Silicon Laboratories - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Jonathan. I will be your conference operator today. Welcome to Silicon Labs' First Quarter Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one one again. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Giovanni Pacelli, Silicon Labs, Senior Director of Finance. Giovanni, please go ahead.

Giovanni Pacelli (Senior Director of Finance)

Thank you, Jonathan, and good morning, everyone. We are recording this meeting, and a replay will be available for four weeks on the Investor Relations section of our website at investor.silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs President and Chief Executive Officer, Matt Johnson, and Interim Chief Financial Officer, Mark Mauldin. They will discuss our first quarter financial performance and review recent business activities. We'll take questions after our prepared comments, and our remarks today will include forward-looking statements that are subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future.

We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company's earnings press release and on the Investor Relations section of our website. I'll now turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson. Matt?

Matt Johnson (President and CEO)

Thanks, Giovanni, and good morning, everyone. Silicon Labs reported solid first quarter results, with revenue and EPS exceeding the midpoint of our guidance. We are confident that Q4 represented the trough for us, and we expect revenue growth to accelerate from Q1 into Q2. Based on a sampling of our top customers, we believe they have made further progress in reducing excess inventory in the quarter. We also continue to see steady improvement in our weekly bookings levels, although still below the level we'd like to see. On a unit basis, channel inventory remains very low, decreasing again in the quarter. We're working closely with our distribution partners and key customers to manage lead times and increase order visibility as the demand environment begins to improve. I'm also incredibly excited about the senior leadership announcements that I will cover later in the call.

Now, I'll hand it over to Mark for the financial update. Mark?

Mark Mauldin (Interim CFO)

Thanks, Matt, and good morning, everyone. First quarter revenue came in at $106 million, above the midpoint of our guidance and up 23% sequentially. Revenue was up for both business units. The Industrial and Commercial business ended at $65 million, up 9% sequentially, with the broad industrial category experiencing the largest increase in the quarter. Home and life revenue was up 51% sequentially at $41 million, driven by a rebound in smart home, particularly in home security applications. We are well positioned in the Home and Life markets, as market initiatives such as Matter-enabled ecosystems and connected health gain further traction. Overall, ASPs were about flat compared to the prior quarter, and unit volume was up. Our regional revenue mix was also consistent in the quarter, with EMEA and the Americas slightly outpacing APAC.

Distribution revenue mix was about 66% for the first quarter, up from last quarter, but still below our typical levels. Channel inventory decreased to 61 days. On a unit basis, channel inventory was down almost 25% sequentially and 50% year-over-year. As Matt mentioned, we are working closely with our distribution partners and customers to bring order patterns within our standard lead times to improve demand visibility as the market recovers. Non-GAAP gross margin ended in line with guidance at 52%. As expected, customer mix was the largest headwind on our gross margin, along with the impacts of fixed costs over the lower revenue levels. We expect gross margin to increase toward targeted model as revenue further recovers. Non-GAAP operating expenses of $94 million were better than expected, largely due to slower than expected hiring and discretionary spending.

Non-GAAP operating loss was $39 million, and our non-GAAP effective tax rate was 20%. Non-GAAP loss of $0.92 was at the top end of our guidance range, mainly driven by the OpEx favorability. On a GAAP basis, gross margin ended at 52%. GAAP operating expenses were $114 million, which was also better than expected. GAAP operating loss was $59 million for the first quarter. GAAP loss per share was $1.77 for the first quarter, above the top end of our guide. Turning to the balance sheet, we ended the year with cash and investments of $333 million. We repaid the $45 million outstanding on our revolving credit facility in the quarter and have no outstanding debt. Our DSO was approximately 30 days, and we continue to see no customer credit concerns.

Our internal inventory was up slightly in Q1 at $198 million. Inventory turns ended at 1 time, and we expect this represents our peak inventory level for the year. Importantly, the die bank inventory we strategically built over the past year positions us to address the channel efficiently as in-market demand improves. Before returning the call to Matt, I will cover guidance for the second quarter. We expect revenue for the second quarter to be in the range of $135 million-$145 million. We anticipate both business units to be up sequentially. We expect non-GAAP gross margin in the second quarter to be approximately 53%. The gross margin for this quarter continues to reflect a temporary customer mix shift away from the channel and toward direct customers, as distribution partners work to further reduce their inventory.

