Good morning. My name is Keith, and I will be your conference operator today. At this time, I would like to welcome everyone to Silicon Labs' First Quarter Fiscal 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jalene Hoover, Director of Investor Relations and International Finance. Jalene, please go ahead.

Thank you, Keith, and good morning, everyone. Tyson Tuttle, Chief Executive Officer, and John Hollister, Chief Financial Officer, are on today's call. We will discuss our financial performance and review our business activities for the first quarter. After our prepared comments, we will take questions. Our earnings press release and the accompanying financial tables are available in the Investor Relations section of our website at www.silabs.com. This call is also being webcast and a replay will be available for four weeks. Our comments today will include forward-looking statements subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future. We encourage you to review our SEC filings which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP financial results is included in the Company's earnings press release and also in the Investor Relations section of Silicon Labs' website. I would now like to turn the call over to Silicon Labs' Chief Financial Officer, John Hollister.

Thanks, Jalene. Revenue for the first quarter was in line with our guidance ending at $188 million, down 13% sequentially due to the broad slowdown in the semiconductor industry. We are pleased to report that we saw a sharp rebound in our Q1 bookings and expect revenue growth in Q2. IoT revenue ended at $106 million, down 11% sequentially with declines in MCU and wireless products resulting primarily from broad weakness in the industrial end-markets. Revenue for Infrastructure was roughly flat sequentially ending at $46 million. This result was better than we expected with timing up slightly and nearly offsetting the decline and Isolation which was due to weakness in China and industrial end-markets. Broadcast revenue for Q1 was down significantly to $26 million representing a 25% sequential decline driven by macro factors on top of typical consumer seasonality and a weak automotive market. First quarter Access revenue also declined sharply in Q1 ending at $10 million and down 36% sequentially driven primarily by a slowdown in the China telecommunications market. Looking at the first quarter revenue by end-markets, all major end-markets served were down sequentially with the sharpest drop coming from Industrial driven by IoT and Infrastructure, followed by Consumer due to declines in Broadcast and finally Communications driven by Access. Automotive was down slightly. Revenue also declined across all geographies with APAC showing the largest sequential drop driven by Broadcast Consumer, coupled with a broad slowdown in China, particularly in MCUs and Isolation. Distribution mix ended at 71% and due to the broad nature of the downturn, our top-10 customer mix increased to 23%. No end-customer accounted for more than 10% of our revenues. Non-GAAP gross margin for the quarter ended very strong at 61.8% driven by favorable product mix. We effectively managed our non-GAAP operating expenses in…

Thank you, John. We are pleased with our execution in the first quarter including revenue at the midpoint of guidance and gross margin, OpEx and EPS meeting expectations. Our favorable OpEx performance reflects the company-wide effort to limit discretionary spending without sacrificing essential investments to continue to drive top-line growth. Based on our first quarter results, strong Q1 bookings and Q2 guide, we believe Q1 should represent the bottom of the downturn. That said, we have not seen material improvements in key macroeconomic conditions including geopolitical and trade factors since our January earnings call. Our China exposure is lower than many of our competitors with less than 25% of total revenue designed into China-based customers. We also benefit from a fabulous model, which allows us to scale our supply chain while maintaining a largely variable manufacturing structure. In Q1, we saw the second highest quarterly bookings in our history. We are seeing increasing momentum in the sales funnel which has reached $11.4 billion with Wireless leading growth and design win lifetime revenue up nearly 50% year-on-year in Q1. Turning to IoT, in a recent KPMG survey, two-thirds of the 149 industry leaders worldwide ranked IoT as the leading revenue application over the next year with 60% ranking of wireless communications at the top. In Q1, our IoT products achieved record design win lifetime revenues and delivered 3% year-on-year revenue growth with gains in Wireless including the addition of Z-Wave, offset by declines in MCUs. We are seeing a resumption of growth in the UK smart metering market, an uptick in ordering from high volume lighting customers and customer ramps into smart home. At the Embedded World Conference in February, Silicon Lab showcased its latest Wireless Gecko Connectivity Solutions for smart home, lighting and building automation applications. Hands on demonstrations highlighted…

Thank you. Before we open the call for the question and answer session, I would like to announce our participation in Stifel’s Cross Sector Insight Conference in Boston on June 11. We would now like to open the call up for your questions. To accommodate as many people as possible before the market opens, we ask that you please limit your questions to one with one follow-up.

