Silicon Laboratories - Q3 2023
November 1, 2023
Transcript
Operator (participant)
Hello, my name is Lisa, and I will be your conference operator today. Welcome to Silicon Labs' third quarter fiscal 2023 earnings call. I will now turn the call over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.
Giovanni Pacelli (Senior Director of Finance)
Thank you, Lisa, 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 Chief Financial Officer, John Hollister. They will discuss our third 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 the Silicon Labs 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. In the third quarter, the Silicon Labs team executed well in a challenging environment, driving revenue and EPS to both exceeded the midpoint of our guidance. Current market environment continues to be characterized by a difficult combination of weak demand and high inventory. Specifically, end customers continue to carry inventory levels that are too high. At the same time, our end customers' demand environment continues to be weaker than previously forecasted. In particular, we see weakness extending further into the broad industrial end market. As a result of these factors, our fourth quarter will be negatively impacted across both business units. We have contained operating expenses thus far in the second half of this year by focusing on temporary reductions in discretionary and flexible spending.
Given the duration and severity of this downturn, we have now proactively taken the difficult decision to make structural reductions in headcount and other spending, effective immediately, to manage our OpEx further, while maintaining investments in essential R&D projects to drive future growth. While the near-term outlook is clearly challenging, we are focused on managing what we can control and putting ourselves in a position to deliver strong growth and higher earnings power once this difficult market cycle corrects. Our design win momentum has never been stronger, and we are as confident as ever in our potential. To underscore this, our industry-leading Series 2 platform continues to perform exceptionally well, driving our design wins to an all-time record level in Q3 and up 25% year-over-year.
Importantly, we are starting to see this design win momentum pay off with some exciting ramps that I will share after we hear from John. Also in Q3, we announced our next generation platform, called Series 3, that will further position us to lead in this space. All of the items I've mentioned strongly position us moving forward. With that, let me turn the call over to John to cover Q3 results and guidance for the fourth quarter. John?
John Hollister (CFO)
Thanks, Matt, and good morning, everyone. Third quarter revenue was $204 million, above the midpoint of our guidance range and down 24% year-over-year. ASPs in the quarter declined sequentially, primarily due to product and customer mix. Unit volume was down just slightly on a sequential basis. Revenue was down year-over-year in both business units in the quarter. The industrial and commercial business ended at $121 million, down 17% from the same period last year. All three product groups in I&C declined in the quarter, with the broad industrial category experiencing the largest decline. Within the I&C business, our performance in smart metering, however, has continued to be an area of relative strength. Home and life revenue of $83 million was down 33% year-over-year and was up 4% sequentially.
We continue to see strength in life applications, particularly in connected health devices. Geographically, we saw year-over-year decreases in all regions, with APAC being down less than Europe and the Americas. APAC, ex-China, was up year over year. Distribution revenue was 81% in the third quarter, up slightly from the second quarter. Inventory in the channel was around 90 days. Our largest end customer was under 5% of revenue in the quarter, and our top ten end customers were about 25%, consistent with our historical trends. Non-GAAP gross margin ended slightly lower than expected at 58.5% due to product mix. We continue to see a generally stable pricing and input cost environment with no significant changes expected in the next quarter.
Non-GAAP operating expenses of $95 million was in line with our expectations as we executed focused spending reductions in the quarter, primarily related to variable compensation, contractor spending, and travel. Non-GAAP operating income was $25 million, or 12% of sales, and our non-GAAP effective tax rate was in line for the quarter at 24%. Non-GAAP earnings of $0.62 was $0.03 above the midpoint of our guidance, primarily due to higher revenue. On a GAAP basis, gross margin ended at 58.4%. GAAP operating expenses were $107 million, which was better than expected, and was $13 million below the midpoint of our guidance, primarily due to a change in stock compensation expense, driven by an expected lower achievement on performance-based awards. Accordingly, GAAP earnings per share were $0.32 for the quarter.
Turning to the balance sheet, we ended the quarter with cash and investments of $417 million. Our accounts receivable balance grew in the quarter to $102 million, with days sales outstanding, 45 days. Customers, including distributors, have requested longer payment terms in this current market environment, and accordingly, we temporarily extended payment terms for certain customers from our standard 30-day terms. We added about $22 million in net inventory in the quarter to $168 million, as we continue accumulating strategic inventory based on the strong design win momentum we've seen for the past few years. Inventory turns ended at 2 times. We repurchased approximately $16 million worth of shares in Q3, retiring approximately 100,000 shares. Our fully diluted shares outstanding in Q3 ended at 32 million shares.