We expect non-GAAP operating expenses in the second quarter to be approximately $102 million, and the non-GAAP effective tax rate to be approximately 20%. Our non-GAAP loss per share for Q2 is expected to be in the range of $0.58-$0.70. On a GAAP basis, we expect gross margins to be 53%. We expect GAAP operating expenses to be approximately $125 million, and GAAP loss per share to be between $1.45-$1.61. I will now turn the call back over to Matt. Matt?

Matt Johnson (President and CEO)

Thanks, Mark. We continue to gain share in both Home and Life and Industrial and Commercial end markets with our industry-leading power efficiency, security, and RF performance, as well as our leadership position in Matter. Last quarter in our home business, we highlighted the release of Matter 1.2 by the CSA, which expands Matter's reach to include smart TVs, white goods, and gateways. Matter 1.2 also extends Wi-Fi connectivity to a wide array of home devices, such as appliances, home security systems, and automation products, including battery-powered cameras, switches, sensors, and window shades. As consumer interest in interoperability intensifies, more customers are embracing Matter-enabled ecosystems. Silicon Labs remains a trusted partner in this rapidly expanding market. Our commitment to building Matter infrastructure has well positioned both Silicon Labs and Thread technology moving forward.

As an example of this, we are actively working with 24 of the 26 major ISPs in North America and Europe that are integrating Matter into their solutions. Earlier this month at Embedded World, we continued to build out our Series 2 platform with the unveiling of the xG26, our most advanced multi-protocol wireless device family yet. Engineered to future-proof IoT technology, this new family ensures that manufacturers' current designs can keep pace with the escalating demands of sophisticated IoT applications. The xG26 enhances performance with advanced compute capabilities, embedded AI, ML acceleration for energy-efficient battery-powered devices, top-tier security, 2.4 GHz wireless connectivity, twice the flash and RAM, and support for wireless protocols such as Matter, Bluetooth Low Energy, and multi-protocol and Thread. Additionally, with Amazon Sidewalk moving through its initial rollout phases, we are driving partnerships with manufacturers to facilitate their wireless development within this growing ecosystem.

Though Amazon Sidewalk is still in the very early stages, we secured a design win in the quarter with one of North America's leading hot water heater manufacturers, providing a Wi-Fi dual-band solution with Matter and Amazon Sidewalk capability. This win was directly related to our being a key Amazon partner on the development and rollout of Sidewalk, enabling us to leverage our technology leadership as the Sidewalk ecosystem continues expanding. In our life business, we are excited to see further global expansion of our continuous glucose monitoring solutions. As an example, we have secured additional APAC design wins in the quarter for more than 12 total design wins in the region, a few of which are starting their ramps in the quarter. In the industrial end markets, the integration of machine learning at the edge is proving essential.

As a reminder, we have multiple wireless SoCs in production with industry-leading integrated AI/ML capability. Our customers are enhancing the efficiency of connected equipment with wireless connectivity for applications such as predictive maintenance. We recently secured a design win with a leading connected equipment provider in the construction industry to facilitate real-time data analysis and location tracking. Similarly, AI/ML at the edge is boosting efficiency in HVAC systems and smart buildings using motion sensing, while also enhancing vehicle safety with rear seat monitoring technologies. In the smart access sector, Chamberlain Group, a global leader in intelligent access, has chosen our FG28 device for their 11 million plus MyQ users because of its superior compute power and radio performance that delivers a more reliable user experience. Our position in smart cities remains strong, particularly in the metering sector, where wireless communication is making electric grids more efficient and sustainable.

We are actively involved in developing solutions for load disaggregation or non-intrusive load monitoring that are maintaining our leadership in smart metering across various regions. In the commercial domain, we are tapping into retail automation trends, such as electronic shelf labeling, where emerging technologies like shelf cameras and standalone sensors. While the overall market penetration for electronic shelf labeling is still nascent, our multi-protocol solutions and design wins in this area reinforce our belief that this market will be an additional growth engine for us, driven by expanding deployments globally. Looking ahead, we are strategically allocating resources to initiatives that bolster our long-term growth and scalability. The rollout of Series 2 continues to progress well, like the xG26 that we just announced, and is contributing significantly to our current and future growth.

At the same time, the development of Series 3 continues in parallel, helping position us for an even stronger future. We will begin sampling Series 3 to alpha customers this quarter. Series 3 introduces industry-leading wireless performance, compute, and scalability on a multi-radio platform and a unified code base that will support over 30 new wireless SoCs. I want to thank Mark for stepping in as interim CFO during the CFO transition, and I look forward to Dean Butler joining us on May fifteenth. We also announced two additional leadership appointments. Bob Conrad, a longtime industry veteran, is stepping down from our board of directors to become our SVP of Worldwide Operations. Bob's expertise in rapidly scaling semiconductor businesses will be critical as we position to scale even faster. Additionally, Radhika Chennakeshavula joins Silicon Labs as our new Chief Information Officer.