Yes, thank you. [Operator Instructions] And today’s first question comes from Matt Ramsey with Cowen.

Thank you very much. Good morning. Congratulations guys on seeing the turn in the business. I know it’s been a bit tough out there. So it’s great to see. Tyson, in the IoT business, you guys have talked about sort of the correction that happened from Q3 to Q1 being sort of in line with the industry and potentially undershipping and sell-through. Maybe you could talk a little bit about where things are with inventory with your distributors? And the record bookings or near record bookings and things that you saw during – do you expect to see during Q2 is that sort of catching up with demand or is that back on sort of a trend back to that sort of 20% long-term growth target that you guys have talked about? Any color there would be helpful. Thank you.

Yes, Matt. This is John. Let me take the first question on days and inventory. We saw stable performance in our distribution days statistic into the high 40s at around 49 days as we ended Q1. Bearing in mind that is a rearward looking calculation on the quarter’s shipment rate. So, obviously with a depressed shipment rate in Q1 the absolute inventory units accounts declined in the first quarter and that’s not surprising. So, we think that level of inventory is healthy and positions us well to grow in the second quarter. So that is normal from our perspective. In terms of the bookings, we saw very robust bookings through the balance of the first quarter after we got through the first couple of weeks in January and as Tyson indicated, that allowed us to achieve the second highest quarterly bookings rate in the company’s history. Some of that is likely a snap back from what was a depressed bookings rate at the end of Q4. But certainly it also speaks to the secular growth drivers we are seeing particularly in the wireless portion of the IoT business.

Yes, just to give you a little bit more color on the bookings that we saw in particular in IoT, we saw strength in the metering market as the SMETS 1 to SMETS 2 transition is essentially complete. And so, the UK smart energy and metering in general was quite strong in the bookings as we are standing right now. We also saw a lot of smart lighting applications where we saw some delays in programs last year and those are beginning to ramp. And so, we have a very strong position with our Zigbee products in lighting. We also saw strong revenue in Bluetooth and strong adoption of our Bluetooth 5 and Bluetooth Mesh solutions. And those are starting to layer in as well as just in general, a lot of the smart home activity around the Zigbee and Z-Wave. So we feel good about kind of the breadth of that rebound in the bookings in Q1. And in terms of the growth target long-term, we’ll have to see how the macro holds in through the year, but I think if you take it on a long-term basis, we feel confident in our ability to continue to grow the IoT business.

Got it. That’s really helpful color. I just wanted to ask sort of a follow-up on the Infrastructure side. It’s obviously encouraging commentary on your Timing business with the kick-off of 5G builds in earnest. Tyson, I wanted ask a little bit longer term, I know there was a third leg of that factor of growth for your Timing business in terms of cloud datacenter and a lot of the technologies that you had in wireline and now in wireless are applicable there as well. Maybe you could give us a little bit of a maybe the next 24 months update about where things are on the cloud side, et cetera? Obviously, a big SAM as well. Thank you

We feel very good about our position in Infrastructure and in particular in the Timing area around 5G. We believe the 5G opportunity sitting in front of us which is really just starting right now doubles our SAM over the next few years. We also believe that our – just our wireless infrastructure revenue will be doubling from last year to this year and that’s off of a very strong 2018. We grew the Infrastructure business about 30% year-on-year. So we had a very strong performance and then you saw sequential – essentially, flat into Q1 and Q2, but that’s reflecting some general weakness in the macro coupled with ramps on the 5G side as well as in our core optical networking area. So, given the opportunity in 5G and the strong roadmap that we have, and the market opportunity and the expansion of our SAM, we feel again very good about our opportunities and specifically in Infrastructure around timing. And also on the Isolation side, we have a very strong roadmap there and the spike effect that we’ve seen some weakness in the China market believe that we have a very strong roadmap and growth prospects on the Isolation side as well.

Thanks very much. ]

Thank you. And the next question comes from Cody Acree with Loop Capital.

