Hello, my name is Gigi [ph], and I'll be your conference operator today. Welcome to Silicon Labs's Fourth Quarter Fiscal 2024 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 will now turn the call over to Giovanni Pacelli, Silicon Labs's Senior Director of Finance. Giovanni, please go ahead.

Thank you, Gigi, 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 this morning are Silicon Labs's President and Chief Executive Officer Matt Johnson and Chief Financial Officer Dean Butler. They will discuss our fourth 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 our website. I'll now turn the call over to Silicon Labs's Chief Executive Officer, Matt Johnson. Matt.

Thanks, Giovanni, and good morning, everyone. Silicon Labs delivered fourth quarter results consistent with our outlook as we continue to drive momentum through a challenging market cycle. Looking back at 2024, we grew more than 90% from our trough one year ago, underpinned by consistent improvement in both excess customer inventory and our bookings, as well as share gains across both of our business units. Our Home & Life business entered a correction several quarters before our Industrial & Commercial business has since grown sequentially each quarter in 2024. At the same time, our Industrial & Commercial business has seen a more modest recovery after entering its correction a couple of quarters after Home & Life. As we look at 2025, we are confident in the many growth opportunities ahead, independent of a broad recovery and end market demand, as design wins in connected healthcare, smart metering, commercial retail, and many other applications are now ramping into production. In connected healthcare, we're partnering with more than a dozen continuous glucose monitoring customers globally. In Q4, we shipped meaningful volume to multiple CGM customers, which helped drive the sequential growth of our Home & Life business last quarter. We continue to expect strong growth for us from CGM ramps throughout the coming year. As an application, we see the potential for CGM to comprise nearly 10% of our revenue in the next 12 to 18 months and are laser-focused on further building momentum in this space across multiple regions with our industry-leading portfolio and security capabilities. In smart metering, we have begun shipping millions of units to India's Smart Electric Metering Initiative using our Series 2 sub-gigahertz products. India's smart metering rollout is progressing quicker than other geographic metering rollouts have historically, and we're well-positioned to capture a majority share of…

Thanks, Matt, and good morning to everyone. I will first review the financial results for a recently completed year-end and fourth quarter, followed by a discussion of our current outlook. Silicon Labs ended the fiscal year 2024 with revenue of $584 million, which represents a year-over-year decline of approximately 25%. The decline was most pronounced in the company's Industrial & Commercial products, which experienced a 32% decline as customers depleted excess inventory positions throughout the year. The company's Home & Life products declined 14% versus the prior year. While the year-on-year sales decline was substantial, I'm happy to have seen a positive progression in both sales and profitability improvements throughout 2024 as customers depleted inventory and demand for the company's products began to return. As a result, the company ended the fourth quarter of 2024 in a substantially better financial position with a GAAP operating loss of $29 million versus the same quarter one year ago GAAP operating loss of $73 million. Summarizing our fourth quarter results, revenue for the recently ended December quarter was $166 million in line with the midpoint of our prior guidance and up 91% from the lowest trough point we experienced in the December quarter of 2023. In our Industrial & Commercial business, December quarter revenue was $89 million, down 8% sequentially, but up approximately 50% year-over-year as customers in this area work through much of their excess inventory positions. During the quarter, we saw stabilization of demand signals for applications such as electronic shelf labeling and continue our early deployments of smart meters in the India market, which offset some of the slower recovery applications such as building controls and classic industrial end applications. Home & life December quarter revenue was $78 million, up 11% sequentially and up nearly threefold year-over-year led by new…

Thank you. [Operator Instructions]. Our first question comes from the line of Quinn Bolton from Needham & Company.

Hey, guys. Congratulations on the nice results and outlook. Dean, I know visibility is pretty low given the high level of turns orders, but you guys seem very confident in your new program ramps in CGMs, electronic shelf labeling. Just wondering, you've talked about sequential growth through the year, but Dean, can you help us shape what kind of growth you're looking at in terms of maybe quarter-to-quarter? What's realistic given the limited visibility you have right now?