Radhika will oversee IT operations, enterprise applications, data analytics, and critical digital transformation initiatives. I would also like to thank Sandeep Kumar for his role in leading our worldwide operations team for the last 18 years. Sandeep has been pivotal in leading Silicon Labs' operational strategies, including during the recent supply chain crisis. I would also like to express my gratitude to Karuna Annavajjala for her leadership in our IT organization over the last 4 years. Looking ahead, we remain laser-focused on executing on our new Series 2 and Series 3 products, driving design wins, and continuing to accelerate our position. As excess inventory at our customers corrects, our design wins ramp, and end market demand improves, we're well positioned to drive revenue and profit growth throughout 2024 and beyond. I'll now hand it back over to Giovanni for Q&A.

Giovanni Pacelli (Senior Director of Finance)

Thanks, Matt. Before we open the call for Q&A, I'd like to announce our participation in J.P. Morgan's Global TMT Conference in Boston on May 21st, and Stifel's 2024 Cross-Sector Insight Conference in Boston in early June. We'll now open up the call for questions. To accommodate as many people as possible before the market opens, I ask that you limit your time to one question and one follow-up. Jonathan?

Operator (participant)

Certainly. One moment for our first question. Our first question comes from the line of Matt Ramsay from TD Cowen. Your question, please.

Matt Ramsay (Managing Director)

Yes, thank you very much. Good morning, everybody. Matt, I wanted to, I mean, we're obviously going through the, the bottoming and now the beginning of the recovery, and, and you made some, I think you guys made some comments in the script about, maybe a little bit more mix toward direct sales versus the channel, for this interim period, and I guess that makes sense as the customers that are supported by the channel drain their own inventory. I guess my question is, in, in the prior few months, how much more visibility have you gotten to, to customer-level inventories that are supported by the channel?

I don't know if you can give any anecdotes as to what you're hearing by either end market or by geo, as to how the direct, sort of the customer inventory behind the channel is trending. That'd be really helpful. Thanks.

Matt Johnson (President and CEO)

Yep, sure. Thanks, Matt. So quick answer is, end customer inventory and channel or distribution inventory, are both moving in the right direction, and down, is the fastest way to say it. In terms of, end customer inventory, you know, our approach has been to, to sample, you know, our top customers, and, and pretty extensively now, given what we've been through. And we see a consistent trend, Matt, is the fastest way I can say it, that, you know, from December to January, January to now, we've seen both the average of excess inventory working down, as well as the count of customers who have excess inventory. So, it is not, you know, fully corrected.

You know, easy way to say that is this revenue level that we're guiding is not indicative of our consumption, but we continue to see it moving in a good direction, and we like the progress we're seeing, and the same for disty inventory. I'd say disty inventory is, you know, I don't think we want that to go lower now. I'd say that's fully corrected. But, end customer is moving in the right direction, but not there yet.

Matt Ramsay (Managing Director)

Got it. No, that. A couple things in follow-up there, Matt. I think the first one being, do you feel like coming out of this, you'll have built maybe deeper relationships, more visibility of relationships that you might have the company might have over the next two, three, four years, whatever, more visibility into customer-level inventory levels behind the channel? I don't know. I'm just trying to figure out if this whole thing, you guys going through it with your partners, has led to any permanent difference in visibility. And I guess my last the last question, completely unrelated, you mentioned you might sample Series 3 to a few lead customers in the quarter. Any thoughts or anecdotes about which industries or what type of applications or anything like that, that we could get some insights to?

Because that's a pretty big milestone. Thanks.

Matt Johnson (President and CEO)

Yep. So, the first piece, Matt, quick answer is absolutely yes on stronger relationships and more visibility. Easy way to say it is, you know, going through these things, you know, it's been a tough cycle, and, you know, that builds a relationship. I guess it can also work the other way, but what we've seen, whether it was a supply chain crisis or this inventory crisis, relationships got stronger, and those partnerships got stronger. So, that I can say that with, you know, high confidence. I also can say with high confidence our, you know, approach and visibility to understanding end customer inventory has improved. As you all know, there's not an easy approach there or report, like we can do with, you know, obviously internal or distribution inventory.

