Good afternoon, and welcome to SiTime's Third Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today's conference call, instructions will then be given for the question-and-answer session. As a reminder, this conference call is being recorded today, Wednesday, November 2, 2022. I would now like to turn the call over to Brett Perry of Shelton Group Investor Relations. Brett, please go ahead.

Thank you Bella, and good afternoon. Welcome to SiTime's third quarter 2022 financial results conference call. On today's call from SiTime are Rajesh Vashist, Chief Executive Officer and Art Chadwick, Chief Financial Officer. Before we begin, I would like to point out that during the course of this call, the company may make forward-looking statements regarding expected future results, including financial position, strategy, and plans, future operations, the timing market and other areas of discussion. It's not possible for the company's management to predict all risks, nor can the company assess the impact of all factors on its business or the extent to which any factor or a combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. Neither the company nor any person assumes responsibility for the accuracy and completeness of the forward-looking statements. The company undertakes no obligation to publicly update forward-looking statements for any reason at the date of this call to conform these statements to actual results or to changes in the company's expectations. For more detailed information on risks associated with the business, we refer you to the risk factors described in the 10-K filed on February 25, 2022, as well as the company's subsequent filings with the SEC. Also, during this call, we’ll refer to certain non-GAAP financial measures, which we consider to be an important measure of company's performance. These non-GAAP financial measures are provided in addition to, and not as a substitute for, or superior to measures of financial performance prepared in accordance with US GAAP. The only difference between GAAP and non-GAAP results is stock-based compensation expense and related payroll taxes. Please refer to the company's press release issued this afternoon for detailed reconciliation between GAAP and non-GAAP financial results. I’d now like to turn the call over to SiTime's CEO. Rajesh, please go ahead.

Thank you, Brett. Good afternoon. First, I'd like to welcome you as well as existing investors to the SiTime Q3 2022 earnings call. For those of you that are new to our business, SiTime is the leader in a dynamic new product category called precision timing. In electronics, timing is ubiquitous and ensures reliable functioning. SiTime created precision timing to service the accelerating need for higher performance, smaller, lower power and more reliable timing chips for applications like automated driving, 5G and data centers. We are early in our growth trajectory as we transform the $10 billion timing market. We have shipped three billion units of our precision timing chips to 20,000 customers in 300 applications across all electronics. As many of you have heard from others in the semiconductor industry, the current market conditions we are experiencing are unprecedented. In 40 years of industry experience, I have not seen a downturn as rapid or as deep as this one. We see this as a result of multiple, unusual and simultaneous macro events making it more difficult to forecast than ever. Last quarter, we saw a significant change in market conditions, which has reduced our expectations for the year. While our Q3 revenue, gross margin and EPS were all solidly within our guidance range, we have seen end customer demand slowing, first in consumer then in industrial markets and now in comms, datacenter for fourth quarter '22 and first quarter 2023. This is because while we continue to see normal inventory levels at our distributors, it appears that customers have built inventory at their contract manufacturers. We expect that in all segments, our customers will need to spend the next two quarters working through this buildup. Despite this our long-term growth story in precision timing and SiTime's leadership remains intact.…

Great. Thanks Rajesh and good afternoon everyone. Today, I'll discuss third quarter results and I'll provide guidance for Q4 and make some comments on 2023. I'll focus my discussion on non-GAAP financial results and refer you to today's press release for a detailed description of our GAAP results as well as a reconciliation of GAAP to non-GAAP results. Revenue in the third quarter was $73.1 million, up 16% from the third quarter of last year, but down 8% from Q2. Sales into our mobile, IoT, and consumer segment were $24.2 million or 33% of sales, down 10% from Q2. Sales to our largest customer, which is included in this segment, were $18.2 million or 25% of sales. Excluding sales to our largest customer, sales into this segment were $6.0 million, down 62% from Q2. Sales into our industrial, automotive, and aerospace segment were $25.1 million or 34% of sales, down 22% sequentially. Within this segment, sales into auto were sequentially flat, but sales in the broadband industrial were down more than 35%. Sales into our communications and enterprise segment were $23.8 million or 33% of sales, up 17% sequentially. Non-GAAP gross margins were solid at 65.2%. Non-GAAP operating expenses were $28.0 million as we held spending essentially flat with Q2. Expenses were $16.1 million in R&D and $11.9 million in SG&A. Non-GAAP operating margins were 26.8%. In addition, we earned $2.5 million in interest income this quarter up substantially from prior quarters as interest rates have recently increased. Non-GAAP net income was $21.9 million or $0.97 per share. On the balance sheet, accounts receivables were $44.9 million with DSOs of 55 days. That's up from $38.7 million and DSOs of 44 days in Q2 as customers are paying just a little more slowly than before. Inventory at the end of…

[Operator Instructions] Our first question comes from the line of Alessandra Vecchi from William Blair. Your line is now open.

