Good morning. My name is Cole. And I will be your conference operator today. At this time, I'd like to welcome everyone to Silicon Labs' Third Quarter Fiscal 2020 Earnings Conference Call. After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to George Lane, Director of Investor Relations & International Finance. George, please go ahead.

Thank you, Cole, and good morning, everyone. Tyson Tuttle, Chief Executive Officer and John Hollister, Chief Financial Officer is on today's call. We will discuss our financial performance and review our business activities for the third quarter. After prepared comments we'll 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 in the Investor Relations section of Silicon Labs website. I would now like to turn the call over to Silicon Labs, Chief Financial Officer, and John Hollister.

Thanks George. We are pleased to announce a strong finish to the third quarter with revenue ending at $221 million exceeding the top end of our guidance range. Third quarter revenue was up approximately 7% sequentially. Revenue from our IoT products set a new all time record in Q3 at $133 million, up more than $18 million from Q2, or about 16%. During the quarter, we saw particular strength from ramps and smarthome and lighting products, with product sales from our wireless connectivity technologies, growing 29% sequentially. As expected, revenue from our infrastructure and automotive products declined in the third quarter ending at $88 million. Timing revenue was down significantly due to lower demand from our customers coming off a strong first half. We also had a late quarter impacts to our timing products due to the stoppage of shipments to Huawei. Revenue from broadcast products increased in Q3 with seasonal strength from sales of TV tuners, as well as a slight recovery in automotive radio. Turning to end markets, revenue from industrial and consumer was up in the third quarter due to strong growth in IoT. Automotive revenue was roughly flat; revenue in communications was down significantly due to weakness in timing. Geographically revenue in the Americas was strong in the third quarter on IoT growth. Sales into Europe also increased whereas APAC revenue was about flat to second quarter. For IoT wireless customers moved into our top 10 customer list during the quarter, and a US base IoT customer became our top customer. Our Top 10 customers now include five IoT customers all based in the Americas and Europe. Revenue from the Top 10 customers increased to 22% of revenue up from 20% in Q2. Distribution sales were 78% of total revenue in the third quarter, and we…

Thank you, John. Third quarter revenue was considerably stronger than expected with our IoT products leading the way with a record quarter. We see sustained acceleration toward a more connected world which our products are well suited to address. Both third quarter designs win lifetime revenue and bookings set records highlighting the strength of our strategy and product portfolio. In particular, we are delighted that Bluetooth design wins continue to set new records. Design wins were up 49% sequentially in Q3 and up 100% year-over-year. We continue to see upside in demand for our IoT products now making up 68% of our design wins and 65% of our total opportunity funnel. Our IoT opportunity funnel grew 8% sequentially to over $9 billion of lifetime revenue. Moving on to product category updates; in IoT we are seeing increasing demand for connectivity. Smarthome, consumer and industrial solutions are driving design wins and we continue to strengthen our wireless portfolio, adding new differentiated capabilities while advancing security and growing ecosystem partnerships. In Q3, we announced our collaboration with Amazon to support Sidewalk, a secure network created by neighbors who share a small portion of their broadband connection, enabling their devices to work better at home and beyond the front door. Sidewalk is a free software application layer that works on top of our wireless Gecko Series 2 products to support sidewalks, sub gigahertz, and low Bluetooth Low Energy protocols and permit IoT devices to securely connect to each other for the cloud. Sidewalk is simple to set up, free to use, and is expected to have a tangibly positive quality of life impact. We were glad to have Ring Founder and Chief Inventor Jamie Siminoff joined us during our works with smartphone developer conference last month to share more details about how Sidewalk…

Thank you, Tyson. Before we open the call for a question and answer session, I'd like to announce our participation in the Barclays Global TMT Conference on December 10 using a virtual platform. We'd 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.

[Operator Instructions] Our first question today will come from Blayne Curtis with Barclays.

Hey, guys, thanks for taking my questions. I had two; just kind of curiously think about the strength you're seeing in IoT. You mentioned smarthome and consumer. I'm assuming there's some benefit from all this home improvement people are doing while they're sitting around. So just kind of curiously think about what you saw an upside and in any kind of perspective in the next year. And then second question just on gross margin, obviously bottom of the range. You said mix and I think you mentioned wireless being 68% of the design wins, I'm assuming wireless will continue to increase as a percent of the mix. So any perspective where wireless as the percent mix in September, and then just thoughts on gross margin as that becomes a bigger part?