But, you know, we've learned a lot through this cycle, and we've gotten, I think, much better at being able to see it, understand it, and, you know, navigate it. So quick answer there is yes. Series 3, we're not sharing those customers. We are sampling, which is exciting. It's a big milestone. I would encourage people to remember, that Series 2 is still, relatively early days in its cycle and ramp, and at the same time, we're already introducing our next generation. So, you know, it's gonna be. Just to be blunt, Matt, it's gonna be a, a difficult message for our investors that, both are doing really well and both are progressing, and that, you know, the game is long for both.

But at the end of the day, the combination positions us extremely well, and we're happy with the progress on both.

Matt Ramsay (Managing Director)

Thanks very much for the time, Matt. Appreciate it.

Matt Johnson (President and CEO)

Yep.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Gary Mobley from Wells Fargo Securities. Your question, please?

Gary Mobley (Analyst)

Morning, guys. Thanks so much for taking my questions. Matt, you're on record in a public venue back in, in March as saying that you think your end customer consumption level, I think related to the first quarter, was about $160 million. So perhaps you undershipped the channel by $50 million. And hopefully that $160 million end consumption level is a target that's moving up and to the right. And so my question is, based on the June quarter revenue guide of $140 million, you know, by how much are you undershipping end customer demand in the current period?

Matt Johnson (President and CEO)

Yeah. Thanks, thanks, Gary, for reminding me of the record. So the quick answer is what we said was, we see consumption at least $160 as a data point there, and we didn't say it was at $160, we said it was at least at that number. So, that was, that was the data point we provided. So easy way to think about it, on, as I said earlier to the previous question, we are seeing revenue at $140, is not indicative of consumption. And, as we said in that conference, we think it's higher or at least $160, as an easy way to think of it.

So I don't think you can get to the math based on that of exactly what consumption is and exactly how much end customer inventory remains. But easy way to say it, they're going in the right direction. End inventory is going down, revenue is going up, getting closer to consumption, but still a ways to go.

Gary Mobley (Analyst)

Got it. Thank you. And as a way to get a supporting metric for future revenue growth, hopefully you have this number at your fingertips, but I'm curious what the measure of lifetime value of design wins captured in the first quarter may have been, and then embedded within that, you know, what the pricing trends, you know, were like you know, in those design wins on a like-for-like product basis or maybe even considering any sort of ASP shift associated with Gen Two.

Matt Johnson (President and CEO)

Sure. Yeah, I don't have all that off the top of my head. Quick answer is, I think, actually, correct me if I'm wrong, guys, in the quarter, I think pricing on a like-for-like basis was basically flat. On design wins, no changes there. Good progress, and on track. And in terms of pricing on design wins, you know, as we've communicated, no, no changes there. That that's where we see, you know, more pricing pressure is on new business, not on existing business, and we expect that to continue.

But what we're seeing there is what I define as more typical and expected, and it almost looks, Gary, I mean, I'm jumping ahead a little bit, but we're kind of getting back to, you know, kind of, you know, pre-pandemic type of behaviors on pricing, which means low to mid-single digit, you know, pricing pressure on an annual basis, which is what we've always had, and we've always offset that with new products, new features, differentiation. So I wouldn't say we're there yet, but that appears to be the, where things are going.

Gary Mobley (Analyst)

Thanks, Matt. Appreciate it.

Operator (participant)

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

Tore Svanberg (Analyst)

Yes, thank you, and congratulations on the continuous recovery here. So Matt, obviously, consumption is a number that, you know, we analysts have to decide at some point, but I just wanna sort of understand, now that you've gone through the upcycle and downcycle, you know, and as we think about the consumption number, you know, is the thought here that the business would grow about 20% going forward, longer term? Just wanted to make sure that nothing's really changed, you know, with the upcycle and the downcycle fundamentally.

Matt Johnson (President and CEO)

Yeah, sure. So for a quick answer is, no change. Our commitment to the, 20%, you know, compound annual growth on our revenue has not changed. That is, our target, a model. We see the path to doing that, and, we feel really good about that. So that's, that's the fast answer. The, you know, a couple of things are worth mentioning. You know, we're not doing a, a victory lap at a $140 guide, right? That we are doing the things that, you know, we believe, we said we'd do, that we can grow revenue. We're improving gross margin, improving profitability. You know, that will, that happened in Q1, that's gonna happen in Q2, and we can continue doing that, but we're far from out of this at $140, right?