Hi, guys. Thanks for the candor on the environment and what you're seeing. I guess just one question to circle back. What is it that you're hearing from your customers that are giving you the confidence that inventory levels will be worked out in Q1 and that you can start to grow from there. Kind of what are the puts and takes we should be looking out for?

So thanks, Alex. Obviously, with the caveat that we don't know exactly what's going to happen, we see that the inventory and demand are, of course, correlated quite a bit, right? The lower demand there is, the lesser inventory comes through. I think what we see is that the inventory buildup has been in a somewhat unusual place in the contract manufacturers, which is typically not the case. We see the demand at comms and enterprise, which is one of the larger declines, that continuing, albeit at a slower pace. And while we factor in the reduced demand, and the inventory that they have to work through, that is what we begin to hear. In many cases, I think some of them are significantly over in the street. Some of them are very likely over in the street. But given the breadth of our customers, I think the broad view is that the next two quarters, Q4 and Q1 are going to definitely needed for all that to come through. So that's what we've learned. We've also learned that in talking to our -- to looking at the channel, including the CMs [ph] and we see that in many, many cases, that to be true.

Okay. That was really helpful. And then if I can do one follow-up, just on your commentary about the ASP growth over the last eight quarters and seeing ASPs up even in Q1 of 2023, how much of that is a function of the decline in consumer versus a function of the newer products gaining traction versus a function on ASP increases on an apples-to-apples basis on some of the legacy products?

Yeah. So the ASP increases on the legacy product is probably the least component of it. I would say that our mix is probably the most influential piece where we are selling more in comps, more in automotive, more in high-end industrial. And finally, I think the introduction of the new products is having an impact. As you know, in many cases, the new product introduction takes a little while to come through for revenue from design wins. But in this case, I think there has been a significant growth of new products, in particular, the Aetna product line and the Elite product line, which has contributed significantly to it. So this is a long-term transition of SiTime. Last time, I commented on how our ASP has grown 30% year-on-year, Q2 2021 to Q2 2022. And I anticipated that ASPs would be flattish. I think ASP growth has exceeded my expectations. And I think it continues to be high now. It may come down in Q1 a little bit over current numbers because of lesser on the mix side, but it will still be higher than what it used to be a year before that.

And Alex, I'll add just a few comments. We've always talked about our strategy being developing much higher performance, higher ASP products. And that's what you're seeing here. Our newer products, again, higher performance, higher ASPs, generally higher gross margins, and that's exactly what we're seeing here.

Okay. Perfect. That was very helpful. With that, I'll go back into queue. Thank you.

Your next question comes from the line of Suji Desilva with ROTH Capital. Your line is open.

Hi, Rajesh, hi, Art. Can you give us some sense of what the different segments might look like in 4Q? And I was curious, particularly about automotive, you said it was flat. Is that one going to hold up better than the others, given the design win ramp?

Yeah, I think automotive is going to hold up pretty nicely from Q3 to Q4 and well into next year, when we look at our forecast for automotive, that's definitely a growth segment for us. Our consumer sales will be relatively flat from Q3 to Q4, starting with our largest customer. Our largest customer is 25% of sales in Q3, and it's probably going to be pretty similar to that in Q4. But we are going to see a decline in comms and enterprise. Again, for the most part, it's because they are over-inventoried. And that was my comment also on Q1. We're really going to see a lull in new shipments to our comms and enterprise customers in Q1. So that trend will continue until they work through some of that inventory, then we think we get back on a growth path.

And aren't industrials at bottoming given the sharp follow-up or not?

It should flatten out yes.

Okay. Good. And the other question I had is with the inventories on the balance sheet. Now that you've built up buffer stock and can return to more positive working capital and do you feel like you've built sufficient buffer stock there in inventory?

Yes. I mean, we had a pretty good step-up from Q2 to Q3. As I mentioned in my commentary, that was a very conscious decision. All of last year, people were kind of hand to mouth on wafers. And of course, we procure our wafers from both Bosch for our MEMS wafers and TSMC for our CMOS wafers and both of those are sole source. So just to provide some cushion in there, we increased our buffer stock. I expect our inventory levels remain kind of at this level for the next couple of quarters.

Okay. All right. Thanks.

And, Suji, I think you rightly identified that, as buffer stock, because that's how we are seeing it increasingly in a continuing uncertain world, site and of supply of both CMOS and analog chips and MEMS chips, we think it's prudent for us to have significant inventory to support our customers who, as I mentioned, are in fact, significantly single source to SiTime. So I think it's very important. We're also moving into some areas like automotive and aerospace, where it becomes even more critical to our customers to have these.

Got it. Thanks.

Thanks, Suji.

Your next question comes from the line of Quinn Bolton with Needham & Company. Your line is now open.

