Silicon Laboratories Inc. (SLAB) Q2 2024 Earnings Report, Transcript and Summary

Hello. My name is Tanya, and I’ll be your conference operator today. Welcome to Silicon Labs Second Quarter 2024 Fiscal Earnings Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.

Thank you, Tanya, and good morning, everyone. We are recording this meeting and a replay will be available for four weeks on the Investor Relations section of our website at investor.silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs’ President and Chief Executive Officer, Matt Johnson; and Chief Financial Officer, Dean Butler. They will discuss our second quarter financial performance and review recent business activities. We will take questions after our prepared comments and our remarks today will include forward-looking statements that are 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. I’d now like to turn the call over to Silicon Labs Chief Executive Officer, Matt Johnson. Matt?

Thanks, Giovanni, and good morning, everyone. Silicon Labs delivered strong second quarter results with revenue reaching the top end of our forecast and earnings exceeding expectations. Many surveyed customers report that their excess inventory levels have normalized, although some significant outliers remain. Improved booking patterns in the first half of the year indicate a continued recovery in the second half, even though weekly bookings are still below our target level. Our design win pipeline is well on track for the year with record design wins in Industrial & Commercial business units with particular strength in the Smart Cities business. The Home business also set a design win record in the quarter. We’re also pleased to see numerous design win s ramping into production and shipping to customers, including insulin management devices, electronic shelf labels and smart meters. In insulin management, we’ve started shipping millions of units across multiple customers and regions. We expect this momentum to continue in the second half of the year and accelerate into 2025 as the market and our share for these products grow and large customers begin ramping in programs. In smart retail, global deployments in the electronic shelf label market are expanding and we have a clear leadership position in the space. We’re working with four of the top five global ESL providers to support their rollout to retail customers. Lifetime, we have cumulatively shipped 300 million units and ESL has become our fastest-growing business. We are meaningfully ramping our ESL unit volume and see this growth continuing to accelerate into the next year as this application gains further traction. In smart metering, we are participating in all of the largest smart metering deployments globally outside of the China domestic market. We’ve secured designs with a major global metering supplier positioning us to capture significant share in upcoming metering deployments in new and emerging markets like India, Central America, Southeast Asia, as well as to support next-generation deployments in more established markets like the U.S. and Europe. We’ve also just secured a significant smart metering design win with a top utility provider in Japan. This win will enable us to support a majority of Japan’s smart metering market, servicing both new and existing deployments with our multi-protocol solutions, including our award-winning Wi-Fi 6 solution, the 917, and our best-in-class sub-gigahertz solution, the FG25. Our first Wi-Fi 6 product, the 917, has meaningfully lower power consumption than competing products in the market and we believe it has the potential to drive share gain similar to our Series 2 Bluetooth solutions over the past several years. The 917 continues to generate significant market opportunities and we are now seeing those opportunities convert to dozens of design wins, including at one of the world’s largest appliance manufacturers. As IoT devices proliferate, our Series 2 portfolio is well-positioned to unlock new use cases through industry-leading power consumption, security, multi-protocol wireless performance and Edge computing power. We were the first in our industry to integrate PSA Level 3 security into our Series 2 products. We’re seeing its importance and are now securing new business as a result. Similarly, our early integration of AI/ML into multiple Series 2 SoCs is also driving strong customer engagement as they seek to understand the potential use cases and applications for ML Edge in their product roadmaps. We continue to see strong momentum in the adoption of our current generation Series 2 products, while at the same time, we’ve started sampling the first product in our next generation Series 3 platform. The strength of our current generation and potential of our next generation platforms that are highly complementary is exciting and positions us extremely well going into the future. Further, customers will be able to transition from Series 2 to Series 3 as needed through common code base, scalable memory architecture and significant advancements in performance, power consumption, and compute capability. We will be talking more about Series 3 at our upcoming Works with Developers Conference this September. Overall, I’m proud of the team’s execution last quarter. As anticipated, the main driver of our recovery so far this year has been many of our end customers managing down their excess inventory. The steadily improving inventory backdrop combined with design win ramps and key focus areas, such as insulin management, ESL and metering, positions us to continue driving sequential growth in the second half. The third driver of our future growth is an improvement in the end market demand, the time of which remains hard to predict. That said, as bookings improve and shipments into our channel increase, we will benefit from this catalyst and the combination of all three of these factors will provide momentum for us moving forward. Lastly, we remain laser focused on returning to profitability as quickly as possible and executing for our long-term financial model. Now I’ll hand it over to Dean for the financial update. Dean?

