Good morning. My name is Matt, and I will be your conference operator today. At this time, I'd like to welcome everyone to Silicon Labs' First Quarter Fiscal 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Austin Dean, Silicon Labs' Investor Relations Manager. Please go ahead.

Thank you, Matt, and good morning, everyone. Tyson Tuttle, Chief Executive Officer; John Hollister, Chief Financial Officer; and Giovanni Pacelli, Senior Director of Finance are on today's call. We will discuss our financial performance for the first quarter and review our business activities. After prepared comments, we will take questions. Our earnings press release and the accompanying financial tables are available in the Investor Relations section of our Web site 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' Web site. I will now turn the call over to Silicon Labs' Chief Financial Officer, John Hollister.

Thanks, Austin, and welcome everyone. Last week, we signed a definitive asset purchase agreement with Skyworks Solutions for the divestiture of our infrastructure and automotive business, launching our transformation into a pure play leader of intelligent wireless connectivity for the IoT market. We also announced organizational changes that will enhance our ability to capitalize on this exciting new opportunity in IoT. Matt Johnson, formerly Senior Vice President and General Manager of IoT, has been promoted to President of Silicon Labs, where he will be leading our day-the-day business operations, as well as our product development activities. Daniel Cooley, formerly our Chief Strategy Officer, will now serve as our Chief Technology Officer, where he will continue to develop our technology roadmap and align our products and solutions to the market opportunity before us. Tyson Tuttle will continue as Chief Executive Officer to further evangelize our products and platform to the growing IoT customer base. Please note, that the divestiture will include a small [ASIC] [Ph] product line currently classified in the IoT reporting category, which accounted for less than $3 million of revenue last year. Our comments today will focus on the consolidated operations of Silicon Labs. We expect to be in position to report on our continuing operations on an IoT-only basis in the July call. We are very pleased to announce this morning record revenue for the first quarter, at $256 million, up 5% sequentially and 19% year-on-year, significantly exceeding the high end of our initial guidance for the quarter. IoT revenue for the quarter was $158 million, above our expectations, up 7% from Q4, and 34% year-on-year. IoT wireless led the way with 44% year-on-year growth in Q1, with strong double-digit growth across all our major wireless protocols. Infrastructure and automotive revenue in Q1 ended at $97 million,…

Thank you, John. We are pleased to report record first quarter revenue. The pandemic has led to an accelerated digital transformation creating market opportunities we have been to seize through organic growth despite unprecedented global supply chain constraints. The revival of economic activities stemming from the recovery signals greater market growth ahead. And we are well-positioned to continue to capture share in 2021. Our opportunity pipeline continues to be robust at $15 billion. And our design win lifetime revenue achievement in Q1 was up 8% year-on-year. Bookings have been very strong in recent months with the semiconductor industry poised to deliver an excellent 2021. Turning to our IoT business, wireless connectivity products continue to see surging momentum, posting greater than 40% year-over-year growth in first quarter revenue. In Q1, we saw strength across our entire wireless portfolio with robust and consistent growth in all of our major wireless connectivity protocols. Security continues to be critical for the IoT's expansion. And Silicon Labs has established a clear and unique leadership position in protecting IoT devices against bad actors. In March, Silicon Labs became the world's first Silicon innovator to achieve PSA certified highest level of IoT hardware and software security. Our secure vault technology sets the standard for IoT security effectively protecting against hardware and software attacks. We have made strategic investments to ensure security as a core strength, becoming the first company to achieve PSA level 3 certification, a strong validation of our leadership role in securing the IoT. In addition to delivering superior security in our high performance parts, we provide strong security in our battery optimized devices like the xG22 which just became the world's first wireless SoC to earn CSEP Level 3 certification using the Diabetes Technology Society's DTSec security protection profile. DTSec sets the security standard…

Thank you, Tyson. We'd now like to open the call up for your questions. To accommodate as many people as possible for the market opens, we ask that you please limit your questions to one with one follow-up, Matt, back to you.

We'll now begin the question-and-answer session. [Operator Instructions] Our first question will come from Gary Mobley with Wells Fargo Securities. Please go ahead.

Good morning, guys. Thanks for taking my question. I want to ask a multi-part question about gross margin. It sounds as if you had a higher than expected mix of radio and IoT, which I believe perhaps margin-dilutive, but despite that you beat for the quarter. Wonder if you can give some reason or rationale behind that? And then as it relates to the headwinds from higher input cost as it impacts your gross margin, can you quantify the impact in the near-term? And as it relates to passing on the price increases where might you be getting some pushback from customers?

