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OFFON

SILICON LABORATORIES INC.

(SLAB)
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SILICON LABORATORIES : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

04/28/2021 | 09:27am EDT

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Please see the "Cautionary Statement" above and "Risk Factors" below for discussions of the uncertainties, risks and assumptions associated with these statements. Our fiscal year-end financial reporting periods are a 52- or 53-week fiscal year that ends on the Saturday closest to December 31. Fiscal 2021 will have 52 weeks. Fiscal 2020 had 53 weeks with the extra week occurring in the first quarter of the year. Our first quarter of fiscal 2020 ended April 3, 2021. Our first quarter of fiscal 2019 ended April 4, 2020.



Impact of COVID-19


A new strain of novel coronavirus which causes a severe respiratory disease ("COVID-19") was identified in 2019, and subsequently declared a worldwide pandemic by the World Health Organization. We implemented a response plan and continued operations while largely transitioning our global workforce to a remote work model. The third parties that perform our semiconductor manufacturing, assembly, packaging and testing have generally remained operational. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, severity and spread of the pandemic, related restrictions on travel and transportation and other actions that may be taken by governmental authorities, the impact to the business of our suppliers or customers, and other items identified under "Risk Factors" below, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, access to sources of liquidity and financial condition.



Overview


We are a leading provider of silicon, software and solutions for a smarter, more connected world. Our award-winning technologies are shaping the future of the Internet of Things (IoT), internet infrastructure, industrial automation, consumer and automotive markets. Our world-class engineering team creates products focused on performance, energy savings, connectivity and simplicity. Our primary semiconductor products are mixed-signal integrated circuits (ICs), which are electronic components that convert real-world analog signals, such as sound and radio waves, into digital signals that electronic products can process.

As a fabless semiconductor company, we rely on third-party semiconductor fabricators in Asia, and to a lesser extent the United States and Europe, to manufacture the silicon wafers that reflect our IC designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We rely on third parties in Asia to assemble, package, and, in most cases, test these devices and ship these units to our customers. Testing performed by such third parties facilitates faster delivery of products to our customers (particularly those located in Asia), shorter production cycle times, lower inventory requirements, lower costs and increased flexibility of test capacity.

Our expertise in analog-intensive, high-performance, mixed-signal ICs and software enables us to develop highly differentiated solutions that address multiple markets. We group our products into the following categories:

? Internet of Things products, which include wireless connectivity,

microcontroller (MCU) and sensor products; and

Infrastructure and automotive products, which include timing products (clocks

? and oscillators); power products (isolation and Power over Ethernet (PoE)

devices); broadcast products (consumer and automotive radio devices); and

access products (Voice over IP (VoIP) products and embedded modems).

The sales cycle for our ICs can be as long as 12 months or more. An additional three to six months or more are usually required before a customer ships a significant volume of devices that incorporate our ICs. Due to this lengthy sales cycle, we typically experience a significant delay between incurring research and development and selling, general and administrative expenses, and the corresponding sales. Consequently, if sales in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and, potentially, future quarters would be adversely affected. Moreover, the amount of time between initial research and development and commercialization of a product, if ever, can be substantially longer than the sales cycle for the product. Accordingly, if we incur substantial research and development costs without developing a commercially successful product, our operating results, as well as our growth prospects, could be adversely affected.



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Because some of our ICs are designed for use in consumer products, we expect that the demand for our products will be typically subject to some degree of seasonal demand. However, rapid changes in our markets and across our product areas make it difficult for us to accurately estimate the impact of seasonal factors on our business.




Current Period Highlights



Revenues increased $40.6 million in the recent quarter compared to the first quarter of fiscal 2020 primarily due to increased revenues from our IoT products. Gross profit increased $21.4 million during the same period due primarily to increased product sales. Gross margin decreased to 58.9% in the recent quarter compared to 60.1% in the first quarter of fiscal 2020 due primarily to variations in product mix. Operating expenses increased by $3.2 million in the recent quarter compared to the first quarter of fiscal 2020 due primarily to increased new product introduction costs, amortization of intangible assets and personnel-related expenses, offset in part by decreased promotional and marketing expenses. Operating income in the recent quarter was $22.2 million compared to $3.9 million in the first quarter of fiscal 2020.