Thanks, Matt, and it’s great to be joining everyone this morning, having officially stepped into the CFO role during Q2. Before discussing our results and outlook, I thought it’d be helpful to begin with some early observations. Those of you who know me know that I’ve long been an admirer of the Silicon Labs business and I’m thrilled to be the newest member of such a great team. Silicon Labs is a unique company in our semiconductor industry with its singular focus as a pure player for one of the fastest growing end markets for semiconductors, the IoT. The characteristics of this market offer many compelling financial attributes, such as a tremendously diverse customer base, long product life cycles, emerging new growth applications and the ability to command market-leading pricing with highly valued technology central to the end market application needs. Having now joined and begun to integrate into the organization, I’m pleased to share that the product depth and breadth are even more impressive than I originally understood. I’m happy to report that the sales funnel is extremely robust with a pipeline of customer engagement and design wins as diverse as the IoT itself, bolstering my belief in future growth for years to come. A key focus area for us will be ensuring that we convert this pipeline of design wins to measurable topline growth, and importantly, delivering that sales growth to the bottomline in the form of ETF expansion. We can do this by putting a renewed focus on our operational expenses and improving product margins, which will become clear as our revenue continues to recover and our newest products are released to market. Now moving forward to the June quarter results. Revenue was $145 million, up an impressive 37% sequentially and above the midpoint of our prior guidance as our recovery path takes hold. Year-over-year, revenue was down 41% as expected. In our Industrial & Commercial business, June quarter revenue was $88 million, up 35% sequentially and down 47% year-over-year. The sequential increase was driven by strength and application such as smart meters, smart building controls and retail electronic shelf labels, all delivering double-digit growth. Home & Life, June quarter revenue was $57 million, up 39% sequentially and down 28% year-over-year. During the quarter, we saw strength in home automation and security. In the Life business, we’re seeing continued traction in connected health and fitness customers, and have completed the qualification at several new continuous blood glucose monitoring customers, and are now shipping products to multiple of these CGM customers globally. These medical and health-centric applications are poised to deliver future growth for Silicon Labs as customers begin to ramp their production. We continue to focus on the level of inventory in our distribution channel, which has now declined to 55 days in the June quarter. Even more encouraging is the sequential growth in our distributor POS, which leads us to believe that some of the long-tail customers are beginning to work past their excess inventory position. Distribution made up approximately 69% of our revenue mix for the June quarter, an increase from the prior quarter, but still below our typical distribution versus direct sales channel mix. Overall, ASPs were down slightly compared to the prior quarter, but this is due to product and customer mix during the quarter, while unit volume was up significantly, driving our strong sequential growth. Geographically, we saw sequential increases in all regions, with APAC being up more than EMEA and the Americas during the quarter. For the June quarter, our GAAP gross margin was 53%. Non-GAAP gross margin was also 53%, which was in line with our guidance range and reflected a mix tilted toward direct customers versus the channel, as we previously discussed. GAAP operating expenses were $125 million, which includes share-based compensation of $16 million and intangible asset amortization of $6 million. Non-GAAP operating expense of $102 million was in line with our guidance range. We continue our focus on diligent expense control and converting our working capital back into cash while experiencing non-GAAP operating losses. GAAP operating loss for the quarter was $48 million and non-GAAP operating loss was $25 million. During the quarter, we recorded a GAAP tax expense of approximately $37 million. Our non-GAAP tax rate remained at 20%. GAAP loss per share was $2.56 and non-GAAP loss of $0.56 per share was better than our guidance range. Turning to the balance sheet, we ended the quarter with $339 million of cash, cash equivalent and short-term investments. Our days of sales outstanding was approximately 30 days. During the quarter, we depleted $32 million of our internal inventory, which ended the quarter down to $166 million of net inventory. Our days of inventory on hand improved to 217 days and we expect further to reduce our balance sheet inventory position in the subsequent quarters as sales levels improve. Now, let me turn to our September quarter outlook. While visibility is somewhat limited, excess inventory at our customers is moving in the right direction, and distribution POS and our booking have gradually improved throughout the course of the year. Although the rate and pace of the recovery is still somewhat uncertain, we remain confident in our ability to continue to drive sequential growth in the second half of the year. We anticipate revenue in the September quarter to be in the range of $160 million to $170 million. We expect both the Industrial & Commercial, as well as the Home & Life business units, to be up sequentially in the September quarter, with growth being led by the Home & Life, but also returning broadly across products and end applications. We expect our GAAP gross margin in the September quarter to be in the range of 54% to 56%. We expect our non-GAAP gross margin to also be in the range of 54% to 56%, both of which mark strong sequential improvements from the prior quarter. As revenue further recovers towards a more normal run rate, our distribution mix improves and we would expect gross margin to continue to increase. We expect GAAP operating expenses in the September quarter to be in the range of $123 million to $125 million. We expect non-GAAP operating expenses to be in the range of $101 million to $103 million. And finally, we expect GAAP loss per share to be in the range of $0.95 to $1.25 loss and we expect non-GAAP loss per share is expected to be in the range of $0.10 to $0.30 loss. I’ll now hand the call back over to Giovanni for the Q&A session. Giovanni?