Hi, Gary, it's John. On the first part of your question, as we've talked about before, technology mix is relevant. But what's also relevant is the end market and customer mix, and we did see strong results in the first quarter in our industrial and commercial part of the business. Metering was strong in Q1, which was constructive for IoT margins, as an example of that. Looking at the input costs, we don't have a hard number to give you, but you clearly can see it -- a point or so of margin impacts. And as we work through our competitors in the market and desire to grow share, we're continually assessing how to transfer that on to the customer base, and that's an ongoing process for us.

Appreciate that color. And in your presentation of week, you outlined a goal of achieving roughly $650 million in sales for the IoT business. And you mentioned in your prepared remarks that you expect continued supply chain constraints for at least a few more quarters. But I'm curious to know whether or not, in a $650 million revenue expectation for IoT, you might have factored in any capacity constraints extraneous to SLAB's supply chain?

Yes, in the revenue guidance that we gave for IoT for the year we are factoring in known supply chain constraints. So, that is a supply constraint number.

Got you. All right, thank you very much, guys.

Thank you.

Our next question will come from Blayne Curtis with Barclays. Please go ahead.

Hey, good morning. Thanks for taking my question. Maybe just following up on Gary's question there, if you -- in the outlook for the year you had IoT margin kind of 57. It seems like, for the June guide, infrastructure has been kind of flat for a bit, is up sharply. So, maybe you could talk about that. And then specifically, I guess if IoT margins are 57, seems like infrastructure margin is going down. Maybe just talk about the mix there.

Yes, Blayne, first on the upside for infrastructure in Q2, we're seeing strength in automotive, timing in isolation, sort of where you would expect that, so that's very positive for the I&A business, and great to see that. And similar dynamics that work with some input costs increasing there related to supply chain situation affecting I&A as well as IoT.

That's it. And then maybe just a longer-term question, you maybe [indiscernible] maybe in analyst day, but in the long-term targets you kind of showed an effective doubling of that $650 million in IoT. The growth rate, I mean Tyson has been talking about IoT could maybe even grow 30%. You're kind of there this year. So kind of maybe can you put some timeframe as to what that long-term is or maybe what kind of how you see the IoT CAGR going forward?

Yes, Blayne, we tried to articulate that in the deal call last week, of identifying a 20% CAGR opportunity over time here. So, hopefully that can give you a sense of the doubling time that could be achievable if we're able to sustain that, which we believe is possible. So, we did try to go ahead and call that out. This is a strong year for sure, and we have a lot of momentum in the business right now.

Thanks.

Our next question will come from Craig Hettenbach with Morgan Stanley. Please go ahead.

Yes, thanks. On the strength that you're seeing in the wireless IoT in the quarter, as well as your expectations going forward, can you just talk about implications of market share and where you're seeing the best momentum?

Yes, Craig, this is Tyson. We're seeing strength in wireless really across protocols and across a number of different market segments. We outlined some of those things, like lighting, industrial automation, retail, shelf tags, smart home, a lot of the mesh networking, a lot of the Bluetooth applications and things like portable medical. So it's kind of an across the board in terms of different applications and different wireless protocols where we're seeing the strength in wireless. And those are trends that are going to just continue year-after-year. If you think about IoT, it is a long-term trend. It's not just something that's going to happen in one area, and then dwindle away. The projections are that the IoT wireless market will grow at a 15% CAGR over the next decade. And so our target of a 20% CAGR means that we will be gaining share over that timeframe while the market continues to grow.

Got it. Thanks. And then, just the follow-up question on tax kind of going from the low to mid-20s on a combined basis, anything to note on just the IoT piece from tax implications longer term?

Yes, Craig, similarly facing the dynamics around the increase with the change in the tax law, we'll be further refining that as we move to our continuing operations model, but a similar type of increase based on current law. And I will add that, obviously a lots happening in DC right now. We're watching that carefully, and the landscape could change depending on what happens with legislation.

Thanks.

Our next question will come from Raji Gill with Needham & Company. Please go ahead.

Yes, thank you. Just a question if you did not have supply constraints related to IoT. Any sense in terms of what the IoT growth rate would have been in 2021?

Yes, Raji, it's -- not able to provide a hard number to you, but suffice to say that we exited the first quarter as we did exited the fourth quarter with an unusually high amount of unmet demand. So it would be a big number, Raji. But the entire industry is constrained, and we're working through that best we can.