Yes, good question, Quinn. So really what we're basing our outlook as we look forward into the remaining balance of 2025 is really around design win ramps. We think that should be relatively consistent throughout the year. Like you said, quarter-to-quarter visibility a little bit limited based on shorter lead times, but we do have confidence that we will likely grow each quarter. I think it's sort of yet to be seen exactly how that rate plays through, whether there's any unique pockets of seasonality throughout the year, but at this point, we are looking at likely a positive quarter-on-quarter throughout the year, Quinn.

Great, thanks. Thanks for that color, Dean. And then, I guess maybe just you guys talked about the new 917 Wi-Fi device you showed at CES. Can you just sort of talk about the pipeline you've built up for that product? How it might compare to Bluetooth and how do you see that contributing to revenue growth in calendar '25 and '26?

Sure. So a bunch of things in there. I'll start with the pipeline. We shared some time ago that that device actually generated the largest operating pipeline that we'd ever seen for any product we'd ever released or announced. So, we've had an incredibly strong reception to that device. And the pull-through, it's mostly pull-through existing customers. We have a very broad existing customer base. They've interested in these types of products, and it's really bringing new to industry capability, as well as our support and capability that we bring to all of our customers. So, the opportunity funnel has been strong. Design win momentum has been strong. We like what we see there. And that is going to be contributing to revenue starting pretty quick in 2025. So we're not talking about something that's as far away conceptually. The product's generally released. Opportunity is good. Design win's good. And revenue's starving. So we like what we see there. To your other point on how does it compare to Bluetooth, much earlier days. If you think about it, we shared quite years ago that we were increasing our focus on Bluetooth. And that takes time, right? A lot of products in the portfolio, support, enablement. And as we've shared here, it worked. It's now our biggest opportunity funnel and fastest growing revenue space we have. And that's with the backdrop of our other technologies also all doing well. So Wi-Fi is earlier. These are really just the first products. So what you should expect is a lot more products coming down the road as we continue doing derivatives of Series 2 and introduce more products in Series 3, which will further accelerate what we're doing in Wi-Fi, which is unique because it's focused on the edge of IoT, where we really focus and thrive. So hopefully that helps.

That's great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Christopher Rolland from Susquehanna.

Hey, guys. Thanks for the question. I guess maybe my first question is around the Synaptics and Broadcom agreement. And this was around kind of next-gen technologies, including Wi-Fi 8, which is a little further out than your roadmap. And these technologies are less low power and different from your portfolio. But I was wondering if you had any thoughts on this agreement. If you've looked at these assets from Broadcom and ultimately your thoughts on them, were they too overpriced or just absolutely not strategic in any way to you guys?

Yes, sure. We're familiar with the technology. And the fastest way I can say it is, this isn't in our wheelhouse or backyard at all. What they're doing is focused on handsets, in the handset space where we don't operate or play. So a way to think of it is, it almost takes them further away from where we focus. And our focus, as I was saying a few minutes ago, is really on that low power edge in the IoT space, which we have to develop Wi-Fi products specifically for that ground up. So those products don't play in our space. And the IP is not applicable for this space, as I think they share publicly in their comments. So quick answer is, good technology, but focused on handsets, not in our markets, and kind of moves them further away from us, not closer.

Yes, I figured as much. My second question is around distribution, basically, you versus your competitors. It sounds like you finally think you're in line. You're still a little bit below your target, I think. If you had any expectations to raise that, but would love to know how you think your competitors, whether they're over allocated to distribution right now? And then also kind of maybe a postmortem, how to look at this to prevent the massive cyclical move that we've seen over the past couple of years here, what can we do to prevent that? Is it just keeping it super low moving forward? Is that your caution on just the inventory? Would love the big picture take?