We ended the first quarter with $572.9 million in cash, cash equivalents and short-term investments. Net cash provided by operating activities was $14.5 million during the recent three-month period. Accounts receivable was $103.7 million at April 3, 2021, representing 37 days sales outstanding (DSO). Inventory was $79.2 million at April 3, 2021, representing 68 days of inventory (DOI). During the first quarter, we paid $140.6 million in cash and issued 528,022 shares of common stock in connection with the redemption of the remaining principal of our 2022 convertible senior notes.

Through acquisitions and internal development efforts, we have continued to diversify our product portfolio and introduce new products and solutions with added functionality and further integration. In the first three months of fiscal 2021, we introduced a new 32-bit MCU on our award-winning xG22 platform for IoT edge applications; a new isolated gate driver board designed to simplify the development of systems using power modules; and new SmartClock™ technology for our automotive timing solutions.

During the three months ended April 3, 2021, we had no customer that represented more than 10% of our revenues. In addition to direct sales to customers, some of our end customers purchase products indirectly from us through distributors and contract manufacturers. An end customer purchasing through a contract manufacturer typically instructs such contract manufacturer to obtain our products and incorporate such products with other components for sale by such contract manufacturer to the end customer. Although we actually sell the products to, and are paid by, the distributors and contract manufacturers, we refer to such end customer as our customer. Two of our distributors who sell to our customers, Arrow Electronics and Edom Technology, each represented more than 10% of our revenues during the three months ended April 3, 2021.

The percentage of our revenues derived from outside of the United States was 90% during the three months ended April 3, 2021. All of our revenues to date have been denominated in U.S. dollars. We believe that a majority of our revenues will continue to be derived from customers outside of the United States.



Results of Operations


The following describes the line items set forth in our Condensed Consolidated Statements of Income:

Revenues. Revenues are generated predominately by sales of our products. Our revenues are subject to variation from period to period due to the volume of shipments made within a period, the mix of products we sell and the prices we charge for our products.

Cost of Revenues. Cost of revenues includes the cost of purchasing finished silicon wafers processed by independent foundries; costs associated with assembly, test and shipping of those products; costs of personnel and equipment associated with manufacturing support, logistics and quality assurance; costs of software royalties, other intellectual property license costs and certain acquired intangible assets; and an allocated portion of our occupancy costs. Our gross margin fluctuates depending on product mix, manufacturing yields, inventory valuation adjustments, average selling prices and other factors.

Research and Development. Research and development expense consists primarily of personnel-related expenses, including stock-based compensation, as well as new product masks, external consulting and services costs, equipment tooling, equipment depreciation, amortization of intangible assets and an allocated portion of our occupancy costs. Research and development activities include the design of new products, refinement of existing products and design of test methodologies to ensure compliance with required specifications.



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Selling, General and Administrative. Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation, as well as an allocated portion of our occupancy costs, sales commissions to independent sales representatives, amortization of intangible assets, professional fees, legal fees, and promotional and marketing expenses.

Interest Income and Other, Net. Interest income and other, net reflects interest earned on our cash, cash equivalents and investment balances, foreign currency remeasurement adjustments, income or loss on equity method investments, and other non-operating income and expenses.

Interest Expense. Interest expense consists of interest on our short and long-term obligations, including our convertible senior notes and credit facility. Interest expense on our convertible senior notes includes contractual interest, amortization of the debt discount and amortization of debt issuance costs.

Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences.

