SILICON LABORATORIES INC. 10-Q

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 2024 will have 52 weeks and fiscal 2023 had 52 weeks. Our first quarter of fiscal 2024 ended March 30, 2024. Our first quarter of fiscal 2023 ended April 1, 2023. Impact of Macroeconomic Conditions The current global economic environment is experiencing inflationary pressure, high interest rates, and geopolitical tension. We have experienced a decline in revenues, as our customers are slowing purchases to reduce existing inventories in a softening market. The extent of the impact of these macroeconomic conditions on our operational and financial performance will depend on future developments, including the duration and severity of any economic downturn, the impact to the business of our suppliers and/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. Current Period Highlights Revenues decreased $140.4 million in the recent quarter compared to the first quarter of fiscal 2023 due to decreased revenues from our Home & Life products and our Industrial & Commercial products. Gross profit decreased $98.8 million during the same period due to decreased gross profit from our Home & Life products and our Industrial & Commercial 17 Table of Contents products. Gross margin decreased to 51.8% in the recent quarter compared to 62.3% in the first quarter of fiscal 2023, and increased slightly compared to 50.6% in the fourth quarter of fiscal 2023, primarily due to variations in customer and product mix. Operating expenses decreased by $20.1 million in the recent quarter compared to the first quarter of fiscal 2023 due primarily to lower personnel-related costs as a result of the workforce reduction in the fourth quarter of fiscal 2023. Operating loss in the recent quarter was $59.1 million compared to operating income of $19.6 million in the first quarter of fiscal 2023. Refer to “Results of Operations” below for further discussion. We ended the first quarter of fiscal 2024 with $332.7 million in cash, cash equivalents, and short-term investments. Net cash used in operating activities was $71.8 million during the current year three-month period. Accounts receivable were $32.6 million at March 30, 2024, representing 28 days sales outstanding (“DSO”). Inventory was $198.2 million at March 30, 2024, representing 348 days of inventory (“DOI”). During the first quarter, we repaid $45.0 million in borrowings under our revolving credit facility. We have continued to diversify our product portfolio and introduce new products and solutions with added functionality and integration. 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 March 30, 2024, 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 March 30, 2024. The percentage of our revenues derived from outside of the United States was 95% during the three months ended March 30, 2024. 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. Results of Operations The following describes the line items set forth in our Condensed Consolidated Statements of Operations: 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. 18 Table of Contents Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes that were previously outstanding and our credit facility. Interest expense on our convertible senior notes included contractual interest and amortization of debt issuance costs. 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, Subpart F income inclusions, and other permanent differences. See Note 10, Income Taxes , to the Condensed Consolidated Financial Statements. Equity-method Loss. Equity-method loss represents income or loss on our equity-method investment. The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of revenues for the periods indicated: Three Months Ended March 30, 2024 April 1, 2023 Revenues 100.0 % 100.0 % Cost of revenues 48.2 37.7 Gross profit 51.8 62.3 Operating expenses: Research and development 75.8 36.2 Selling, general and administrative 31.5 18.2 Operating expenses 107.4 54.4 Operating income (loss) (55.6) 7.9 Other income (expense): Interest income and other, net 2.6 2.0 Interest expense (0.5) (0.7) Income (loss) before income taxes (53.5) 9.2 Provision (benefit) for income taxes (0.4) 3.1 Equity-method loss 0.0 (0.4) Net income (loss) (53.1) % 5.7 % Revenues Three Months Ended (in millions) March 30, 2024 April 1, 2023 Change % Change Industrial & Commercial $ 65.3 $ 150.7 $ (85.4) (56.7) % Home & Life 41.1 96.1 (55.0) (57.2) % $ 106.4 $ 246.8 $ (140.4) (56.9) % The decrease in revenues in the recent three-month period was due to decreased revenues of $85.5 million from our Industrial & Commercial products and decreased revenues of $55.0 million from our Home & Life products. Average selling prices of our products and 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. The overall demand environment for our customers’ products is generally weaker than previously anticipated. Customers are also seeking to reduce inventory levels relative to amounts they held during the recent period of widespread supply chain disruptions. As a result, the current demand environment for our products is experiencing high volatility and general weakness, with customers more frequently requesting cancellations, changes to delivery dates, and price and payment term concessions. 19 Table of Contents Gross Profit Three Months Ended (in millions) March 30, 2024 April 1, 2023 Change Gross profit $ 55.1 $ 153.9 $ (98.8) Gross margin 51.8 % 62.3 % (10.5) % Gross profit decreased during the recent three-month period due to a decrease in gross profit for our Home & Life product group and a decrease in gross profit for our Industrial & Commercial product group, primarily as a result of the decrease in unit volumes in the periods. Gross margin decreased primarily due to variations in customer and product mix. 