Thank you, Dean. Before we open up the call for Q&A, I’d like to announce our participation in KeyBanc’s Capital Markets Technology Leadership Forum in Vail on August 5th, Jefferies Semiconductor, IT Hardware & Communications Technology Conference in Chicago in late August, and Evercore ISI’s 2024 Semiconductor, IT Hardware & Networking Conference, also in Chicago in late August. We’ll now open up 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 and one follow-up. Tanya?

[Operator Instructions] And one moment for our first question, which will come from Matt Ramsay of TD Cowen. Your line is open.

Thank you very much. Good morning, guys, and Dean, welcome to the show here. I guess for my first question, Matt, I wanted to dig into a couple of the end markets. I think we’re all obviously following the cyclical recovery for your company, but there’s some new drivers out of the back of this that I wanted to dig into a little bit and the first one is on the electronic shelf labeling market. Maybe you could spend a couple of minutes on the size of the market, the growth trajectory of the market, unit economics and then just a little bit about how that market works for a company like you guys. Do you go through an intermediary? Do you go to the retailer directly? Do you see retailers, once they make the decision to go electronic, roll things out super-fast? Do they do it regionally? Just trying to get my head around the growth dynamics and some of the unit economics of that market as it takes off? Thanks.

Yeah. Sure, Matt. Good morning. So, maybe just starting at the top with the electronic or digital shelf labels. Like a lot of areas that we focus on, these things don’t happen overnight. So, this has been a multiyear investment and multiyear partnership with a lot of customers out there. So, to answer some of those questions, first is we do work directly with our customers being the shelf label supplier. So, they would actually make the shelf label and then they would work with the retailers on the strategy deployment and kind of rollout of those products and technologies. Shelf labels are not new as a technology, they’ve been around for a long time, but we’ve seen a real increase in the adoption of those technologies really led by a few dynamics. One is I think the technology maturity is now there in terms of the robustness, the interoperability, reliability. Another key factor that we’ve seen is battery life, where the battery life of these labels is enough that the retailers don’t have to worry about going around and replacing those, they can last year’s depending on how they’re being used. And then the software reliability is also critical. And then I think the key here is the return. Our retailers are seeing returns that are really attractive to them. And as a result of those things coming together, we’re seeing the adoption of retailers globally really accelerate. And this is not a phenomenon that’s unique to one retailer or one geo, we’re seeing this as a broad trend. And as we’ve said, we see ourselves as very well positioned in that space and as a leading supplier because of one, our underlying technology, a lot of our customers deploy a proprietary implementation, which is one of the many areas we thrive in the IoT. We know how to develop products that last a long time from a battery life perspective, they’re secure, they’re reliable, they work well, they work well together, all things that are critical in a retail environment where consumers are actually going to be seeing these things and experiencing these products. So, I think, even though we’ve started shipping over the last few years, a lot of unit volume, I still think we’re early days in this market. And I’d also add that in terms of ways to think about these deployments, most of our customers and retailers, they’ll prototype, right? They’ll prototype stores, they’ll try different configurations, they’ll see what’s happening and then they’ll expand those within a region, within a geo and they’ll keep going. So, again, still early days, but we like the progress we see, we think this is a durable trend, and it’s really because of one, the maturity of the technology and the return and our position here is strong, so we’re excited about this.

