Silicon Laboratories Inc. (SLAB) Q3 2019 Earnings Report, Transcript and Summary

Good morning. My name is Jamie and I will be your conference operator today. At this time, I would like to welcome everyone to Silicon Labs’ Third Quarter Fiscal 2019 Earnings Conference Call. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I’d like to turn the conference call over to Jalene Hoover, Director of Investor Relations and International Finance. Jalene, please go ahead.

Thank you, Jamie, 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 third 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 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. Third quarter results ended stronger than we expected due to a combination of revenue upside, in line gross margins and favorable operating expenses. Revenue ended at $223 million, up 8% sequentially and at the high end of our guidance range. Non-GAAP earnings exceeded the top end of our guidance range ending at $0.96 per share. IoT delivered another strong growth quarter ending at 58% of total revenue or $129 million setting a new all time record. Sales of wireless products, which now account for more than two thirds of IoT revenue, led IoT growth with ramps in the home automation, security and lighting markets. Infrastructure revenue ended better than expected, up slightly to $45 million or 20% of our total revenue, primarily due to stronger results from isolation products, which benefited from ramps in the electric vehicle and solar energy markets. Broadcast was up strongly in the quarter as expected to $34 million or 15% of total revenue due to seasonal strength in consumer on ramps and sales of video tuner products. Access was also up in the quarter to $15 million or 7% of revenue. Looking at third quarter revenue by end market, we saw sequential growth in all markets with the most significant increases in industrial, automotive and consumer. By geography, we saw the strongest third quarter growth in the Americas and APAC with Europe about flat. We continue to benefit from a broadly diversified business model. Our distribution revenue mix ended at 73% for the third quarter, which was flat to Q2. Distributor inventory days grew slightly on rising product sales ending at 41 days versus 39 days from the prior quarter. No end customer was greater than 10% of our revenue in the third quarter. Non-GAAP gross margin was in line with expectations for the quarter at just above 60% which was down sequentially from Q2 as expected primarily due to seasonal upside. Non-GAAP operating expenses were favorable for the quarter at $87 million. Non-GAAP R&D expenses were $49 million for Q3 which was better than expected due to lower spending on new product introduction costs. Non-GAAP SG&A ended at $38 million which includes favorable spending on outside professional services. Non-GAAP operating margin for Q3 ended stronger than we expected at 21.1%. Our non-GAAP effective tax rate for Q3 was slightly favorable at 11.1% and non-GAAP earnings ended at $0.96 per share, which was above the top end of our guidance range. Looking at our GAAP P&L results, gross margin ended the quarter at 60.1%. GAAP R&D expenses were $63 million. GAAP SG&A expenses were $48 million. GAAP operating margin was 10.7% for the quarter. Stock compensation expenses were $14 million and amortization of intangible assets was $9 million, both in line with expectations. GAAP earnings per share ended at $0.45. Turning now to the balance sheet. We ended the quarter with total cash and investments of $701 million. Accounts receivable increased to 76 days based on growth in the business with third quarter days outstanding holding at 31 days. Our inventory balance decreased to $71 million in Q3 due to effective supply chain management with inventory turns improving to five times, up from 4.3 times in Q2. Operating cash flow was strong in the quarter, bringing the Q3 year-to-date total to $135 million. During Q3, we amended our bank credit facility to increase the overall amount of our borrowing capacity to an aggregate $650 million, including $400 million in base borrowing and $250 million extension. As part of the credit amendment, we also extended the maturity date of the facility to 2024 along with other improvements in the terms. This updated credit facility along with our strong organic cash balance provides us with a robust level of liquidity to execute our capital deployment strategies. Last week, our Board of Directors extended the term of our remaining $134 million buyback authorization to the end of fiscal 2020. In summary, our balance sheet continues to be very healthy. I will now cover guidance for the fourth quarter. We expect Q4 revenue to be in the range of $217 million to $227 million with infrastructure up, IoT flat and Broadcast and Access down. We expect non-GAAP gross margin to be approximately 60.5%. We expect non-GAAP operating expenses to be around $90 million. We expect our non-GAAP effective tax rate to be 11.5% and our non-GAAP earnings per share to be in the range of $0.84 to $0.94. On a GAAP basis, we expect gross margins to be 60.3%. We expect GAAP operating expenses to be $113 million and we expect GAAP earnings per share to be in the range of $0.33 to $0.43. As you are updating your financial models, I’d like to call out that our fiscal year 2020 will have 53 weeks with 14 weeks in Q1 rather than the typical 13. I will now turn the call over to Tyson.