Thank you guys for taking my question. Question with CI’s comments last night about a continuing broad based slowdown in the chip market and then mix stat for that was some of your comments, you are just on the last question about a – maybe a certain amount of snap back and getting back in normalcy of order as you go into the Q2. Do you think that as we progress into the second half that we benefit in the short-term from that snap back to the normalization, but in the second half it’s more macro-driven or do you expect to continue growth sequentially through the year?

Yes, I think if we break down, what we’ve seen in Q1, I think that we had at our customers a bit of an inventory correction that suppressed bookings and revenue there in Q1. But really the Q4 bookings going into Q1 and then a lift as we come back into Q1 bookings and then guidance into Q2. And we haven’t really seen in our broad businesses. We still see a fairly muted demand in particular around China and around Industrial. I think that when we are referring to the snap back, we are returning to a more normal operating pattern given the macro situation, but also being driven by very strong design win performance and the ramp of new programs. And so I think that the increase in revenue that we are seeing here in Q2 is a result of both of those factors and the design win traction that we’ve seen in Q1 design wins up 50% versus last year, the very strong pipeline that we have up to $11.4 billion. That’s really what we are relying on for growth. No matter what the macro does and certainly if the macro starts to improve, that will lift all boats. But we are not counting on that to drive growth into the second half. And so we feel good given our design win traction and the visibility that we have in the bookings and a lot of these new programs that we are going to continue to be able to outperform the market.

And so my follow-up, like you said, that the continued macro uncertainty, are you starting to see any willingness about – for your OEMs or your distribution partners to carry a bit more inventory? Are they still working down? And then, what are your plans for your internal inventories given the backlog you are building?

Yes, Cody. This is John. So, we have had normal inventory levels in the channel as we ended the fourth quarter. That specific was in the mid-40s which is reasonable. That’s not a high level of inventory and as we’ve moved to the end of Q1, of course, that number declined. But that’s based on a reduction in the overall level of business. But we definitely have seen the distribution channel willing to carry an appropriate amount of days in inventory and we believe they will continue to do that. As far as our internal inventory, we are positioned for growth. We see four turns of inventory. But that’s on the low side, where we like to manage the business, but that is appropriate given the level of growth that we are projecting into Q2. And as I mentioned on the prepared comments, I would expect us to improve our turns some as we progress through the course of this year with continued growth in revenue.

Thank you guys.

Thank you.

Thank you. And the next question comes from Blayne Curtis with Barclays.

Hey guys. Thanks for taking my question and nice results. Just curious on the guidance. You mentioned all about Infrastructure growing, I am just kind of curious, I know they are not growth businesses, but Access and Broadcast were down very sharply in Q1. So I was just curious to what extent those come back for you in Q2. So if you can give any color between the segments in the Q2 would be helpful?

Yes, Blayne, this is John. So, as you look at Access and Broadcast, we clearly had an unusual amount of decline in the first quarter where you have seasonality in the Broadcast market that is typical. That was compounded by the industry slowdown. So we see a resumption of performance there with the growth returning in both the Automotive and Consumer areas of Broadcast with a little more growth expected in Automotive and then on the Access side, similar comments. We see the drop in Q1 as being more unusual in nature given the slowdown with some resumption of more normalcy beginning in Q2.

Thanks. And then, just on gross margin in Q1, obviously mix Infrastructure should help, just kind of curious if you add any other color as to what drove the outperformance?

Yes, it’s really mix across the categories. So, strong Infrastructure led by timing helps that. There was also, underneath that, there was favorable product mix within the categories, which helped as well.

I’d also say that the decline on the Broadcast consumer side, the seasonality in the decline there also helps to drive the gross margin in Q1.

Thanks.

Thank you. And the next question comes from Gary Mobley with Wells Fargo Securities.

Hey guys. Thanks for taking my questions. On to a follow-up on Blayne’s question about gross margin maybe looking more into the future. Your prior guidance has been 58% to 60% and you are teetering on 51% for the first half of the year. And I know mix is going to play into it, but are you going to continue to run about that 50%? Should we rethink that long-term outlook of 58% to 60% and in the operating margin side, I commend you guys for coming in below expectations for the quarter and holding OpEx flat here as we tread through some turbulent times. But it’s still only a 15% you are miles away from the long-term target and you reconfirm what the revenue level needs to be to be target and how committed you are to getting to that level?

