Hello. My name is Sarah, and I will be your conference operator today. Welcome to Silicon Labs' Third 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. [Operator Instructions] Please note this event is being recorded. I will now turn the call over to Austin Dean, Silicon Labs' Investor Relations Manager. Austin, please go ahead.

Thank you, Sarah. We are now recording this meeting and a replay will be available for 4 weeks on the Investor Relations section of our website at silabs/investors (sic) [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 third 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 remarks 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 on the Investor Relations section of the Silicon Labs' website. For clarity, all information detailed in the call today will refer to results from continuing operations. Any references to discontinued operations will be explicitly noted. I would now like to turn the call over to Silicon Labs' Chief Executive Officer, Tyson Tuttle. Tyson?

Thank you, Austin. I'm excited to announce the achievement of record quarterly revenue for Silicon Labs. We recorded $185 million in third quarter revenue, a 9% increase from our previous high achieved in the second quarter of this year. I'm very proud of how our team has executed in such an unusual, and at times, challenging environment. First, John will provide further details on our financial performance. Then, Matt will discuss our execution and accomplishments for the quarter. I'd now like to turn the call over to John Hollister. John?

Thank you, Tyson. I'm pleased to report excellent results for the third quarter. IoT revenue for Q3 ended strong at $185 million, which is above the high-end of our guidance range and represents growth of 39% year-on-year. We saw strong growth in both of our primary end-markets during the quarter, industrial and commercial, and home and life. Here strength in the quarter were in home automation and security, smart retail, portable medical, and sports and fitness. Our wireless IoT solutions continue to be the primary driver of revenue growth and share gain. Wireless products delivered robust 48% year-on-year growth during the third quarter and we saw increases across all our wireless IoT protocols, including Bluetooth, WiFi, Z-Wave, Zigbee, Thread and Proprietary. By geography, we saw the greatest strength in the third quarter in the Americas and Europe, which were up significantly. APAC was up slightly. Distribution revenue in Q3 was 81% of total sales. Our business remains highly diverse. For example, our largest customer in the IoT business is only 5% of our mix and our top 20 customers represent approximately 31% of the total. Non-GAAP gross margin exceeded our expectations for the quarter at 59.4% with favorable mix. Earlier this year, we implemented price increases to recoup cost increases from our suppliers and we are seeing positive effects. The supplier situation remains dynamic with the tight supply and rising costs across the manufacturing landscape. We expect to continue to pass along supplier cost increases to our customers to preserve our gross margin performance. In doing so, we remain committed to applying our pricing strategy in an equitable and constructive manner to maintain our strong customer relationships and long-term growth in the IoT market. Given the variable timing associated with cost and price increases, we are experiencing greater volatility in…

Thanks, John. I'm happy to report record revenue in Q3. We're on a path to sustained growth and continued leadership in the wireless connectivity market, while achieving our profitability model. We've grown nearly 40% since Q3 of last year, which is remarkable. We've also captured greater design win lifetime revenue in the first 3 quarters of this year than we did in all of 2020. In the third quarter, Silicon Labs became a pure-play IoT company, and we're excited by the early results. The team is energized and laser focused to capture the significant market opportunity that providing the wireless connectivity for the Internet of Things represents. We achieved nearly 50% growth year-on-year and our core wireless business, despite supply chain constraints. We saw gains across all product lines. In particular, our WiFi revenue more than doubled from the third quarter last year, the first full quarter after the Redpine acquisition. Supply remains a challenge as we work to meet customer demand and do the right thing for our long-term business. We were able to build inventory slightly that we are still not what we consider a normal operating range. In addition to strong financial results, we executed well across the board, I'd now like to share some of the highlights. In September, we held our second annual Works With developer conference. The response from our ecosystem was incredible. We drew nearly 8,000 registrants, an increase of almost 20% over last year. We featured multiple keynotes including industry leaders like Amazon, Google, IKEA, Landis+Gyr and Schneider electronics. By popular demand, we also expanded the conference to add tracks on rapidly growing markets like smart retail, smart industrial and portable medical. We estimate the Works With 2021 helped us identify more than 500 new opportunities with the potential for more than…

