Hello. My name is Jason, and I'll be your conference operator today. Welcome to Silicon Labs' Second Quarter Fiscal 2021 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Austin Dean, Silicon Labs' Investor Relations Manager. Austin, please go ahead.

Thank you, Jason. We are now recording this meeting and a replay will be available for four weeks on the Investor Relations section of our website at silabs.com/investors. Joining me today are Silicon Labs' Chief Executive Officer, Tyson Tuttle; Matt Johnson, President; and John Hollister, Chief Financial Officer. They will discuss our second quarter's financial performance and review recent business activities. This information along with accompanying financial tables and the earnings press release is available on our website. We will take questions after our prepared comments and our comments today will include forward-looking statements subject to risks and uncertainties. We base these forward-looking statements on the 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, John Hollister.

Thank you, Austin. Earlier this week, Silicon Labs accomplished a major milestone closing the divestiture of our infrastructure and automotive business to Skyworks Solutions for $2.75 billion in an all-cash transaction. The proceeds of which have been fully funded. We expect that net proceeds after taxes and fees to be approximately $2.3 billion. We are evaluating the best ways to return the majority of this capital to our shareholders while preserving an appropriate level of liquidity and financial flexibility for the business. The completion of this strategic transaction solidifies Silicon Labs as a pure-play leader in secure, intelligent, wireless connectivity for the IoT. Our team is now hyper-focused on helping customers use our integrated hardware and software development platform, an award-winning security technology to create connected devices for a wide range of industrial, commercial, home, health and safety applications. We're also working diligently to enhance production. Like the entire semiconductor industry, our supply chain conditions are tight. Yet even in this unprecedented operational environment, I'm pleased to share that Silicon Labs ended the second quarter on a strong note. Revenue on a total company basis exceeded the top-end of our guidance range at $278 million. IoT revenue ended at a new record high of $169 million, up 7% sequentially and 48% year-on-year. We also experienced another strong quarter of bookings exceeding $400 million for the total company and bringing our total for the last nine months to more than $1 billion. These successes in large part are due to strong demand for our wireless connectivity solutions. Our wireless product portfolio, which is unparalleled in breadth and depth, continues to see surging momentum, posting greater than 60% year-on-year growth in the second quarter revenue. We are also seeing strong top-line organic growth across all supported wireless protocols, including Bluetooth, Thread, Zigbee,…

Thanks John. To echo John's comments, I'm thrilled to report record revenue in Q2, a continued track record of sustainable growth, a large opportunity pipeline and strong demand for our wireless technology. I also want to recognize and thank the dedicated team with both Silicon Labs and Skyworks Solutions for executing the major transaction. The infrastructure and automotive business will remain a key part of Silicon Labs history and success story. Additionally, since I spent 24 years working with that group, it will always be a personal source of pride. We wish our former colleagues continued success at Skyworks. Moving forward; Silicon Labs will continue to capitalize on the large, growing and diverse IoT market. By centralizing efforts, we aim to accelerate market leadership, optimize execution, and maximize future growth opportunities and we are positioned to win globally. The highlight, I want to share some of our recent successes beyond our financials. First, we are operating successfully in the current era of unprecedented demand for semiconductors. We understand the importance of a resilient global supply chain and are working around the clock with our customers and partners. This collaborative approach ensures we are maximizing production and fairly allocating products. Additionally, we are carefully evaluating long-term options to expand capacity into 2022 and beyond. The serious shortage of supply across the industry and increased foundry prices are not impacting our strategic roadmap or pace of innovation. We keep driving the IoT market forward with our leadership position in many well-known ecosystems and wireless protocol alliances. We are at the foundational level of many standards, including Amazon Sidewalk, which extends the power of the IoT beyond the home, without the need for cellular technology. And Wi-SUN, which improves developer's ability to create scalable, robust, and safer industrial and smart city applications. We…

Thank you, Tyson. I'm incredibly excited to lead Silicon Labs as we embark on taking the company to the next level. We have great talent in technology, all now focused on the IoT wireless space that is rapidly growing. Our position to accelerate our impact has never been greater. I'm looking forward to sharing more with you on our Q3 update. I will now turn the call back over to Austin.

Thank you, Matt. Thank you for joining Silicon Labs' Q2 2021 financial and business updates. I recognize we've covered a lot of information. So I will now open the call for questions. To accommodate as many people as possible before the market opens, I ask you to limit your time to one question with one follow-up inquiry, if needed. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gary Mobley from Wells Fargo Securities. Please go ahead.