Thanks for the question, Blayne. I'll cover the first part, and then I'll let John covered the gross margins, we are seeing really robust growth ahead in IoT, and there are large ramps in wireless with top tier customers. And we mentioned smartphone, consumer retail; it's really very, very broad. There's a lot of industrial applications that are coming online, we've got things like smart lighting, home security systems, building automation, retail asset tracking, there's just a lot of design win activity, and some very, very strong ramps, and we see really a path to double digit revenue growth next year. As the SAM expands, and we take share in wireless and double digit revenue growth is really for the whole company. We see the design win, funnel, everything very, very strong. The wireless growth I think we did 29% here in Q3, and we see an opportunity to continue that growth 30% up next year, kind of same as what we've seen, we're seeing a lot of the work that we've been doing for the last couple of years is now starting to ramp into production. And some of the trends that we've seen in a pandemic, having accelerated some of those programs. And just the general trend towards IoT and connected devices in general. So, yes, the trends in IoT are very, very, very positive. And it's both at the tier one customers as well as the broader base of customers that we are seeing here.

Yes, Blayne, this is John. So on the gross margin topic, you're right; it's really as a function of mix. With both a combination of factors strength in IoT. And as a reminder, our IoT gross margins are a bit below the corporate average gross margin. Combined with weakness and timing, we saw the restrictions placed on Huawei and also a general pullback in timing in the third quarter coming off of what was a very strong first half in that part of our business. So it's really a combination of those two factors. And, yes, we do see that continuing.

Yes, Blayne, I would like to just mention that our IoT gross margins are there in the high 50s. There, but they are a little bit below the overall corporate gross margin levels, in certainly less than timing. So when you swap timing revenue for IoT gross margin, you'll see that next shift occur, and that's what we're seeing here in the second half.

I guess a quick follow up if the IoT margins in the high 50s, should we think about the wireless within that being lower or is that not the case?

Yes. It's -- it really gets into customer specific and application specific, the technology itself, without going into too much detail there. But it's -- there's a blend in various mix factors within IoT.

Yes, I think you look at the IoT wireless mix and or the IoT mix and wireless is more than two thirds of the revenue. And it is in the high 50s. On the wireless side, there's a mix depending on the various technologies, and then that gets blended in with the microcontroller margins, which are in the same range. So I would say that, across the wireless and everything, wireless is in the high 50s as well, but it's not quite the, 60% that we have in our target,

Our next question will come from Gary Mobley with Wells Fargo.

Hey, guys, thanks for taking my question. What to double click on the topic of gross margin. Speaking about the mix, within the mix of IoT, would you characterize the gross margins and the wireless radio mix as being lower for standards based wireless like Wi Fi and Bluetooth versus, something that's a little more proprietary like C wave, and do you see a significant difference in the growth rates of each, and you mentioned some tight supply in your supply chain. Are you seeing some maybe outsized way for inflation?

Yes, I can cover kind of the mix of standards and there's also the mix between modules and chips. And then you've also got the difference between large volume customers and smaller customers. We, if you look, we're seeing very strong uptick and 15 dot four, which includes ZigBee, and Thread. And those margins as well as the GeeWay and the smartphone tend to be in line, Bluetooth is a lot of more consumer higher volume applications; we're seeing very strong growth there and very respectable margins. Wi Fi is still a smaller portion of the business, and those are in line as well. So we don't see too much variation, I would say that on the proprietary side, which I would maybe include the GeeWay in there, but we have a lot of stuff in sub gigahertz proprietary that goes into industrial networks, it's a very broad range of things. And that's maybe a little bit above, but overall, the variation between these is not that, there's not that huge of a range between the top and the bottom end of the -- on the wireless customers, then you blend in the eight bit and 32 bit and CUs and sensors into that mix. But I would say that the variation probably is more based on volume than it is based on standard. And, John, I want you to cover the other part of that question.

Yes, that's right, Tyson. And on the tight supply chain, Gary, I mean, you're seeing this across the sector with strong reports a strong order rebound here in the second half. And yes, there is some added pressure on the manufacturing cost profile. We're working carefully with our suppliers to ensure capacity and service customers. But there is a bit of pressure there. Yes.

Got it. The follow up, I wanted to get a sense of what's missing from the export restrictions targeting Huawei. What was Huawei as a customer in the third quarter?