There's, you know, still a big gap to our consumption levels, and we also, you know, need to see, you know, a lot of design wins ramping, which is starting, which is encouraging, and we need to see the end market show more strength. So, you know, we're trying to, you know, reflect. We're very encouraged by the process, progress. Things are going in the right direction. All signs are encouraging, but we're still in a pretty big hole, and we got a ways to go. So we're not celebrating 140. We'll be celebrating at much bigger numbers.

Great. And as my follow-up, you know, beyond the cyclicality stuff, you've sort of highlighted, you know, at least three big growth engines this year. You mentioned some of them, the script, right? But the glucose meter, the smart meter, and also the shelf labeling. Any more details you could add on those three as far as, you know, ramps, you know, types of customers, regions, and so on and so forth?

Yeah, sure. So, nothing meaningful beyond what's in the script, except I'd say, to be clear, all three of those segments are ramping for us in 2024. That's, that's important. And, that's encouraging because that gives us growth beyond inventory stocking and whatever the end market demand dynamic ends up being.

Excellent. Thank you.

Operator (participant)

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

Thomas O'Malley (Analyst)

Hey, guys. Good morning, and thanks for taking my question. Just a model squaring away first, and then a question off that. Just what was the percentage split between the two businesses in March? What are you guys assuming for June? And then can you talk to the linearity? Obviously, it looks like the disti channel is getting a little bit. disti is getting better, channel is getting better, even end customers improving. Can you just talk about the linearity of what you see right now in terms of revenue as you progress on throughout the year? Thank you.

Giovanni Pacelli (Senior Director of Finance)

Tom, hey, it's Giovanni. I'll take the first part. Revenue as between the BDUs for Q1, so it was $65 for the Industrial and Commercial business unit, about $40-$41 for Home and Life. Then I'll let Mark pick up on the linearity as we get through the year.

Mark Mauldin (Interim CFO)

Well, I think what we said in the script, that we would expect both business units to continue to grow during the year. We're not providing specific guidance for each business unit for the second quarter.

Matt Johnson (President and CEO)

Yeah. I mean, maybe a way to think about it, Thomas, is, you know, in general terms, I'd characterize Home and Life as further through the cycle. Industrial and commercial, still absolutely going in the right direction, but not as far through the cycle. I think that's important. And then in terms of inventory, I would definitely say that Q1 represents the peak for us in internal inventory that we have intentionally built to be ready for what's coming in as we move forward from here. So that's one. And as we've said, external inventory at our distributors and at our end customers is working down and continues to work down. So I think the next piece is disti inventory.

You know, we've, you know, assumed that that's gonna be flat, but at some point, you know, distributors are trying to work it down. At some point, that's gonna start coming up as we see increases in demand in the channel, as their end inventory works down and as they just start to ramp new designs and market strength continues. But we're not assuming that in our guidance right now.

Thomas O'Malley (Analyst)

Helpful. And then just on the gross margin side, as you see a normalization of your percent sales to kinda disti and direct, with direct coming back a bit down, how much do you have baked in for that normalization in the June quarter, and how quickly do you see that happening? Obviously, it's a tougher thing to kind of understand. It's a, it's a lot of different customers. But just in your base case assumption for kinda the midpoint of your margin guidance, which is up, I think, 80 basis points, what do you think that split looks like?

Matt Johnson (President and CEO)

Yeah, it's tough to call because part of that includes call on the market, which is not a good business. So I think the way to think about it is, we have been, you know, you know, absolute in our commitment to our gross margin model, as well as our total model for the company, going through the peak and the trough of this cycle. You know, we didn't increase our gross margin targets in the peak, and we are not decreasing our gross margin targets in the trough. And what we've said is, as we go through each quarter, as revenue increases, gross margins will increase. That's what we've seen in Q1. That's what we're sharing, that we expect to continue in Q2.

And we expect, you know, simply said, as revenue increases, gross margins will continue to increase back to those levels that we all know and love. So that's an easy way to think about it. It's also worth mentioning that as the revenue goes up, you know, the component of the fixed cost absorption goes down, so we're seeing that. You know, right now, the predominant factor is the mix... and, you know, that's what we shared in the script, and that's what we're looking at right now. Easy way to think about it, each quarter that revenue increases, you'll see that gross margin increase with it.

Thomas O'Malley (Analyst)

Thanks, Matt.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Quinn Bolton from Needham and Company. Your question, please.

