R. Matthew Johnson; President, Chief Executive Officer, Director; Silicon Laboratories Inc
Dean Butler; Chief Financial Officer, Senior Vice President; Silicon Laboratories Inc
Srinivas Pajjuri; Analyst; Raymond James & Associates, Inc.
Peter Peng; Analyst; J.P. Morgan Securities LLC
My name is Michelle and I will be your conference operator today. Welcome to the Silicon Labs third quarter fiscal 2024 earnings call at this time.
(Operator Instructions) Please be advised that today's conference is being recorded. I would now like to turn the call over to Giovanni Pacelli, Silicon Labs' Senior Director of Finance. Giovanni, please go ahead, sir.
Thank you Michelle and good afternoon 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 third 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'd now like to turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson.
Thanks, Giovanni, and good afternoon, everyone. Silicon Labs delivered solid third-quarter results with revenue and earnings exceeding the midpoint of our guidance.
Our surveys indicate that many of our customers' excess inventory levels have now normalized. However, there remain outliers whose destocking will continue to take time. Bookings patterns and distribution POS have modestly improved but have not significantly accelerated, indicating to us that a demand recovery is likely to be more gradual than many of our customers originally expected.
Broadly speaking, the majority of our customers remain positive looking forward into 2025. Our current quarter outlook reflects near-term uncertainty around the timing of a more robust end-market recovery and importantly, does not assume any significant channel restocking.
Looking ahead, our growth in the near to midterm is underpinned by design win ramps in the secular growth areas that we have previously discussed including connected health, smart metering, and commercial retail as well as many other applications. We are currently ramping shipments to multiple customers in all of these and are confident we are gaining share in these markets, giving us conviction in our growth opportunity moving forward.
Over the last quarter, Silicon Labs Works With developer conference was a huge success. We hosted over 500 unique existing and new customers in person for two days as well as our ecosystem partners including Amazon, Google, Samsung, and now NVIDIA. At Works With and at embedded world North America, our CTO, Daniel Cooley, and I delivered keynotes in discussing how AI is rapidly becoming a growth catalyst that will enable the total number of IoT devices to reach over $100 billion over the next decade.
We also detailed the continued success of our industry-leading Series 2 platform and new-to-industry capabilities of our upcoming Series 3 platform. Simply said, AI not only enables better use of existing IoT devices, it will also enable and accelerate even broader device deployments moving forward, further expanding the Silicon Labs addressable market.
At the product level, we are currently shipping Series 2 devices with integrated machine learning inference engines. This includes our xG24 family of SoCS, a device where Silicon Labs was first to bring machine learning acceleration to wireless SoCs and still currently delivers more performance per unit of power consumption than any other wireless SoC based on a recently publicly available benchmark done by a third party.
Also in the quarter, we announced Series 2 enablement of Bluetooth Channel Sounding on our xG24, enabling secure and precise distance measurement between Bluetooth devices and opening the door for a new wave of proximity-based applications in home security, location tracking, geo-fencing, vehicle keyless entry, and building access control. This capability is already driving another wave of customer interest and design wins on our Series 2 platform at existing and new customers.
At the same time, we are now sampling our first Series 3 device to customers which is purpose-built to extend our successful Series 2 architecture to new-to-IoT levels of performance for the industry. For example, Series 3 will have dedicated hardware acceleration to create the world's most flexible IoT modem, dedicated security cores designed to enable post-quantum-level encryption, and an advanced machine learning core designed to enable an order of magnitude increase in performance over our already industry leading energy per inference benchmarks.
We are excited with our progress on Series 3 and our Series 2 platform continues to build momentum with new exciting products and features, growing market share, and new use cases through its industry leading power consumption, security, and multiprotocol wireless performance. This includes our first Wi-Fi 6 device, the 917, which we expect to be in ramping at customers as early as Q1 of 2025 and can deliver up to two years of battery life on a single AAA battery. This equates to meaningfully better battery life versus any competing alternatives.
Customer engagement with our 917 device is strong, and we are ramping our design wins quickly across multiple application spaces. Our initial intent in Wi-Fi is to work with our broad existing customer base to identify opportunities for pull-through and applications where Wi-Fi is becoming more relevant and where power consumption and security are also key requirements.
We've been investing significantly in Wi-Fi because of our firm belief in its relevance and growth potential within our IoT space. We're hyper focused on driving the same market share expansion of Wi-Fi that we're currently achieving with our Bluetooth solutions after increasing our strategic focus in that technology around five or six years ago.
