Good afternoon, everyone. Welcome to Day 2 of Citi Global TMP Conference. My name is Atif. I'm going to cover U.S. semiconductors, semiconductor equipment, and networking equipment stocks at Citi. It's my pleasure to welcome Matt Johnson, President and CEO of Silicon Labs, as well as Thomas Haws from Investor Relations. It's our final session before the semifinals kick off U.S. Open, so let's do this. Matt, in terms of the market outlook, your revenues troughed last December 2023, and you've seen some good consecutive sequential recovery for the past one and a half years. Before diving deep into share gains and prior cycles, could you share with us what you're seeing in the end market demand now?
Sure. Big picture, I think being transparent with everyone, there's not a lot of great visibility out there in the marketplace right now. There's, I think, between uncertainty around trade and a lot of other things going on like geopolitics, I think customers are not leaning in. I think they're taking a safe and conservative approach and kind of ordering well within lead times. We've seen this consistently over much of this year. Visibility isn't as strong as we'd like. What we do like is, from a data perspective and actuals, we like what we see in bookings. It's been consistently moving in the right direction, pretty stable and steady over those six quarters. We like where inventory's at. Our inventory's in line, if anything, on the lower side. We continue to see steady progress over the last six quarters.
I think the actuals are moving in the right direction and pretty stable. Visibility's low. I think that uncertainty's probably likely to continue for a few quarters until there's answers to some things out there that everyone wants to see and hear. The other thing that's worth pointing out, our growth this year, as we've said the entire year, is really driven by share gains and these ramps and these new applications and products. That's what's allowing us to grow as fast as we are this year. We're not banking on a broad market recovery. I do think that's got to happen at some point, but not seeing it yet to call that that's happened. I think it'll take a little more time.
Okay. Going back to the June quarter, did you guys see any kind of pull forward in demand or in your bookings pattern, anything that will make you think things could normalize more in the second half?
Yeah. The quick answer is nothing meaningful. Like everyone, we've been watching very closely for that. I think it defies logic to say that that's not happening at some level. It has to be. In the data, just not seeing it. We're seeing the orders coming in very linearly, no spikes. We can monitor our we got a lot better at this as an industry and as a company in this last crisis in the supply chain. We're watching end customer inventory. We're watching order patterns. We're looking for anomalies or deviations. We're just not seeing that. Even though we're looking for it, if it's happening, it's happening on the margins and not in a meaningful way.
Matt, yesterday and today, a couple of your peers talked about weakness in China on the auto side. You guys do not have any exposure on the auto side. I am curious if you are also seeing some sort of weakness in China. If you just could talk about the regional sentiment.
Yeah. I don't dare say we're seeing new weakness in China. As a starting point, we don't have an auto focus or big exposure there. I think we have had more business in China historically, but we've seen weakness there that's persisted. I wouldn't say there's something new. I think what we're seeing for us is a continuation of what's been the case now for quite a while. Just to make that real, I think we saw business go from, say, 35% of sales down to maybe 15% over the course of the entire market cycle. A lot of that was allocation strategy. That was by design. When you have allocation, someone has to be a lower priority. That's what we did strategically. That really hasn't recovered. We've been consistent publicly. We see China as opportunistic, not strategic.
If we can get business there, we support it and do. We are not investing R&D. We see the deck stacked against us strategically, geopolitically. We support what we can. We do not expect that to meaningfully change or pop in the coming quarters. Compared to most companies, we do not have a lot of exposure to China. That is by design.
Can you touch on the competition in China? Some of the weakness in the auto side is because of the indigenous competitors and the microcontrollers or IoT side. What sort of competition do you see in China?
We haven't seen any meaningful change there. Again, I think we were faster to change our posture compared to a lot of other companies on, we don't have R&D there. We don't have strategic growth there. Just opportunistic. What we see is, if I were to say changes, we've always seen local suppliers are favored over international suppliers. We're only used when we offer something that a local supplier cannot offer. That's been consistent. I think what's changed is that headwind has started to increase for local suppliers. It's more difficult for them to sell into the West now than before. We see that particularly in the U.S., big brand companies less likely to use Chinese silicon. That's change one. I think change two, we're now seeing another kind of tier of local suppliers start competing with the top tier of local suppliers.
The competition is intensified within China. The tier one local suppliers, they're in a tough spot because tough to sell out. They're competing internally now against a new class of up-and-coming competitors. Really tough place to be. We do not compete on price in China, full stop. We don't believe that that's our model. We compete on differentiation. That's when we're used in China. We're quite comfortable with our position in China and where we're at.
