Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the “Cautionary Statement” above and “Risk Factors” below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2023 will have 52 weeks and fiscal 2022 had 52 weeks. Our first quarter of fiscal 2023 ended April 1, 2023. Our first quarter of fiscal 2022 ended April 2, 2022.
Impact of COVID-19
The COVID-19 pandemic has impacted the global economy, disrupting our operations, global supply chains and the operations of our customers. We implemented a response plan and continued operations while largely transitioning our global workforce to a remote work model. We have reopened offices in all of our locations, subject to local regulations. The third parties that perform our semiconductor manufacturing, assembly, packaging and testing have generally remained operational. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, related restrictions on travel and transportation and other actions that may be taken by governmental authorities, the impact to the business of our suppliers or customers, and other items identified under “Risk Factors” below, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.
Overview
We are a leader in secure, intelligent wireless technology for a more connected world. Our integrated hardware and software platform, intuitive development tools, industry leading ecosystem and robust support enable customers in building advanced industrial, commercial, home and life applications. We make it easy for developers to solve complex wireless challenges throughout the product lifecycle and get to market quickly with innovative solutions that transform industries, grow economies and improve lives. We provide analog-intensive, mixed-signal solutions for use in a variety of electronic products in a broad range of applications for the Internet of Things (“IoT”) including connected home and security, industrial automation and control, smart metering, smart lighting, commercial building automation, consumer electronics, asset tracking and medical instrumentation. We group our products as Industrial & Commercial or Home & Life based on the target markets they address.
As a fabless semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.
The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.
Because some of our ICs are designed for use in consumer products, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.
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Current Period Highlights
Revenues increased $13.0 million in the recent quarter compared to the first quarter of fiscal 2022 due to increased revenues from our Industrial & Commercial products offset by decreased revenue from our Home & Life products. Gross profit decreased $1.9 million during the same period due decreased gross profit from our Home & Life products offset by increased gross profit from our Industrial & Commercial products. Gross margin decreased to 62.3% in the recent quarter compared to 66.6% in the first quarter of fiscal 2022 primarily due to variations in the price and costs of our products and variations in product mix. Operating expenses increased by $12.1 million in the recent quarter compared to the first quarter of fiscal 2022 due primarily to increased personnel-related expenses, new product introduction costs and occupancy costs. Operating income in the recent quarter was $19.6 million compared to $33.6 million in the first quarter of fiscal 2022.
We ended the first quarter of fiscal 2023 with $1.2 billion in cash, cash equivalents and short-term investments. Net cash used in operating activities was $13.3 million during the recent three-month period. Accounts receivable were $87.7 million at April 1, 2023, representing 32 days sales outstanding (“DSO”). Inventory was $133.2 million at April 1, 2023, representing 129 days of inventory (“DOI”). In three months ended April 1, 2023, we acquired 0.1 million shares of our common stock for $13.5 million.
We have continued to diversify our product portfolio and introduce new products and solutions with added functionality and integration. In the first three months of fiscal 2023, we introduced new integrated Bluetooth® SoC and MCU families that offer IoT device designers energy efficiency, high performance and trusted security for the smallest form factor IoT devices. We plan to continue introducing products that expand the capabilities we offer in order to serve both current and emerging applications, enabling us to address new markets and expand our total available market opportunity.
During the three months ended April 1, 2023, we had no customer that represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the three months ended April 1, 2023.
The percentage of our revenues derived from outside of the United States was 84% during the three months ended April 1, 2023. All of our revenues to date have been denominated in U.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside of the United States.
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Results of Operations
The following describes the line items set forth in our Condensed Consolidated Statements of Income:
Revenues. Revenues are generated predominately by sales of our products. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products.
Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. Our gross margin fluctuates depending on product mix, manufacturing yields, inventory valuation adjustments, average selling prices and other factors.
Research and Development. Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications.
Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, amortization of intangible assets, professional fees, legal fees, and promotional and marketing expenses.
Interest Income and Other, Net. Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments, and other non-operating income and expenses.
Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes and credit facility. Interest expense on our convertible senior notes includes contractual interest, amortization of debt issuance costs, and for periods prior to fiscal 2022, amortization of the debt discount.
Provision for Income Taxes. Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits, global intangible low-taxed income and Subpart F income inclusions and other permanent differences.
Equity-method Earnings (Loss). Equity-method earnings (loss) represents income or loss on our equity-method investment.