Thank you, John. Third quarter revenue was up 8% sequentially with growth across all major product categories and following a 10% sequential increase we realized in the second quarter. Despite macro headwinds, ongoing trade policy uncertainties and current semiconductor industry market conditions, we are pleased to deliver two consecutive quarters of strong revenue growth and a return to target operating model profitability. Q3 year-to-date design wins lifetime revenue was up more than 25% year-on-year, indicating a strong tailwind for future growth and a validation of our strategy. Third quarter IoT revenue reached an all time high of $129 million. Wireless products established record revenue in Q3 with 15.4 including Zigbee and Thread, Proprietary and Z-Wave leading growth. We continue to strengthen our wireless portfolio, adding new capabilities and driving differentiation while advancing security and growing ecosystem partnerships. Our connectivity portfolio is gaining significant traction as we target low-power wireless end nodes with a broad range of protocols and optimal combinations for home automation, security, lighting, metering, industrial and commercial applications. We believe having multiple connectivity standards under one roof strengthens our influence on the evolution and adoption of wireless standards in targeted IoT market segments. Combining multiple capabilities in the same platform, developing our own standards-based wireless protocols rather than licensing stacks from third parties and optimizing our hardware and software to work seamlessly together are all examples of how we differentiate ourselves from the competition. Silicon Labs unique platform approach to supporting thousands of IoT applications is resonating with our customer base, enabling them to reuse more hardware and software in ways not possible with single-point solutions. We see the proliferation of innovative platform-based customer designs across the IoT, many customers leveraging their investments through efficient reuse of tools and stacks, amplifying the stickiness of the software element of our platform solution and contributing to R&D efficiency. We continue to expand our next generation Series 2 wireless Gecko platform, offering best-in-class integration, wireless performance, security and cost. During the quarter, we launched a new portfolio of wireless modules based on the Series 2 platform and supporting Zigbee, Thread and Bluetooth mesh as well as Bluetooth low-energy and multi-protocol connectivity. The new modules feature a powerful ARM Cortex-M33 processor and integrated RF tower amplifier for long range connectivity, a dedicated security core and extended temperature operation for a wide range of applications including smart LED light bulbs. During the quarter, we announced our collaboration with Allegion, a pioneer in security products to expand IoT capabilities into smart homes and commercial buildings. Allegion is transforming the industry with the addition of wireless connectivity to its locks and other security devices, making them simpler, stronger, and more secure while meeting complex compliance, certification and market demands. A growing number of Allegion security solutions now use Silicon Labs Wireless Gecko IoT platform supporting Zigbee, Bluetooth, and Z-Wave connectivity. The Zigbee certified Schlage Connect Smart Lock is an example of a recent collaboration when paired with an Amazon Key and Cloud Cam, homeowners can remotely grant access to visitors and enabled in-home delivery. Silicon Labs also enjoys a strong partnership with Chamberlain, a leading provider of access control solutions, including garage door openers and one of our top IoT customers for several years. In Q3, we were honored to receive the Chamberlain Group’s Innovation and Technology Solutions supplier award based on our excellent technical support and collaboration. We continue to aggressively promote the Z-Wave Alliance to drive increased adoption across multiple ecosystems, market expansion into new device sites and the convergence of standards in end nodes and gateways to simplify the end user experience. Earlier this month, the Z-Wave Alliance hosted a Fall Summit in Austin, convening members, partners and thought leaders for a series of discussions, panels and workshops around the future of Z-Wave and the smart home market. The Z-Wave ecosystem comprises more than 3,000 certified devices and a member roster of more than 700 companies, including ADT, Alarm.com, ASSA ABLOY, Jasco Products, Leedarson, LG Uplus, Nortek, Amazon Ring and Samsung SmartThings. Turning now to infrastructure, third quarter revenue exceeded expectations, increasing 3% sequentially due to strength in isolation products. We continue to expand our timing and isolation portfolios to address new markets and application needs. For example, during the quarter, we announced the expansion of our isolation portfolio with a