In Q2, we drew $80 million from our revolving credit facility. We repaid $35 million of that balance in Q3, and have an outstanding amount remaining of $45 million. Overall, the balance sheet continues to be very healthy and remains well positioned to weather the current market environment and to execute on our strategy. Before I turn the call back to Matt, I will cover guidance for the fourth quarter. As Matt mentioned in his opening statement, the current demand environment is still quite challenging as customers are focused on reducing their excess inventory. Our bookings activity slowed significantly during Q3, and we believe many of our end customers still hold higher than normal inventory levels. As a result, we expect a decline in revenue for the fourth quarter with a guided range of $70 million-$100 million.
We anticipate both unit business units to decline in Q4. Due to the uncertainty in the market environment, we are widening the guidance range to ±15 million from the revenue midpoint for this quarter. We expect non-GAAP gross margin in the fourth quarter to be approximately 53%. The lower gross margin for this quarter primarily reflects the impact of certain fixed cost elements in our cost of goods sold, which are being absorbed over a significantly lower revenue level. We continue to maintain discipline over our operating expenses, and the temporary reductions we discussed last quarter will remain in place for the fourth quarter. We expect non-GAAP operating expenses in the fourth quarter to be approximately $94 million. We expect the non-GAAP effective tax rate to be approximately 3% in the fourth quarter.
Accordingly, our non-GAAP loss per share for Q4 is expected to be in the range of $1.22-$1.66. On a GAAP basis, we expect gross margin to be 53%. We expect GAAP operating expenses to be approximately $123 million, inclusive of an expected restructuring charge of around $6 million in Q4. We expect GAAP earnings per share to be a loss of between $1.95 and $2.39 per share. I will now turn the call back over to Matt.
Matt Johnson (President and CEO)
Thanks, John. Despite the current economic challenges, we continue to execute on design win ramps in long-term growth markets, such as smart cities and healthcare, which are driving significant deployments of devices with sizable ramps in the coming year. In smart cities, Silicon Labs has been the wireless leader in smart metering market for many years. Like the leadership role we played in the successful rollout of smart meters in the U.K., we are now playing a similar and dominant role in India's rollout, where 250 million smart meters are expected to be deployed in the coming years, with our production ramp starting early next year. In addition, we were awarded new designs with Landis+Gyr, a leading provider of energy management solutions, who will use our Series 2 SoCs in its primary smart electric metering platform, ramping early next year.
Also, within our industrial business, we have been designed into multiple products at one of the top two EV providers in the world, which we expect to ramp over the next few quarters. Turning to our life business, the healthcare space continues to accelerate and offer exciting new growth opportunities that are a great fit for our platform. We are starting to see our multi-year focus on this market pay off, having secured multiple designs globally. As part of this, we are excited to share our partnership with Dexcom, which will use our platform in its continuous glucose monitors or CGMs moving forward. Silicon Labs' ability to offer customizable and highly secure solutions with our Bluetooth SoCs was key in solidifying this relationship, and we expect these product ramps will begin contributing to our revenue early in 2024.
At our fourth annual Works With Conference in August, which attracted thousands of IoT developers, I previewed Silicon Labs' fifth generation platform, called Series 3, which is on track to sample early next year. Series 3 brings three major new capability to the IoT. First, it brings new to industry performance through new levels of security, wireless performance, power consumption, and multi-band and multi-protocol capabilities, areas we have always stood out in. Second, are new levels of compute. Series 3 can support more than 100 times the processing capability of our current generation, Series 2, including integrated artificial intelligence and machine learning accelerators, and enabling the integration of system processing from standalone MCUs into our wireless SoCs. And third, the IoT is seeing new to world volumes and applications.
Because of this, our Series 3 platform will offer new levels of scalability with a multi-radio platform and common code base that will serve over 30 new wireless SoCs, a 2-3x increase over the number of Series 2 products, as well as extendable and scalable memory architecture, including support for external flash. As part of scalability, Series 3 is built on a supply chain that leverages multiple fabs and geographies to maximize the resiliency and reliability of supply. As part of the Series 3 announcement, Silicon Labs also announced the next version of its developer tool suite, Simplicity Studio 6, which will allow developers to utilize the most preferred integrated development environments on the market, while giving them the latest tools to support their continued development on Series 2, as well as Series 3.
As we told our developers, an investment in our industry-leading Series 2 platform is also an investment in our Series 3 platform. Importantly, Series 2 will continue to grow and be supported with new silicon and software, and will complement Series 3, with both platforms coexisting for many years to come. In closing, I would like to acknowledge that despite the near-term weakness in our end markets, our team is dedicated to overcoming this market downturn without hampering our long-term strategic and financial goals. The fundamentals of our story and the growth prospects for our end markets remain sound, and our position in those markets has only become stronger. Based on everything we're seeing, we believe Q4 will be our bottom, and we expect to return to sequential growth in the first quarter of 2024. I will now hand it back over to Giovanni for Q&A. Giovanni?
