and then the other piece is, this prevailing view, it's gonna get better. Mm-hmm. I mean, how long have we been hearing: next half, next half, next half, right? And the combination of those things really got us to, well, it's not getting better as quick as anyone wanted, and wow, we got a lot of inventory, and that, that hit the whole industry hard. I think the prevailing view of the industry generally tends to be more positive as you start to see things slow down. Yes. I guess you're saying channel is fine, end customer is not great. How about bookings? When you look at order patterns, you're saying you're confident in a bottom for yourself. What are you seeing that gives you that confidence on the booking side? Sure. On the booking side, you know, it's been a long... Yes S low, thing. But we are seeing, you know, what I'd say is, you know, cautiously optimistic, patterns and behaviors there, one. Yeah. So, you know, not getting worse, you know, starting to improve, which is great. But then it's also, you got to remember the level we're operating at, one, and two, that our run rate business is, you know, meaningfully above what we have for our fourth quarter guide. That's because we are working down that inventory. Mm-hmm. So the combination of the bookings, the actual run rate on our business while we worked on inventory, and the strength of our design wins and ramps, that's what gives us the confidence to say we—you know, we shouldn't call the cycle, but we definitely can call our growth moving forward. So we talked about inventory at, in the channel, at end customers. What about your inventory on your balance sheet? What do you think the ideal... I think days is a good metric in a time like this, 'cause dollars is more difficult, especially as revenue is either ramping or... Yeah O r coming down. So. Well, it's hard in the channel too, though. I mean... Yeah Y ou know, we're, you know, our it's this both are moving, right? If you look at us from a channel inventory perspective, the actual material in channel hasn't meaningfully changed all year. Yeah. But as the revenue comes down, DSI goes up, right? Yeah. So, you know, for channel, what I'd definitely say is this: you know, we've historically, people have expected us to be, I don't know, 40, 50 days. Is that... 45 to 55. Yeah. Yeah. And, I think that was too low. So we do plan to run at a higher level on a go-forward basis. We're at, you know, last quarter, I think, around 90, too high. So I think somewhere in there is what you'll see it moderate down to pretty quickly, and then, you know, there could be a quarter where the market recovers faster than we expect, where it'll drop quick, but we'll try to get that back to a level kind of in between those two. So perfectly into my next question. So recoveries are all different, and I think that we saw on the way down, this one was particularly different. But if you look at the recovery, you're not gonna have perfect line of sight to this, but the question is meant to kind of understand your thoughts about the next year is: do you think that this recovery is linear because of how far you fell, or do you think that it will also be lumpy? And by lumpy, I mean, do you see a couple quarters of growth and then a small reset? I think that the reason I ask is... Yeah P eople will point to the fact that we've fallen so far that maybe you get some linearity in the early days of the recovery. Mm-hmm Because you're so far below where the normal run rate of the business is. Any comments on that would be super helpful. That's difficult to answer. Yes. I think, so what we know is, one, you know, we're at an extremely low level. And quick, I'd just say, given the way you described linearity and lumpiness, I'd bias towards linearity. Yeah. But it won't be linear, right? But I do think we can drive growth every quarter moving forward... Got it A ll things considered. And that's a confluence and combination of all those factors, including those ramps. Mm-hmm. If I didn't have the, you know, Design Win momentum and all those ramps happening, I'd be less confident to say that because the market would weigh heavier on that answer. Got it. Giovanni, anything you wanna add? No. Yeah, I was gonna bring up ramps, but you caught that. That's a really important factor as we look into the first half of next year. Yeah, no, the intention was, do you see continued sequential growth quarter-over-quarter, which is what I was getting at. Mm-hmm. So... Yeah I appreciate it. Answer is yeah. One area I wanted to dive in a bit more is ASPs. I think most companies, including yourselves, saw a substantial benefit. Where I look at prices were at the beginning of the upswing and where prices are today, how much higher are you on your average product? Or if you don't have a perfect answer on an average product... Yeah How much higher do you think you are for your products versus then? Uh, pre? Pre... Yeah U pswing in the market. So yeah, that's a topic that's been, I believe, I'm gonna use the word, radically misunderstood. Mm-hmm. That, you know, the easy way to say it is, you know, pre-pandemic, pricing was what it was, then we had some, you know, pricing increases out there. We haven't seen those prices go down either... Yeah B roadly in the industry. We also don't have a mechanism in our business to reduce prices on a daily, monthly, et cetera, basis. What most people don't realize, our business is, you know, vastly sole