family of compact, robust isolated smart switches. Programmable logic controllers or PLCs use smart switches to control the automated factory through digital outputs. Each output is isolated for safety using Silicon Labs’ groundbreaking CMOS-based isolation technology, offering better reliability and performance than legacy optocoupler-based isolations. The new smart switches are ideal for driving resistive and inductive loads such as solenoids, relays and lamps used in industrial control systems. Moving on to timing, automotive developers have traditionally used quartz crystal and oscillator timing solutions, which are prone to shock and vibration failure degrading reliability. As vehicle automation systems add new features that grow more complex and drive higher data rates. As a result, clocking requirements have become more demanding, requiring a more diverse mix of frequencies and lower jitter reference clocks. To meet these clocking needs, during the quarter, Silicon Labs announced the industry’s broadest portfolio of automotive grade timing solutions including AEC-Q100 qualified clock generators, buffers, and PCIe devices. The new portfolio targets a wide range of automotive applications including advanced driver assistance systems or ADAS, camera sub-systems, radar and LIDAR sensors, autonomous driving control units, infotainment systems and GPS and 5G connectivity. We are excited to enter this growing market with our first automotive timing portfolio, which further expands our sales. Our newest timing devices help automotive developers simplify clock tree design, reduce points of failure, increase system reliability and optimize the performance of high speed serial data transfer. These benefits enable automotive OEMs and Tier 1 suppliers to deliver innovations which are redefining how we drive, navigate, and experience our cars. Earlier this week, we announced our acquisition of Qulsar’s IEEE 1588 precision time protocol or PTP, software and module assets, enabling Silicon Labs to simplify the development and adoption of IEEE 1588 synchronization in wireless, transport and access networks. IEEE 1588 distributes time of day across packet-based networks to provide precise network synchronization for a wide range of fast-growing applications, spanning small cells, optical transport, smart grid, automotive and 5G wireless infrastructure. The financial impacts of this transaction are not material. Moving on to Broadcast. Seasonal strength in third quarter TV tuner sales drove sequential growth in Broadcast consumer with Broadcast automotive up slightly. Total Q3 Broadcast revenue increased 30% sequentially. There’s a growing need for automotive radio manufacturers to support all global digital radio standards with a common platform. To address this need, during the quarter, we introduced Silicon Labs’ first automotive radio tuner, supporting the Digital Radio Mondiale, or digital – DRM standard, which is prevalent in India with trials underway in Russia and South Africa. Our new tuners include hybrid software-defined radio capabilities to deliver the highest integration and reception performance and the lowest BOM cost of any automotive SDR tuners in mass production today. Advanced digital radio features enable radio manufacturers to develop a single platform to demodulate and decode worldwide digital radio standards, greatly simplifying car radio designs and reducing system cost. I’m thrilled to welcome our new Chief Marketing Officer, Megan Lueders, to our leadership team. Megan joins Silicon Labs with more than 20 years of high-tech executive experience in a variety of marketing disciplines, including brand awareness, corporate communications, channel and strategic partnerships and global demand generation. Megan has the strong leadership skills and business acumen we need to clearly communicate our vision, engineering excellence and culture of innovation to our customers, partners and the industry as we scale our revenue to the next level. Silicon Labs’ strong track record of driving revenue growth starts with an innovative, passionate and collaborative team. I’m proud to report that for the third year in a row, we have been awarded the Great Place to Work certification. Most notably, employees regard Silicon Labs as a respectful workplace, offering a high trust culture where they can bring their whole selves to work. While macro headwinds continue and the level of policy uncertainty and market volatility remains high, we believe Silicon Labs is strategically well positioned in long-term secular growth trends and with key ecosystem players. Our role in the large and growing smart home, industrial IoT and Infrastructure markets is increasingly important as we offer a combination of innovative products, best-in-class software and scalable solutions. Thank you for your time and attention. Before we take your questions, I’d like to turn the conference call over to Jalene. Jalene?