Yes, maybe Chris, I'll start off with just our viewpoint on inventory holdings versus us internally versus distribution channel. Look, one of the things that we've seen over the last few quarters is increasing short lead time orders, which really is a perfect fit for channel partners. Quite honestly, we've been working down our internal inventory, our balance sheet inventory. And what we'd like to have happen is have a larger sort of holding set at distributors to service those short lead time orders. I think in the industry right now, there's quite a bit of inventory at various supply points and people are able to deal with it. I think once you get back to sort of a normal steady state environment, we would probably look to have our inventory holdings closer to 100 days and distribution close to 70 days. So it's really just a change between balance sheets between us sort of directly versus where the distributors are. And certainly when it comes to peers and sort of what's happening with some people around us, I think the distributors are sort of hesitant to take on a lot of extra inventory right now. I mean, everybody's sort of got their own nuanced model that they're trying to drive, but I don't think I've seen any instances where distributors are taking too much or taking too little. It seems to be fairly balanced, at least from a Silicon Labs perspective, the last probably about four quarters, we've operated in the mode of let the distributors sort of naturally hold the amount of inventory they think is sufficient for supporting their working capital sort of models, as well as customers. I think as things continue to stabilize, you'll see them probably inch up in their holdings relative to where they are now. Today, 56, we just ended the quarter with 70, 75 days as our longer term target.

Yes, I fully agree with what Dean's saying. And maybe just an add as a reminder for everyone, we never really had a distribution or channel inventory problem throughout the cycle. The biggest challenge we had was really end customer excess inventory. That's where there was a substantial buildup as we went throughout this cycle. And that's really what we've been focused on working down over the past year. And as Dean and I shared in our remarks, we've made substantial progress towards that end. So maybe a way to think about it is just like in the crisis where there was not enough supply, we maintained a really constructive relationship with our suppliers. And I think we fared better than most. And also on the other side of it, I think in the inventory side, we maintained a really constructive relationship with our distributors, and I think we fared better than most there. So the biggest challenge for us was really end customer excess versus channel, although never easy to navigate all the moving pieces.

Thank you very much. Very helpful, guys.

Thanks, Chris.

Thank you. One moment for our next question. Our next question comes from the line of Tore Svanberg from Stifel.

Yes, thank you and congrats on the continuous recovery here. You mentioned the glucose meter business could be 10% of revenue over the next 12 to 18 months. Do you have similar numbers perhaps for some of your other circular drivers, including the shelf label and the smart meter business?

No, Tore, we haven't shared those. We just felt that in the CGM space where you can see it coming relatively quickly, it's better to get out ahead of it and share that.

Great. And as my follow-up, there seems to be a lot of activity on the Matter side. I'm just wondering how we should think about this for Silicon Labs going forward. Obviously, this is a standard. It pulls through, obviously, a lot of your components. But how should we think about this, either from penetrating existing applications to even potentially penetrating some new applications and maybe even things like smartphones?

Yes, absolutely. So the net takeaway, I'll start with the headline, is we see Matter as net favorable to the industry in terms of device adoption and net favorable to Silicon Labs in terms of our position. For anyone not familiar, Matter was really adopted for the industry to simply said, make it easier for companies to develop and deploy IoT technology and easier for consumers to adopt and deploy these technologies. And there's frustration out there with some because it's taking longer than people expected. I don't particularly find myself in that camp. I think these big transitions that are worthwhile take a lot of time. There's a lot of moving pieces, a lot of companies. And I think the thing to focus on there is, does it continue to move forward in the right direction? And the answer is yes. It continues to move forward. And if you look at where it's being adopted, the easy way to think of this is the infrastructure is being built out for Matter. And what that does is creates the real potential for us, which is the deployment of Edge devices out there. So as service providers and handsets put this technology in their devices, it lays the groundwork for all the Edge devices. That's the big volume to adopt this technology. And that's where we thrive. So as we've said all along, that's why we've leaned in on this. We have been the largest code provider for any semi-company, more SERPs than any company out there around Thread. And as I've shared in my remarks, since that spec was ratified, which I think was roughly two years ago, we've won and secured more business since then than in the prior five years combined, which speaks to really the acceleration that you're seeing. And to answer the question, yes, existing devices definitely want to adopt and deploy. And we also see new devices where they say, okay, maybe it's time. Maybe this makes it easier for us in terms of our development and for the likelihood that the outside world can adopt it. So we're cautiously optimistic that this is a win for the industry and a win for us to continue to move in that direction.