Giovanni Pacelli (Senior Director of Finance)
Thank you, Matt. Before we open the call for Q&A, I would like to announce our participation in three upcoming conferences. Stifel 2023 Midwest One-on-One Growth Conference in Chicago on November 9, Wells Fargo's 7th Annual TMT Summit on November 29 in Rancho Palos Verdes, and the Barclays Global Technology Conference in San Francisco on December 7. 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. Lisa?
Operator (participant)
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question will be coming from Matt Ramsay of TD Cowen. Please go ahead.
Matt Ramsay (Managing Director, Semiconductors Research)
Thank you very much. Good morning, everybody, and hang in there, guys, in this tough environment. I think, Matt, I wanted to start my question and just to kind of back up and reassess things on kind of first principles about some of the assumptions we have in the model relative to what's going on here. It sounds like pricing, stability, exciting things coming with Series 3, still really strong design win traction. And at first read, this seems just to me like an inventory correction on steroids a bit. And I'd like to get you to respond to that and just think about...
If as you think about the design wins going forward, that you guys continue to accumulate, are you concerned that maybe the volumes and revenue going forward that underpin those design wins have just come down, and the TAM for the business that you're looking at is smaller? Or is this just literally an inventory correction that we got to get through, before we get back on the bike? I'm just trying to think about, given the level of falloff in revenue here, how are you guys thinking about reassessing the actual TAM for units and dollars relative to just the design wins? Thanks.
Matt Johnson (President and CEO)
Yep, completely understand. Thanks, Matt. Yeah, let me do my best to answer that. Just start with, you know, before we get into the inventory and the demand, it's important to point out that, you know, we really essentially index to a couple major end segments. Consumer, which has been down for, you know, a year now, pretty significantly, and industrial, which had been more resilient, but we've been seeing signs of that, and that really came through as we were leaving Q3 and going into Q4, the weakness in that space. But the end inventory is really important to talk about, right?
So we've really, when we sample our top 40 or 50 customers, they're carrying more inventory than they normally do, by at least a quarter, I'd say, is an easy way to think about that. And on top of that, I think their expectation for demand and growth and strength was higher. And when those two things converge and the demand is less and that inventory is high, the impact is profound. And that's what we're seeing. So that is the first piece of it. And in terms of the second piece, in terms of you know, end markets and design wins and all that, a few things. One is, you know, we don't see share loss here.
When we look at it on a socket-by-socket basis, we see gains, and that's reflected in our design win numbers and strength with a record, you know, Q3 that was, I think, up around 25% year-over-year. But what we do see is, you know, while some of those have ramped, we see those ramps being impacted by the overall market. Maybe their volumes are less than they thought. Ramps might be pushed out as they work through inventory, et cetera, but the big ramps are solid and there, although some might be delayed. And so, you know, we shared some of those in the prepared remarks that are, you know, pretty, pretty substantial and, and coming very soon in Q1. But I don't see anything on share loss. I want to be clear about that.
That your question about the TAM, I mean, I think there's an argument to be made that when the market's down like this, the size of the market is significantly less. But the fundamentals in terms of the long-term size of the market, the growth of the market, none of that's changed at all. So what we really see is that confluence of end inventory and demand being much softer than expected coming together, and we got to navigate that. But the fundamentals haven't changed, and that's what gives us confidence moving forward.
Matt Ramsay (Managing Director, Semiconductors Research)
Yeah. Thank you for all that, perspective, Matt. I really appreciate it. John, just as my follow-up, two things: One, it looked like you guys burned $50 million or something like that in cash, and you're guiding to obviously a negative P&L for the December quarter. So I just wanted to do a check on cash balances, liquidity, the revolver, stuff like that, just to see how you're thinking about it. And then you spent a little time on some OpEx reductions in the script. Maybe you could quantify how we should think about that for 2024. Thanks.
John Hollister (CFO)
Sure, Matt. So on the cash balance, you know, we continue to have a strong cash balance. Our revolver that's outstanding is really around optimizing between short-term investments and interest, et cetera, to, to optimize that portion of, of our cash flow P&L. So, we're, we're not concerned about the liquidity in the company. We continue to have a robust cash balance. In terms of the OpEx actions, remember that in the second half of 2023, we undertook temporary, non-sustainable OpEx containment actions such as travel, contractor spending, some of our bonus programs, et cetera. These things need to come back heading in the next year, and it's because. You know, related to that, unfortunately, we are taking some structural reductions in the business.
From a quantification perspective there, Matt, the way to think about that is first quarter OpEx we see as roughly flat to the second half run rate as these two things basically offset each other. And then we'll monitor this as we move through the rest of, of next year based on the rate and pace of revenue improvement, improvements, which we do anticipate happening through the course of next year. We just need to see how, how strong the recovery is, based on the ramps and recovery of the general market.