Yes, the steady state run rate for Huawei has been in the 2% range. And that includes both direct as well as some indirect business addressing the Huawei supply chain. So it's about 2%.

Our next question will come from Srini Pajjuri with SMBC.

Thank you. Good morning, guys. John, just curious what you're seeing in terms of your DSI channel trends in terms of inventory, et cetera. Given the strong demand, I'm just curious, as you're looking to Q4, if you're seeing your channel inventories go up or down.

Yes, Srini. POS has been very strong, we expect strong POS in the fourth quarter. Ideally, we would like to add some DSI inventory, we're going to try to do that; we'll see how we can process everything through the balance of our order flow this quarter. But, as we just reported days actually declined five days from 53 to 48 days. In the third quarter, our goal would be to hold that stable if not grow it slightly. But I do not expect a large increase in days as we round out the year.

Got it. And then just to follow up on the auto business, I know you said it grew sequentially. Some of your peers are reporting very strong auto numbers, I guess, the demand is coming back, the production has recovered very strongly. I'm just curious as to how big that business is for you, and why we are not seeing a stronger recovery there.

Yes, auto is not tremendously large for us. It's on the order of about 7%, 8% of our total revenue. And, it's more targeted; we have particular focus with the infotainment sockets as well as an emerging footprint in electric vehicles. I think what you're seeing some peers with the more broad based nature of their auto exposure more than anything.

Our next question will come from Tore Svanberg with Stifel.

Yes, thank you. Question for Tyson or maybe you could just elaborate a little bit more. You said you're starting to see the fruits of a lot of hard work on the IoT side and obviously you're expecting some pretty strong growth. Hope if could you just elaborate a little bit more on that? Is that still going to be broad based growth? Are you talking about, some really big customers driving that growth?

It's really both Tore, the demand the demand is quite broad based in IoT in particular, on the wireless side, we've had a very strong design win numbers, and a strong funnel, the IoT funnel now is it at $9 billion. And continuing to move customers through that. We do have a number of tier one customers here, we mentioned that we now have five customers in our Top 10 list that are in IoT and our top customers now in IoT, actually, we had our top customers have been in the same top customer for about 20 years. And they were just surpassed by the ramp of a large IoT customer. So it's really both and it's really across segments as well. As you know, IoT has just a variety of different applications. And the diversity of applications is both an opportunity because it's stable and it's -- has a lot of different components to it. But it's also a challenge in being able to address that both from a platform concept and make sure that you have the functionality across thousands of applications, and that you're efficient in supporting those tens of thousands of customers that are out developing with us. So the launch of our new Simplicity Studio 5 tools, we continue to evolve our ease of use to make it easier for customers to design in our products. And we continue to expand our portfolio to add additional wireless capabilities and to keep up with the standards, and to continue to push the integration levels and cost to the point points where it needs to be. So we're really excited about the opportunity is very broad range. And we continue to try to get better and better in terms of our portfolio and our R&D. And the efficiency around that and a lot of the software, as well as the customer support side and to be able to take as much of that opportunity and convert it into design wins if possible.

Thank you for that. And as my follow up you guided order and infrastructure to be up sequential in Q4. So are you starting to see a recovery in the timing business? Or is it just more the broader category being up?

Yes, it's really more of the broader category, Tore. We expect timing to be down slightly in the fourth quarter.

Our next question will come from Rajvindra Gill with Needham & Company.

Yes, thank you and congrats on the IoT momentum. Just digging a little bit deeper in the IoT. I think Tyson you'd mentioned that the wireless is more than two thirds of the IoT revenue. I'm wondering how we should think about that mix going into 2021? How do we also think about Redpine contribution? And how do we think about kind of GeeWay in the module business, just the components of that, of the IoT business moving to 2021?

Yes. So in Q3, wireless was over two thirds of the total. And we talked about wireless next year growing 30% and that we have a good shot at that given the design win momentum and the traction that we've got. That includes the Redpine products and includes the GeeWay, a lot of stuff on the proprietary industrial side, industrial commercial, and a number of consumer and smartphone applications as well. We don't break out the revenue by standard and that varies a bit. GeeWay continues to see a lot of momentum in the market. With, in particular with like security customers on the smarthome side. Certainly Wi Fi has an important place there. And we continue to develop the next generation products and drive design wins with the 9116 in the existing silicon and we are ramping a number of tier one customers into production with our Wi Fi solution with Redpine So continue to be happy with that, with the team that we have over in Hyderabad. But you'll see next year the mix shift going more and more towards wireless. A lot of times customers are going from separate microcontrollers into either a connected device that adds wireless or the integration of a microcontroller and wireless and you got -- you've got to think about all of our wireless solutions as essentially having an integrated microcontroller. So over time, that wireless mix is going to continue to click up and will have a higher and higher concentration of revenue coming out of the wireless portion of it.