Thank you, Matt. I joined Silicon Labs in 1997 as the 10th employee. And I am so proud of what we accomplished over the last 25 years. It's been a great honor and a privilege to lead the company for the last decade as CEO, driving our transformation into a pure-play leader of secure intelligent wireless connectivity for the large, diverse and fast-growing IoT market. Throughout this time, we have stayed true to our values. And one of those values is to hire the best. I want to thank all the employees past and present who help turn the vision of a smarter, more connected world into a reality. Going forward, I'm excited about the future of Silicon Labs, to thrive as connectivity becomes ubiquitous in our lives and throughout the economy. As I pass the torch, I have full confidence in Matt's ability to carry forward our values and culture. And under his leadership, I know the team will continue to build on Silicon Labs' strong foundation to capitalize on the opportunities ahead. Finally, since this is my last earnings call, I want to thank all of you for your time and attention through the years and sometimes patience. I've enjoyed sharing Silicon Labs' vision for the industry, our stories of innovation, and the great work of our engineers with you all. And with that, I'd like to turn the call back over to Austin.

Thank you, Tyson. And thank you for joining Silicon Labs' Q3 2021 financial and business update. I will now open the call for questions. To accommodate as many people as possible, before the market opens, I ask that you limit your time to one question with one follow-up inquiry if needed. Operator?

Thank you. [Operator Instructions] Our first question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hey, guys. Thanks for taking my question and congratulations, both Tyson and Matt, on the next chapters of your lives and careers. And congratulations on putting an exclamation point on the finish to the fiscal year. And that's where I want to start with my questioning. To what extent is this roughly 9% revenue upside, that you're posting here in the second half of the year, being driven by a better wafer supply, easing of the supply chain in general? And to what extent is it being driven by demand upside? What I'm really trying to get to is some of the forward-looking demand metrics, like your ending backlog or your book-to-bill ratio for the quarter?

Yeah, Gary, this is Matt. Thank you. I guess the way I'd like to answer that is what we're seeing is continued constraints in the supply-chain in the coming quarters. With that being said, we see the opportunity each quarter to increment up on our supply. And at the same time, as we see costs coming in from our suppliers, we're passing those on to our customers, but only to the extent that it makes sense and trying to maintain our margin model. With that being said, looking forward, we see that supply will continue to be constrained, and demand is continuing to increase, widening that gap moving forward. So even though we're incrementing up our supply, demand continues to increase at a faster rate.

Thank you for that. My follow-up question is a bit boring, but important. Nevertheless, John, could you share with us what you would expect the share-count to be following this $400 million ASR that you're, I guess, concluding this week? Is it roughly 37 million shares outstanding?

Yeah, thank you, Gary. The estimate there would be around 39 million shares for the fourth quarter. And, that's really what is in view right now. So that's what I'd suggest you to think about.

Got it. Thank you, guys.

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

Thank you very much. Good morning, guys. First off, Tyson, congrats. It's been a hell of a run. And I think most importantly, the culture you've built there is something that we can certainly observe from the outside. So just wanted to, for my question, and it kind of touches on a couple of things that Gary mentioned in his first question. But what I wanted to touch on is pricing and the environment that you're seeing. There is a lot of companies talking about some being really successful, some maybe slightly less so in passing along increased input cost, given the tight environment that we're in, through to their pricing. And obviously, the big upside that you guys showed in the back-half of this year, folks just kind of kicking the tires to see how much of that is units, how much of that is supply, how much of that might be pricing and how durable any pricing upside might be as you work through the next several quarters. Thanks, guys.