No. Thank you, Matt, for all the details there. I think it’s an important point on the returns for the customer. I guess this is my second question, sort of similar, but on the smart metering market, you guys had a lot of success in the U.K. in some of their programs a few years ago and it seems like there’s some developments in different countries, you mentioned Japan in your prepared script, Matt. Maybe just kind of level set us on the different programs that your customers have in flight now in the different regions and what we should expect from that market in the next, I don’t know, 24 months.

Sure. Maybe to compare and contrast with ESL a little, more mature market in the grand scheme of things, market dynamics are very different in terms of the rate and pace at which it moves. These things can be out there for 10 years or 15 years in terms of life cycle. But big picture, again, very well positioned, market leader, that market leadership is a function of having all the requisite technologies our customers need, not just one technology, it’s multiple technologies that we have to bring together across sub-gigahertz and Bluetooth, Wi-Fi, all coming together, as we mentioned in the prepared remarks. And the way it started, as you mentioned, rollouts like we saw in the U.K., but a couple of phenomena. One is the rollouts, you’d expect, it takes years for these deployments to happen and then you’d expect kind of a peak and then the business to roll off. What we’re seeing is it’s much more resilient and durable because once the rollout kind of gets to its saturation, if you will, they start renewing the meters on the back end of that. So we’re seeing a lot more life and stability in each deployment than I think would have been originally expected. And you only know that as this technology becomes more mature and you get to see it. And then we’re also seeing new deployments go out globally, and that’s important, right? So across new geos, new applications, and this is broad -- this is gas, water and electric. And you can really just see, again, that combination of the maturity of the technology, the reliability, the robustness and the returns for those customers. Putting that intelligence inside a meter gives returns for those deployments. And it can be different depending on the geo and their care about and what they’re trying to accomplish. But the point is they see the return and they see the technology maturity and we have a leadership position there. So we think that’s a very long-term, robust and reliable space for us. And we don’t take that for granted and we’re not doing a victory lap in the sense that this is done. It’s still early days. But we’re well-positioned to continue bringing new technology to the space and continuing that leadership with what we have in Series 2 and what’s coming in Series 3.

Really appreciate the thoughts. Best of luck as we get through the cyclicality here and back to the growth vectors. Thanks, guys.

Thanks, Matt.

And our next question will be coming from Thomas O'Malley of Barclays. Thomas, your line is open.

Hey, guys. Thanks for taking my question and welcome, Dean. My first one was just on pricing over the last couple of quarters. It’s really held in a lot better than some would have imagined kind of on the upswing. Could you guys talk about when you look at September just kind of taking the assumption of just a little bit of a pricing decrease, the midpoint of your guidance assumes another robust step up in units. Is that how we should be thinking about the next couple of quarters on the revenue upswing? Is it largely driven by units or should we be seeing any sort of ASP tailwind as we get some of the upgrades to your newer products?

Yeah, Tom. Good question. This is Dean. Thanks for the warm welcome. On the ASP front, largely what we saw in the June quarter and then now what we look into the September quarter guidance is primarily a function of mix. In the June quarter, actually, we ended up shipping quite a bit more direct customers than we typically would. What we find is that the mix of products and the ASPs between direct versus channel is just a little bit different in the nature of long-tail versus large consolidated customers. So I wouldn’t read into that too much. Pricing continues to be relatively stable. There hasn’t been a whole lot of change in the last couple of quarters from what I can ascertain. And as I look forward into probably the next couple of quarters, at least what we can see on the visibility front, I don’t think you’ll see much change at all from a sort of like-to-like, so customer-on-customer ASP change, if that helps, Tom.

Yeah. That’s super helpful. Go ahead.

I’ll just add to that, just exactly. An easy way to think about it is, no big change in the pricing environment out there and what we’re seeing right now is, as we’ve said, really a function of our mix. So, as revenue goes up and that mix continues to change, you’ll see the gross margin improve and that’s what we’re guiding from Q2 to Q3, which is really important for people to understand.

Yeah. And I think like the second part of that is obviously the mix back to disti. So, you said disti was 55 days. If you look over the last three quarters, similarly, it’s gone from like 63% to 66% to 69% of revenue. Can you just talk about like the cadence there? Like, do you think 55 days is a place where you’re going to start to see some of these guys being more aggressive? Like what’s the right target for disti? And like, in terms of how quickly you can get back to what was the norm, which is low 80s by my math, like how long do you think that takes? Thank you guys.