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 (in millions) March 30, 2024 April 1, 2023 Change % Change Research and development $ 80.7 $ 89.4 $ (8.7) (9.7) % Percent of revenue 75.8 % 36.2 % The decrease in research and development expense in the recent three-month period was primarily due to decreases of $9.2 million for personnel-related expenses as a result of our restructuring activities and $1.1 million for technical services, partially offset by an increase of $1.8 million in new product introduction costs. We expect that research and development expense will increase in absolute dollars in the second quarter of fiscal 2024. Selling, General and Administrative Three Months Ended (in millions) March 30, 2024 April 1, 2023 Change % Change Selling, general and administrative $ 33.6 $ 44.9 $ (11.3) (25.2) % Percent of revenue 31.5 % 18.2 % The decrease in selling, general and administrative expense in the three-month period was primarily due to a $9.4 million decrease in personnel-related costs as a result of our restructuring activities and a $1.7 million decrease in outside services. We expect that selling, general and administrative expense will increase in absolute dollars in the second quarter of fiscal 2024. Interest Income and Other, Net Interest income and other, net for the three months ended March 30, 2024 was $2.7 million, compared to $4.8 million for the three months ended April 1, 2023. The decrease in interest income and other, net in the recent three-month period was primarily due to lower interest-bearing investment balances as a result of the sale of investments to fund the settlement of our 2025 convertible senior notes in the second quarter of fiscal 2023, stock repurchases in the second and third quarters of fiscal 2023, and repayment of borrowing from our credit facility in the third quarter of fiscal 2023. 20 Table of Contents Interest Expense Interest expense for the three months ended March 30, 2024 was $0.5 million, compared to $1.7 million for the three months ended April 1, 2023, respectively. The decrease was primarily due to the settlement of our 2025 convertible senior notes in the second quarter of fiscal 2023. Provision for Income Taxes Three Months Ended (in millions) March 30, 2024 April 1, 2023 Change Provision (benefit) for income taxes $ (0.4) $ 7.8 $ (8.2) Effective tax rate 0.7 % 35.7 % The decrease in the provision for income taxes for the three months ended March 30, 2024 is primarily due to reporting a tax benefit on pre-tax book loss for the current period compared to tax expense on pre-tax book income for the three months ended April 1, 2023. The Company estimates that its annual effective tax rate will be close to zero for the current year. Thus, discrete items may have a disproportionate impact on the calculation of the overall effective tax rate. Equity-method Loss Equity-method loss for the three months ended April 1, 2023 was $1.0 million. Our equity-method investment was sold in the fourth quarter of fiscal 2023. Business Outlook The following represents our business outlook for the second quarter of fiscal 2024. Income Statement Item Estimate Revenues $135 million to $145 million Gross margin 53% Operating expenses $125 million Diluted loss per share $(1.61) to $(1.45) Liquidity and Capital Resources Our principal sources of liquidity as of March 30, 2024 consisted of $332.7 million in cash, cash equivalents and short-term investments, of which $191.7 million 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 $71.8 million during the three months ended March 30, 2024, compared to $13.3 million during the three months ended April 1, 2023. Operating cash flows during the three months ended March 30, 2024 reflect our net loss of $56.5 million, adjustments of $21.1 million for depreciation, amortization, stock-based compensation, equity-method loss, and deferred income taxes, and a net cash outflow of $36.3 million due to changes in our operating assets and liabilities. 21 Table of Contents Accounts receivable increased to $32.6 million at March 30, 2024 from $29.3 million at December 30, 2023. The increase in accounts receivable resulted primarily from normal variations in the timing of collections and billings. Our DSO decreased to 28 days at March 30, 2024 from 30 days at December 30, 2023. Inventory increased to $198.2 million at March 30, 2024 from $194.3 million at December 30, 2023. Our inventory levels will vary based on the availability of supply and the impact of variations between forecasted demand used for purchasing inventory and actual demand. We have invested in building inventory to minimize potential supply disruptions and meet forecasted future demand. Our DOI was 348 days at March 30, 2024 and 407 days at December 30, 2023. Investing Activities Net cash provided by investing activities was $81.5 million during the three months ended March 30, 2024, compared to $254.3 million during the three months ended April 1, 2023. The decrease in cash inflows was principally due to a decrease in cash provided by net purchases, sales, and maturities of marketable securities of $190.8 million in the current period. Financing Activities Net cash used in financing activities was $45.7 million during the three months ended March 30, 2024, compared to net cash used of $24.5 million during the three months ended April 1, 2023. The increase in cash outflows was principally due to $45.0 million in payments on debt in the current period. Debt As of March 30, 2024, we had a $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 net leverage ratio to exceed 3.50 to 1.00, subject to certain conditions. As of March 30, 2024, no amounts were outstanding on the revolving credit facility. 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, 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 30, 2023. 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 March 30, 2024 would decrease our future annual interest income by approximately $2.5 million. We believe that our investment policy, which defines the duration, concentration, and minimum credit quality of the allowable investments, meets our investment objectives. 22 Table of Contents 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 March 30, 2024. If we borrow from the credit facility in the future, we will again be exposed to interest rate fluctuations. 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 Operations. 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.