Hi, Matt. This is Tyson. I'll start off and then I'll let Matt continue to comment on that. But I appreciate the kind words. It's been a great ride and we've had a lot of success in building the IoT business and I couldn't be happier for Matt to take over the reins here and take it to the next level. Just a few comments on the revenue upside here and what that's going to look like going forward. We have substantial pricing power in the IoT markets, strong demand. I mean, certainly in a supply constrained environment, you're going to have pricing power. We're also seeing some increased costs coming in from our suppliers. And we've seen some of that this year and expect that to continue to a certain degree. And we are passing on those cost increases in terms of price as we go forward. We can't get caught in the middle of, we got to hold our margins, and we're taking that as a goal. But at the same time, you don't want to damage your long-term relationships with customers. We want to do this in an equitable way, in a way that is sustainable going forward. We don't want to create headwinds in the future. And we want to maintain our relationships with customers. So there is a real balance with that. I'd also say that the team has been putting substantial effort into increasing supply, both with our existing customers, or with our existing suppliers, as well as bringing on new supply in the future, putting R&D into increasing supply as well as driving the roadmap. And, we see that in terms of securing additional supply going into the new year, but really as we go through 2022 and into 2023, making sure that we can support our long-term growth for the company, that we've got the supply to do that. So it's really a combination of things, very good execution, very good ability to manage our cost and our pricing, and increasing the supply going forward to support our growth.

Yeah. Thanks. Thank you for all that, Tyson. I really appreciate it. As my follow-up, I guess, this is for both Matt and John, when the deal got announced, the divestiture to Skyworks, I think the IoT franchise was somewhere in the low-single-digits from an operating margin perspective. And the fourth quarter guidance adds about 10 points to that, I think we're at 12% in the fourth quarter. It really, really early to ask about the long-term model I get that, but just want to make sure that you guys are still comfortable with the leverage you forecast out in that medium term model that was announced with the deal, it looks like you might be running a little ahead of that. So just any commentary you might have now that you've had a quarter 2 with the business running standalone, would be really appreciated? Thanks, guys.

Yeah, Matt, you bet. This is John. We are committed to the model and are really guiding our actions to deliver on that. And we are pleased that we're running ahead of it right now. It's a good start and no change to that longer-term outlook at this time. And that remains our goal to grow the business and drive the profitability model. That's exactly what we're focused on here.

Thanks very much, guys.

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

Yes, thank you. Congratulations on the strong results. And Tyson, congratulations on your retirement, we're going to miss you greatly. First question is on the CPMS program; can either one of you just elaborate a little bit on that, what exactly does it mean as far as continued share gains? And is there any way that you could tie it into financials?

Sure, Tore. This is Matt. So a little bit more detail on what it is and how it works. This is a service that we give our customers access to, that allows them to basically program and add customization in the late stages of our manufacturing before it leaves the facility. And in doing so it allows them to, as I said earlier, really simplify their supply chain. They don't need to send devices somewhere else for flash programming for any customization. And it also really helps with the security as well as the security configuration can be done before it ships out versus sending it somewhere else, multiple places in some cases to add those security configurations. So this is a capability that we're really excited about, because the timing is right in our industry, whether it's the supply chain challenges, the whole industry is seeing or the cybersecurity and security threats in general. This is something our customers are really looking for, and the ability to further differentiate their products as well. So it's an awesome combination. It's a service that we charge for, and it's really a good economical value for our customer base, because these are things they have to pay multiple stages of complexity in their supply chains to accomplish today. So this is a capability that we just announced and works with, and so far, the reception has been really strong.

Yeah, Tore. This is Tyson. I'd just like to add, we have a custom test platform that's really targeted at the broad market. It enables us to do this customization in a very efficient way. It also saves the customers a lot of work. In other words, they don't have to program up the parts, as they go through their manufacturing flows, it also protects them from somebody switching a different type of part into the - so that it's custom for them. And that allows us we are charging for this, it gives us a premium pricing model. And it's kind of a good element of agility that we get, because of the way we've done our manufacturing. I'd also say that that's also given us some advantage in the supply prices, just our custom test platform that enables us to scale the back end very, very efficiently without having to acquire new big arm testers and things like that, and that's proven a big advantage for us. So we see the advantage in the CPMS program, as kind of even widening that further going forward and plays into the margin and pricing model that we have.