Thank you, Tyson. Before we open the call for the question-and-answer session, I would like to announce our participation in Wells Fargo’s Third Annual Technology Media and Telecommunications Summit in Las Vegas on December 4; NASDAQ’s 41st Investor Conference in London also on December 4; and Barclays Global Technology, Media and Telecommunications Conference in San Francisco on December 12. We would now like to open the call up for your questions 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. Jamie?

[Operator Instructions] Our first question today comes from Cody Acree from Loop Capital. Please go ahead with your question.

Yes. Thank you for taking my questions. Tyson, John, I guess just looking at TI’s comments from last evening, they’re talking about a further broad deceleration because of macro headwinds over just the last 90 days, definitely year-over-year, but even within the last 90 days. I guess I’d like to get your take on the last 90 as far as order rates and linearity, if you would.

Yes, Cody. This is John. We’ve seen fairly steady behavior in our ordering rates and a linear progression of our bookings through the course of the quarter. We are entering the fourth quarter with a decent level of bookings as we begin the quarter. All that said, we do have concerns around the overall policy environment and the macro environment that we’re remaining vigilant about. But clearly, we have some secular drivers in the business, including in some of our more broad-based product lines, such as isolation that are powering through that. But it is something that we will continue to monitor carefully here at the company.

And if you could, maybe just give us any visibility that you can on expected seasonality as we head into the beginning of next year and just your thoughts on the possibility of 2020 revenue growth.

Yes. So we do expect first quarter to have a seasonal downtick. That’s very common in the industry and in our own experience on the 2020 business opportunity. We have a very strong opportunity pipeline and continue to work hard to convert those into new design wins. The macro, of course, is a concern, but we feel good about where we are positioned in the business, as we indicated in our prepared comments.

All right. Thank you, guys.

Our next question today comes from Gary Mobley from Wells Fargo Securities. Please go ahead with your question.

Good morning, everybody. Thanks for taking my questions. I want to ask about Broadcast and Access, realizing that these are not long-term growth businesses for Silicon Labs, but they certainly add robust sequential comps in the third quarter. So was just wondering if you could indicate whether or not there were any buy hedge or onetime – or lifetime buys related to those specific products, specifically in TV.

Yes. This is Tyson. In terms of Broadcast and Access, no, there were no last time buy activities. Actually, we saw a relatively robust demand for TVs. We believe that the TV market this year will be about flat to last year, and our market share continues to be above 75% in that for our tuners. So we’re holding our long-term view there that that is maybe a 10% year-on-year. I think this last year – this last quarter was a little bit better than that. But overall, we feel that, that’s stable businesses in Broadcast. We have a growth path there on the automotive side with our automotive radio tuners. We saw a little tick-up, although we do view the automotive market as being weak right now, so demand a little bit below where we would expect. But on the consumer side, we saw a strong uptick. We will see, as we go into Q4, the Broadcast revenue on a seasonal basis start to trend down. It tends to be highest in Q3 and lowest in Q1. On the Access side, we have a stable business. We – there was – the modems are one part of that, and that has continued to trend down. We’ve actually done pretty well with our SLIC business and gaining some share there and had a little bit of upside in Q3 actually coming out of China, but holding our long-term view of the Access market as well with about 10%, both in Broadcast and in Access looking at a 10% model – long-term model decline year-on-year. And so this year, we’ve actually – I think Q3 Access was about 10% down year-on-year and Broadcast was down about 5%, but we continue to hold that model going long term. But there was nothing unusual in the quarter to drive those results.

Okay. If I recall correctly, your initial expectation as far as the impact from Huawei was about $6 million a quarter. But I understand that you have been able to resume shipments for the most part to Huawei. But of course, there might be some supply chain bottlenecks along the way. So I’m wondering if maybe you can quantify what the impact has been from Huawei as we progress through the balance of the second half of 2019.

Yes, Gary. This is John. This is an area that we continue to carefully evaluate. Of course, we’re fully complying with the law. We’ve looked at the export control around our products, find that we are able to ship most products as a consequence of that. That said, the indirect impacts remains around the business opportunity related to complementary products and component product availability. So business there is – it’s still down some, but we have resumed shipments there.

Okay. All right. Thanks, everybody.

Our next question comes from Raji Gill from Needham & Company. Please go ahead with your question.

Yes, thanks and congrats on good results in light of a very volatile environment. A question on the IoT business, specifically around smart metering. I know last year, there was a pause as the industry transitioned to the SMETS 2 standard. Can you talk about the contribution of smart metering reaccelerating this year to the IoT growth and along those lines, smart lighting, how did that – how’s that segment been trending toward this year?

Thank you, Raji, for the question. On the smart metering, we have resumed kind of normal shipments into the smart metering market. There was a pause last year as we went from the SMETS 1 to the SMETS 2. And just as a reminder to everybody, this is a rollout in the UK. It’s about a 5-year rollout. There’s about 120 million units. We’ve got about 85%, 90% of those. And that’s over – we’re about halfway through that deployment. So it is multiple suppliers within that chain that tend to move share back and forth a little bit. But overall, that is at a steady rate here, kind of back to normal rates in 2019. So that’s on the smart metering market in the UK. We also have smart metering business, just in general. That’s a strong category for us. They are adding connectivity, both for in-home monitoring and meter reading and with a variety of different technologies. And so that is what we view as a very high quality, long-term strategic growth market for us. On the lighting side, you’ve got really two segments on lighting. You’ve got the more consumer, retail type of channel for smart lighting. And we introduced our newest Gecko 2, Gecko Series 2 platform both the chip last quarter, and earlier this year and now the modules. And that’s targeting high-volume bulbs with Zigbee and Bluetooth, and 15.4 capability and have a leadership position there in terms of our ability to drive those solutions. And we see strong adoption in volumes and ramps in the lighting market. So that’s very good. You also have a very pretty diverse, I mean, you just look at the conversion of lighting from older technology to LED and then from non-connected to connected. And this is across different types of fixtures. I mean, you look at commercial buildings, and lots of different markets and so there’s a lot, they are fairly broad range of deployments of lighting across a number of large lighting manufacturers that we’re engaged in. And so the penetration rate today of connectivity into lighting is actually quite small, but we see that as a long-term growth driver for us as lighting and the features, the value that you can add by adding connectivity directly into the fixtures and bulbs makes sense. So that’s a little bit of color for you on the lighting market.