Matt Ramsay (Managing Director, Semiconductors Research)
Very clear. Thanks, guys. See you next week.
Operator (participant)
Thank you. One moment for the next question. Our next question will be coming from Tore Svanberg of Stifel. Your line is open.
Tore Svanberg (Managing Director, Semiconductors Research)
Yes, thank you. I wanted to zoom in on your comment about Q4 being a bottom and seeing some growth sequentially in Q1. It sounds like you have some design wins ramping. That's pretty clear, but can you also talk about the inventory correction? I mean, obviously, given the size of the Q4 guidance down here, obviously, you, one would think that that's clearing out of inventories, but any more color or visibility you have on the inventory situation as you go into 2024, that'd be helpful.
Matt Johnson (President and CEO)
Sure. Yeah, Tore, this is Matt. A few things on that. You know, we are definitely not calling the market bottom, and we want to be clear about that, and it should be clear there's also headwinds, right? You know, it's unclear how much more of a correction industrial has as an end segment, so there's some headwinds there. And on end customer inventory, that would be awesome if it was super clean on a quarter boundary, but it isn't. It's not uniform across our customers. We talked to, as I said, our top 40 or 50, they're carrying more than they should, some less, some more, some extending into, you know, Q1 and Q2, some okay now.
But if you average it all out, it's really the biggest impact is it's about a quarter that they have they're carrying more than they typically should or would. So that's important. So we're not saying the inventory headwind will go away, but the biggest piece of it should hopefully be addressed. So that's one. And so you have those headwinds for sure, but that should be working its way through on end inventory. And then, you know, the tailwinds would be, you know, obviously starting from a remarkably low revenue number moving forward and that inventory working down at our customers and the design win strength.
... that we have. As I said earlier, none of those sockets are gone. We continue to accumulate them, and some of the bigger ones are right around the corner. So it's a confluence of those two stories that gives us the, you know, confidence to say, you know, based on what we're seeing and what we believe, is this will be our bottom, and we can drive sequential growth from here.
Tore Svanberg (Managing Director, Semiconductors Research)
Yeah, that's very helpful. And as my follow-up, I know this is always a very tricky question, given cyclicality and inventory management and so on and so forth, but you know, your revenues peaked at $270 million, you're guiding to $85 million at the midpoint. Where do you think the true consumption is of your business, you know, whether on a quarterly or an annual basis? Just so sort of we get a sense for, you know, where you will eventually go back to, you know, as we get through this inventory adjustment period. Thank you.
John Hollister (CFO)
Yeah, Tore, this is John. Yeah, it is, it is a hard question to answer, given the lack of visibility we have into, into the inventory level and how that relates to our revenue run rate, as we're seeing the effect of that right now. But, you know, suffice to say, we think it's meaningfully higher than where we're running, guiding right now. That is clear. But, you know, clearly we, we do need to take some action around our OpEx, and we're, we're reacting and executing towards it.
Tore Svanberg (Managing Director, Semiconductors Research)
Sounds good. Thank you.
Operator (participant)
Thank you. One moment while we prepare for the next question. Our next question will be coming from Gary Mobley of Wells Fargo. Your line is open.
Gary Mobley (Analyst)
Hey, guys. Thanks for taking my question. I wanted to make sure I have the impact of the inventory reduction squared away in my head. So you talked about $200 million worth of perhaps excess inventory, or said differently, roughly a quarter's worth of revenue, and you're guiding the fourth quarter revenue down $120 million sequentially, roughly. So that is, what? Roughly 60% of it being digested in the fourth quarter and then maybe 40% digested into the first quarter. To what extent does this, you know, $85 million revenue guide reflect lower turns assumption, just given the lack of visibility as your lead times have shortened?
John Hollister (CFO)
Yeah, Gary, you know, we're working through this and, you know, as best we can to navigate the inventory situation at our customers. I guess, on your question on turns, you know, we definitely have seen very low turns in the business. That's really at the root-
Gary Mobley (Analyst)
Yes
John Hollister (CFO)
... of what is going on here. Turns have been quite low for multiple weeks, and that is really underpinning the weakness in our guidance. And it is exactly that that we look to first as the first indicator of a recovery emerging as customers clear inventory. As the inventory clearance happens, we should see turns improve. I hope that's answering your question. That's kind of the best I have for you right now.
Gary Mobley (Analyst)
Okay, fair enough. All right, and, and so I wanted to ask about the flexibility of the buyback. I think you have listed in your PowerPoint deck on your, on your investors section of your website, $100 million left on the buyback. How much flexibility do you have to ramp that up, considering the cash on the balance sheet, the lending capability and whatnot, and, and to what extent are you willing to, to borrow at today's interest rate environment to, to buy back stock at these levels?