Yes, Gary, this is John. So, on the gross margin question, we are very pleased with the execution in the first quarter and it really reflects the differentiated nature of our technology and the fact that we are adept at managing our manufacturing costs very well. And so, that’s a testament to those factors. On the longer-term model, we are holding. We think 58% to 60% is the right way to view the business in the long-term as we may begin to ramp more and more programs that may pull that down a bit. So we want to hold that model at 58% to 60%. As far as DOI, as we see this with continued growth from the business in the next several quarters, we see the opportunity to come back to model and we think the right posture for ourselves to continue make the critical investments we need to make for long-term success in the business while being judicious in our spending and allow the revenue growth to pull us back up to our target operating margin range.

Okay. As a follow-up, I wanted to ask about the Gecko Series 2, you spoke in your prepared remarks the benefits to customers as it relates to security power range, use of design, what not, but how does it benefit Silicon Labs? What I mean by that is, how does that benefit SiLab from an ASP perspective and maybe as well cost optimizing the product versus first generation?

So, the Gecko Series 2, which – this is the first set of product out of the whole portfolio product that we are broadening our product portfolio and adding critical features that customers need to drive IoT adoption, in particular security, which essentially enables payment-grade security right down to the device level. That’s very, very secure and also easy to use and implement and I think that that’s one of the key things to drive additional adoption. And that also increases our differentiation and I think that as a company, we are quite good at selling the value of our differentiation and that’s responsible a lot for the gross margin performance that we are able to achieve. I think that also there is optimization of these devices for specific use markets. We saw the first set of products optimized for gateways, hubs, lights, voice assistance and smart electric meters, and we have additional devices coming onboard that are cost optimized for the Bluetooth market, for the Z-Wave market and for higher levels of functionality which will continue to drive differentiation in our ability to take share from the competition. If you look at the Series 1, those products are very, very strong, but they were also very general purpose and carried some additional functionality for a lot of those segments. So as we optimize that cost, we believe that the competitiveness of the products, as well as the enhanced integration and the lower energy consumption that we are able to achieve is going to significantly improve our ability to convert that very large funnel into design win. So, we are very happy with where we are on the Series 2. Those are very active developments in our R&D pipeline both on the hardware side as well as the software side. We are very pleased to have Z-Wave now part of that portfolio and that suite of products and software. And we also continued to drive simplicity in our tools and software. So that this makes it easy to design in and it helps us scale our SG&A investments and our sales investments to address an even broader range of customers and applications.

That’s helpful. Thank you.

Thank you. And the next question comes from Tore Svanberg with Stifel.

Yes, thank you. First question, Tyson and maybe following up on Series 2, I assume that’s sampling now. So, what’s sort of the feedback you are getting from the market as far as all the different wireless standards? I mean, should we still assume this high level of fragmentation between Bluetooth and Z-Wave, Zigbee? Or are you starting to see at least some convergence at all when it comes to wireless connectivity in IoT?

Yes, so, in terms of the Series 2, the first set of products are actually in early production with customers. So those are – those have been sampling now for over a year and we are now ready for broad sampling out into the market to more customers, but we do have those currently in production. And those are based on a new 40-nanometer process technology to SMC. So it’s a high volume, very, very robust process technology that’s highly optimized for IoT applications. And the platform is also optimized across a wide range of standards. So, we can talk a little bit about the deployment of standards. I would start by commenting that Silicon Labs has the widest range of wireless protocols available from any supplier in the market and we have leading positions in the Z-Wave and Zigbee in the mesh networking, as well as in the proprietary set of protocols where customers run their own protocols on our device in sub-gigahertz and 2.4 gigahertz and that primarily addresses a lot of the industrial markets where people want compatibility with legacy standards, as well as upgradability into a new set of standards. If you look at the smart home, the addition of Z-Wave last year really puts us in a driver’s seat in terms of being able to drive the convergence of standards and we see the advantage of having both Z-Wave and Zigbee and Thread as a competitive advantage and makes us a very good strategic partner for companies that wants to be able to offer devices that are interoperable with as many standards as possible and to streamline their product development experience. So that puts us in a very strong position. And we also talked about Bluetooth and we are a leader and we were the…

That’s very helpful, Tyson. And then, my second question is on Infrastructure. So, it sounds like, it’s surprised you a little bit on the upside in Q1. But maybe some of that is going to come back down in Q2. And then, how should we think about that bucket sort of linearly throughout the year, because you are obviously talking about wireless infrastructure doubling in revenue and so on and so forth. So, should we assume that in the second half that that should be a fairly strong market? Because obviously in Q2, it’s going to be more flat.