That’s great. For my follow-up on the infrastructure business, particularly around the 5G rollout, you had mentioned for several quarters now that you had wins that at four of the top five base station vendors. I was wondering if you could describe what you’re seeing in terms of the 5G rollout as we go into next year. Has that continued to accelerate? How is your position with your timing product compared to your competitors? Kind of any color around the 5G rollout would be helpful as well. Thank you.

Yes. Our view is that actually the 5G rollout is there has been some delay in 5G in terms of just capital deployments. We’ve got the situation over in China and some of the export controls have had some impact there. That being said, our position actually in 5G in terms of our products, and this is mostly on the timing side with our clocks and oscillators is actually this is a strategic market for us and we continue to have a strong roadmap, and solid engagements and design wins in this area. So we think that as 5G continues to rollout, we will have a growing contribution in our timing business from the 5G and wireless markets. So we have not traditionally participated in that area. Most of our business has been on the core infrastructure, optical networking backhaul. And now we’re getting into the radio heads and into the base station units themselves with our timing products. So we feel good about our roadmap, feel good about our competitive position, probably a little better on our competitive position than we were six months or a year ago. We’ve been driving some good wins in new products out into the market. But still we see a little bit of slowdown in terms of the deployment of this technology, given some of the trade war dynamics.

Thank you.

Our next question comes from Ruben Roy from Benchmark. Please go ahead with your question.

Thanks. Hi guys. Tyson, I wanted to follow-up on some of the IoT commentary. With your guide for Q4 it looks like the IoT business is going to be sort of in the mid-single-digits growth range and obviously a lot of macro headwinds out there, et cetera. But it seems like the wireless portion of the business, which you guys said is now around two thirds of the business, it seems like that’s continuing to do well. Just wondering if you could parse out your thoughts on the wireless part of IoT versus microcontrollers and maybe revisit longer term growth prospects for that segment. That’d be great. Thank you.

So if you look at the IoT business, you’ve got now about a third of the business in microcontrollers and about two thirds in wireless. On the microcontroller side we are seeing similar trends to the other broad based suppliers in terms of overall exposure to the macro and slow down in a lot of the industrial activity both in Europe and in China, so that business on the microcontroller side is down call it 15% or so year-on-year. And this is on the backdrop of both 32 bit and 8 bit microcontrollers. We’re actually seeing a little bit more strength on the 32 bit side. So microcontrollers are getting hit by the macro situation. On the wireless side, we continue to see strong adoption on a lot of the – I mean you’ve got 15.4, and ZigBee and in Thread you’ve got the addition of our Z-Wave products, you’ve got Bluetooth and the opportunities around Bluetooth mesh, and Bluetooth low energy and then a lot of the proprietary wireless stuff that we’re doing that go into a lot of the industrial networks. And all of those businesses are in growth mode this year. I mean we are seeing a strong adoption of IoT technologies out into the market. You look at this smart home, we talked earlier about metering and lighting. And so that is really the wireless is kind of powering the strength there. It’s a 15% to 20% growth this year on wireless, which is less than we thought. It was going to be given the design win traction, and the size of the markets, and the growth, but I think that is – it is impacted a bit by the macro, but we continue to see a lot of growth there. So we’re really pleased with the fact that we drove record wireless revenue here in Q3 and continue to see wireless ramp as we move into 2020. So feel good about the long-term health of that market, and the deployment and our position.

That’s very helpful detail. Thanks Tyson. And then for a quick follow-up, the isolation strength, is that company or geography specific, or is that more broad based and is that what’s driving the infrastructure uptick in Q4 again?