Quinn Bolton (Analyst)

Hey, guys. Thanks for taking my question. I just wanted to follow up first on that, that mix issue for gross margin. You kind of said that the mix shifts more to direct here in the near term, and it sort of feels like you're implying that that's a gross margin headwind. Just wanted to confirm that the disty sales do carry a higher margin than direct sales and, you know, not sure if you will, but I'll ask if you could quantify, you know, how much of an impact is that channel mix having on near-term gross margins? And then I've got a second follow-up question.

Matt Johnson (President and CEO)

So, yeah, Quinn, this is Matt. Quick answer is, you know, generally, you do see channel or distribution gross margins as higher than direct. That's fairly typical. And for us, you know, what we've also said is, mix is now the major driver or predominant driver of the gross margin being at the levels it is, versus where it should and will be. So those are the two, I think, answers to your question, or hopefully helpful.

Quinn Bolton (Analyst)

Got it. Yep. No, that helps. And then I guess, you know, I know you guys obviously aren't getting beyond the current quarter, but, you know, given that you've stated, you know, that consumption level of, you know, $160 or higher, I guess, you know, kind of looked out to the second half of the year, the street's got, you know, revenue close to $190 in September, $220+ in December. You know, that's significantly higher than that consumption level. And so I guess, you know, these aren't your numbers, but what has to happen for the business to get back to kind of where the street's looking in the second half of the year? Do you think consumption can increase at that rapid of a pace?

Is it really the three growth drivers you talked about, the smart metering, glucose monitoring, the electronic shelf labeling, that get you there? Or, you know, just any sort of thoughts on sort of that second half.

Matt Johnson (President and CEO)

Sorry, Quinn, can you just say the key question is, what are the drivers for the-

Quinn Bolton (Analyst)

Yeah, I mean, I just, you know, obviously, you've kind of stated this, this consumption number of $160, and I know that that's a, that's a, you know, kind of a, a floor, not necessarily where you think consumption is, but, but the street numbers for the second half have revenue in September up at, like, $190 and $220. And I know these aren't your numbers, but I guess, you know, to the extent the company were to hit that kind of revenue in the second half, you know, what, what has to, you know, what drives that? Is it you think consumption can get up to that kind of level in the second half? Is it driven by some of these new product opportunities that, that are ramping this year?

I mean, just, you know, what's. How would you, you know, get there in the second half, given that $160 million consumption number you've discussed?

Matt Johnson (President and CEO)

Got it. Got it. Okay. So yeah, a couple things. I mean, obviously, the first starting point is, and you all know this, we don't guide beyond the current quarter, but I can definitely talk about some dynamics that might be helpful towards that end. Just a reminder on that $160 number, that was to give people context around, you know, kind of what we—as we were going through our OpEx reductions last year, you know, that was kind of a rough estimate of a break-even point. And obviously, you know, our point was, you do your reductions around something that you believed was, you know, indicative or better of our consumption.

You wouldn't, you wouldn't make OpEx reductions on what you thought your go-forward steady state was, if you're losing money there. So that's important. But to your question, so easy way to think about it is, you know, if you oversimplify it, the three major buckets. You know, we have this destocking phenomena, where there's excess inventory at customers. You have design wins ramping and end markets. You know, right now, the bulk of what we're seeing in Q1 to Q2 is really destocking. You know, there are some ramps in there, but it's not the primary driver. So, you know, as we've said, even at $140, that's not indicative of consumption, so there's still a ways to go, which is encouraging, and we see that destocking continuing.

are two other factors there, which are the design wins, which I just shared earlier, that we do see, you know, good design win progress and ramps, this year on, you know, some pretty major trends and areas including CGMs, electronic shelf labels, metering, where, you know, strong positions and those are ramping. So that gives us an additional lift in addition to revenue approaching consumption. The end market piece, end demand is more difficult to call. You know, there's just a lot of uncertainty out there, in the marketplace. There's, you know, conflicting signals and, you know, not for sure not trying to call that. But, if and when that does improve, that's an additional tailwind. But obviously, you can't bank on that or assume that, at least right now.

Quinn Bolton (Analyst)

Understood. Thanks, Matt.

Operator (participant)

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

Srini Pajjuri (Analyst)

Thank you. Good morning, guys. Matt, on the bookings front, I think you said the weekly bookings are getting better. So I was just hoping you could give us some additional color as to whether the bookings, you know, improvement you're seeing is fairly broad-based, or if it's, you know, if one particular end market is doing better than the others, and also from a geography standpoint, if you're seeing any, you know, noticeable differences in terms of the bookings improvement.