That's a great color. Thank you, Matt.

Thank you. One moment for our next question. Our next question comes from the line of Cody Acree from Benchmark Company LLC.

Great. Thanks guys for taking the questions and congrats on the nice annual turn. With a little bit of street estimates for '25, I think the street's got you up 37% annual, about a little over $200 million annual. If I look at the drivers that you laid out, glucose monitoring, electronic shelf labels and smart metering, can you maybe handicap your other growth drivers or how much of that 37% street estimate that you could realistically gain from those large drivers and how much is going to have to come from the rest of the company?

The rest of the company being other areas?

Yes, just other applications.

Yes, sure. We haven't broken it out, but we want to be very clear about a few things. We talk about ESL, sorry, electronic shelf labels, continuous glucose monitors, smart metering, because they're applications that people understand. We have strong positions. There's awesome growth out there for both the industry and for us. I'm not going to answer the question directly what percent, but they have meaningful growth for us and they're helping impact our expectation and outlook for the year. That being said, we've also mentioned just here on this call, we expect growth in Wi-Fi. We expect growth in Bluetooth. Some are in those applications, a lot that's independent of those applications. We just talked about Matter, which is not included in those applications, which we see only accelerating as we move forward in time. So the point being, those applications and there are multiple other applications that we see as growth drivers and there's multiple other technology trends that we see as growth drivers, so I wouldn't over index on those three areas, although we really like what we see there and they're giving us good lift. There's a lot of other vehicles out there, too, that are giving us a tailwind.

Excellent. Thank you guys for that. Maybe if you can just talk about your gross margin puts and takes as we progress through the year, any color would be appreciated.

Yes, Cody, we've done a good job in improving our gross margins throughout '24. As we enter the first quarter into '25, it looks like gross margins are coming up again a little bit. Looks like midpoint is 55% is what we're guiding to for Q1. I think as we look forward into the balance of '25, we would expect sort of continued progress in gross margin. I don't think you're going to see any big sort of step function from here. We're pretty close to where we see ourselves as kind of our longer-term model, this mid to 50s or mid-high 50s, so we're in sort of the striking range now. So what I would like to see in progression in gross margins, one, as revenue continues to increase, you'll sort of get the absorption of fixed costs. So on a ratio basis, your margins will get a little bit better. As some of the new design wins ramp, I think that's helpful, but again, it's not a step function. One of the things I think is going to be key is to see sort of the broader distribution, sort of the tens of thousands of customers continue to recover and improve from here, and that will probably bring up the margins. A lot of those distribution customers end up being servicing our industrial side of the house, and that tends to come with a little bit better gross margin from a mixed perspective than some of the other areas. So I hope that helps, Cody.

It does. Thank you guys very much.

Yes.

Thank you. One moment for our next question. Our next question comes from the line of Srini Pajjuri from Raymond James.

Yes. Hi. Good morning, guys. Matt, I was hoping you could maybe give us some additional color on when you talk about end customer inventory, not just the Disney inventory, but end customer inventory kind of still normalizing. Where do you see kind of what end markets or what customer types, where do you feel comfortable that inventory is back to normal, and where do you think there's still some excess that needs to be, I guess, corrected over the next few quarters?