John Hollister (CFO)
Yeah, we do have flexibility up and down, Gary, to the point of being opportunistic on it, but also being mindful of our overall liquidity. These are all factors at work as we comprehend the best way to approach that. But we're not locked in, so to speak. We do have flexibility for you.
Gary Mobley (Analyst)
All right. Thank you, guys.
Operator (participant)
Thank you. One moment while we prepare for the next question. Our next question will be coming from Quinn Bolton of Needham. Your line is open.
Quinn Bolton (Analyst)
Hey, guys. Thanks for taking my question. Just wanted to follow up on Gary's question there. You know, he kind of went through the math of the inventory clearance. You know, maybe you clear 50-60% of it in Q1, sorry, Q4. It would seem that Q1, while you're guiding it up, is still gonna have a significant inventory effect, and then hopefully by the end of Q1, maybe you've cleared most of that and you start to get back to better sequential growth rates. Just wondering if I'm thinking about the shape of the trajectory right, or if you would think it's a different, you know, trajectory off the bottom.
John Hollister (CFO)
Yeah, Quinn, thank you. This is Matt. I'm not sure about that trajectory. You know, if we step back, I think just looking at it big picture, to be clear, our internal inventory, we are definitely growing that by design, intentionally, strategically, in support of the future business and ramps we've secured, and it's important for our customers. We're our sole source on, you know, majority of our products, the primary silicon on a lot of our products, and our customers have just been through, you know, this whole supply chain mess that, you know, we have to make sure that we're ready to support this business, that we keep securing. So that's one piece.
Matt Johnson (President and CEO)
... The distribution channel piece is, you know, obviously separate, and in that case, you know, that's, I think it's around what? 90 DSI. So higher, but at the end of the day, we're carrying, you know, about a quarter's worth at, you know, suppressed revenue levels. So as we've said, you know, in the last few quarters, it's higher than our historical, but not alarming to us and definitely manageable as we look forward and with what we know that's coming down the road. I think our biggest challenge is our end customers and what they are carrying in their, you know, lines and supply chain, and being able to... You know, that's high, higher than it's historically been. And at the same time, you know, they thought their demand was gonna be much stronger.
The compounding or confluence of those two things coming together is extremely impactful, and that's what we're seeing in Q4.
John Hollister (CFO)
Yeah, Quinn, this is John. Let me try to address what I think you and Gary are both asking and say this: we are not saying that all inventory will be cleared in the fourth quarter.
Matt Johnson (President and CEO)
Oh, no.
John Hollister (CFO)
Matt indicated that. We've got a mix of customers, and, and based on the best we have, and it's very imperfect information, do see some of them with inventory levels that would require more time to clear and, you know, into first quarter, some even beyond first quarter. So I'm trying to respond to what you and Gary are both asking about. Yeah. Makes sense?
Quinn Bolton (Analyst)
Yeah, I guess that's, that's what I was trying to drive at, was it, was it feels like, you know, obviously a, a low guide for the fourth quarter, but it doesn't look like you're clearing all of that, you know, quarter's worth of, of-
Matt Johnson (President and CEO)
Yeah
Quinn Bolton (Analyst)
... inventory customers. And so I'm kind of assuming that the March quarter, I know you're not guiding, but the March quarter probably isn't all that different from from the December levels, and then hopefully by the end of March, you will have gotten through most, maybe not all, but most of that inventory build of the customers, and then we'll just have to see sort of where end demand is and, you know, how quickly, you know, the consumption rates recover, I guess, is the way I'm thinking about it.
Matt Johnson (President and CEO)
Yeah, I'm gonna reiterate what I understand the comment and question now. I think the easiest way to frame it is what we've said, one, definitely not saying we'll get through all of it, and very imperfect, right? This is. There's no reports for this. This is just a lot of discussions with customers on the phone and trying to get a feel for, you know, what that level is, and they're moving in target. But we believe that in Q4, based on, you know, their expectations, their levels, we'll get through. You know, easy way to think of it is a majority of that, but there's still gonna be some to work. And that's what gives us the confidence in saying that, you know, we see that as our bottom.
And, you know, it's not only the inventory, but it's a big factor moving forward. It's also those ramps on the other side of it that are helping as well. But you know, it's a massive, massive hit in Q4, and that inventory is a huge piece of that. So it's important that we're clear about that, but you know, the data says that it'll work through a big chunk of it.
Quinn Bolton (Analyst)
Got it. Got it. And then just on the split of the business, I assume you're probably seeing a bigger hit to the industrial and commercial, just as, you know, that business seemed to be much stronger and, you know, through the second quarter this year, and I could certainly see more inventory having accumulated there versus home and life-
Matt Johnson (President and CEO)
Yes
Quinn Bolton (Analyst)
... which has been under pressure for, you know, about a year now.