Yes, the isolation business is also one of our broadly exposed businesses in terms of just a lot of different applications. It’s quite industrial heavy. We saw particular strength in electric vehicles and solar energy deployments. Despite some weakness out of China on electric vehicles, we have strong design win traction on electric vehicles in isolation and see that as a really healthy long-term trend for us. And so as companies move over to electric our isolators go into things like onboard chargers, battery monitoring systems and motor control units. And there’s a healthy content of isolation in those applications and we’ve been winning more than our fair share of design fair. Actually the solar had a very good quarter we’ve been doing well on design wins, although I would say that the deployments of solar have been a little bit mixed out in the market. That it’s in the backdrop of a fairly broad industrial, just weakness coming out of Europe and APAC and China. But that was more than offset by the ramp in the electric vehicle and solar energy markets.

Great, thank you guys.

Our next question comes from Matt Ramsay from Cowen. Please go ahead with your question.

Thank you very much. Good morning everybody. Tyson, I wanted to ask a couple of longer term questions around topics. One is in the timing business there’s been a lot of focus on you guys pushing from wire line into 5G and compute. But I noticed there was some products and sort of direction announced around timing for automotive. Maybe you could talk a little bit about that a little bit. And the other topic I wanted to touch on a similar long-term vein is I saw there were some partnerships around cellular IoT, particularly LTE CAT-M. I guess some new markets there that are of interest that if you have any comments. Thank you.

Let me take the first question on timing. We’re pleased to see – to be able to enter into the automotive market with our products. This is really around getting the qualification and the ACQ100 and all that have a lot of are the same products that we’re able to deploy into the base stations and into wireline. Those same technologies are more and more applicable to the automotive market as you’re driving to higher data rates and you’re driving to lower jitter and all the things that make our timing products great. And so we’ve seen a fair amount of demand from automotive makers and Tier 1 suppliers to get to go after our timing products. So being able to get those formally released, and qualified, and really targeting the automotive market, we think that expands our SAM for the timing market. So it’s a similar type technology. Over time we’ll continue to introduce new products in this area, but being able to deliver the reliability, and the performance levels and all of that is a big advantage for a lot of the systems that we talked about in the call, like ADAS, driverless assistance stuff, cameras, LIDAR, a lot of the stuff that’s going into autonomous driving requires a higher performance timing. I mean, both on the compute side, as well as the sensors and the communication around the car. So that’s an exciting opportunity in timing and a good application of our technology there. In terms of the LTE CAT-M and the wide area network stuff, we have focused our efforts in wireless on the personal area networks such as Bluetooth and in the local area networks such as 15.4, ZigBee, Thread and Z-Wave, as well as a lot of the proprietary stuff. These are more where you’ve got a gateway, and a base station and you’re connecting device – or I’m sorry, a gateway, where you’re connecting devices, client devices to that gateway, it’s not using a long-distance base station like you would have in a cellular type network. And we’ve used that as the highest volume, most diverse part of the market. I think that the stuff that’s going on around Laura and around Cat-M is still in early phases, we do see some rollouts. It’s a different set of applications, a different set of customers it’s something that we’re monitoring very, very closely and is a very similar type technology to what we’re offering today. But we’ve got more opportunity than we know what to do with on the wireless side. You look at the size of our funnel, we’ve got about an $8 billion funnel around IoT right now and are busy with that. If you look long-term, I think, that the wide area network stuff is very interesting. It’s going to be a huge market, it’s going to be one of those technologies that takes decades to deploy out in all of the different applications. But the stuff that’s going on right now in the local area, and the personal area networks and driving the prioritization, and the maturity of our platform and driving the roadmap there is our main focus here over the mid-term. I think that is a sufficient size market to be able to take the company to a much larger position in the market than we are today without having to expand too far. So I think from a management standpoint you’ve always got to balance the expansion of what you’re doing with the focus. And right now focusing on the opportunity right in front of us is what we’re doing.

Thanks. Thanks Tyson. I really appreciate the color there. I guess that dovetails into my follow-up with all the opportunities out there, John, it looks like OpEx is going to be up 2%-ish, this year given the macro, any thoughts about how you guys are planning for 2020 on the cost side? Thanks.

Yes, we’re working through that now Matt. We’re having our AOP meetings this fall meeting with the management team and the Board of Directors. We should have some more color to provide on the January call. I will note that we have the extra week so that needs to be comprehended in the modeling. But the balance is – the goal of course would be to stay in the model range. The macro will have an influence on our ability to do that and we do need to continue to invest for the long-term to be successful in this business, but we will endeavor to provide more color in January.

Got it. Thanks guys.

Our next question comes from Blayne Curtis from Barclays. Please go ahead with your question.