With respect to the recovery that we have seen so far in your businesses, is your sense that this is still kind of inventory replenishment or now you're starting to shift to real demand?
You want to comment on that, Thomas?
Yeah. The inventory cycle for us, the excess inventory that was at the end customer, that has largely played out. That drove our sequential growth kind of through 2024. Where we sit today, the kind of excess inventory destocking has played out. The predominant driver for us in 2025, it's been the case through the first two quarters and into the September quarter as well. It's just these secular design win ramps that are happening.
Let's put cycle aside. The cycles matter to you guys. Fundamentally, you guys are a prior cycle story to us where you have good design win momentum on Series 2 and you talked about Series 3. Let's talk about that design win funnel, where we are in terms of adoption, Series 2, and then what are the aspirations for Series 3?
Sure. I guess first things first. For anyone not familiar, Series 2 is our current generation of platform that we could not be happier with the market response or momentum that has achieved. Just incredible opportunity funnel, design win momentum, and share gains from that platform. It is still continuing to deliver design wins and share gains sitting here today, just loving what we see. At the same time, we're now introducing and ramping production on our next generation Series 3, which will take that industry-leading capability on Series 2 and takes it to the next level. Everything that we brought to the industry on Series 2 that was leading, industry-leading security, industry-leading wireless performance, industry-leading battery life, we're doing that again at the next level on Series 3.
In addition, we're putting much greater levels of compute and AI capability on Series 3 to really set us up for the future. Maybe just an example to help make that real. On Series 2, we were the first company in the world to achieve PSA level 3 security. That was years ago. We still have competitors trying to get to that level of security today. We just announced recently Series 3, our latest and greatest, just achieved PSA level 4, which is not only the first company in the world, but the highest rating that they currently have available. We just keep pushing that boundary. Just like we did in Series 2, which is still doing great in the industry, now we're bringing new industry capabilities with Series 3.
We just love the setup that we have, that momentum still on Series 2, and now we're bringing even more with Series 3. That puts our competition on their heels in a really tough spot to compete with us as a supplier and as a competitor. Design wins, easy way to think about it. We shared at our analyst day that in our last three years, we've achieved over $10 billion of lifetime revenue on the total design wins over those few years, which is more than all the prior years combined. That sets us up for great growth in the coming years. You're already starting to see that in 2025, where we're growing this year well above market. That's not on market strength. That's on ramps and share gains. We see a path to continuing that for the next few years.
As we know, it's really tough to say what 2026 is going to look like, 2027 in terms of the market. We feel confident that we'll be able to continue outgrowing the market because of those wins and those share gains that we have that have already been secured and are just starting to ramp now.
Matt, which end markets are you seeing the most traction on Series 2 orders?
Thomas, do you want to?
The Holman supply side of the business, that's where the continuous glucose monitoring ramps are active. In that end market, we have 12 customers that we're currently ramping. Really like what we see there. We think that as an application, CGM will be about 10% of revenue kind of sometime by the end of 2025 or the second quarter of 2026. On the industrial side of the business, we have smart metering where we are participating in every global metering rollout. Currently, we're seeing a lot of traction in the India smart metering rollout, which is about 250 million units over about a five-year period. We've been starting to shift that over the past couple of quarters. On the commercial side of the business is the electronic shelf labeling, which has been one of our fastest-growing applications over the past three years.
A couple of quarters ago, we said that we shipped about 300 million units of ESLs. As that market continues to grow and adopt, we're going to continue to be very well positioned.
Coming back to outgrowing the market, I remember a few years back, this is pre-COVID, your goal was to grow like one and a half times the market growth. What are the aspirations these days on outgrowth?
Yeah. What we shared at our analyst day is our goal is we set a target of 20% CAGR for our space. Where that comes from is, roughly speaking, we believe total semis on average seems to be 5-7%. Our SAM can be 10-12%, maybe even 15% some years. We always want to make sure that we're doing meaningfully better than that. I think we have a pretty good track record of doing that for multiple years. We see an even stronger path moving forward, which is what we're so excited about, that big picture, we've been gaining share and we see a path to continuing to gain share. We have the design wins to back it up. We're really starting to see the revenue growth to back it up.