Yeah. That’s right. I think that replenishment is probably, I’ll call it like roughly two quarters to sort of keep moving. Look, we’ve deliberately been shipping less into the channel to try to continue to burn down inventory as the channels and customers also look to burn down inventory. What has happened is that’s gotten lower than we typically expect. Typically, Tom, we would probably look at 70 days, 75 days as kind of a healthy sort of channel inventory mix. Like you said, we’re at 55 today. Look, I think customers and distributors, they’re all sort of watching it and nobody’s in a hurry to sort of replenish quickly. And we’re not pushing for that, just to be clear about it. I do think we ended the quarter at about 69% of our revenue coming from channel. Typically, like you said, we’re 80% kind of channel based and about 20% direct. So I do think as channel inventory comes down, starts to replenish, those long-tails and customers burn through their final access inventory and start coming back into a normal run rate, we’ll keep moving up toward that more normal distribution versus direct set of business. And then hopefully over the course of the next couple of quarters, distributors are comfortable to holding a more normal inventory level. And we’d like to see that back to the 70 days, 75 days. But like I said, I would just reiterate, we’re not pushing for that and that is not something that we’re contemplating in the September guide as we talk today.

Thank you guys.

And one moment for our next question. Our next question will be coming from Quinn Bolton of Needham. Your line is open, Quinn.

Hey, guys, and welcome. I guess just a quick clarification on your answer to Tom’s question there. Dean, it sounds like you’re sort of saying or implying that the disti mix does normalize. I think you said over a couple of quarters, but I’m hoping to try to pin you down a little bit more. Do you think it normalizes kind of by the end of this year? Do you think the disti mix takes into calendar 2025 before you get back to that more typical 80% of sales level?

Yeah. I don’t have a perfect crystal ball, Quinn, but if I were a betting person, I really would sort of put highest odds on early 2025 rather than getting all the way there back to normal by the end of this calendar year. So that’s, for what I can see on backlog and the way your customers are behaving, it’s probably an early 2025 rather than an end of 2024.

Got it. And then, I guess, my first question is kind of knowing that mix towards disti is helping somewhat, but you’re not fully there in the September quarter, the roughly 200-basis-point margin improvement in September feels like some of that probably is, it’s not entirely all disti mix. And so can you just kind of walk us through what are the biggest drivers of the gross margin improvement in the September quarter beyond the mix back towards disti?

Yeah. I mean, there’s channel, there’s product specific and then there’s the absorption of overhead. So I think all three contribute to differing levels. In the move from June quarter 53% to now guiding September quarter 55%, that 200 basis points, it’s largely around channel and product mix. So if I look at it, it looks like better margin products are likely to shift into September quarter. Channel will continue to probably make some progress as an overall mix of the revenue. And then to a lesser degree, but it is certainly a contributing factor in growing the revenue by $20 million sequentially. That has an overhead absorption contribution as well. And when I think about September quarter 200-basis-point and then going forward for there, I think about September as 55% is sort of back into kind of the normal range. And then as we sort of sequentially grow from there, okay, channel sort of contributing and then overhead absorption contributing, and probably, less so than a specific set of products or a specific set of customers as being probably third on the list as I look forward over the next few quarters.

Got it. Thanks, Dean. And then I guess just to, obviously, continuing to digest inventory, albeit at a lower rate into the second half of the year. Any updated thoughts on when you think you’ll largely be back to shipping in line with consumption? Is that something you think happens by year end? Could you see some customers, continuing to early 2025, just any updated thoughts on when you think you’re largely back to shipping in line with consumption? Thank you.

It’s actually, it’s a tough question. I know a lot of people have that on the top of their list. When do we get back to sort of regular consumption? Look for us, it’s difficult to tell. I don’t think anybody has any great precision on this one. Look, we’re looking at trends. They are things trending in the right direction. Our bookings coming up, there’s POS coming back. Our inventory on the customers that we survey coming down and therefore sort of the excess is bleeding off. Those indicators are all going the right direction. When we’re back to full, sort of call it regular normalized consumption rates, I don’t know, I don’t have a great prediction. I think it’s also clouded by a number of new designs that are now starting to hit production as well, that are contributing, that also mask it to some degree. And you have to imagine a company like Silicon Labs with thousands of customers, there’s no one generic answer that’s going to be a great fit for everything. So long story short, don’t think we’re quite there yet, but really tough to call when and what level that kind of normal consumption rate is. I don’t know, Matt, if you wanted to add anything.