Hi, Rajesh and Art. I guess, for just the first question, last quarter, you talked about sort of the split between precision timing and non-precision timing. And as you look into the second half of the year, I'm wondering, if -- could you give us some sense, how much of the portfolio, either in Q3 or maybe for the Q4 guide would be from your higher-end precision timing parts? And how much of the business would still be more legacy non-precision timing where ports might be much more competitive.

Yes. So, what we have found more and more is that, most -- there's very little business of ours, which is so-called multi-source; in other words, where we can be easily substituted because the customers either don't want their performance or don't put the supply chain benefits or the quality benefits of SiTime and where they can substitute as readily. I think that portion of our business has declined significantly through this year. And when we exit the year, a large portion of it will be that 80% single source that we talk about. So it's an interesting idea where we can have a customer in the consumer segment that is also a single source and also not going to be substituting quartz-based crystal easily. Most of our single source, of course, goes in automobiles. It goes in industrial. And it goes in comms enterprise. And that's a significant portion of our business. Our design wins in consumers are also, as we look out into the New Year are also at a lower level than design wins in all these other markets that we have spoken about. So I see that trend continuing where single source of high band products and also don't forget that we are introducing six new products this year, which will likely be a single source of customers. And we're going to introduce five new products next year, which will be also significantly single source next year. So that trend is a long-term trend of five times, because of essentially a functionality and/or quality reliability.

And Quinn, I'll try to -- I'm sorry, go ahead.

Oh, no, go ahead, Art.

I was going to just quantify this just a little bit. If you recall on our conference call a quarter ago, we estimated that about 70% of our business was precision, 30% non-precision timing and a bulk of the non-precision timing business was in our consumer space, not our largest customer, but the remaining consumer business. And if you recall my remarks, a few moments ago, that piece of the business declined 62% from Q2 to Q3. So that piece of the market is getting squeezed out pretty quickly here.

Yeah. So I was going to say, it sounds like its 80% or north of 80% is sort of precision timing and 80% sole-sourced or single sourced and sounds like that percentage you would expect goes higher as you introducing products into 2023?

Yes, absolutely.

Got it. Perfect. And then or just a clarification on your comment about the largest customer, you said would be flat quarter-to-quarter. I wasn't sure if you meant flat on a dollar basis or flat on a percentage basis.

Yeah. Excellent question. It's going to be flattish on a dollar basis.

Perfect. Thank you.

…which is kind of what we expect with them.

Yeah. No, makes sense.

[Operator Instructions] Your next question comes from the line of Tore Svanberg with Stifel. Your line is now open.

Yes. Good afternoon. This is Jeremy calling for Tore. I guess a question first on the comms data center weakness here. Is there anything to call out within like any subsegments, kind of, any insight you have, whether -- comms or the data center versus the enterprise segment is doing particularly. Yes, thank you.

Yes. Hi, Jeremy. Yes, I think the particular areas, if you were to look at it, would probably be in the data center and enterprise. I think in general, those have been the hot markets and I think those are the ones that have been muting slightly as we go forward based on the over inventory situation we talked about.

Got it. Thank you. And can you give us any color on the -- on your lead times? It seems like you guys have been pretty consistent, pretty well relative to the rest of the industry. And can you talk about how that's compared, maybe anything -- any changes in the last 90 days or so and how you see this going forward?

Yes. We don't see…

Yes. So if you recall in prior conference calls, we talked about lead times going out two quarters or so. Lead times have definitely come in from that during the last number of months. So to answer your question without quantifying it, lead times are absolutely coming in -- coming down.

Got it. Thank you. And maybe just one last question. Looking at the -- your focus segments. Can you rank order some of that for us? Like how you see it playing out in 2023 as the recovery happens, which of these segments do you expect to kind of drive the near-term return to growth? Thank you.

So I'm not sure I want to call out any particular segment, but I think the segments that we have always talked about being strategically important to us, our comms and enterprise as we mentioned, that is somewhat soft today. But what's really declining in that area is the fact that they're over inventory. So we've got to work through the inventory in that area. If you look at our new product introductions, again, higher performance, higher ASPs, higher gross margins, that's generally in comms, enterprise, and for us, aerospace most definitely, and auto is going to be strong. So those are really the key growth drivers that we see long-term.

Right. And extra largest customer, I don't think it's going to be consumer. We don't -- extra largest customer, I don't think it will be consumers that will be leading it. So that's on the other side of that story.

Understood. Thank you very much, guys.

Thanks, Jeremy.

Yes. You’re welcome. End of Q&A:

And we have no further questions at the queue. I will now turn the call back to the management for closing remarks.

In that case, we want to thank everybody for joining us on today's call, and I hope everybody has a great afternoon. Thank you.

Thank you, all.

This concludes today's conference call. Thank you for your participation. You may now disconnect.