Matt Johnson (President and CEO)

Yep, understood. Quick answer is, bookings are improving in a pretty broad and consistent pace. And so what I mean by that is, you know, this isn't one or two or three good weeks. This is many weeks and months of consistent improvement, which is what you'd wanna see. As I mentioned, it's not at the levels we wanna see to say, you know, we're fully on the other side of this, but the trend is undeniable and encouraging. To your other point, definitely broad by technology, geo, application space, which is what you'd wanna see. As I said, I think, you know, Home and Life is a little bit further through than Industrial and Commercial, but we're seeing improvement and strength in both.

And the last thing is just a caveat to all of that. Maybe the exception is China, where, you know, to be clear, we're, you know, APAC, we're seeing improvement, but in China, we're seeing encouraging signs in terms of design win activity, you know, signaling that there's, you know, improving strength, you know, PMIs improving, all that, but we're not seeing that manifest in terms of revenue yet. So that would be the one place. And we haven't baked it in. We're not assuming it improves. So there's some encouraging signs, but, no, it's not coming out in results yet. So hopefully that helps.

Srini Pajjuri (Analyst)

Yeah. Yeah, great. Thanks for the color. And then, you also kinda talked about ASPs kind of returning to, you know, the pre-pandemic, you know, levels or at least the trends, in terms of annual ASP declines. I just wanna kind of, you know, given, you know, your new product pipeline, of course, the market does what it does, but can you talk about, you know, in terms of as we go from Series 2 to Series 3, and there's a lot of talk about, you know, edge, AI, et cetera, how have your own ASPs on a mix-adjusted basis.

I guess what I'm trying to get at is that as we look out to the next, you know, 12-24 months, you know, should we kind of bank on unit growth, you know, to model your revenue growth, or do you see kind of, you know, content increasing for you as well? And if content is increasing, what are the end markets and what are some of the applications, you know, that'll drive that content? Thank you.

Matt Johnson (President and CEO)

Sure. So, you know, big, big, big picture, if you step back, you know, Series 2 is obviously helpful for us from a, you know, gross, gross margin perspective and pricing perspective, in that these are new products with new features, new capabilities that are, you know, in demand. And, you know, easy way to say it, we mentioned, you know, AI, ML, so artificial intelligence, machine learning. So, you know, having products that are in production, that have the ability to very efficiently provide, you know, machine learning inference at the edge on a battery-powered device is a, you know, pretty powerful capability and feature, and, you know, obviously helps us in terms of being differentiated and driving, you know, value with our customers.

So, you know, Series 2, as it continues to come out with its features, capabilities, that are best in class, that is, obviously helpful against that dynamic. And to be clear, that it's not a new trend or dynamic. That's always how we've operated and traded, but, you know, it, it's Series 2 is still introducing new products, even in the last few days and in the last few months. So that helps. And then the second piece is Series 3 obviously will, as we've shared, bring new to industry capabilities, features, and performance, which will again allow us to, you know, you know, work on that dynamic. But I do wanna set expectations according or appropriately, you know, that won't be an ASP lift in the next couple years.

I mean, that's, you know, Series 3 will ramp, you know, over, you know, years. And, you know, I wouldn't look there for an ASP lift. I'd look more to Series 2 and how is that doing, and then Series 2, three is more of a mid and long-term play, but both help on differentiation, performance features, which help on ASPs and gross margins.

Srini Pajjuri (Analyst)

Got it. Thanks, Matt.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Cody Acree from The Benchmark Company. Your question, please?

Cody Acree (Analyst)

Yeah, thanks, guys, for taking my questions. Just quick thoughts on operating expenses as you're heading off the bottom here.

Matt Johnson (President and CEO)

Yeah, sure. So, I mean, a reminder for everyone, as we were going through this cycle, as revenue was decreasing, we decreased our OpEx every quarter along with that. And then, you know, as we've shared, as revenue starts going up, we will increase our OpEx, although not at the same level, moving forward, and, you know, some of those changes last year were structural, right? With reductions that we've shared in prior calls. That being said, the increase from Q1 to Q2 would be faster than that. And part of that is just one-time dynamics, for example, as we've added, you know, an annual merit cycle back for our employees, that drives increases from Q1 to Q2.

And then some of the temporary things from last year that have to come back, such as, you know, bonus accruals or travel, that's driving an unusually high increase as well. But, you know, to be clear, as you know, revenue is going down, we reduced OpEx every quarter. As it goes up, we will increase it at a lower rate, Q1 to Q2, a little bit higher than normal because of those one-time effects.