No. I think that’s 100% it. Maybe the only thing to add is, clearly Q2 is not at our consumption levels and neither is our Q3 guide. And as Dean said, I think, the three kind of pillars we’ve talked about are to drive growth. The inventory is stocking, going the right direction, but not done yet. Design when ramped, that’s encouraging that we’ve been on an incredible design when pace over the last few years. We’ve been driving design when growth annually throughout this cycle, which is remarkable. And we’re finally starting to see those designs ramp. It’s early days, but they’re ramping. So that’s going to give us some lift moving forward in addition to the de-stocking as that starts to wind down at some point. And then the third pillar is the end market, which is obviously the most difficult to call. But like the progress on de-stocking, like the progress on design wins, still watching the end market because still a fair amount of uncertainty out there.

Got it. Thanks, Matt. Thanks, Dean.

And our next question will be coming from Srini Pajjuri of Raymond. Your line is open.

Yeah. Good morning, guys. Maybe first one for Matt. Matt, you talked about design win momentum being pretty strong. Maybe you can give us an update in particular on the Wi-Fi market. I know you talked about some progress on the smart metering. Just curious as to what end market, obviously, this is a very large market when we talk about Wi-Fi. I’m just curious as to outside of smart metering, what are your target markets with this product? And how much of the overall SAM do you think you’re addressing and how should we kind of think about revenue contribution from Wi-Fi as we think about the next 12 months to 18 months?

Got it. I’m just taking a lot of notes there. See if I can answer as much of that as possible. First, we are early days in Wi-Fi. As we’ve said, we’re introducing our first product of many in the space. What is exciting is that first product is getting a great market reception. We’ve shared that the opportunity funnel was record for us as a company as we introduced that product. Shared in the prepared remarks, we’re starting to convert those opportunities to design wins, which is really awesome to see. Once you have design wins, it’s going to take, depending on the product application, customer, geo, et cetera, you’re going to see a year or two to start to see those ramp. So the quick answer is, I would expect to see Wi-Fi growth continuing and if not accelerating going into 2025 and 2026. In terms of the SAM, the product, those types of questions, we are focused right now on, for lack of better terms, our backyard. And our backyard is one-by-one Wi-Fi 6 for IoT applications at the Edge. And what we’re bringing there is, as I’ve said a few times, is the world’s leading power consumption, which brings new-to-Wi-Fi battery life to those applications. So where we’re seeing design, we’re seeing design where someone needs longer battery life, that’s meaningful. And we’re also seeing a lot of design wins in markets where there’s pull-through with our existing customers. Because of our large base of customers and we serve a lot of other wireless technologies in those spaces, we see almost instant opportunity and interest in having one supplier put all these things together for those customers. So that’s kind of the quick answer of the where and that. And important way to think of it is, as you said, this is a big market and these things take time. So first product, like what we’re seeing out of the gate, it’s a lot of work, but it’s going in the right direction and you should expect to see multiple products coming as we move forward that continue to build out that position, expand the SAM and increase the capability and offering that we offer the customers in those markets.

Got it. Thanks Matt. Very helpful. And then I have a question on competition, in particular in China. You talked about smart metering, it sounded like you’re not participating in the China smart metering market. Just wondering if there’s any reason for that. And in general, we’ve been hearing about increased competition from domestic suppliers. So, if you could talk about what you’re seeing in that market, that’ll be very helpful?

Yeah. Sure. So, the quick answer is why not, China in terms of the local market there. The quick answer is it’s not for lack of competitive solutions. We have full stop, the world’s leading solutions for intelligent metering. That’s the one that you can imagine that they do not want a foreign supplier providing the technology behind their infrastructure. That’s the fastest way to answer that question. We do see opportunities in China for export of meters that would go outside of China, but not for ones to be consumed inside of China. So I don’t think that that should be surprising anyone. It’s a pretty common dynamic and similar to what we see in other geos, including U.S. and Europe, where I don’t think a Chinese supplier would be considered for smart metering infrastructure. In terms of, kind of the next clicks on that, nothing new is, in China, you only win if you have a solution that there’s no alternative to and local suppliers are favored. That’s not new, it’s probably amplified over the last few years. What we’re seeing right now is still strong design and momentum in China. But in terms of strength of the end market, it’s still relatively weak, although we have seen some improvement, it’s gone up for us, but nothing that we’re banking on or building into our forecaster numbers. So hopefully that’s helpful.