In addition, we are continuing our focus and growth in Bluetooth. Not only is it now our fastest-growing technology by revenue, but it is now our largest opportunity pipeline by technology as well. Our early integration of new-to-industry capabilities like PSA Level 3 security and benchmark setting machine learning performance continues to generate strong engagement and growth. Lastly, our commitment to building matter infrastructure, alongside our leadership in thread technology positions us well as trusted partner to ISPs, ecosystems, and developers who are working to integrate matter into their solutions and support interoperability of edge devices.
Overall, in the near term, the timing of the end-market demand recovery remains uncertain. However, we expect a solid growth year in 2025 as the significant design wins we have driven over the last few years begin ramping to production. We will continue to focus on solid technology innovation and execution, gaining market share, and returning to our financial model as fast as possible.
Now I'll hand it over to Dean for the financial update. Dean?
Dean Butler
Thanks, Matt, and good afternoon to everyone. I'll first review the financial results for our recently completed quarter, followed by a discussion of our current outlook.
Revenue for the September quarter was $166 million, up 14% sequentially and slightly ahead of the midpoint of our prior guidance. Year over year, revenue was down 18% as demand continued to be hampered by excess inventory absorption across distributors and end customers.
In our industrial and commercial business, September quarter revenue was $96 million, up 10% sequentially but down 20% year over year. The sequential increase was driven by a strength in applications such as smart building controls and smart meters.
Home and life September quarter revenue was $70 million, up 22% sequentially and down 16% year over year. As expected, home and life grew faster than industrial and commercial in the third quarter, which we believe is at least partially driven by consumer-oriented end markets being further along in their inventory correction relative to the industrial end markets. Wearable-related applications such as smart watches and fitness trackers saw strength in the quarter contributing to the 22% sequential growth.
Inventory in our distribution channel declined 2 days to end the September quarter at 53 days. We are monitoring our distribution inventory and allowing shipments into the channel to flow naturally despite being lower than target level. Distributor POS continue to grow sequentially in Q3 as we believe many long-tail customers have now worked through the majority of their excess inventory, potentially paving the path to further recovery in 2025.
Distribution made up approximately 72% of our revenue mix for the September quarter, an increase from the prior quarter but below our historical distribution versus direct channel sales mix of around 80%. For the September quarter, our GAAP gross margin was 54.3%. Non-GAAP gross margin was 54.5%, which was an improvement versus 53% in the prior quarter.
GAAP operating expenses were $120 million, which includes share-based compensation of $16 million and intangible asset amortization of $5 million. Non-GAAP operating expense of $99 million was below the low-end of our prior guidance range as we manage expenses during times of more limited visibility. GAAP operating loss was $30 million, and non-GAAP operating loss was $8 million, both of which were substantial improvements from the prior quarter moving us in the right direction.
During the quarter, we recorded a GAAP tax expense of approximately $2 million. Our non-GAAP tax rate remained at 20%. GAAP loss per share was $0.88. Non-GAAP loss of $0.13 per share was better than the midpoint of our guidance range due to lower operating expenses.
Turning to the balance sheet, we ended the quarter with $370 million of cash, cash equivalents, and short-term investments. Our days of sales outstanding was approximately 30 days. During the quarter, we further reduced our internal inventory by $27 million ending the quarter at $139 million of net inventory, which contributed to our positive operating cash flow of $32 million for the September quarter, despite our operating losses. Days of inventory on hand improved to 165 days, a significant improvement from the 217 days at June quarter-end.
Now let me turn to our December quarter outlook. While visibility remains limited, due in part to shorter lead times, the rate of change in our customers' access inventory destocking process has decelerated after having made rapid progress over the last few quarters. While distribution POS and our own bookings have improved, the pace of our recovery remains somewhat uncertain due to the slower end-market demand.
Looking ahead to Q4, we anticipate revenue in the December quarter to be in the range of $161 million to $171 million indicating a flat quarter-on-quarter comparison, which is likely better than seasonality. Considering the relative end-market ordering patterns, we would anticipate another quarter of outperformance by our home and life products in the December quarter being somewhat offset by a muted industrial and commercial and market, therefore, resulting in our flat guidance expectations for Q4.
It's worth noting that the midpoint of this guidance implies a 90% year-over-year growth rate versus the trough experienced in the December quarter of 2023. Additionally, as previously anticipated, we expect to begin our initial production shipments to continuous blood glucose monitoring customers and have line of sight to full-scale customer ramps into 2025.
We expect GAAP gross margin in the December quarter to be in the range of 54% to 55%. We expect non-GAAP gross margin to also be in the range of 54% to 55%. We expect GAAP operating expenses in the December quarter to be in the range of $118 million to $122 million. We expect non-GAAP operating expenses in the range of $97 million to $99 million.
Finally, GAAP loss per share is expected to be in the range of $0.75 to $1.05 loss. Non-GAAP loss per share is expected to be in the range of $0.01 loss to a loss of $0.21.