Cody Acree (Analyst)

Thanks for that. And maybe just continuing on there, what were the processes that you went through as you were going through the OpEx reductions during the cuts to make sure that you weren't impairing revenue growth?

Matt Johnson (President and CEO)

Oh, yeah, sure. That's So big, big picture, that's, that's hard, and, and not easy, to, to do if, if we're being honest about it. So what we've done is some of the changes were, things, obviously prioritization, where you take, you know, classic things, things are at the bottom, and you do less of those and, and make sure you're feeding the things at the top that have the biggest impact, biggest returns. There's also, you know, going after, shifts, where using the environment as difficult as it is for doing, strategic initiatives and shifts, where you need to, reshore or move, resources from one geo to another, or do, leadership changes. So as an example, you know, we shared the, the CIO announcement with Radhika.

That was one of the changes that came out of last year, where, you know, we said strategically, how do we approach IT differently? So there's employees moving across geos as part of that, but also, you know, leveraging ex- you know, rebalancing internal, external capabilities and, you know, make versus buy, as a classic way to say it. So it's the combination of all those things, saying, you know, look, it, it hurts and it's difficult to make these decisions, but, you know, look at it through a lens of, you know, managing the portfolio and how do we use this difficult environment, not just to cut and have less revenue, but to cut and use it to transform and restructure, rechange how we approach things.

Because, you know, easiest way to say it, Cody, is if we do these cuts, then we don't, we come out the other side and say, "Let's just add them back the same way," horrible inefficiency. The motto and approach is, make these difficult changes and use them to make us better, use them to transform, to reconstitute our capability, and that's the approach we've taken. So I really do see this will be transformative, even though it was difficult, but obviously, too early to see the signs of that. But you're starting to see early things like the CIO announcement.

Cody Acree (Analyst)

Great. Thanks for the help.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Peter Peng from J.P. Morgan. Your question please.

Peter Peng (Analyst)

Hey, good morning. Thanks for taking my question. Just want to follow up on the China point, where it seems like you guys are not seeing any improvement. How important is China recovery to that $160 million number that you guys, you know, talked about?

Matt Johnson (President and CEO)

Yeah, the quick answer is it's not in there. China, I think, you know, right now for us, is roughly around 13% of our revenue, and, you know, we are supporting the region. As I said, good design win activity, but the revenue hasn't meaningfully moved, and we're not assuming that it will. So if it does, that's fantastic, but not baked into an assumption of recovery for us.

Peter Peng (Analyst)

Got it. Thanks. Maybe just on some of these new design win ramps we talked about, you know, potentially coming in the second half. Maybe you can help us understand maybe the size or the scope of these ramps and how meaningful is it to revenue in the second half of this year?

Matt Johnson (President and CEO)

So we haven't provided that, that context, and we're not guiding beyond the current quarter. But easy, easy way to think about it is, you know, we've shared over previous quarters all of these ramps are one not single customer. They're end market across multiple customers, and they are meaningful end segments for us in ramps. And I would characterize each of them also as relatively early phases for us in terms of their ramp and potential. But they will all ramp this year, which I think is important and will give us a tailwind, as I said earlier, to whatever, you know, whatever that consumption number is. As we approach that, it gives us lift beyond that, and then, as I said, the end market as well when we see strength there.

But no, no more color on the actual magnitude or size of those. We haven't provided that.

Peter Peng (Analyst)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question please.

Joe Moore (Analyst)

Great, thank you. Now last quarter, you had talked about one competitor. I think it was isolating a single competitor that had been pricing a little bit more aggressively. Can you give us an update there, any change? Is that just the new normal or is there any, anything to report there?

Matt Johnson (President and CEO)

Hi, Joe. I don't think there's, it's, I think that's been consistent, that, you know, most, most of the industry market has been behaving as you'd expect in this type of market environment. You know, as we said, we, we did see one competitor who was, we thought, being more aggressive, and that hasn't changed. But, not signaling anything there, not trying to convey anything. I just wanted to answer with integrity, which is why I called it out.

Joe Moore (Analyst)

Appreciate that. All right, thank you.

Operator (participant)

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Giovanni Pacelli for any further remarks.

Giovanni Pacelli (Senior Director of Finance)

Thank you, Jonathan, and thank you all for joining our call this morning. This concludes today's call. Thanks.

Operator (participant)

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day!