Yeah. Thanks, Matt, and welcome, Dean.

Thank you.

And our next question will be coming from Kyle Smith of Stifel. Kyle, your line is open.

Good morning, everyone. Kyle Smith on for Tore Svanberg at Stifel. First off, congrats on the continued sequential growth and the record design wins in multiple end markets this past quarter. Maybe I could start there. So maybe, I know we’ve talked about this a bit, but any additional color on the lifetime value of design wins in the prior quarter? And if you have any commentary on pricing trends you’re seeing within these new revenue streams, that would be great?

Okay. So I’m just trying to, let me try to answer the design win piece. So the quick answer is, we’ve talked quite a bit about the trend of our design wins. We haven’t shared the magnitude, but the way to think about the magnitude is we always look at our design win targets in the sense of what levels of design wins do we need, all things considered, to make sure we’re driving the financial model that we talked about, which is -- you’re well aware is that 20% component of revenue goes over time. So we have been successfully securing those amount of design wins on an annual basis, if not more, and we’ve seen that continue to grow annually throughout this entire market cycle and over the last few years, which is really incredible when you consider that normally you do see, if you go through a trough or any part of a cycle, you usually see design wins somewhat correlate the revenue and go down. We’re not seeing that. We’ve seen design wins’ growth and strength. So that’s been exciting. That’s encouraging. That’s what we want. I think the piece that’s been maybe disappointing and discouraging is a lot of those design wins haven’t ran when we wanted them to or when they were expected to. We expected a lot of design wins to rank last year and that didn’t happen for various reasons, supply constraints, product strategies, et cetera. Not lost, not going away, but for the most part, delayed. But as we’re sharing today, we are starting to see those ranks and that’s really exciting. We’re not talking one customer, one geo. We’re starting to see, as the market works through this last few years, we’re starting to see a lot of those start. And the durations can vary, right? Some last for a decade, some last for two years or three years, but those are starting to ramp and as we’ve shared, it’s just brought across multiple applications. So early days, but we like the trend that we’re seeing, and I think that’s what gives us the confidence to say, we can continue to drive sequential growth from here.

Great. Thank you. And for my follow-up, I would ask, I know you mentioned that both business segments are expected to grow in the September quarter with growth being led a little bit more by Home & Life. Maybe if you could add any additional color there on how you see that revenue split, both in September and exiting the year, that’d be great?

Yeah. We don’t, Kyle, give specific quantified split between the two different areas when we guide going forward. But a couple of observations that we’ve seen as we look into the September quarter and sort of guiding up, we do see that the Home & Life is likely to grow a little bit faster in the upcoming quarter than the Industrial & Commercial. A couple of factors, one, look, Home & Life actually went into the down cycle earlier than the Industrial & Commercial. So, we’re starting to see that emerge just a tad quicker from at least what we can see. Even though June quarter, both of those businesses grew pretty much in line, 39% growth, 35% growth. So pretty consistent across the two. Home & Life, though, specifically has some new product ramps that are starting to take foot in the September quarter that we can see. And I think that has sort of pulled just the sequential growth between the two just to be a little bit more in favor of Home & Life rather than Industrial & Commercial. Although in our prepared remarks, like we said, both are growing and both are growing across multiple of their end applications.

Great. Thank you.

Yeah. Thanks, Kyle.

Okay. And our next question will be coming from Cody Acree of The Benchmark Company. Your line is open, Cody.

Yeah. Thanks, guys, for taking my questions and welcome, Dean. I guess you’ve taken a stab at when you start shipping back to consumption, but any color on what that consumption level is currently or expected to be in September?

Yeah. I think the quick answer that I mentioned earlier is Q2 levels are not at consumption and the Q3 guide is not at consumption. So, that’s as far as we’ve gone in trying to articulate that. I think the other piece is the end customer inventory, which is improving. But as we said in the prepared remarks, we still, while we see improvement in the number of customers getting to right levels of excess inventory or right levels of inventory, we still have some big customers out there who are carrying more than they should. So we’ve got to see how those factors play out, but not there yet in Q2 or Q3.