Matt Johnson (President and CEO)
Yeah. Yes, I think that, you know, really in the second half of this year, the industrial impact is really been significant, where it had been, you know, so much more resilient and durable prior to that. Consumer been hit all along, you know, over the last year and significantly, but, you know, also worth pointing out, both are down in Q4, not only industrial. So, new low levels for both of those, Q3 to Q4.
Quinn Bolton (Analyst)
Got it. Thank you.
Operator (participant)
Thank you for your question. One moment while we prepare for the next question. Our next question will be coming from Cody Acree of The Benchmark Company. Your line is open.
Cody Acree (Analyst)
Yeah, thanks, guys, for taking my questions. I guess, John or Matt, if you can maybe speak to your order linearity over the last quarter, last few months, and maybe how are you looking at your forecasting methodology, just adjusting how you're expecting to predict going forward?
Matt Johnson (President and CEO)
Sure. I'll start. I would not say there's any linearity, would be the starting point on that. You know, it's been somewhat remarkable that, you know, we've seen bookings decline, and then you'll see a pause, maybe a little bit of calm, and then they'll decline some more. Same thing on terms. Terms continue to drop. So it's been extremely challenging, as we try to forecast this. And remember, the forecast is, you know, we have tens of thousands of data points and customers, and our forecast is really an attempted bottom-up accumulation of their views.
But I think the biggest challenge is when the market is changing so quickly, so volatile, the visibility is as low as it is. Our customers are struggling to forecast that as well. And that accumulation is very challenging. You know, as we go through these quarters and see this, we're trying to do our best to reflect that, to communicate that, be transparent about that. And, you know, I think I'd say it feels each time a little more conservative. I don't know how else to say it, given what we're experiencing, until we see really strong signs on the other side of that, of the market recovery, which we're not seeing yet.
Cody Acree (Analyst)
Thanks for that, Matt. And then, John, if you can maybe give us any better picture of your OpEx budget for next year as you port some of these cost reductions in the model?
John Hollister (CFO)
Yeah, Cody, like I said, you know, first quarter, we expect to be roughly flat to the second half run rate in the mid-nineties based on the best available, the best available information we have as of yet. And beyond that, Cody, you know, we just have to monitor this and see how the recovery goes. And our, you know, our model remains our compass, how we want to operate the company, and that's what we would seek to get back to as soon as we can. So we're gonna maintain some flexibility on OpEx as we head into the second quarter and second half of next year based on how things are tracking.
Cody Acree (Analyst)
Okay, great. Thank you, guys.
Operator (participant)
Thank you. One moment while we prepare for the next question. Our next question is coming from Srini Pajjuri of Raymond James. Your line is open.
Srini Pajjuri (Analyst)
Thank you. Good morning, guys. John, on the inventory, especially the DSI inventory, I think you said, roughly 90 days. I'm guessing that's about $200 million. So as we go through, I guess, you know, the next quarter exiting December, heading into March, I'm just trying to understand how we should think about the absolute inventory. How much of that DSI inventory are you hoping to draw down? And, you know, if you could maybe give us some color when and where I think it normalizes, I guess, you know, what is, what is a normal level for you in this environment?
John Hollister (CFO)
Yeah, Srini, sure. Yeah, so 90 DSI at the end of third quarter is in the neighborhood of more like $100 million of value, roughly, not $200 million. And-
Srini Pajjuri (Analyst)
Okay. Got it.
John Hollister (CFO)
Yeah. And we do expect that to moderate and decline in the fourth quarter, based on what we're seeing. I mean, that's part of the challenge here is the very weak POS or sell-through demand is, you know, at the root of what's behind our guidance here. Over time, you know, I think we can see some further reduction of that with the market recovery. But, you know, landing in the 60-70-day DSI is normal. That would be fine, you know, from an operating perspective as we look ahead.
Srini Pajjuri (Analyst)
Got it. Got it. Thanks for that. Then, Matt, you know, your comment, obviously, the environment is not great. We've heard similar comments from some of your peers, but the magnitude of your, you know, outlook is definitely worse than what we've heard so far from your peers. So I'm just trying to understand as to why there is such a discrepancy. I guess it could be just, you know, your conservatism or it's possible that some of your customers have a little bit more inventory, and some of your components were maybe constrained a bit more, that caused inventories to go up a bit more than versus what your peers are seeing.
Just trying to reconcile that as to why you would be, you know, I guess, much worse than some of your peers here, given that your comments that you're not losing any share.