At the same time, while we have those engines, I don't think anyone would dispute that over time, we're going to see AI moving from the data center to our edge. That's going to create a whole nother wave of growth. I'm not saying it's going to happen in the next year or two, but we have plenty of growth catalysts between now and then. Over time, that will start to accelerate. We couldn't be better positioned for that. The combination of those things is pretty exciting for us.
Yeah. The edge AI is coming. Are there opportunities within the data center for any of your products or mostly on the edge?
Not materially. I think we've always been hyper-focused on edge wireless and really the compute that goes with that. That's worked well for us. There's plenty of opportunity there. We just see this end market accelerating. If you think about it, the end market is getting shinier. We see more people wanting to be in this space. We're the largest company dedicated to it. We couldn't be better positioned. We just want to connect those two things as best we can, as aggressively as we can, and not get distracted by any other market that's not really our strength.
All right. Let me pause here and see if there are any questions in the audience.
I don't actually answer that. I hope that answered the question correctly.
The question talks about how much of your growth is product ramp and/or independent largely from the macro?
I'd say a majority is the quick answer. Difficult to pinpoint exactly, but maybe this year, I think the street has us around 35%. Probably total semis is somewhere around, I don't know, 10-13%. That's, I think, lifted quite a bit by data center. I think we're meaningfully outgrowing the market on share gains and those ramps, not riding on market growth. I do think at some point we should see some market strength more than what we're seeing right now, but really tough to call when that'll be. We've got plenty of gas in the tank on design wins and share gains to cover us between now and then. I feel with confidence we're in a good position to outperform the market in the next coming years.
Thomas, yeah.
Can you talk about the growth opportunities in Bluetooth and Wi-Fi and how large have they become of your portfolio?
Yeah. Bluetooth, for anyone not familiar, our historical strengths as a company were really in the sub-gig and 802.15.4 wireless spaces, which are multiple wireless technologies, but those are the core technologies. We have the market-leading position in both of those areas. Years ago, we decided to focus and add Bluetooth to our capability. I honestly think that's gone better than we expected and better than we could have hoped. We've seen significant share gains in that space. We've shared publicly. We're growing 80% year on year this year in BLE. Just to help make that real, that is now a similar size to our other wireless technologies in 802.15.4 and sub-gig. Seeing really good progress there. We see share gains that not only are happening right now, but we expect that to continue based on opportunity funnel and design win momentum.
We like what we see in BLE is the quick answer. Wi-Fi is a newer area for us, so not as big in terms of magnitude, but we've shared we're growing, I think now over 40% year on year in Wi-Fi. We see a good path to continue growth there. Products are starting to come out. We have a real distinct advantage that we've brought to that space in power consumption. We just shared on our last earnings call that Roku has adopted that technology for security cameras that are wireless, battery powered. They're bringing really a step function in battery life that's enabled by our technology. That's available at Walmart and Amazon for this holiday season. We're going to see those types of things continue to accelerate that Wi-Fi growth.
We like what we see there as well, just earlier days and a lot more room to grow. Anything there is really going to be share gains as we start to enter that Wi-Fi market. Bluetooth much further ahead, Wi-Fi good progress, not as far ahead, but plenty of runway in both.
Thomas, I was curious if you guys are breaking this out, the Wi-Fi versus microcontroller that you used to do in the past. Are you breaking out the business and giving us percentages?
No, we're not breaking out that. I think the order of magnitude that Matt kind of just described is kind of how we've currently broken it out.
Okay. Great. Tariffs, could you talk about the impact of tariffs you've seen so far to your business? Understand it's not material, given you only ship 10% within the U.S., What is the impact of tariffs?
Just broad tariffs, yeah. It's difficult to know, right? I think more than anything at this point, more than real demand impact, what we're seeing is uncertainty that comes from this, right? We're seeing questions about, are there delays in orders because of this? Are there pull-ins or build-aheads in orders because of this? Customers are trying to, there's so much uncertainty that we're probably getting less visibility than normal. I think the real first-order impact is just uncertainty in the marketplace. I think less on real demand impact at this point in time. Because that's the thing we get asked the most frequently is, is it really impacting demand? It's pretty difficult to put our finger on that right now if that's happening. You can't deny it's created a lot of disruption and uncertainty. That's telegraphed and kind of permeated throughout the landscape.
Great. Gross margins, they're expected to trend higher in the second half towards the high end of the target model. Is this a sustainable level we should look at going into next year?