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The following table sets forth our Condensed Consolidated Statements of Income data as a percentage of revenues for the periods indicated:
Three Months Ended
April 1,
April 2,
2023
2022
Revenues
100.0
%
100.0
%
Cost of revenues
37.7
33.4
Gross margin
62.3
66.6
Operating expenses:
Research and development
36.2
33.2
Selling, general and administrative
18.2
19.1
Operating expenses
54.4
52.3
Operating income
7.9
14.4
Other income (expense):
Interest income and other, net
2.0
0.6
Interest expense
(0.7)
(0.7)
Income before income taxes
9.2
14.3
Provision for income taxes
3.1
5.0
Equity-method earnings (loss)
(0.4)
0.5
Net income
5.7
%
9.8
%
Revenues
Three Months Ended
April 1,
April 2,
%
(in millions)
2023
2022
Change
Change
Industrial & Commercial
$
150.7
$
126.7
$
24.0
19.0
%
Home & Life
96.1
107.1
(11.0)
(10.3)
%
$
246.8
$
233.8
$
13.0
5.5
%
The increase in revenues in the recent three-month period was due to increased revenues of $24.0 million from our Industrial & Commercial products offset in part by decreased revenues of $11.0 million from our Home & Life products. Average selling prices of our products increased while unit volumes decreased in the recent three-month period. The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix, pricing decisions and other factors. In general, as our products become more mature, we expect to experience decreases in average selling prices.
Gross Profit
Three Months Ended
April 1,
April 2,
(in millions)
2023
2022
Change
Gross profit
$
153.9
$
155.8
$
(1.9)
Gross margin
62.3
%
66.6
%
(4.3)
%
Gross profit decreased during the recent three-month period due to a decrease in gross profit for our Home & Life product group offset by an increase in gross profit for our Industrial & Commercial product group. Gross margin decreased primarily due to variations in the price and costs of our products and variations in product mix. Increased product demand and production capacity constraints have increased the selling price and costs of our products, and has resulted in period-to-period fluctuations in our gross margin.
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We may experience variations in the average selling prices of certain of our products. Increases in average selling prices may occur during periods of increased demand, but such demand may be short-lived and could be accompanied by higher product costs. Declines in average selling prices create downward pressure on gross margin and may be offset to the extent we are able to introduce higher margin new products and gain market share with our products; reduce costs of existing products through improved design; achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or reduce logistics costs.
Research and Development
Three Months Ended
April 1,
April 2,
%
(in millions)
2023
2022
Change
Change
Research and development
$
89.4
$
77.5
$
11.9
15.3
%
Percent of revenue
36.2
%
33.2
%
The increase in research and development expense in the recent three-month period was primarily due to increases of $8.3 million for personnel-related expenses, $1.2 million for new product introduction costs and $1.0 million for occupancy costs. We expect that research and development expense will remain relatively stable in absolute dollars in the second quarter of fiscal 2023.
Selling, General and Administrative
Three Months Ended
April 1,
April 2,
%
(in millions)
2023
2022
Change
Change
Selling, general and administrative
$
44.9
$
44.6
$
0.3
0.5
%
Percent of revenue
18.2
%
19.1
%
We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in the second quarter of fiscal 2023.
Interest Income and Other, Net
Interest income and other, net for the three months ended April 1, 2023 was $4.8 million compared to $1.5 million for the three months ended April 2, 2022. The increase in interest income and other, net in the recent three-month period was primarily due to increased interest income earned as a result of higher market interest rate.
Interest Expense
Interest expense for the three months ended April 1, 2023 and April 2,2022 was $1.7 million.
Provision for Income Taxes
Three Months Ended
April 1,
April 2,
(in millions)
2023
2022
Change
Provision for income taxes
$
7.8
$
11.7
$
(3.9)
Effective tax rate
35.7
%
33.8
%
The increase in the effective tax rate for the three months ended April 1, 2023 is primarily due to a decrease in the Company’s foreign tax rate benefit and an increase to nondeductible stock-based compensation, partially offset by an increase in the Company’s Federal research and development credit benefit year over year, further impacted by these items’ relation to pre-tax book income.
Equity-method Earnings (Loss)
Equity-method earnings (loss) for the three months ended April 1, 2023 were $(1.0) million compared to $1.2 million for the three months ended April 2, 2022.
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Business Outlook
The following represents our business outlook for the second quarter of fiscal 2023.
Income Statement Item
Estimate
Revenues
$238 million to $248 million
Gross margin
60%
Operating expenses
$131 million
Effective tax rate
34%
Diluted earnings per share
$0.35 to $0.45
Liquidity and Capital Resources
Our principal sources of liquidity as of April 1, 2023 consisted of $1.2 billion in cash, cash equivalents and short-term investments, of which $0.8 billion was held by our U.S. entities. The remaining balance was held by our foreign subsidiaries. Our cash equivalents and short-term investments consisted of government debt securities, which include agency bonds, municipal bonds and U.S. government securities; corporate debt securities, which include asset-backed securities, corporate bonds and Yankee bonds; and money market funds.