Good morning everybody. Matt, Tyson, let me extend my congratulations on both of your milestones. I want to start out by asking about your plans for the net proceeds specifically I think the $2 billion you had originally outlined for either a one-time dividend share buyback or other uses I'm hoping to get your current view on the options. And as well you mentioned and this is linked to the use of cash. You mentioned that you're looking at different options to expand capacity. Might you use some of that cash for things like pre-purchase about wafers to secure that?

Hi, Gary. This is John. Yes, really no change in terms of the capital deployment. We are expecting to deploy roughly $2 billion of the cash that's in the company now, which is around $3.3 billion currently ahead of final payments for taxes and fees, et cetera, associated with the deal. No change in our view of how that might come about, either through a share repurchase program, various techniques to accomplish that either through open market repurchases, advanced share repurchases, a tender offer, these are all possibilities. A special dividend of some amount is also a possibility and the board and the management team are continuing to evaluate that in light of market conditions and other factors to determine how to proceed there. So no change in the message this morning and also nothing specific to announce this morning on that. Regarding the production capacity, we are looking at various options to enhance our production capacity into next year. This could involve entering into some longer-term agreements with suppliers, but nothing to announce specifically this morning, but we are looking at various options through.

My follow up, I want to ask a question about your IoT mix and your long-term gross margin guidance, which I believe was 56% to 58%. Your guidance for the third quarter implies that you're at the high end of that long-term guidance range and that seems a bit counterintuitive given that you're – the radio portion of your IoT seems to be the growth engine right now. And I know there is mix within that mix, but maybe if you could just walk us through – basically what I'm asking is, is it sustainable? Is that third quarter gross margin sustainable given sort of the mix dynamics?

Yes, Gary, so we've taken steps this year to address the cost increase situation that we've been facing over the last six to nine months and have implemented a number of price increase programs with our customers. As we indicated in our prepared comments, we are working collaboratively with customers to ease that in so to speak and ensure that it's not a shock to them and that's working well. We're collaboratively working with the customer base on that point, but that's definitely helping gross margin here short-term. On the sustainability, we continue to view the longer-term model here as likely indicating some pressure out in time. It's hard to predict exactly how that's going to play out, but we haven't changed our long-term model from what we talked to you guys about when we announced the deal.

Thank you, guys.

The next question comes from Blayne Curtis from Barclays. Please go ahead.

Hi, good morning. Thanks for taking the question and Tyson congrats. I just wanted to revisit the – your internal inventory levels, you said it needs to come up a great deal. I'm also kind of just looking at your revenue and I think you said wireless was a 60% year-over-year. So I guess the non-wire is probably down. So I am just kind of trying to figure out how you're managing that? Are you prioritizing certain products? And then maybe just a peek into the downstream supply chain, what were your lead times? And clearly, you can't buy a lot of these wireless products. So I'm just trying to understand when do you think you can get caught back up?

Yes, Blayne, it is a tight supply chain situation out there and we're working very hard every day to secure more capacity and we're pleased actually what that we're able to do that and show some growth in the business here was strong year-on-year growth both for the second quarter results as well as the third quarter guide. The inventory level, ideally we would elevate that, now that we're in the pure-play mode and a couple of things to keep in mind about the IoT business. One is, it's very broad-based. So we're not talking about application specific products. These products are widely applicable for numerous types of applications. And that in and of itself reduces the level of inventory risk and also calls for a higher level of inventory across a broad range of tens of thousands of customers. It's a bit more challenging to predict exactly what is going to be ordered versus having a very isolated vertical type business with just a handful of customers. So, we look forward to increasing the inventory levels as we can out in time. It's going to take some time. It's likely several quarters for us to get our inventories back to where we want them to be.

Thanks. And then I just want to ask you at the time of divestiture you gave a annual guide, I didn't know if you want to revisit that or any thoughts on December?

We're moving back into the mode of one quarter at a time on our guidance, so no real update on the annual view at this point.

Okay. Thanks, guys.

The next question comes from Matt Ramsay from Cowen. Please go ahead.