This wraps up our prepared remarks. I'd like to now hand the call over to the operator to start the Q&A session. Michelle?
Operator
(Operator Instructions)
Srini Pajjuri, Raymond James.
Srinivas Pajjuri
Thank you. Matt, you talked about bookings being somewhat uneven. Maybe you could give us some additional color on which end markets. I think, you guys are guiding for a commercial to be kind of flattish or muter seasonally?
And then home and life seems to be doing better. But within those I guess end markets, any particular sub segments or end markets that are standing out in terms of weakness? Thank you.
R. Matthew Johnson
Sure. Yeah, I think the broad bookings statement is that, we have seen continued improvement overall, but as we said, in the prepared marks, not an acceleration that you'd want to see, to say, we're on the other side of this cycle that we're all in.
In terms of the next level down, quick answer is more strength in home and life, and not as much strength in industrial and commercial, particularly industrial. Which, I guess, on one hand isn't surprising, given that it's, later into the cycle, but we'd like to see more strength from industrial than we're now seeing.
Srinivas Pajjuri
Okay, got it. Maybe a quick follow up. We hear a lot about edge AI and obviously you have a very strong position in IoT and you did talk about that as well. I'm just curious, I mean, when we look at these markets, we always tend to think in terms of units and ASPs. So maybe, if you can help us understand, as we see more and more AI functionality in these applications, what sort of ASP uplift are you seeing and what should we expect as we, look out to the next couple of years? Thank you.
R. Matthew Johnson
Sure. So quick answer is it definitely would lift ASPs. That's the first thing. It's important just for framing that there's multiple levels of this, right? As we've said in some of our key notes, as well as the prepared remarks, we do see AI accelerating IoT edge adoption ultimately, whether it's improving the usefulness of existing deployments or helping accelerate broader deployments. So that's exciting and encouraging to see.
At the device level, simply said it takes more cores, more compute, more silicon space, more performance to bring inference at the edge. What we shared, in the early remarks is we have production release devices that provide industry leading inference at the edge for machine learning for battery powered applications.
And we see that increasing in its adoption and for sure when customers use those, there's an ASP lift associated with that. So think of it as ASP lift and I also add -- you should also think of it as SAM expansion because it opens the door to additional application and use cases for our devices. So net positive for us on product level and end market adoption level.
Srinivas Pajjuri
Got it. Thanks Matt.
Operator
Quinn Bolton, Needham & Company.
Nick Doyle
Guys, Nick Doyle on for Quinn. Thanks for taking my questions. You guys mentioned no channel restock next quarter. So I guess how are you thinking about the distributor mix overall? And can that mix get back to 80% in the early 2025? Thanks.
Dean Butler
Yeah, Nick, we're not assuming that there's a broad restocking into the channel. I would just remind everybody that our target channel days of inventory is approximately 70 to 75. We just ended the quarter at 53. The prior quarter was 55. And so really, I think to see the channel restock is going to take several quarters.
I think as POS continues to grow, as confidence and customer forecast continue to grow, which they have sequentially every quarter, you'll gradually see distributors continue to take more and more stock and put them on the shelves as turns actually go up. And that's one of the notable things that I think we've seen in the last quarter, is to have short lead times, turns orders coming in which of course is, heavily dependent on the channel being able to support that.
In terms of getting the channel back to closer to our historical mix of about 80%, we're in no rush. I think ultimately, that's where the company heads back to kind of our normal course of business. But again, the channel is made up of tens of thousands of customers and we're going to just slowly, continue to participate and support our customers as they continue to grow, as their destocking gets over with and they return back to normal consumption.
And once you get back to that point, I would expect it to get back near to that 80%. But it didn't take a few quarters. You won't see that move in one quarter, you won't probably see it move in two quarters. It's just a little bit of a patience game, I'd say Nick.
Nick Doyle
Thanks, helpful. The second question on CGMs. You mentioned line of sight to full ramps in 2025. Can you give us any more details on what that looks like in terms of units? I think you've talked about millions or tens of millions of an opportunity and, I think online, I think CNBC was talking about 100 million unit or more in terms of the overall market. So any help there, it would be nice. Thanks.
R. Matthew Johnson
Yeah. So as we've said in the past and it's unchanged. Easy way to think of it is as a company essentially, very little historical revenue and continuous glucose monitors and insulin management in general. We've shared multiple design wins at multiple end customers. We've said more than a dozen and we are starting to see those ramp and, as we exit this year. So we expect that those would start contributing in a way they haven't been able to as we go into 2025.
To answer your question directly, we believe that that end market represents hundreds of millions of units of opportunity. And that's a statement in terms of the, SAM or served available market there. And we feel that we're doing a pretty good job at securing market share there and we expect that to continue moving forward.