source, you know, 95% sole source, and most of it is a primary silicon in the end product that it's in. And we don't negotiate on that on an annual basis, quarterly basis. It only gets negotiated when it gets designed in. Okay. So that's, that's important one. But to answer your question, what I'd say we're seeing right now is, I'd say, except for one company out there, all the other companies are doing exactly what you'd expect in a down market, and that's the typical behavior that you see. Yeah. We do not see a step function or a cliff coming on pricing. Any resistance we're seeing right now is on mix or things like that, or just our revenue being so low, we have to absorb more fixed costs. Mm-hmm. I think you guys have mentioned it's where you're negotiating new contracts that you're seeing some pushback. So it's not a cliff, but would you say that it's... I guess, in your best, you know, in your best read of the market, are you gonna start working back to where you were, or do you think that there is some pricing bump that you've gotten through this period of time that never gets given back? I think there's some piece that never gets given back unless you see the, you know, entire supply chain reset their price basis. Got it. Because, you know, think about it, if the fabs all drop, and they are doing everything they can to hold on to that as well, right? So far in the cycle, they've been able to manage through that, and their expectation is when the market recovers, this will become less of an issue. So that's what's going on out there. But if that were to happen, we'd feel obligated to give some of that back to our customers. Yeah. You know, the easiest, easiest summary I can give you, our commitment is to our model and our gross margin target, which we've been consistent on this throughout the entire, entire journey, that, yes, our margins went up as we were in this. We didn't say we're resetting our model to these new margins. You know, everyone was saying: "What are you, crazy? Reset your margins. Mm. We said, "No, we're holding to this because we expect it to come back down to our normal model, you know, between 55 and 60, and that's what we're holding to. It's almost unfair, because historically, SLAB was always below that margin model, and people are like: "Is it ever gonna get there?" And now we've gone above, and I guess it is in the perfect range. But, I would say that's exactly where I wanted to go is, you know, you have pricing impacts on margin, and you've seen this big reset on that side as well. Mm. You sound like you're maintaining the same range that you did before. Mm-hmm. Other than pricing, is there anything that I should be thinking about that would impact the range that you guys have kind of put out there before? Absolutely. Our platform, our new products. Okay. So our portfolio is the strongest it's ever been. It's in... I, I don't have the right words other than a power cycle, in the sense that our Series 2 is hitting the mark with end customers. It's what's driving our design win growth, which is phenomenal, and allowing us to gain share. Mm-hmm. So as you would expect, it would defy logic for us to be having such portfolio strength and to not be in a position to, you know, maintain industry-leading margins for our applications. So we don't see that changing. So commitment to our model, commitment to being at the high end versus competition because of what we do, and that's first order driven by our portfolio products and that strength, not by the costs we're getting from our suppliers. Helpful. And you bring up competition, and I think this is a key area that people don't talk about enough. Can you just remind us, who are your biggest competitors that you see on a socket-by-socket Design Win basis? And two, have you seen any change in behavior from them? Because you guys are saying, "Look, we're not gonna pass down costs until the foundries cut down- cut costs, too," and that makes total sense. But I could see other guys who are more opportunistic taking that, taking that pricing down earlier. Sure. Are you seeing any of that in the market today? I'm seeing one semi company out there being more aggressive and atypical. Mm-hmm. But they don't have much crossover to us, literally one or two parts. So, you know, of our portfolio of hundreds of parts, it's not gonna change, you know, what you see in terms of top line, bottom line. But to answer your question directly, this is one of the things that is difficult for people to understand because there's, you know, a lot of competition, and it varies. We cover the entire wireless spectrum for IoT applications. Majority of our competition do not. Yes. So where we see competition depends on what the application is and what the sockets are and what the wireless technologies are. So to be specific, Bluetooth, biggest competitor has been and continues to be Nordic. We are taking share from Nordic. That has been consistent for the last few years, and we see that accelerating, not slowing down. Mm-hmm. Which is a big statement in Bluetooth because they've historically been strong there, and historically outperformed us in Bluetooth. But we decided to double, triple down a few years ago. It's worked. We're making big progress, and we see a path to continuing that. Sub-GHz, really only two or three companies in the world do sub-GHz for our space. Mm. TI is the biggest other one, and I think TI, you know, really took a step