Right. And you talked about supply constraints, lasting persisting for a kind of several quarters. Any kind of insight or color in terms of how the industry is progress in terms of supply and capacity, these are kind of lagging edge nodes, where there is supply constraints. You kind of gave it a somewhat of a timeframe, but any sense in terms of, what steps the industry is taking in order to try to increase the capacity particularly on these lagging edge nodes?

Yes. So, the industry is -- TSMC has announced a number of investments in mature technologies. And this is really 28 nanometer and above. So this is, it's not the three nanometer and five nanometer and seven nanometer at the advanced nodes. But what's happened is that a lot of the -- in addition to strong demand, we've also had a focus of all the CapEx into the advanced nodes. And then, because Moore's law is pushing the limits here. A lot of products have gotten left behind, the N-1, N-2, N-3 nodes. And so that has also filled up the mainstream technologies. Right now, it's safe to assume that for the remainder of the year, we are going to be in a supplied constrained situation, there's incremental improvements that can be had. But it takes a little while to get other sources of supply qualified. And certainly, to the extent that we have to build new fabs and mainstream, which is not the way it used to work, it used to be that they would focus on advanced nodes and the mainstream nodes would empty out. But we're getting into a situation where the demand for semiconductors has exceeding that that model and those slowing pace of Moore's Law migration is adding to that. So it's -- I believe that this will persist into 2022, but certainly, for the remainder of the year, we're going to be in a supply chain constrained situation.

And just for a follow-up, in terms of your kind of long-term strategy in IoT, you're pretty much dominating wireless by servicing all the different types of standards that are available there out to your multi-protocol, multi-radio, SoC. Are there other connectivity technologies such as cellular, massive IoT that you're considering? When you are now thinking about, IoT and becoming kind of the leader in IoT going forward?

Yes, certainly we look at a lot of the other technologies in cellular, but I think when you think about strategy and one of the things that we're accomplishing with the sale of our I&A group is to obtain focus, to be able to focus on this massive opportunity in IoT. And I think even within IoT, it's very important that we focus on the most important things and that we don't get spread too thin. And one of the -- you look at the standards that we are addressing from WiFi, Bluetooth, all the mesh networking, Z-wave, Zigbee, Thread, and then all of the industrial proprietary protocols that we can also run those onto our chip. There's a massive opportunity for that, and if we focus and execute on our vision, and continue to push that with -- into the next process technology nodes, and to really build-up our WiFi business and our Bluetooth business. We have a long runway of growth without having to necessarily add another protocol. And in fact, adding another protocol, especially going after cellular could be seen as a distraction from the success in these other large areas. So it's something that we're keeping our eyes on, but also being very careful to make sure that we maintain that focus on what the really big prizes, which is the standards that we're on is a massive growing market. And we've got to make sure that we ensure success in that.

Appreciate it. Thank you.

Our next question will come from Matt Ramsay with Cowan. Please go ahead.

Thank you very much guys. Good morning. John, I wanted to ask a little bit about after the I&A sale, the proforma business and the concentration for the IoT business on distribution. Is that materially different than the combined company has been? I think my observation would be probably yes. And then secondly, with supply constraints, I imagine your own books inventory and your inventory in the channel are below levels right now in the IoT franchise that you'd like to run that business at in a steady state basis. If you could talk a little bit about where the IoT businesses from an inventory perspective versus what inventory might be need to be rebuilt as we get back to supply demand parity at some point here? Thanks.

Yes, Matt, certainly, on the first question IoT is a relatively distribution heavy business with a broad base of customers outstanding support from our distribution network. So we expect that to be on the high distribution side of how we operate. And on the inventory question, you're right, channel inventory is lean. And we'd like to see some build in the channel inventory levels. And the IoT business would normally operate with a relatively higher level of inventory inside than the company average, you tend to see faster turns on more vertically oriented businesses. With a broad-based business like IoT it makes more sense to carry a bit more inventory. And we're not there right now.

Got it. Thank you. Tyson, and just a bigger picture question, and just, I guess a reflection of some investor feedback I've gotten in the last week or so since the deal was announced. You look at the IoT franchise 20% growth going forward, as you've outlined a $15 billion IoT TAM? I don't know. I would imagine you guys would agree that we're in the early innings of this IoT market phenomenon. And then you get $2 billion in the door that you've earmarked to give back to shareholders. I wonder what the debates been within the management team and the board feedback from shareholders as to use of that proceeds? My observation is a bit of a scarcity value of high growth quality and your market cap range in public companies. And I wonder if investors might ask the question, what other uses of that cash could there be to grow the business further versus just returning it to shareholders? So any big picture thoughts that would be really helpful, appreciate it?