Sure. So the quick answer is, for anyone not familiar, what we do is we work with our top 60 to 70 customers and really try to understand their end inventory situation. So again, not perfect science, but roughly right. And we've seen consistent progress there over the past year. To the point now where the pockets that remain, as we said, are probably more customer-specific phenomena than market or industry phenomena that are going on there. So, we're getting pretty close to that working its way out for us. I think the easiest way to say it is there's still some, so we don't want to ignore that. But if you can break it into the major three factors that we've been talking about for quite a while now, it was excess inventory, end market strength, and design and ramps. And I think where we are right now, maybe the easiest way to conceptualize it is going forward, the biggest influencers first will be those design and ramps. Second will be broad market or end market strength that we're not seeing yet, but we do expect at some point. And third is inventory. So it's really moved down the list where last year it would have been one. Now it's down there. So I think it's really moving from a big factor to a much smaller factor and less consequential in our expectations moving forward. So hopefully that's helpful.

Yes, that's helpful. Thank you. And then just to follow-up to one of the previous questions about, I look at your outlook for the CGM going to 10% of sales in the next 12 to 18 months, but you feel pretty good about the next few quarters. So there must be something else that's also contributing to that incremental growth because your expectation for the end markets is kind of relatively kind of stable. So I'm just curious, what are some of the other new products that are driving, that's giving you that confidence that you'll grow through the next few quarters in the year? And also if you can talk about some of these markets are so niche that I guess some of us don't have very good idea how big these markets are. So if you can kind of give us some idea where you are in terms of penetration and how big these markets are and any additional color will be helpful? Thank you.

Sure. So let's see. There's a lot in there. Let me talk about first, just kind of answer the first piece as directly as I can. CGM ramps have already started and they started across multiple customers, so that's important that that's not just a down the road thing. That's a real time thing. So that's one. And the way to think of that is if you go back a year ago, that was zero, so effectively. So that's all incremental growth for us as a company. So I don't want to downplay that piece. But to answer the question, the other areas we talked about ESL has been ramping in a good clip and that was already in motion. Metering, we've always had a strong position, but as we shared in the prepared remarks, we're also starting to see new deployments globally like the India smart metering initiative. We're starting to ship millions of units into there, so that's starting to ramp for us. We're seeing that one move faster than other geos we've seen historically, which is encouraging to see. So the areas we've talked about are all contributing. It's not just those one. And then, I'd also say, we expect to see growth in areas like from new products like Wi-Fi that we've talked about. BLE we've shared is now our fastest growing revenue space. So that's driving share gains and strong growth there. We expect Matter will continue to contribute favorably. When you see such an acceleration of design wins, the simple way to think of that is that's a precursor to an acceleration of revenue. So, all those are additional factors that we see contributing in addition to CGM to your original question. On the piece that, some of these end markets seem niche or relatively small, I'd put it this way. Maybe I'll just focus on CGM, continuous glucose monitors and shelf labels. I'd say this. Both are markets that are relatively early in terms of their global adoption. That being said, they already represent hundreds of millions of units. We've shared previous calls that we'd shipped over 300 million units into ESL already. And it's early days in that market. So the way I'd take away for those markets, early days in terms of global adoption, I think the growth potential is substantial in all those markets over time. And our position is very strong within each of those markets. So we're well indexed for the future growth opportunity there.

Very helpful. Thanks, Matt.

Yes.

Thank you. One moment for our next question. Our next question comes from the line of Thomas O'Malley from Barclays.

Hey, guys, thanks for taking my question. I wanted to ask about the dynamic between the Zigbee and the direct inventory. It took a step down in the December quarter. Could you just walk through what happened there? I think for a period of time you had talked about moving up in terms of revenue towards Zigbee and how that helped gross margin? That's question one. And then question two is, as it relates to the top 10% customer, you stop breaking it out at the end of 2023. But could you give us an update on where that stands today? I would assume that given the direct customer has grown as a total dollar amount. That number has also grown as well. Any help with that would be helpful as well? Thank you.