back in sub-GHz during the supply chain crisis because they retrenched to protect other markets. So that, that was actually beneficial for us as well. And then when you get into 15.4, you know, we're the leader by a long shot. There's a lot of other little companies out there, but no strong one other to even name. Which just for those who are unaware, that's Zigbee, that's Thread, and one of the technologies that's the foundation of Matter. Wi-Fi, different. We're earlier days of Wi-Fi. We're entering that market. There's a lot of competition out there with different, different strengths and weaknesses, you know, literally about 5 or 6 other companies. But for that space, what we're gonna do is not go in like any of those. We're gonna go in leveraging our strengths in low power, security, our customers and applications, tens of thousands of customers, and we're gonna bring what we do to those other areas, like Bluetooth to Wi-Fi, and I think that'll serve us well. A point I wanted to make on your commentary is just a guy like TI backing away from a product portfolio, particularly during the shortages. By far, their capacity issues were the worst going into the cycle, but you saw other guys run a little short as well, particularly at the peak of this entire pandemic. I would say, what is, what is your worry? Does it worry you that larger guys, particularly with aggressive capacity plans like a TI, decide, "Hey, I need to push product. I'm gonna reenter markets in which I retrenched from during that period of time"? Is that something that you're seeing where, hey... Absolutely. A guy that had backed away, comes back into the... Absolutely. Yeah. They will all try. Yeah. It would defy logic for them not to try. Easiest way to think about it is, you know, before the supply chain crisis, we competed against the big guys and were able to gain share. During the supply chain crisis, everyone thought, "You're a smaller company. You're gonna need that scale to navigate this thing." We outgrew everyone in that space, over 40%, two years in a row, because we were able to navigate it even as a small guy. So coming out on the other side, of course, they'll try to go back... Yeah After it. But it's not just them saying, "I want it." It's the underlying fundamentals on multi-generations of technology platform approach. You know, you can invest in fabs. That doesn't mean you're gonna be able to win those sockets. Helpful. All right, so I wanna step back. We did the supply chain, we did pricing. Yes W e did gross margins, all of the fun, intricate stuff. Let's step back to look at the big segments here. Sure. So Home and Life, Industrial and Commercial, when you look at those two businesses, where do you think the recovery starts? Is one coming off the bottom faster than the other? And then maybe point to some product, products within those two segments that are driving that growth off the bottom. Sure. So what we're seeing, and it's what we expected, it's kind of almost on a FIFO basis, right? Where, Home and Life has been weak now, you know, I think I mentioned earlier, four or five quarters. And we are seeing some signs of life there. You know, Matt referred to the bookings, design wins. We talked a lot about our partnership with Dexcom in our last earnings call. You know, we expect that to ramp in the coming year and meaningfully contribute to revenue. So, you know, Industrial, later to the party, and we expect that it will probably lag the recovery in Home and Life a little bit... Mm. Which is not surprising. Mm-hmm. Yeah. Yeah, I wouldn't dare call Industrial done yet. Yeah, it could take a while for that to work through. Any products within those two that you'd specifically point to that are leading that charge? I think the... You know, on your latest call... Sure You highlighted India smart meters and your partnership with Dexcom and their continuous glucose monitors. Mm-hmm. I know that's more of the, you know, maybe some newer products, but will these be material in 2024? Are those part of the reason why you're more optimistic? Yes and yes. So, I'll just work quickly from Industrial and Commercial, work our way back, way back. Industrial and Commercial, you know, we break it into, you know, three subsegments within that. So we have Industrial, then we have Smart Cities, and then we have Retail and Commercial. Smart Cities is where we have metering... Mm-hmm For better or for worse, and in that space, metering has not been that impacted by this overall environment. These are long-term, you know, 10, 15-year plays, tenders run by the government, et cetera. So we've had the leading position in that space for a long time, but what we're seeing is adoption accelerate. The ROIs are just getting really good in, you know, water, electric, gas. We mentioned on the call that this, you know, just like we did in Great Britain with the rollout there, we see the same opportunity in India, where they have, you know, you know, the next decade of growth. We are the, you know, leading supplier by a long shot for all the options there, and that's starting to ramp. So we called that out, and that is going to have a good impact on 2024. Then you get into, you know, ESL, in the retail space. You know, we've been strong there for a while. We see continued growth there. General industrial, I'd be less bullish and confident on because I still think it has a few clicks to go as it works through its correction. But we