Matt Johnson (President and CEO)
Yeah, sure. Makes total sense. So multiple things, right? One is, you know, our percent of our industrial and commercial business is pretty high as a percentage of our total revenue going into the second half of this year, and that's getting hit pretty hard right now. So that's one element that, you know, we'd already seen the consumer piece. Industrial and commercial is really unique to the second half of this year. Because we talked about the demand piece, too, and our customers' end inventory. I think, you know, we had a lot of customers who expected, you know, a lot of ramps, a lot of strong growth, and were carrying inventory as such. And I think that those coming together, the way they have is hit us really hard.
You know, like I said before, we have all these design wins that I think, you know, some of those have been delayed, some are not the level our customers expected. All of that, I think, you know, is unique to us, given that we've been accumulating designs at such a fast level over the last few years. So the, you know, predictability of being able to forecast for our customers, even the timing of those ramps, the magnitude of those ramps, I think is challenging. And then there's other pieces that are, you know, more difficult to know and are speculative, right? But we definitely have, you know, as I said earlier, we are sole source in a lot of our sockets, almost all of our sockets and the primary silicon in a lot of those.
We're on mature nodes, and customers worry about supply. I think the, you know, while our gross margins are strong, the ASPs are lower, and we have customers that are planning on these ramps. So, you know, maybe they, they did accumulate more in anticipation of those, but that's unclear and, and difficult to know because it's hard to compare end customer inventory level. What we know is our ramps, and design-ins, we have confidence in those. The variability is on the timing, and we know that our customers are carrying more than they want, and they're working that down. But that's, you know, temporal or, or temporary. So that's what gives us the confidence on the other side of that.
But I really think the confluence of all those things I mentioned are what's, you know, hitting us and unique to us in Q4, in the second half in general. But all those things can be true and don't change the fundamental piece on the other side, that the growth potential, market position, share gains, you know, the potential there is still just as strong. So we just have to navigate this environment responsibly. That's why we're doing what we're doing in OpEx, and position ourselves to capture all this opportunity and business that's been secured on the other side of it.
Joe Moore (Managing Director, Head of U.S. Semiconductors)
Thanks, Matt. Makes sense.
Operator (participant)
Thank you. One moment while we prepare for the next question. Our next question will be coming from Blayne Curtis of Barclays. Your line is open.
Blayne Curtis (U.S. Semiconductor Analyst and Managing Director)
Hey, good morning. Thanks. I have two questions. I'm just kind of curious for the December quarter, $85 million between the two segments. I'm just having a hard time. The order of magnitude is so large of the correction. I mean, you actually saw a little growth in consumer, so I think the view was going into this, that maybe you're kind of getting through things and then you're seeing a decline. So I guess, curious what you think the trigger was. I mean, was it lead times coming in or just, you know, the customers just turned off? And what was the trigger for that? And then just of that $85 million, can you help us between those two segments a little bit more? Sounds like industrial is worse, but just any kind of, like, broad strokes would be helpful between those two segments.
Matt Johnson (President and CEO)
Yeah, I mean, the quick answer is, industrial is definitely the bigger challenge, because we're seeing that hit harder right now. Consumer has been hit all along, but you're absolutely right that, you know, we've seen a little bit of, let's just call it stability in Q3 on consumer, and that's going down again in Q3 to Q4. You know, the team believes that, you know, seasonally, consumer is stronger in Q3 in anticipation of, you know, holiday builds in that cycle. And, you know, we saw some benefit from that, but those levels obviously aren't stable and holding going Q3 into Q4. So, that could be impacting the consumer side of it, but we're not sure.
We need a few more clicks before we can say for certain.
Blayne Curtis (U.S. Semiconductor Analyst and Managing Director)
Got you. And then I want to ask on gross margin, I mean, I'm assuming there's some fixed cost absorption that's not happening here.
Matt Johnson (President and CEO)
Yes.
Blayne Curtis (U.S. Semiconductor Analyst and Managing Director)
Wondering if there's any written off inventory, and then if you can help us on the recovery of gross margin next year?
Matt Johnson (President and CEO)
Yeah, Blaine. It's really two effects in the fourth quarter. There's not an unusual amount of obsolescence or write-offs that are contemplated, but we are seeing both with the sharp reduction in revenue in Q4, an oversized concentration effect of customer and product mix on the downside. That's one leg of it. But the thing I mentioned and what you mentioned is also a big piece of it, that we just have fixed that is being absorbed over a smaller revenue base. We do anticipate, with recovery in the market, that gross margins would revert back to what we experienced in third quarter and as we move into first quarter and second half of 2024. We think this is anomalous, what we're seeing in the fourth quarter of 2022.
Blayne Curtis (U.S. Semiconductor Analyst and Managing Director)
Thanks.
Operator (participant)
Thank you. One moment for the next question. Our next question will be coming from Joe Moore of Morgan Stanley. Your line is open.