Yes, Tom, the direct versus distribution mix is actually pretty simple. We have been improving distribution versus direct as a percentage of revenue throughout '24. It did take a step down in the fourth quarter. And it's actually pretty simple. So a lot of our industrial type business goes through the channel. That's a little bit slower right now. And at the same time, some of the ramping businesses such as CGM that Matt talked about actually tends to go direct. And so what you see is distribution is not growing at the same rate that these new customer ramps are happening. And that's throwing it off. What I would expect, though, sort of throughout the year and going forward, is as industrial sort of starts coming back and sort of broader demand continues to return, I think you'll see that distribution channels continue to grow. And so you'll find probably in the near term, hey, what is the dynamic between some of these direct new design ramps versus sort of the broader long tail? And I think it would probably just take a little while before they kind of get back to equilibrium. As for your second question, Tom, around top customers, generally speaking, our top customers that you might see in some of the SEC filings tend to be our distributors. So we sell direct distributors. Historically, that's roughly on the order of 70% to -- in some cases, 80% of our revenue goes to distributors. And so a lot of the top customers you see in that vein, the company for a long, long time has never had a 10% single end customer, and that continues to remain true.

Thank you. One moment for our next question. Our next question comes from the line of Peter Peng from JP Morgan.

Hey guys, thanks for taking my questions and congratulations on the results. Maybe on the March quarter, can you maybe talk about where we are in terms of shipment versus end consumption trends? I know you guys talk that most of your customers are done with going through inventory trends, but are you still continuing to under ship versus the end consumption trends?

Sure. Hey Peter. So the quick answer is as long as there's some excess inventory out there at our customers, you can't say you're at consumption, I guess is the fastest way to say it. But as I said earlier, I think as a component of the kind of dynamic and expectation moving forward, we're predominantly through this inventory correction for us specifically. And as we've shared, that's continued to move down to a rate now or a level now where I would prioritize it the way I said, really the primary driver of expectations moving forward is design and ramps, then, broad market and then inventory. So it's really moved down to a factor that gets way less visibility and influence of our expectations. So don't say we're -- I can't say we're there cause there's some excess out there, but it continues to work its way down and it's no longer the primary factor like it was in '24, '25 is about other growth factors.

Got it. And then if I kind of look at some of the seasonal trends like March quarter is typically your softer period. Usually it's more flattish to down slightly, but you guys are guiding for up 7%. And then June and September quarter is your seasonally stronger periods. So would it be given all the design and ramp that you guys talked about that revenue growth is going to be accelerating into the June and September quarter?

Yes, Peter, good observation. You're right. Generally Q1 tends to be a little bit softer. We're bucking that trend with some of these new product ramps currently. I would say, it's probably too early to call the, what does your June, September quarter look like. Look, I do think we have lower visibility right now than we may historically have over the last couple of years. I wouldn't bank on sort of a significant acceleration from here. I mean, sort of posting a March quarter 7% positive sequentially is pretty substantial in this market based on what we're hearing around some of our peers. I would think that as you look forward into the summer months, you would probably enter with a little bit of caution. At least we do. And we look at the backlog and we say, hey, things are going the right direction, but we're not calling acceleration at this point. And that's maybe how I would frame it, Peter.

Perfect. Thank you guys.

Thank you. At this time, I will now hand the call back over to Giovanni Pacelli.

Thank you, Gigi. And thank you all for joining this morning. Before concluding today's call, I would like to announce our upcoming participation in Susquehanna's 14th Annual Technology Conference in New York city on February 27th. I would also like to announce our upcoming Analyst Day in New York City on March 11th at 9.00 AM Eastern. Matt, Dean and others from our executive team will provide an in-depth review of our long term strategy, key growth initiatives, and financial outlook. We look forward to connecting with you and providing a deeper insight into our business. The registration link is available now on our website at investor.silabs.com. The event will also be streamed live on our website. This now concludes today's call. Thank you.

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