Yes, so, we had flat revenue from Q2 or Q4 to Q1 which we thought was a very good result with some of the 5G applications, as well as, as return to more normal patterns on the communications side. We did see some weakness on Isolation with Automotive and this broad industrial in China down. And we think that just in combination, those are going to be flat coming into Q2. That being said, we see ramps in 5G and also ramps of new programs and design win traction in the Infrastructure area which should drive some growth into the second half versus the first half runway. But it really remains to be seen where the macro. We are being careful about projecting a lot of things out into the second half. But given the stable macro situation compared to where we are now, we would see growth in Infrastructure in the second half.

Very helpful. Thank you.

Thank you. And the next question comes from Suji Desilva with ROTH Capital.

Hi, Tyson. Hi, John. So, congratulations on the recovery here. I was curious with couple of end-market questions. First of all, I was curious that your smart lighting kind of burked back up or maybe burked up after being muted. Can you talk about what the drivers are that are gaining that going, that have smart lightings that recovery is it sustainable at this point or kind of near-term pattern?

Suji, this is Tyson. In terms of the smart lighting market, we have a very strong share in that market with our Zigbee devices, as well as Bluetooth Mesh and it should be noted that with the Z-Wave 700 Series, we now have the temperature performance to operate in lighting applications as well. We’ve had a lot of design wins with customers where they were moving from an older solution into newer solutions. And the delay in the rollout of those products with our devices inside was really due to some inventory issues that they had on their end that delayed the ramps that we are now starting to see here in Q1. If you look at the drivers in the market having smart lighting and this is a variety of different bulbs, as well as fixtures. You just see the broadening of portfolios of different types of fixtures and different types of bulbs as new building construction happens and as consumers retrofit existing devices with smart lighting. These provide not just convenience features, but also security as well as health being able to adjust to colors and the brightness as you go through the day. So, there is a lot of benefits I mean, especially in new construction where these LED fixtures are being deployed and the addition of connectivity and control into those in a fine grained manner allows both commercial and residential builders to deliver additional value to their customers. So, I think that there is a strong market pool. There is a broadening of the portfolio of devices that are available, growing adoption of smart lighting. So we see this as a very positive long-term trend and we have from the get go optimized our solutions for the requirements and with our Series 2 devices are further optimizing those in terms of functionality and cost.

Sounds promising. And then, another question is on the Infrastructure side 5G timing. Can you just talk about your competitive differentiation there and what the competitive landscape is like? And what kind of share you think you are going to achieve in 5G versus 4G maybe your products are better positioned given the requirements of 5G being more stringent? Thanks.

So, our Infrastructure products have always been the highest performance devices on the market and we continue to invest in new devices to drive lower jitter and better functionality for various applications. For instance, Synchronous Ethernet which is used in a lot of infrastructure applications. We have some patented technology which allows us to synchronize better than conventional types of architectures. So, in addition to delivering the best jitter performance we offer the highest flexibility, the highest integration. We have additional patents and technology which allows us to have a variety of outputs at different frequencies that are very, very flexible and that is also very difficult to achieve with conventional architectures. So, our differentiation has always been very strong which is why we had such a high share on the communications side, the optical networking side and we’ve been able to take those features and functions and adapt those to the wireless infrastructure for 5G where you have again higher and higher speeds, more performance requirements, lower noise, and those are – our devices are perfect for those types of applications. And the evidence of that is that four out of the five and hopefully the fifth one will land at some point. But the major vendors of wireless infrastructure equipment have adopted our solutions in their initial rollouts and continue to design in both those parts as well as parts that we have on the roadmap into the mainstream 5G deployments that they are going to be rolling out here over the next few years.

Very helpful, Tyson. Thank you.