Very good and a question on your thoughts on ultra wideband as a technology, given the nature of it regarding precise localization, we're starting to see ultra wideband kind of move into applications outside of mobile phones in IoT in auto, wondering what your thoughts are on that technology.

Yes, I mean, you UWB is a bit of a narrow technology. And it's not universally deployed, like if you take Bluetooth or Wi Fi, or a lot of these other ones. They are more universal than then UWB, UWB does give you a better ability to get precise location technology, although with Bluetooth, now, you can get angle of arrival, and you can get distance within one to two feet, which is -- it's pretty good. And it's universal kind of technology that people can use. So it's an interesting thing, it's got a narrow range of applications. It's mostly for communication in with handsets, whether that handset is in automotive, or other applications or between handsets, so you can see where various people are. So I think it's a little bit more of nascent. And it's still very, very early in the adoption phase. So we're certainly monitoring that technology. But I don't see that as one of the core technologies required for success in IoT. It also has very slow range or very, very low range, it doesn't travel very far. So that also limits it's useful.

And if I could just squeeze in one more question. I think you had mentioned, just correct me if I'm wrong. Path to double digit growth for the entire company in calendar 2021 or was that for IoT?

Yes, given the momentum that we see here in Q3, and continuing into Q4, we believe that we've got a good shot at double digit growth for the entire company next year. And certainly within IoT wireless, we talked about, a shot at 30% growth in the IoT segment next year. And that depends on the macro and a lot of other factors. And not giving formal guidance here. But those are that we look at where the business is today, we feel very confident in our ability to grow, and we'll see what the market turns out next year as well. But very positive momentum right now in bookings. And design wins, which point in that direction.

Our next question will come from Suji Desilva with Roth Capital.

Good morning, Tyson. Good morning, John. Congratulations on the IT progress here. On the Bluetooth, so I'm going to characterize I guess your newer products as single Bluetooth versus path multi protocol focus for lack of a term. I'm just wondering if that high volume wins, you're seeing down Bluetooth, are you capturing shared and existing design to the next generation? Are you seeing new applications where you're coming into the Bluetooth socket? Any color that would be helpful.

As we moved into our series two, which brought our portfolio into 40 nanometer, and we were able to take a lot of the feedback and learning; we introduced a new set of products, which were more optimized for many of the Bluetooth applications. They're still capable of some degree of multi protocol capability, depending on the version, but we also have versions that are highly optimized for the very high volume applications. And so there, we are taking some existing sockets from competitors. And certainly, you see a lot of new applications for Bluetooth, it's really a mixed, but we see this as an opportunity for share gain in Bluetooth, 100% year-over-year in terms of design wins with very strong growth out of all the wireless protocols, we see probably the strongest growth coming out of the Bluetooth applications. And that includes Bluetooth by itself, as well as Bluetooth in combination with something like a Thread or ZigBee or, or even GeeWay or proprietary application. You can use a lot of times you'll connect to a network with a different a different standard, whether that's Wi Fi, or GeeWay or ZigBee, or Thread, but you will commission device with Bluetooth, so Bluetooth then allows the connectivity to a mobile phone. And really across applications. That's a very common way of onboarding devices onto the network. And so the Bluetooth capability is very important from a multi protocol standpoint. But we also have an extremely competitive solution in terms of integration, cost, performance features, and adopting all the latest versions of the, and capabilities of the standard for instance, direction finding and angle of arrival. So we have very competitive on the standalone basis in a very flexible platform depending on how customers want to mix up its digital protocols.

Okay, helpful color. And then second question follow ups for John, perhaps, with the increased, it seems in the profile of IoT connectivity and large customer design wins, which are helping drive success. Is there a shift in how should we think about seasonality for the first quarter perhaps in 2021 versus past years? Or is that not enough to kind of move that seasonality concept?

Yes, it's, Suji, it's a good question. And it is an unusual time right now; typically, one would expect first quarter to be down some due to a variety of factors, including what you're referencing, given the strength and momentum that we see in our bookings. We'll have to see how this plays out as we head into the year end and onwards. First quarter outlook, but it's, it would typically would think of seasonal down. Yes. But bookings are very strong right now.