Hey guys thanks for taking my question. Tyson, maybe if you could you just go back on the infrastructure bucket as a whole, it seems some nice strength recently still off if you look back to the previous highs last year. Maybe you can just walk through those pieces because I know some of these businesses are now starting to come back? So I’m just kind of – looking at delta when that business is over 50 million a quarter and opportunities to get back and surpass that as you look to the next year.

Yes, the infrastructure business last year had a really strong year. We were up 30% year-on-year and saw strong ramps on both the isolation and the timing side with particular strength in isolation. As we entered into this year we saw slowdown in terms of – on the isolation side really kind of industrial demand for power supplies, and motor controls and a lot of the industrial automation stuff that isolators are used in, so that one is down this year. We did talk about the growth vectors we’ve got in electric vehicles, and solar, and just overall penetration into the industrial market. So that is one that we’ll track the isolation, we’ll track the macro situation coming off a pretty strong year last year. So we’re in that kind of macro number of about 15% down year-on-year. In this last quarter we may be able to end in the year a little bit better than that. But the isolation products, we’re still quite bullish about those longer-term, given the design win traction in the new markets that we’re taking on. On the timing side, kind of – it’s a – there’s a – I think another macro, you’ve got some of the trade tension stuff that’s in there. You’ve got a bit of slowdown on some of the capital deployments of new technology. So that one is in a reasonable shape, but is – it’s well positioned in terms of growth vectors in data center and in wireless and now in automotive outside the core networking area. But again, that one is in timing. We are again impacted by CapEx and macro situations. So off of a strong year last year, down a little bit this year in that 10% to 15% range and feel like both of those businesses are well positioned to grow in the future as the economy and the macro situation would improve. But they definitely have had an impact this year in terms of their performance.

Thanks. Then may be just for John with the 14-week quarter, obviously OpEx, you’ve got mechanically an extra week and then it goes back away. On the revenue side, I don’t know if you want to venture any thoughts on March, in general. But then, some people say it matters and then some people say, with the seasonal transition, you don’t really get any credit for. Just kind of thoughts on the revenue side with the extra week.

Yes I mean I understand and would tend to agree around the latter comment that you made. But of course, we’ll provide guidance in January for the first quarter, suffice to say, as we indicated in the – earlier in the discussion that first quarter, we would expect first quarter to come under pressure and be down from fourth quarter as a general trend.

Okay, thanks guys.

Our next question comes from Tore Svanberg from Stifel. Please go ahead with your question.

Yes, thank you. And congratulations on the IoT record revenue. Tyson, could you elaborate a little bit more on the Gecko Series 2 modules, whether that’s from a competitive positioning or dollar content or dollar content. Anything else that you can elaborate on how important that introduction is, that will be great.

So the Gecko Series 2 platform it’s a whole series of both chips and software that’s really – it’s our second generation IoT platform. So our first platform was a 9-nanometer technology and we rolled that out here over, I guess, from 2015 to about 2018. And then we’ve been introducing now additional products on the 40 nanometer platform, which is the Series 2. The Series 2 platform brings power consumption down. It adds features in terms of security. It brings our cost – continues to drive cost and higher levels of integration. So the cycles of learning going from Series 1 into Series 2, we have done some optimization in terms of cost and functionality for various high-volume segments. The first version of the Series 2 being targeted at the high-volume lighting market, and we’ve seen good success with that. And the modules that we introduced in the last quarter were really targeted at taking that product into the broader market and to be able to – whether it’s a lighting design or something outside the lighting design market to be able to get that into the broader market. So typically, we can do a chip down on a high-volume application where cost is really, really important. And then the modules, we supply, do the manufacturing and supply modules into the broader market as well. So that was part of the announcement this time. But we will continue to introduce new versions of the Series 2 that are target different application areas and different points of optimization. And then just on the software side, our software platform and our protocol stack run across all the Series 1 and Series 2. So the Simplicity Studio software and all the protocol stacks to drive the wireless communication and the developer experience, we continue to enhance that as well. So there’s improvements on the software side as well as the hardware side as we get the learning and get engaged with customers and do optimization. So it’s all part of our IoT strategy. And this Series 2 is quite exciting in terms of the improvements that it gets and the optimization that we’re going to be able to achieve.

Yes, thank you for that detail. That’s very helpful. As my follow-up, so the IoT business is now basically, on a run rate basis, more than a $0.5 billion business. It’s been growing double digits, and that’s kind of been your target all along. But as we now sort of think about that size, right, more than $0.5 billion, are there anything – any things that you can point to, to give us confidence that it can sustain that double-digit growth? I know your funnel is $8 billion, but anything else that you could elaborate on to make sure that we feel confident with that double-digit growth going forward, that will be great. Thanks.