Joe Moore (Managing Director, Head of U.S. Semiconductors)
Great, thank you. I wonder if you guys could address, like-for-like pricing. You know, you saw the prices go up the last couple of years when foundry costs went up. Are you seeing any change there? And if you're not, I guess, to the extent that you're thinking about next-generation design wins, you're building your pipeline, do you see more price competition for those new sockets?
Matt Johnson (President and CEO)
Yeah, a couple of comments, Joe. This is Matt. Yeah, what we've seen is the market kind of return to pricing behavior that is typical for this type of market and really, you know, I'm going to call it typical of pre-pandemic and now, you know, kind of post-pandemic. So, you know, an easy way to think about it is the price pressure is really on design wins more than anything, as you pointed out, not on our existing business. That existing business tends to, you know, cross thousands of designs and customers, tends to run as it does. And where we see kind of the leading edge of price pressures is on those design wins, which, as I said, are at record levels, you know, last few years, including this year, including Q3.
What we're seeing there is price pressure that is typical, not anomalous, and, you know, we are still winning at an accelerating pace.
Joe Moore (Managing Director, Head of U.S. Semiconductors)
That's helpful. Thank you.
Operator (participant)
Thank you. One moment for the next question.... We have a follow-up question coming from Tore Svanberg of Stifel. Your line is open.
Tore Svanberg (Managing Director, Semiconductors Research)
Yes, thank you. I just had two quick follow-ups. First of all, and back to the run rate, so if we go back to Q1 of 2021, before you had obviously very strong growth through the pandemic years, the revenue run rate was around $158 million, if I'm not mistaken. I understand, you know, sell-through is deteriorating, I understand there's cyclicality with inventory and so on and so forth, but it, it would just seem that, you know, a number around that, that level is, is probably, you know, where, where the consumption is of your business. Just, just wondering if you have any comment, if, if you think that, you know, that is completely off, or, or, you know, could that potentially be in, in the ballpark?
Matt Johnson (President and CEO)
The only thing I understand, Tore, this is Matt, the logic and the approach. The only thing I'd add or say, and is to think of the design win momentum and share gains, over that time frame. So, you know, even if you consider the entire, you know, pandemic, as a build of inventory, which we don't believe that that's all it was, even if you did, there's gains in stronger business, underpinning that exiting than entering. So that's an important component to add to your question.
Tore Svanberg (Managing Director, Semiconductors Research)
That's great perspective. And the second question is then, you know, maybe moving away from some of the near-term challenges here. In the past, you talked about some new product cycles. Obviously, you mentioned Series 3, but, you know, there's also smart retail, there's your Wi-Fi business. You know, you did talk a little bit about the India smart meter business, but, you know, could you give us an update on any some of these newer businesses that are supposed to start ramping?
Matt Johnson (President and CEO)
Yeah, sure. Yeah, Wi-Fi, you know, so let me step back. You know, big picture, we talked about, you know, an increased focus in Bluetooth. No change there. We're, you know, incredibly happy and excited with the progress we're making there. We are gaining share in, in Bluetooth, and that continues. You know, Wi-Fi, earlier on in that, investment and that initiative, but, you know, one of our fastest growing, areas this year and moving forward, so that's exciting progress as well. You know, when you look at it by segments, you know, we talked about, you know, digital retail, shelf labels, continue to see good progress there. We just, you know, in our prepared remarks, mentioned the metering space, which we've always had, you know, an incredibly strong position, and that's gotten stronger.
There's a lot of rollouts and tenders there that, you know, are gonna give us some lift, not just starting next year, but also for quite a few years. We've talked about healthcare, IoT as an increased focus, and we've made a lot of progress there. Some of that, which we just shared in the prepared remarks, the Dexcom, which we're excited about. You know, another area that hasn't come up, but is worth mentioning, our position in Matter, in the progress in Matter is exciting and going well also. Simply said, you know, for those who aren't familiar, one of our, you know, historically strong positions has been in 15.4, and 15.4 is getting pulled into the mainstream with Matter.
That's why, you know, over 80% of the certs and certifications in Matter are coming from Silicon Labs, and you're seeing Matter get pulled into the mainstream. You know, you saw the iPhone, latest iPhone 15 Max supporting Thread, which is great, and that will help pull Matter more into the mainstream and end products where we're incredibly strong. So all those fundamental, you know, end markets and trends are going favorable. We just have an ugly end market environment and inventory situation that we got to work through to see all the goodness of those other areas coming through, going forward.
Tore Svanberg (Managing Director, Semiconductors Research)
Great perspective. Thank you.
Operator (participant)
Thank you. This concludes the Q&A session for today. I would like to turn the call back over to Giovanni for closing remarks. Please go ahead.
Giovanni Pacelli (Senior Director of Finance)
Thank you, Lisa, and thank you all for joining this morning. This concludes today's call.
Operator (participant)
Thank you all for joining. You may all disconnect.