Thank you. [Operator Instructions] And the next question comes from Rajvindra Gill with Needham & Company

Yes. Thank you. And I echo my congrats in this uncertain environment. Just a question on the IoT segment, particularly around the UK smart metering program. By my math, that program accounted for about, well that opportunity accounted for about $40 million of annual revenue opportunity. And I believe that because of the delay that impacted your IoT business by about $25 million to $30 million, should we expect that kind of full opportunity to flow through the model this year? And should we make the conclusion that that’s - that will be a main driver of the IoT growth this year plus the Wireless Bluetooth components?

If you look at the UK smart energy market just in general, it’s a five year deployments, we are into now year three essentially of that deployment and about a third of the units have been deployed so far. We saw a reduced shipment into that market last year due to the transition from the first-generation standard called SMETS 1 into the second-generation standard called SMETS 2. And we now see a resumption of shipments into the market using this new standard. And we have supported both of those standards. Out of that 110 million units or so, we’ve got about 90% share of that. So we – and that’s broadly across all the suppliers of equipment into the market. So, we do believe that the smart energy and metering market in particular, the UK is going to be, we’ll have more revenue from that this year. But if you look at the IoT growth in wireless, we have growth across the board in Zigbee, in Z-Wave, in proprietary and in Bluetooth. And so, it’s not just the metering market, we talked about the lighting market. There is industrial applications. There is a variety of smart home applications and home security which are ramping through the year which are going to drive more broad growth in IoT. And this is both at higher volume customers in the millions of units as well as the long tail that we’ve been working on making our devices easier to use and developing our sales channel and being able to convert that large pipeline. If you look at that pipeline of opportunities, that $11 billion, about $8 billion of that is in IoT with the vast majority of that in wireless applications. So the number of wireless applications, the competitiveness and breadth of our portfolio and our ability to convert those opportunities continues to get better as we scale our support network and drive our roadmap. So, it’s not just the metering that’s driving the growth. But that’s certainly a very positive factor into the growth here in 2019 for Wireless.

Yes. Thank you for that clarification. And just a follow-up on the IoT business, for MCUs, it’s still a significant percentage of the overall IoT business, particularly in China. I am just wondering, how we think about the 8-bit, 32-bit market, particularly in China industrial, which was hit hard as you know in Q4 and continues to be soft and with limited visibility. I am wondering, how do we think about that portion of the business affecting the overall growth of the IoT business and the company?

So, if you take the IoT category, roughly microcontrollers are about a third of that revenue and those were down here in Q1. We do anticipate a modest growth in MCUs here as we progress through the year and that’s again factoring in kind of a neutral outlook to the relative performance of China in the industrial market versus where we are right now. You also have to remember that a number of our MCUs are sitting next to wireless devices or our end-devices that are becoming wireless-enabled. So, we have a strong conversion of those microcontrollers which are in that microcontroller category into wireless, because they move from a standalone microcontroller with a discrete wireless solution or no wireless solution into an integrated SOC which includes wireless connectivity, as well as microcontroller functionality, energy management and all of the center interfaces and that sort of things. So, that is the place where we have a true differentiation that that’s where we are able to deliver additional performance and integration benefits and where we are seeing the strongest traction. But certainly, the MCU market, while challenged is one that we continue to participate in.

Great. Very helpful. Thank you.

Thank you. And the next question comes from Alessandra Vecchi with William Blair.

Hi guys. Congratulations on a great performance. Just circling back on operating expenses, acknowledging your earlier comments that sort as the macro improves and as some new design wins we should start to be thinking about your operating margins getting back to the target rate. If I look through it historically at your normal OpEx seasonality, Q3 is tended to trend down a bit and Q4 has tended to trend up. Should we think of sort of a similar situation this year? Or given the depressed levels in Q1, Q2, is it more a little bit of a step function of, as we progress through the rest of the year?

Yes, this is John. We will see how the year plays out. If macro holds and as we continue to see ramps in the business with continued growth into the second half on the revenue side, I would expect us to step up a bit with the OpEx levels as the year progresses. But we’ll have to see how it plays out.

That’s helpful. That’s it for me.

Thank you.

Thank you. And I would like to return the conference back over to Jalene Hoover.

Thank you, Keith and thank you all for joining us this morning. This concludes today's call.

Thank you for attending today’s presentation. You may now disconnect your lines.