Yes, I mean, we're going to have a substantial cash balance here after completing the sale of I&A. And you don't want to have cash sitting on the balance sheet and it's our belief both the staff, my staff and the board that returning that to shareholders is an important priority. That being said, we have a massive opportunity in front of us. The TAM will go to on the order of $10 billion plus, and we want to ensure success. So we will be focused on execution. I think as we execute the transaction and we move our I&A team over to Skyworks, we've got optimization and execution within the company that is going to be very important for us to focus on. And there are a lot of efficiencies to be gained by having this pure play focus and both in terms of brand, in terms of culture, in terms of engineering execution, in terms of systems. And we've got to make sure that we take full advantage of that and do not want to get distracted with an immediate acquisition. I would also just add two other points. One is that with our narrowed focus on IoT that necessarily narrows the range of targets that we would potentially be interested in. And certainly, we've been active and done a number of acquisitions within the IoT area, but now that would be our pure focus in terms of M&A, and even after we returned that money, we will have a substantial cash balance to continue that. So I think overall, the right message to send is that we're going to return this either in the form of dividends or share repurchase. We're going to be getting feedback from our investors and welcome feedback on the mechanism and exactly how to deploy that, but we do think that's the right thing to do and really focus on execution and optimization around our IoT business.

Thanks, Tyson. Appreciate it.

Our next question will come from Srini Pajjuri with SMBC Nikko Securities. Please go ahead.

Thank you. Good morning guys. John, on the guidance for IoT being a flattish for next quarter, if I take the run rate, I think you pretty much get to your low end of your $640 million to $660 million forecast for the year. So is that how you're thinking about the second-half? And also if you could remind us if there's any seasonality to this business that we should think about and how that might change, and as they get more supply over the next few quarters?

Yes, Srini. You bet. We're going to see if we can drive some sequential growth in the second-half that's certainly possible, but I think you're thinking about it the right way directionally. Yes, there's really less seasonality in the IoT business than some of our other product categories like broadcast video for example, which has more of a consumer focus, you do tend to see the general first quarter softness that's simply common in the industry, but apart from that, it's more of a broad based secular trend.

Got it. And then just going back to the I&A divestiture, could you remind us some of the mechanics, John, you said you expect to close the deal in Q3, and when do you anticipate receiving the cash and how soon after that, do you anticipate making the decision about the potential usages of the cash, whether it's a buyback or dividend or something else?

Yes, Srini. We expect to receive the cash at closing and the capital deployment will be after that, we'll be consulting with the board further as well as taking input from investors as Tyson just indicated, depending on the technique that's finally puts a work here that can affect the time horizon. I think we can measure that and months and quarters of time, not years of time, that's sort of how we're thinking about it.

Got it. And then one last one on the Redpine acquisition, I think last time we spoke, you said the progress has been pretty much as expected. If you could just remind us how that's progressing and water some of the mileposts that you're kind of looking at if there's any revenue contribution that you want to highlight, I think that would helpful. Thank you.

Yes, we believe that we are on track to the targets that we set out with the Redpine acquisition. And I would say, we talked in the script about Manish Kothari joining us as VP of India. So we are investing in that design center, want to make that the leading wireless design center in India. And we have a strong team there over 200 people with experience in WiFi, continuing to integrate those products into our platform and into our roadmap both from a hardware and a software perspective, continuing to execute on the next generations of WiFi technology. So we expect to be bringing those new more optimized products out into the market here over the next year. So overall very pleased with the team, very pleased with the technology and really the most important thing is that we take that integrated into our platform and make that accessible to a broader range of applications and customers. And I think that will allow us to really turbocharge the WiFi revenue beyond what we talked about initially.

Got it. Thanks, Tyson.

Our next question will come from Tore Svanberg with Stifel. Please go ahead.

Thank you, and congratulations on the revenues and also to Matt and Daniel for their promotions. First question is on the PSA Certied's Level 3 that you achieved with Secure Vault Tyson. The first thing that the company that gets that could you just elaborate a little bit on how important that is, and how do you intend to monetize the security here, whether it's monetizing it itself or perhaps getting higher content or higher ASPs [indiscernible]?