definitely see share gain there. It just depends on how that end market works out. Home and Life, home, hardest hit by a long shot. You know, it, it literally almost couldn't be lower, and we're seeing those signs of recovery. We're seeing the bookings come through. We're starting to see, you know, pull-ins more than pushouts. You know, I'm not saying it's gonna be a rocket ship, but we're seeing it, you know, start the process of crawling its way out of the hole there. The life and healthcare piece is phenomenal. We didn't see that go down during this whole cycle, and that's because... So we talk about Dexcom, which is, you know, extremely exciting, great partnership, gonna help us in 2024. But, you know, that's just the tip of the iceberg in what we have in healthcare and CGM. That's the one we announced. So the combination of those makes us feel pretty good going forward. Helpful. I wanted to ask one on smart metering. I think that, you know, you saw the ramp in Britain. You're pointing to India as the next region. Are there a number of other regions that are on that list that are looking to upgrade to the smart metering... Yes. or is this kind of the end of the cycle here? No. So we also announced on the call, Landis+Gyr for their mainstream solution. That is unrelated to the India and Great Britain opportunities. We're seeing a lot of progress globally and for ourselves, South America, Japan, US. I'd say if you look at the returns, which have different flavors by region, by application, it makes sense. And it's worth pointing out, those applications increasingly rely on multiple wireless technologies, which plays right to our bread and butter, where they'll need a Sub-GHz for long range. They'll need Bluetooth for commissioning, for the, you know, setup on your phone. Wi-Fi might talk back to the building there. It's an interesting space. You noted that design win activity was up 25% year-over-year in third quarter on your call. Can you talk about what areas you're seeing that traction? Maybe what's helpful is by standard, potentially. Sure. Just thinking about, you know, where you're winning there. I know Bluetooth has been strong. You mentioned that, but any color... Yep. In that traction? Sure. Yeah. So, just to frame it for everybody, our revenue grew over 40% in 2021 and 2022 each year. Our design wins grew faster during that same time frame. Here we are in 2023. I almost said 2024. 2023... Close. Almost Revenue, revenue is, is bad. Design wins are on or ahead of plan, which is meaningful growth over those prior years. So that's an awesome trend to see, 'cause usually when you see the market, you see design wins impacted by that market cycle. We're not. So that's we clearly see ourselves gaining share. To answer your question directly, I'd say gains, and I wanna make this clear, gains in all our end segments and markets and in all our technologies. And, you know, if you had to call out clear trends within that, Series 2 is the workhorse. It, it's just the beast in there that is driving the vast majority of our funnel and design wins because of the strength of that platform and products, and we're not done. We've already announced our Series 3, the next gen. We're still knocking out products in Series 2 and will for a while. So that's an exciting combination. In that, I'd say, you know, Bluetooth stands out in terms of growth. You know, I'm talking not absolute magnitude, but growth, relative growth. Bluetooth, strong. Wi-Fi, strong. 15.4 on Thread and Matter is really starting to present. And then Sub-GHz is always strong because we're really one of the only companies out there that has it. Got it. And when you, when you start that design process or you say, "Okay, we're gonna go in with this customer," talk about the life cycle of that product coming to market. So- Never fast enough. When you, when you announce 25% year-over-year, that's a big number. Yeah. When are we seeing that revenue... Yeah Come about? So, quick way to think about it: when we do design wins in, let's say, 2023, we will see some of that in 2024 because we're conservative by nature in the way we report design wins. They have to have started shipping something. So, but you're talking very small. Sub, let's call it, single-digit% of the total lifetime revenue will be in the following year. Okay. So, easy way to think about it, Home and Life, faster ramps. You'll see those as a 3- or 4-year cycle and really start the next year. Industrial, commercial, you know, 6- or 7-year cycles, longer ramps, it takes much longer to go. So we are starting to see the compounding of those take place now, which is what's making us confident to say we can drive sequential growth from here. But easy way to think about it, when we engage, say, a year or 2 on average, until it becomes a win, and once it becomes a win, let's call it a year, 12-18 months before it starts to meaningfully impact revenue on the other side. I wanted to zoom out once again on the decision you guys made to sell, you know, most of your profits to Skyworks. And, you know, you saw two very strong years of growth, and I think it was very impressive. And clearly, during this downturn, everyone's gonna question, was it the right decision? Yeah, sure. You know, is this the direction we should have gone? I'd say, in retrospect, if you look back, talk to me about that decision and what you think about it now. Yeah. And two, you do have cash still, even after