Yeah. So the target gross margin model is 56-58%. We're trending at the higher end of that range as we move into the September quarter. That's primarily a function of mixed OTIF. Right now, the industrial-type customers tend to be served through the distribution channel. We're seeing some strength there, which is benefiting gross margin. We can continue to see that dynamic playing out over time. That target range of 56-58% is intentional. That's kind of where we see the business going longer term.
Perfect. On the manufacturing side, your partner, TSMC, is regularly raising pricing on the leading edge. On the nodes that you operate at, are you seeing any impact to your margins from the pricing increase from the manufacturing side?
It's been relatively stable. I would expect that to continue. I mean, it's difficult to know because I think it's not popular to say this, but we believe most of these things that are happening are probably inflationary towards wafer pricing if we think about it. Any excess capacity, someone has to cover the cost of that. Putting manufacturing where it's not as cost-effective, someone has to pay for that. All this capital acceleration, someone has to pay for that. I think we're happy that it's been as stable as it has over the cycle. I definitely don't see any big swings up or down. I think it's pretty stable.
Matt, you touched on this earlier, the use of machine learning and AI. I think you guys were the early adopters of machine learning to add to your Series 2 and 3 products. When we look at the bigger competitors like TI and others, just trying to understand the level of the moat that you have in your markets, how sustainable that is as these large incumbents also start to incorporate ML /AI.
Just a moat overall or specific to AI?
Both.
Broadly, we are just really in unique territory. Almost, not all, but almost all the companies we compete against, this is not their core focus. They would not admit this, but it is a sideshow. Their core business is something else. And then they also do this. That has served us very well from a competitive perspective. We are 100% dedicated and focused on this. There are very few companies that can say that. That is what we found it takes to do what we do. That is why whatever you want to measure, whether it is the performance of the wireless interface, the security level, the power consumption, we are bringing the industry's leading capability there. We have been able to do the exact same thing in AI/ML. This is not aspirational.
We've had these types of solutions in production for years before generative AI was even a thing, and as exciting as it is for all of us, what we've seen is the end market and customers were not ready for broad adoption yet. A lot of our customers are not experts in this space and native at this. It takes a lot of work and effort to get your data where it needs to be, to learn how to train and develop this capability, and figure out what are the right applications to really bring to the market. What we've seen is the interest and engagement has really accelerated in the last couple of years. Our position is just as unique there in the sense that we have always had a combination of compute and RF on every solution that we make.
We have been able to bring benchmarked industry-independent data showing the best combination of power performance for battery-powered applications, which is where we thrive. We are seeing a lot more engagement. We expect that to only accelerate. Not saying that is going to be a major revenue driver in the next year or two, but I do see those engagements turning into design wins, which will turn into revenue in the years to come. I think that will continue to meaningfully accelerate. An easy way to say it, our moat is that breadth, depth, and focus that we talk about. There is no other company that has the differentiation and capability. Now, honestly, the scale and focus in the space that we do, that is going to serve us well moving forward, whether it is in wireless performance or ML performance at the edge.
Great. Questions on the capital allocation. You guys used to be a lot more acquisitive historically. You guys have kind of slowed down. We're just curious in terms of your strategy. Is this a function of the macro or the cycle, or is it something?
By design. Yeah, something's changed. We historically acquired companies for capability in our space, in our market. We found ourselves here where there's not a capability that we're looking for that we want or need. We have more than enough opportunity in the markets we're in. We have the requisite technologies that we need. Any acquisition we do at this point would really be for some acceleration or for scale in our space, not for a SAM expansion or a technology that we want and need. If there was a technology, we would absolutely go after it because that's part of our value prop is having all the key technologies. Right now, we really like our positioning. We have plenty of growth in the markets we're in. We're covering more than 80% of the core technologies that our customers want and need.
It would really be for scale and growth. There is just not a lot out there that fits that bill, especially because most of our industry is tucked into larger companies that are focused on other spaces.
Yeah. I'm obviously a big fan of all your products. And that INA piece that you sold to Skyworks was also a good piece. Are there areas within your current portfolio that you could divest to improve profitability or everything is fine as it is?
It's fine as it is. I mean, we should always be looking at that to be doing our job and be diligent about managing our portfolio well. Honestly, if we look at it, we divested all the things that were truly not affiliated with our core focus in IoT wireless. Everything we've been investing in from an R&D perspective for years now has been for that. There's really not anything sitting out there on the side that doesn't fit or is not part of that core.
Great. We're almost out of time. And thank you, Matt, and Mr. Gammon to Citi Conference.
Thanks for having us. Thanks, everyone. Appreciate it.