Yes, the PSA certification was a pretty big deal in the industry in terms of really hitting the top levels of security that are required. And this is both software and hardware making these devices kind of impenetrable from hackers and end point attacks and that sort of thing. And so we've built in a number of features into the chip and also the way we've designed the security architecture and the software and the way it connects to the cloud and exchanges keys and all of that. So the entire -- we've thought about kind of the end-to-end security all the way from the Silicon, all the way to the cloud and are implementing that in our series two devices. And then certainly we'll be further enhancing that in our series three devices. Once you have a security at this level, and you can think about it like your credit card, you have the little chip on your credit card or within your phone, you have a SIM card, in IoT, each device will have a unique ID and that general concepts not only can you communicate securely, but you can address those devices in terms of updates or in terms of enabling functionality and those create additional revenue streams. And we are seeing a small amount of revenue from a security and device management and that stuff today. But that is something that over time as we roll this out and as we mature our software stacks and get further penetrated into a lot of these applications. We believe that can be an additional revenue stream. It's not something that we're necessarily forecasting yet at this point, but the ability to address these devices individually in a completely secure way and to have updates and functionality enablement is something that we are looking very carefully at.

Very good. And that was my follow-up. I know you work with several different foundries today, but as you go through with the divestiture, does that really change in a material way or do expect to continue to work with the same foundries?

Yes actually the supply chain for our infrastructure and automotive business and our IoT businesses were actually somewhat different. So the fact that we are divesting I&A actually simplifies our supply chain to a significant degree. And that is one of the benefits that we get. So there were a number of foundries that were used on the I&A side that are not used on the IoT side. We have a very close relationship with TSMC, a 25-year partnership with those guys, and they've done a good job for us, while at same time everybody's struggling with capacity. And so we're looking at additional relationships there that could expand capacity and also continuing to work with TSMC to ensure that they're making the investments. And we have access to sufficient capacity to support our growth.

Thank you, Tyson.

Thank you. Our next question will come from Bill Peterson with JPMorgan. Please go ahead.

Yes, hi, good morning, and thanks for taking the questions. I was hoping can you help quantify where the lead times are currently? Are they extending from the last quarter? And is there a difference between lead ties between IoT and industrial and certainly the infrastructure and automotive businesses?

Hey, Bill, this is John. Yes, lead times have definitely extended out. I mean, we've had in the past lead times running around seven weeks or so of order book coverage. We're looking on average now of half a year even on some product lines longer than that. And that's pretty well, across the board on that, across of the various businesses that we have.

Okay. And the second part is somewhat multi-part question on IoT. Following that earlier question of the 25% to 30% growth expected, I guess, where do you see more contribution from end-markets, home and consumer, or industrial and commercial? You talked about some of the drivers, but I guess with supply constraints, are you focusing more on long lived industrial, and commercial focus and I guess, kind of longer-term, you all have sort of one reporting segment, but we report more granularly on the type of, let's say protocol growth or market growth, I guess anything that can help measure the progress on your share gains and relative performance versus peers?

Yes, Bill's this is John again, we're seeing consistent growth in the two areas between home and life, and industrial and commercial. And part of our strategy here in the upside performance with supply limitations is to be fair and really treat customers well in this scenario we have a long tail of smaller customers. So, we need to be mindful of as we allocate scarce capacity. And that's something that we're also doing, as we also deliver upside with larger customers. So we have to be mindful of those things. And as far as the forward reporting we're working through that and we'll have more to report later on exactly how we're going to break that out, going forward, starting around the next call.

Thanks.

[Operator Instructions] Our next question will come from Alessandra Vecchi with William Blair. Please go ahead.

All right, just as a clarification question on the IoT side of the business, any color and how we should think about microcontroller growth going forward over the next few years?

Alessandra, this is Tyson. The big growth in IoT is on the wireless side. So, this last quarter, we were 44%, up in wireless year-on-year. And if you just look at the mix between MCU and wireless, the mix is going to more and more shift towards wireless over time. We continue to make incremental investments in our MCU portfolio, on the eight bit side have been refreshing some of that and see good opportunity on the eight bit side. And we also, you have to remember that all of our wireless chips have a microcontroller in them. And so, to the extent that those can be redeployed into the microcontroller market, we opportunistically sell those devices with microcontroller functionality in cases where you might need a microcontroller as well as a wireless chip or something like that. So, we do see MCUs as an important business onto itself, but also as an important component of wireless. So in reality, all of our IoT businesses, microcontrollers, but the attach rate of wireless to those products is going to continue to rise as we see the proliferation of the wireless connected IoT.

That helps. And then maybe just one for John, well, somewhat of a moot point, but until the models transition over to IoT only should we still be thinking about roughly that 7% OpEx growth on a combined basis that would give annual guidance past quarter.

Yes, thanks for the question. With the upside in revenue, we're seeing some increase in variable compensation and 9% to 10% is a more rational view on OpEx given the strong upsight in revenue that we're seeing.

It makes sense. Perfect, that's it for me. Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Austin Dean for any closing remarks.

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.