Our next question will come from Matt Ramsay with Cowen.

Yes, good morning, everybody. Thanks for taking the questions. Tyson, just a one thing to just clarify, the comments you made for next year on IoT was that 30% growth of the wireless portion, so that two thirds of your franchise there or your goal is potentially 30% growth of the whole IoT segment? Thanks.

That was particular to wireless with that being, about two thirds so you can, with the remainder are on our microcontroller side to gross there is, this is much more modest. It's -- there are a lot of applications and microcontrollers that are moving to wireless. So you see some, the mix shift more over to wireless, but certainly the wireless is the 30% portion of it.

Got it. Thank you for clearing that up. For a couple of questions on my end. The first one is in the timing business, obviously, the Huawei headwind is hit yourself and lots of folks in the industry. I wonder if you might characterize across wired and wireless applications how as Huawei business remains impaired overall, not just that you guys can't sell to them, but that their own business remains impaired for other reasons. Maybe how you're positioned with the rest of the competitors that might step in and fill some of those voids and any appreciable difference in content margins, any of those things with the rest of the infrastructure providers in those key markets.

Yes. So we sold pretty broadly to Huawei. We had some very good designs that we've worked for years on in 5G; we also sold into their optical communications equipment, networking equipment. And into the broader echo system there. I think if you pull in the, John mentioned about 2%, we have some other suppliers that go in there. But then we also see other companies, for instance, BGP, Samsung, Nokia, Ericsson, Cisco, all kind of maybe taking up the slack depending on the region in the world that you're talking about. With 5G have -- 5G was an emerging opportunity for us. It's not the bulk of the timing revenue, but it's an important piece, we have four out of the top five 5G, infrastructure makers, we essentially sell to the Top 12 networking equipment vendors, we have very strong position in long haul, in metro markets, an emerging position in datacenter depending on the area. We're not in the data, data path, but we're in, providing the timing, the high performance timing within the datacenter. And then we have an emerging opportunity in automotive, but the bulk of the revenue there and timing is really in core network, in long haul type of applications where high performance is really important. And we have a very broad; we sell to pretty much everybody in that market.

Got it. Thanks for that. And just one last, I guess, bigger, quick picture question on the IoT market. I think that and particularly as you talk about maybe some bigger customer programs ramping, I wonder if you might step back and give a little perspective on how you're seeing the usability ecosystem come together. I don't know if that's a real term, but I've been going through as everybody sort of trapped at home during the COVID situation. We've been doing lots of home automation upgrades. For me personally, and I can automate about everything in my home now. I need 37 iPhone apps to do it. So I just wonder if your company is involved in any industry consortiums, any of these bigger customers that you're dealing with might be doing some work on consolidating the usability of ecosystems like that might accelerate adoption. Thanks.

Yes, funny you should ask, I actually I am upgrading all of the lighting control in my house as we speak. So it's like there's a lot of us that are implementing new smart home stuff, and trying out -- trying to figure out how to not have those 30 apps on our phone. We had our conference, in fact, if you haven't checked it out, it's works with.biolab.com. And we did a virtual conference, it was going to be an in person conference, this is actually a really great lesson on just events in general, we had planned on about 1,200 people in person here in Austin. And we ended up with 6,000 people registering virtually and attending from around the world. And this is with companies like Google, Amazon, Comcast, and really the whole purpose of this conference was to talk about how are we going to converge these ecosystems and converge the standards and make it easier for consumers to be able to onboard networks, I mean, everything from, Apple home kit, to Amazon Alexa, the Google Home and all of that, and so that there's less consumer confusion and more convergence of really the user interface and onboarding devices. And all that, as well as, how do you actually make devices and connect them into these ecosystems? So I see tremendous progress in the convergence of these ecosystems and the ease of use, and a strong focus by the largest companies in tech that they see this as something that we need to be working together on. And we took a leadership position in this event, it was a groundbreaking event, and extremely well attended and lots of media coverage. But I think we'll see some progress there. As we know, IoT is -- this is a long path. And, it's -- the momentum is starting to build. But I think that's going to continue every year, and it's -- you are going to continue to see new technologies and new capabilities added, but I think the ease of use is also something that must get addressed for it to scale.

And this concludes our question-and-answer session. I would like to turn the conference back over to George Lane.

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

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.