The last thing, I'd add, Tore, just to make it real. Imagine if a customer wanted to customize top marking or part numbers for their own manufacturing schemes. They wanted to do their application programming at that phase, or they needed to inject certificates in support of multiple wireless standards like Wi-SUN or Matter, they could do that there, as well as adding their secure keys. So all of that can be done there through a secure portal, which really allows them to simplify their supply chain and increase their security. So it's pretty cool for excited about it.

Yeah, being able to do that across a broad range of customers, you're talking the ability to do this over 1,000s and 1,000s of customers is a unique capability for Silicon Labs.

No touch on our part.

Yeah.

Yeah, that's great context. Thank you for that. Just one quick follow-up for, John. John, when you did the divestiture, you talked about gross margin [56% to 58%] [ph] this year, but sort of moving to mid-50s longer-term, obviously, you're quite a bit ahead of that. Now - does that mean that the gross margin should be higher over time? Or are you still sticking to the mid-50s gross margin longer-term?

Yeah, Tore, we're seeing favorable mix here in some cases, price increases to recoup cost increases are contributing there. And the timing of that as an important thing to think about of exactly when costs and price increases are being implemented and coming into effect. No change in the longer-term outlook and it is an unusual time in the industry. We'll see what comes in the future. But we do not have an update for the long-term model today.

Okay, fair enough. Thank you, John.

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

Thank you. Good morning, guys, and Tyson, congratulations on your retirement.

Thank you.

So just on going back on pricing, John, maybe you can help us understand how the mechanics work actually here. So, I think, it'll be helpful to understand what percent of your business you have already implemented this price actions and how much more is left? And then the other thing I want to understand is that, some of this cost increases may not be permanent. So I'm kind of trying to figure out, as you know, the industry kind of normalizes whenever that is, as some of these costs come down, should we worry about pricing coming down as well?

Yeah, Srini, we're not going to get into really precise detail here. But suffice to say, where we're seeing price relief from cost increases that we realized more may be coming as we head into next year, as Tyson alluded to. So there may be more work to do in this area. And, as we said in the beginning, our objective is to not get stuck in the middle, and to leverage the pricing power we have to that end, but also to maintain the strong customer relationships that we have, and ensure that our long-term growth will be there for us. So we'll see what the future brings in terms of normalization of industry conditions, but those are the principles that we're operating from.

That makes sense. And then…

Yeah, Srini, I can also…

Hold on. Just in terms of the cost increases in the durability of that, and I think that we are going into kind of a new phase of the semiconductor industry, where we've got Moore's law and advanced nodes becoming more and more expensive. And you've got mainstream technology now full, and it used to be that the digital guys would move out and the n-1, n-2, n-3 nodes, those would be fully depreciated fabs that you would move into. We have now reached a point where the mix, the ratio between advanced and mainstream is causing fabs, TSMC and others to build new mainstream technology. And that means that those fabs are not fully depreciated. So a large element of the cost increases that the industry is seeing right now is because of the additional CapEx that's having to be put in to build new capacity across the nodes, not just at the advanced nodes, but across. And so if you look at the cost increases that we're seeing another - it's across the industry, there is a certain element of that that's durable over time. And so this is a step function in terms of the cost structure of the industry to match the demand that we're seeing, and the increasing content of electronics throughout the economy and the acceleration of demand that we've seen through the pandemic has really pushed that forward in driven us into the supply constraints, we'll work through that. But to work through that is requiring a lot of CapEx, and that's got to be recouped. And that's got to flow upstream from our suppliers to us to our customers and that's what you're seeing right now.

Makes sense. Thanks, Tyson. And, John, quickly on the channel inventory, if you could give us, what - whether that went up or down? And also, I think, last quarter, you said bookings were stable at about 6 months or so, and if you could give us some color on that? That would be helpful. Thank you.

Yeah, channel inventory is relatively stable. And the bookings have remained consistent. We've continued to have an elevated booking level. And as Matt indicated, actually the strength and demand is not only persisting, but widening a bit in terms of our supply chain. And that's why we're working on all the things, Tyson talked about to expand our ability to supply.