this downturn, would you be interested in going out and doing M&A again, and your feelings on that? Sure. First, first answer is, strategically, absolutely would do it again. No, no hesitation there. But to be brutally honest, yeah, there was a few days in, you know, the last couple of quarters, it was like, wow, it'd be nice to have that there, for sure. But, you know, what's important to realize is we, we wouldn't have been able to perform as well as we did those prior two years if we hadn't done the divestiture. One of the reasons we were able to secure the supply that we did and engage with customers the way we did, we didn't have any conflicts. We were focused on one thing, and that focus helped us get the supply we needed and make the commitments to customers that we needed. If we'd had the other businesses, I guarantee it wouldn't have been the same result on the upside as well, which is important for people to realize. Strategically, the focus, having the entire company doing one thing, and this is what our future depends on, has been a surprise to me from an academic perspective, because I would have said mid and long-term impact. We've even seen short-term impact from this, so absolutely wouldn't go back on it. But yeah, there was a few days I wish that we had more revenue and more diversity in the end business, for sure, but wouldn't change the fundamentals strategically at all. In terms of M&A, absolutely, always looking, always open to it. I think our M&A focus has shifted as a company for a decade. You know, we were acquiring to get capability. We have the requisite capabilities and technologies we need right now, and that's coming through in our funnel, which is, you know, over $18 billion. We have what we need. We're just winning as fast as we can. What we do now would be to different, not to acquire technologies we don't have, it'd be to step function in terms of share and position in the market and scale, in areas where we wanna continue growing, Bluetooth, Wi-Fi. Big markets, we're making great progress. How do we go even faster, be more aggressive? Yeah, I think that leads me right into the next question, which is, historically, if you looked at the success in your end market, it was, you know, either best MCU wins or best radio wins, right? Mm-hmm. And then you saw the evolution of a connected MCU. It's who had the correct standards and where, you know... Yeah W hat end market took off. Yeah, yeah. The guy that was there, won. What do you think the next development from a technology perspective is in your end market? Because you're saying instead of going out and doing M&A and adding more standards and making sure that you can do more for more people, you know, that has changed. Where are you looking next as the next pivot in your industry? Yeah. So I mean, it's just some people don't realize it, at our peak, we had almost 100 different wireless technologies. There's no more to get for the most part, right? We, we don't need more of those. Mm-hmm. It's about scaling the ones that have the biggest, best return and best need in our end market. To answer your question, I do think you're gonna continue to see this dynamic play out between MCUs and wireless products. That simply said, every MCU over time, most likely, will need a wireless capability eventually. And that's why you see the MCU players out there acquiring as much as they can, because you can't home grow. You got to buy it. Takes a long time, takes decades to bring up that capability and integrate it. And we are incredibly well positioned for that dynamic, because what people don't realize is, we talk about ourselves as a wireless company. We sell as much microcontrollers as we do wireless, because every wireless product has a microcontroller integrated in it. So we are a wireless company and an MCU company all day in every product that we ship. To integrate wireless into digital is hard. To integrate digital into wireless, not as hard. We've already done it, and that's what we're scaling. So that's why we're gaining share against those other companies. But I think that dynamic will be pretty big over the next decade, that you'll see the integration of wireless and compute in, in almost everything, because it can be done. We're proving that. Helpful. One last one here, because we're running out of time. You obviously had the accelerated buyback when the deal was getting done and shortly thereafter. If I recall, you still have some authorization there. How are you thinking about buybacks? I think the stock made a pretty big jump after, you know... Yeah A fter the initial announcement of the revenue coming down. But, talk to me about strategically, is now a time where you'd be getting more aggressive? Because you clearly see your business accelerating from here. Yeah, sure. So we do have, as you mentioned, remaining authorization, but we're gonna be very thoughtful and conservative with the approach, given the revenue levels that we're operating this quarter and next quarter. You know, we have to be mindful of liquidity, obviously, and, you know, we feel really good about the balance sheet, but, you know, with negative cash flow for this quarter and, you know, into next quarter, like I said, we will be opportunistic, but we're not gonna lean too far into it. Yeah. Helpful. I just wanna thank you both for being here. Thank you. Have a great rest of the week. Thank you. Thank you everyone for joining. Thank you.