So we are at about a – you’re right, we’re at a little over $500 million run rate. We’ve got a strategic, long-term growth target of 20% and feel comfortable with that as a long-term growth rate in this market. If you look at the statistics – the market statistics and serve – the SAM around connected devices, the SAM this year for our IoT products is over five billion units, and that is growing probably about 2% to 2.5% – or 2 to 2.5x here over the next five to seven years. So you’ve got strong growth in the deployment of units, and this is across industrial and consumer applications, for the most part. And I’m not including handsets or PCs. So you’ve got – we’re going to 10 billion units a year here within the foreseeable future on IoT. And if you think about the increased functionality and – basically, you’re talking to $1 to $2 per unit, so you’re talking about a SAM over the five-year time frame of $10 billion, $15 billion to $20 billion just for wireless in IoT. And this is across just the IoT applications in consumer and industrial. And it’s mostly industrial. It’s about two thirds industrial in terms of the number of units and that’s where our big focus is. So you look at – you step back and say, "Okay, two thirds of $500 million, that’s a big number." But it’s not that big of a number compared to a $10 billion or $15 billion SAM that we’ve got here over the next few years. So we’re trying to keep our eye on the ball in terms of where IoT is going and developing our platform and driving into the market, driving the channel and driving customer relationships. And we believe that it’s got a very bright future to be a much bigger business than what we’re sitting at here today at $500 million.

Very helpful, thank you.

Our next question comes from Sujeeva Desilva from Roth Capital. Please go ahead with your question.

Good morning Tyson. Good morning John. So the timing market with the 1588 acquisition, can you talk about maybe the content increased opportunity for you? Does it increase your addressable market? And what end markets might be 1588 product the most needed for near term?

This is Tyson. On the timing side, 1588 is – really, so think about it. It’s a precision time protocol and it’s doing timestamps. So think about an ethernet-type network, network, where each packet has – you have to know precisely exactly what time those packets are sent and received. And that’s really important in 5G as you’re trying to drive very, very tight latency. It’s important in automotive where you’re trying to – where you have autonomous driving and sensors. It’s important in just the overall networking, in general. So this is getting rolled out. And it’s not just a chip, there’s actually, there’s software. And in a lot of applications, there are modules that are required. We haven’t talked specifically about the market opportunity. It is in the hundreds of millions of dollars and the content is in the – it depends on the application. It’s a pretty wide range, but you’re talking $10 million to $50 million to even more for a high-end module in this area. So it’s a really exciting area. It’s one that is very related to the type of functionality and performance that we’re able to achieve with our timing devices. And we’ve done some optimization. We’ve been working with Qulsar with our products over a period of time to put together this system solution around this, which has both software, it has modules. And so bringing that software and those modules and those designs and that capability into the company where we can then drive the roadmap, we think, is an important expansion of our timing business over time.

Yes Sujeeva, this is John. Let me just add on a little bit. So this was an important move for us. As Tyson said, it’s an area with Qulsar that we’ve been working on for a few years and had a multiyear partnership with them. 1588 is an area that we’re already addressing. This augments and enhances our capability to be successful there, but it’s relatively small from a financial perspective. And the market opportunity is already comprehended in our SAM data that we’ve had out there.

Okay. That’s helpful color, guys. And then the other question I have is on the – I didn’t hear you guys mention much about the WiFi opportunity, the Zentri acquisition. Any update there? Is that still sort of in sort of early wait mode? Or is there any update in terms of ramp potential there?

We did the Zentri acquisition, which was really around WiFi software and cloud-type stuff. And then we’ve also introduced a number of products around WiFi 802.11n. And so those continue to be in the design phases. And we continue to drive the roadmap and thinking around WiFi as it migrates to WiFi 6 and 802.11ax and driving into more integrated solutions, where you’ve got true SoCs. We currently do not have a full SoC around WiFi. And so that’s something that we’re keeping our eye on in terms of driving a higher level of integration around WiFi and see that as a very exciting opportunity in the market. But today, our business But today, our business around WiFi is smaller than what we have on Bluetooth and the 15.4 and Z-Wave standards.

Okay. All right, thanks guys.

Thank you.

And ladies and gentlemen at this point we’re going to conclude today’s question-and-answer session. I like to turn the conference call back over to Jalene Hoover for any closing remarks.

Thank you, Jamie. And thank you all for joining us this morning. This concludes today’s call.

Ladies and gentlemen today’s conference has concluded. We do thank you for joining. You may now disconnect your lines.