Got it. Thank you.

[Operator Instructions] Our next question comes from Rajiv Gill with Needham & Company. Please go ahead.

Yes, thank you and congratulations, and Tyson, best of luck for the future. Question is on the demand landscape, the demand for IoT across all these end markets is extremely strong. Back in July, you talked about total bookings hitting about $1 billion plus in the last 9 months, that obviously appears to be increasing. I wanted to get a sense of what's driving the demand this year relative to previous years? Are there specific end markets that you're seeing that are kind of outliers that are better than what you anticipated that's driving the growth? And it's a similar question on the wireless component, you grew almost 50% year-over-year, WiFi obviously is helping as well as this other particular protocol that you're seeing or end markets that are pulling in the adoption of wireless components as well?

Sure. This is Matt. I'll answer that coming from a few directions. First of all, in terms of how we're seeing the demand come in, it's strong across technologies, and it's strong across markets and applications. So there's always bright spot each quarter, but all in all, it's a very broad strength we're seeing in the overall IoT market. If you take a step back, if you looked at our design-win trajectory over the last few years, we really started seeing an acceleration in design-wins, that we're seeing coming through now in a lot of these applications and customers. And it's, I think another way to look at it is we're seeing an acceleration or pull-in of multiple markets and applications that were expected to grow and take off. And now, we're seeing that happen very broadly and across the board. And, we probably have the most insight into this that we've had in a while. Because of the supply constraints, we've had to spend a lot of time with customers, understanding what's driving the ramps, the durability of the ramps and why we're seeing those demands increase as we move into 2022. So that's where we see it. It's broad. It's across technology and application. And we do expect it to persist in the IoT space, given what's driving these.

Thanks for that insight, Matt. I appreciate it. So just shifting to the supply component of the equation, so your IoT revenue is on track to do over $800 million. And your previous annual guidance was $650 to $700, so you're surpassing that. You mentioned that you are getting incremental capacity from TSMC, that the gap is going to still wide - still pretty wide. When you're looking at - can you give us a sense in terms of the capacity commitments that TSMC has given you in 2022? I think that's going to be important for investors to focus on next year's capacity? And how that capacity commitments correlate to your long-term IoT growth rate of 20%? In other words, has TSMC secured capacity for you to make you feel comfortable that you're going to continue to grow at least 20% in your IoT business next year and going forward?

Sure. So, I won't speak to any specific or individual supplier. But we are spending a tremendous amount of time working to secure additional supply moving forward through multiple angles, including using some of our development resources towards that end as well. And as a result of that, we're able to, as we're seeing now, drive incremental supply each quarter, and we expect that to continue well into 2022, where we'll be able to increment up supply each quarter moving forward. So that's something that we are happy to see and proud, given this environment. But with that being said, to my previous comments, at the same time, we're seeing demand increase much faster than we're able to increment up supply. So I do feel good that we've been able to increase our supply next year, and that that's going to help our customer-base significantly. But those gaps continue to widen, given the dynamic we're seeing in the industry right now.

You're very good. Just last question, John, on the gross margins. Obviously, it's a moving target. You mentioned it's a bit volatile. It's running above target. The price increases the past along those are contributing, but you also mentioned favorable mix shift. Can you maybe elaborate a little bit further, when you're talking about a favorable mix shift within IoT, are there specific end-markets, protocols that are higher margin? How do you see that going forward?

Yeah, I think we'll see normalization there, Rajiv. And you've got, certain product lines carry a bit higher margin than others. What a way to think about that is more proprietary-based technologies versus standards-based technologies, for example. But over time, we think that that's comprehended in our various modeling goals that we've put forth.

Appreciate it. Congrats again.

Thank you.

This concludes our question-and-answer session. I now hand the call back to Austin Dean.

Thank you, Sarah. And thank you for joining the Q3 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 several upcoming conferences. Sarah, you can now conclude this call. Thank you.

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