Nick Doyle
Thank you.
Operator
Cody Acree, The benchmark Company.
Cody Acree
Yeah, guys. Thanks for taking my questions. Maybe if you can just talk about your in consumption levels with revenue here in the back half about flat obviously, after a strong sequential improvement in Q3, what do you think that that is saying about your in consumption levels?
R. Matthew Johnson
Yeah. So it'd be good to hear from Dean as well. The quick answer is not at consumption yet, Cody, is the quick answer. We've seen an improvement in the end customer excess inventory that destocking has made a big impact and working those levels down. But as we've also said, it's not complete yet and still has some more work to be -- ahead for that to be complete. So getting closer to consumption but not there yet.
And just as a reminder, big, big picture, the, the three big pieces we've been talking about. One is that in inventory getting closer but not corrected yet, but definitely has gone in the right direction and we've made some big gains there. Second piece is end market. End market, continues to be low in visibility and choppy and uncertain in terms of what to expect. And our customers, I think just are trying to navigate this environment and they're not sure either. I think is the honest answer.
And then the third piece is our design win ramps. And as we've said, we've benefited from significant design win levels over the last few years and those are now starting to ramp and, that's giving us, the confidence to say, we see a path to continued growth here, even with the uncertain market environment that we're all dealing with.
Dean Butler
Cody, maybe I'll just add just a couple of points. One, we've made pretty rapid progress in the last three or four quarters to actually get majority of customers past their destocking process. I think as we look into Q4, what the dynamics are today is a little bit choppy in between different end markets, for example, industrial seem like that's you sort of gotten a little bit weaker lately. I don't know if there's a sort of hesitancy on some of those customers. While some of the consumer-based applications seem like they're largely past their stocking and their forecast continue to go up.
So we still see sort of pockets of differentiation between some of the end applications. And more notably recently, we've seen a lot more short order lead times. So that short order lead times makes it hard to give us visibility on, hey, what is the next quarter, two quarters, three quarters look like as customers sort of sit on their end demand waiting until almost the last moment. So that is sort of caused a little bit of visibility, gray area for us as we look forward.
But largely I think people, we are making progress and I think we're not quite there yet on end market consumption level. But we're making progress every quarter. And every quarter, a little bit of pockets change and those customers move past and it looks more and more positive.
Cody Acree
Thanks for that color. It's very helpful. Maybe if you can just carry on that thought into the first quarter. Any quick thoughts on normal seasonality or what your order rates are suggesting for the first half?
Dean Butler
Yeah, so for the first half, I would say, there is a lot more turns orders that we're starting to see. So it gives us a little less ability of what we might be able to see into a typical Q1. Q1 for a lot of our end applications is seasonally not their strong point. I think the balancing point for us in Q1 and that I think mentioned in some of his remarks were some of the design win ramps that we see, looking to go into, mass production. We have some going here in Q4. We have some pretty good ones that looks like Q1 is going to be the right timing. So I think our focus largely around the design win ramps, Cody.
Cody Acree
All right. Thank you guys.
Dean Butler
Thank you.
Operator
(Operator Instructions)
Peter Ping, JP Morgan.
Peter Peng
Good afternoon and thanks for taking my question. I want to follow up on the design win ramp maybe if you can just kind of give us on how material this could be to revenue contribution for 2025 that would be helpful versus 2024.
R. Matthew Johnson
Yeah, that's not something that we provided more color on. I think the easiest way to say it is, right now in this market environment, once the inventory destocking is complete, for all intents and purposes, we're assuming that the end consumption or demand environment is relatively flat.
It's got change at some point. We've got to see more strength there, but we're not seeing it right now. So we're assuming that the other side of that, all the growth is coming from design win ramps. And what we've shared is we see a path to solid growth moving forward based on the design win ramps in that flat market environment. That's the most color we can provide right now.
Peter Peng
Got it. Okay. And then as we think about some of these new design win ramps, maybe you can talk about whether there's any margin implications either to the up or down as we think about 2025?
R. Matthew Johnson
Yeah, no meaningful changes. We've remain committed to our overall gross margin model. We see a path to continuing doing or meeting that model. So, those ramps will definitely help our revenue but won't meaningfully change the gross margin outlook.
Peter Peng
Great. Thank you guys.
Operator
I show no further questions at this time. I would like now to turn the call back over to Giovanni for closing remarks.
Giovanni Pacelli
Thank you, Michelle and thank you all for joining us this afternoon. Before concluding today's call, I would like to announce our upcoming participation in Stifel's 2024 Midwest Conference in Chicago on November 7. This concludes today's call. Thank you.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.