Yes. Thank you. Good morning everybody. As folks have said congrats Matt and congrats Tyson. I guess my first question, and you guys laid out this new model when you announced the divestiture and with the third quarter guidance it's sort of out there officially of where the scale of the business and the margin structure is. I guess my question and I guess this is for Tyson and for Matt as we go forward is the confidence in continuing along this 20% growth plan that you have outlined in IoT while keeping operating expenses relatively flat that generate the leverage that you've laid out as we continue to grow the business. I guess that would be my question. Do we need to invest more to generate that type of growth? Or are you really confident in where the investment levels are as we see them? Thanks.

Sure, Matt. This is Matt. I'll answer the first part of that. So our commitment to the long-term 20% CAGR is strong and we see a pretty good path to achieving that. If you look at our current momentum, we are clearly a supply constraint and not demand constraint in this environment in this year and next year. If you look at design win pipeline, it clearly supports continuing this model going forward, so we're encouraged by that. So, current priority is to continue to secure more supply to support that. In terms of short-term, we mentioned that one of the benefits of the divestiture is allowing us to accelerate investment in some key areas to capture as much of this opportunity as we can. Without exaggeration, we basically have unlimited demand right now and unlimited opportunity and we're working to capture that, but long-term our commitment to the model is absolute, so the long-term 20% revenue CAGR and the profitability progression each year. We believe that that's fundamental to this go forward model and that's what we're committed to. So we see a path to achieving it and that's why we're doing this.

Great, thank you for that. And just John, you mentioned a few times about how tight things are across the supply chain. As you guys invest for more supply, how much of unlocking, I don't know, the growth potential are you seeing in the next three, four quarters that that's directly in your control versus all of your peer companies that sell components into the same solutions, our supply constraint as well? So I don't know how are you guys sort of balancing and thinking about that over the next few quarters? Thanks.

You know, Matt, we're really just driving to it and we see greater constraints in foundry capacity. Our OSAT situation is not as constraint at this point and we'll continue to monitor that as the foundry capacity increases, but that is exactly our task to keep working that and ensuring that we have adequate wafer supply to drive our growth. That's what we're laser focused on doing here.

The next question comes from Raji Gill from Needham and Company. Please go ahead.

Yes, thank you and congrats Tyson and Matt as well. Just to go back on the full year guidance for IoT. I know, John, you had mentioned that you're not giving an update on the 2021 guidance for IoT, but it looks like it's given the guidance for third quarter that it could exceed the midpoint of the guidance, unless there is a pretty big sequential decline in Q4 to hit the midpoint, which would be, I think, different from seasonality patterns if there were to be a decline of that magnitude. So I just want to get an update of kind of what's the thought process of the full year for IoT? And how should we think about that?

Yes, Raji, I think you're thinking about it correctly and we're not providing guidance of a decline in the fourth quarter. Demand is very strong. We continue to work the supply, certainly have the opportunity to have consistent Q4 performance. So we're not communicating this morning that we anticipate a decline in the fourth quarter.

Okay, good to know. And in terms of the wafer capacity constraints, I think Tyson in the last earnings call or the earnings call before had talked about that they were – you guys were 40% to 50% overbooked at TSMC for calendar 2021. And production capacity is limited on the wafer side, although the backend capacity seems to be efficient. Your recent updated conversations with TSMC, give us a sense of how those conversations are trending. How we look at capacity in calendar 2022?

Yes. Raji, this is Tyson. And that the comment on TSMC was, they are 40% to 50% overbooked. They are completely jammed. We're working allocations for 2022 and have received increased allocations from TSMC and are looking also at other options that are under our control to be able to ramp-up additional capacity that would ramp in 2022 to support our growth. So there is certainly constraints, there's growth from here, certainly with our existing suppliers bringing on new supply and then being able to scale the backend efficiently. There's a lot of work to do here, but certainly have line of sight to that long-term model, and certainly being able to get out of the woods here in 2022. I think everyone's hoping that the – that the global situation lightens up you from – we don't see any cracks in the armor yet in terms of the tightness that we're seeing. And certainly as new fab capacity ramps towards the end of next year, I think that that should get us to the point where we can get back to serving the demand.

And if I can just squeeze one more in terms of the IoT, you'd mentioned broad-based growth across wireless, but kind of specific focus on some traction on WiFi. Any update there in terms of your WiFi efforts? Thank you.