Operating Activities
Net cash used in operating activities was $13.3 million during the three months ended April 1, 2023, compared to net cash provided of $85.2 million during the three months ended April 2, 2022. Operating cash flows during the three months ended April 1, 2023 reflect our net income of $14.0 million, adjustments of $28.3 million for depreciation, amortization, stock-based compensation, equity-method earnings (loss) and deferred income taxes, and a net cash outflow of $55.6 million due to changes in our operating assets and liabilities.
Accounts receivable increased to $87.7 million at April 1, 2023 from $71.4 million at December 31, 2022. The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our DSO was 32 days at April 1, 2023 and 25 days at December 31, 2022.
Inventory increased to $133.2 million at April 1, 2023 from $100.4 million at December 31, 2022. Our inventory levels will vary based on the availability of supply, and to a lesser extent, the impact of variations between forecasted demand used for purchasing inventory and actual demand. Increased product demand and higher product costs have increased the value of the inventory we hold. Our DOI was 129 days at April 1, 2023 and 90 days at December 31, 2022.
Investing Activities
Net cash provided by investing activities was $254.3 million during the three months ended April 1, 2023, compared to net cash used of $217.4 million during the three months ended April 2, 2022. The increase in cash inflows was principally due to an increase in cash inflows of $474.8 million from net purchases, sales and maturities of marketable securities in the current period.
Financing Activities
Net cash used in financing activities was $24.5 million during the three months ended April 1, 2023, compared to net cash used of $166.5 million during the three months ended April 2, 2022. The decrease in cash outflows was principally due to a decrease of $140.2 million for repurchases of our common stock in the current period.
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Discontinued Operations
Net cash used in discontinued operations was zero during the three months ended April 1, 2023, compared to net cash used of $10.0 million during the three months ended April 2, 2022 related to income tax payments.
Debt
As of April 1, 2023, our debt included $535 million principal amount of convertible senior notes (the “2025 Notes”). We also had an undrawn $400 million revolving credit facility. We have an option to increase the size of the borrowing capacity of the revolving credit facility by up to the greater of an aggregate of $250 million and 100% of EBITDA, plus an amount that would not cause a secured leverage ratio to exceed 3.25 to 1.00, subject to certain conditions. On March 22, 2023, we issued a notice of redemption for the 2025 Notes, which will occur on June 20, 2023, for any of the 2025 Notes outstanding that have not been previously converted. We have irrevocably elected cash settlement for the principal amount of the 2025 Notes and intend to settle any excess value with a combination of shares of our common stock and cash for fractional shares, if any.
Capital Requirements
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, the timing and extent of research and development projects, potential acquisitions of companies or technologies and the expansion of our sales and marketing activities. We believe our existing cash, cash equivalents, investments, credit under our credit facility, and cash generated from operations are sufficient to meet our short-term (i.e., over at least the next twelve months) and long-term capital requirements, although we could be required, or could elect, to seek additional funding prior to that time. We may enter into acquisitions or strategic arrangements in the future which also could require us to seek additional equity or debt financing.
Critical Accounting Estimates
Our critical accounting estimates are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Form 10-K for the fiscal year ended December 31, 2022. There have been no material subsequent changes to our critical accounting estimates.
Quantitative and Qualitative Disclosures about Market Risk
Interest Income
Our investment portfolio includes cash, cash equivalents and short-term investments. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. Our interest income is sensitive to changes in the general level of U.S. interest rates. A 100 basis point decline in yield on our investment portfolio holdings as of April 1, 2023 would decrease our future annual interest income by approximately $10.5 million. We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives.
Interest Expense
We are exposed to interest rate fluctuations in the normal course of our business, including through our credit facility. The interest rate on the credit facility consists of a variable-rate of interest and an applicable margin. While we have drawn from the credit facility in the past, we have no borrowings as of April 1, 2023. If we borrow from the credit facility in the future, we will again be exposed to interest rate fluctuations.
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Foreign currency exchange rate risk
We are exposed to foreign currency exchange rate risk primarily through assets, liabilities and operating expenses of our subsidiaries denominated in currencies other than the U.S. dollar. Our foreign subsidiaries are considered to be extensions of the U.S. parent. The functional currency of the foreign subsidiaries is the U.S. dollar. Accordingly, gains and losses resulting from remeasuring transactions denominated in currencies other than U.S. dollars are recorded in the Condensed Consolidated Statements of Income. We use foreign currency forward contracts to manage exposure to foreign exchange risk. Gains and losses on foreign currency forward contracts are recognized in earnings in the same period during which the hedged transaction is recognized.
Available Information
Our website address is www.silabs.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our website free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Our website and the information contained therein or connected thereto are not intended to be incorporated into this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information related to quantitative and qualitative disclosures regarding market risk is set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 2 above. Such information is incorporated by reference herein.
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