And I guess with your guidance, your $20 million sequential increase, that’s obviously a very good number, but it is somewhat of a deceleration from your Q2 growth. Anything to make of that deceleration and what does that say about your December outlook?

Cody, I would just take it as, on a sequential basis, it’s still probably one of the strongest sort of growth numbers probably you’ll see across most of the semiconductor peers. We’re early in the earnings cycle, so we’ll see where everybody sort of shakes out for the September quarter. But I do think it’s probably strong relative to probably many of the peers that you’ll see probably in the coming quarter. The other thing I would say is, look, given that the downturn was very rapid in Q4 of last year, I think, the team’s made really good fast progress and had sort of pretty big uptick in the March quarter and the June quarter. And I think you would logically see at some point, you just don’t see such big jumps and what we’re starting to see is, we’re working out sort of the finer details and most of the jumps will actually be probably smaller from here, rather than continuing every quarter sort of a $40 million increase would be sort of my expectation than you would just normally see this.

Yeah. And it’s important to remember that while we’re trying to be very clear and consistent that we’re seeing encouraging signs and the trends are in the right direction, between those three pillars of the inventory stocking, design and ramp, and then the end market itself, it’s difficult to tolerate. So, and of course, that would be helpful if we had a perfect crystal ball there, but the trend is right and encouraging, which I think is the most important.

Great. Thanks guys.

And our next question will be coming from Peter Peng of JP Morgan. Peter, your line is open.

Hey, guys. Good morning. Welcome Dean. I just want to follow up on the China point. We heard from, a few of your peers that China market is rebounding, but it seems like you guys are not seeing it. Last quarter, it was like 13% of sales. Maybe if you just talk about what your expectations are for this market longer term.

Sure. Yeah. I think, the quick answer is, we are seeing some improvement there, but we’re not banking on it for our future is the quick answer. I think at our lowest, it was China was probably 10% of revenue going up to 13%, going up to 15%. So, and our total revenue is growing as well. So, we’re seeing some improvement there, but I think it’s really important that we set expectations accordingly. There’s still a lot of uncertainty in that end market. There’s still a lot of geopolitical challenges and headwinds. We talked about that earlier around favoring local suppliers. So, we will opportunistically do anything and everything we can to get design wins there, and we’re seeing progress, but we’re not banking on it for our future, and we don’t need it to deliver the numbers that we talked about. So, hopefully that helps frame it.

Great. Thank you. And then in your earlier remarks, you talk about some integration of AI/ML into your Series 2 platform. And maybe you can spend some, few minutes talking about what the use cases and so forth for it that you are seeing from the customers?

Yeah. Sure. So, as I said in the prepared remarks, and hopefully that was helpful for people to understand, what we’re seeing there parallels, what we’ve seen in a lot of other technology areas that we’ve brought to market. So, think of this recurring dynamic where we bring something to market that is ahead of the customer needs, and over time, the customer need moves into what that portfolio offers. Security is a great example. When we introduced security levels that we had, like the first to have PSA Level 3 on Series 2, people were like, that’s overkill. Now we’re winning design after design because of it and we’ve seen the same multi-protocol. The levels of multi-protocol and coexistence performance we brought to the market. Well, a lot of people said, how many applications will need all those different wireless technologies? They do. That’s happening now. We’re winning designs because of it. We see AI/ML as the exact same thing. We’ve brought multiple solutions to market that are introduction, that are AI, well, specifically the machine learning cores or accelerators that we have built to allow machine learning inference at the Edge on battery powered applications. And we’ve really taken our expertise in ultra-low power to bear and brought that to this space. So, I’d still call it early days to be direct in terms of the customer adoption, but it will be what we see in these other areas. Customer interest is high because of the strength of our offering. We get right in the front in terms of the engagement and we’re seeing customers work through how can they deploy machine learning in their application and we see that accelerating. And the rate is increasing over the last year or two. So, I think you’re going to see that continue and we like the trend that we’re seeing there. And as we’ve already announced in our Series 3, that’ll bring a whole new level of machine learning capability to the IoT, which is also very exciting. But we already have the industry leading solutions on an ML perspective and they’re in production today.

I’ll now hand the call back to Giovanni Pacelli.

Thank you, Tanya, and thank you all for joining this morning. This concludes today’s call.

This concludes today’s conference call. Thank you for participating. You may now disconnect.