Yes. This is Matt. So, on the WiFi piece it's been over a year since we completed the acquisition of Redpine. We're very happy with the way that's gone. We've integrated the team. We've seen good market response to the technology, and now we're integrating that capability into our ongoing roadmap. It came off from a small base, but we're actually seeing the growth of those WiFi products above the average of our other wireless technology. So we're seeing good uptake and momentum there. And the fundamental thesis or strategic backdrop for why we did this hasn't changed. If anything we've seen in the last year or two it's accelerated. So we're happy with where it's at and we see continuing momentum there.

Appreciate it. Thank you.

The next question comes from Srini Pajjuri from SMBC Nikko Securities. Please go ahead.

Thank you. Good morning guys. And let me call my congrats as well for Tyson and Matt. Couple of questions; first, John, can we talk about the channel inventory? I think you said it went up four days. Could you put that into perspective and also, are you comfortable where the inventory is? Or do you plan to kind of try to build additional level of inventory as we head into the second half of the year?

Yes. Srini, I mean, the main thing to say about this is our operations team that's done a great job, executing more supply, getting the shipments out and ensuring that we have adequate channel inventory. The inventory is flowing, but we are pleased that we're able to elevate our unit shipments on a sequential basis in the second quarter. I mean, anticipate doing that again in the third quarter. So that is a relatively normal level of inventory, ideally yes. We would like to increase it some, but overall that is relatively normal level.

Got it. And then just to follow-up on gross margins, John. So your longer term model is for mid-50%. I'm just trying to understand how we get to mid-50% from the current level. So obviously you said there was some benefit in the quarter, but as we go through the next few quarters, the next couple of years, should we assume that this is going to be a gradual decline or, I mean, do you even, I mean, should we even expect a decline or do you think the mix itself will take care of itself or are there any other factors that we should be aware of as a model gross margins?

Yes. Srini, it's – of course it's a hard thing to predict, but over time as this market grows and evolves, competition is presence in the market. And we're allowing for the possibility of some slight declines over time as we scale the business and building our model to comprehend the possibility of that happening. It may not happen, but we're acknowledging that it's possible that it might happen.

Got it. Thank you.

The next question comes from Tore Svanberg from Stifel. Please go ahead.

Yes. Thank you, and congratulations to Matt and Tyson. Tyson, we're going to miss you a lot and before we let you off the hook, I was hoping you could just talk a little bit more again about the long-term vision in IoT. Obviously, you become a semiconductor leader. I know you've invested a lot in software and security. So as we look at the next two years, how is this IoT business going to evolve for the company?

Yes. Tore, thanks a lot for the kind words. I'm going to miss traveling with you and your thoughtful reports and questions. So, you know, but we're not done yet here. We got get a little bit of time to go. We started out over a decade ago. I think you remember when we said, hey, we're going to pivot the company to IoT, and we had been a high-performance mixed signal and RF provider of various components across a diverse set of markets. But we viewed the IoT as kind of the next frontier where we're integrating wireless connectivity into everything outside of the PC and handset. And we predicted there would be tens of thousands of customers and thousands of applications for that technology over time, and that, that would be a long-term growth trend, where we could be able to control the integration path to not just do the SoC and the chips to integrate wireless and battery management and processing and memory and sensor interfaces, and now security and AI and a lot of things, but also build on top of that, build our differentiation to where you have communication protocol stacks, and they become experts in networking and communication standards to develop tools and the channel to sell across all of those markets effectively and to drive simplicity so that we're able to effectively support those customers. And we've seen that business grow from several hundred million to now over $650 million this year and divesting our instruction automotive business, which was essentially the legacy business to be able to focus on this is, I think a real testament to how that that strategy has played out here over the last decade. And as we look forward, we see, our position is strong and growing…

Right. Thank you for that Tyson. As a follow-up, John, you mentioned total bookings of $400 million, which translates [indiscernible] book-to-bill of 1.43. Could you calibrate that number a little bit more? I mean, is the bulk of those bookings in IoT, any other color you can share?

Tore, the majority of the bookings are in IoT and the calibration and you're correctly viewing that it's very high and it has been high now for three quarters. And what that means is we have an extraordinarily high level of backlog coverage in the business right now. It really is a supply constraint. And as we've been indicating, we're working constantly to activate as much supply as we can to drive the growth, but it is a very high level of booking.

Sounds great. Thank you very much.

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

All right. Thank you. And thank you for joining us for the Silicon Labs Q2 earnings call. Remember, you can find our financial information at silabs.com/investors. We look forward to discussing our business further during our participation in the KeyBanc Conference coming up on August 9th. Operator, you can now conclude this call. Thank you.

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