The following table sets forth our Condensed Consolidated Statements of Income data as a percentage of revenues for the periods indicated:




                                         Three Months Ended
                                        April 3,    April 4,
                                          2021        2020
Revenues                                   100.0 %     100.0 %
Cost of revenues                            41.1        39.9
Gross margin                                58.9        60.1
Operating expenses:
Research and development                    29.9        33.1

Selling, general and administrative 20.3 25.2 Operating expenses

                          50.2        58.3
Operating income                             8.7         1.8
Other income (expense):
Interest income and other, net               1.1         1.5
Interest expense                           (4.4)       (2.6)
Income before income taxes                   5.4         0.7
Provision (benefit) for income taxes         0.1       (0.3)
Net income                                   5.3 %       1.0 %




Revenues




                                              Three Months Ended
                                  April 3,      April 4,                  %
(in millions)                       2021          2020       Change     Change
Internet of Things               $    158.2    $    118.1    $  40.1      34.1 %

Infrastructure and automotive 97.3 96.8 0.5 0.4 % Revenues

                         $    255.5    $    214.9    $  40.6      18.9 %




The change in revenues in the recent three-month period was due to:

Increased revenues of $40.1 million for our IoT products, due primarily to

? increased demand for our wireless connectivity products and MCU products and

the addition of revenues from an acquisition.

Increased revenues of $0.5 million for our Infrastructure and automotive

? products, due primarily to increased demand for our access products, offset by

decreased demand for our timing products.

Unit volumes of our products increased by 32.9% and average selling prices decreased by 10.1% compared to the three months ended April 4, 2020. The average selling prices of our products may fluctuate significantly from period to period due to changes in product mix, pricing decisions and other factors. In general, as our products become more mature, we expect to experience decreases in average selling prices.



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Gross Profit




                         Three Months Ended
                  April 3,      April 4,
(in millions)       2021          2020       Change
Gross profit     $    150.6    $    129.2    $  21.4
Gross margin           58.9 %        60.1 %    (1.2) %



Gross profit increased during the recent three month period due primarily to increased product sales. The change in gross profit in the recent period was due to an increase in gross profit of $22.9 million for our Internet of Things products, partially offset by a decrease in gross profit of $1.4 million for our Infrastructure and automotive products. Gross margin decreased primarily due to variations in product mix and lower gross margins on our Infrastructure and automotive products. Gross margin declines resulted primarily from lower average selling prices in the recent period.

We may experience declines in the average selling prices of certain of our products. This creates downward pressure on gross margin and may be offset to the extent we are able to introduce higher margin new products and gain market share with our products; reduce costs of existing products through improved design; achieve lower production costs from our wafer suppliers and third-party assembly and test subcontractors; achieve lower production costs per unit as a result of improved yields throughout the manufacturing process; or reduce logistics costs.




Research and Development




                                          Three Months Ended
                             April 3,      April 4,                   %
(in millions)                  2021          2020        Change     Change
Research and development    $     76.5    $     71.2    $    5.3       7.4 %
Percent of revenue                29.9 %        33.1 %         -         -



The increase in research and development expense in the recent three month period was primarily due to increases of $2.0 million for new product introduction costs, $1.2 million for personnel-related expenses, including costs associated with increased headcount and an acquisition, and $1.2 million for the amortization of intangible assets. We expect that research and development expense will increase in absolute dollars in the second quarter of fiscal 2021.

Selling, General and Administrative




                                                    Three Months Ended
                                        April 3,      April 4,                  %
(in millions)                             2021          2020       Change     Change

Selling, general and administrative $ 52.0 $ 54.0 $ (2.0) (3.8) % Percent of revenue

                           20.3 %        25.2 %        -         -




The decrease in selling, general and administrative expense in the recent three month period was primarily due to decreases of $1.0 million for promotional and marketing expenses and $0.7 million for personnel-related expenses. We expect that selling, general and administrative expense will remain relatively stable in absolute dollars in the second quarter of fiscal 2021.

Interest Income and Other, Net

Interest income and other, net for the three months ended April 3, 2021 was $2.9 million compared to $3.3 million for the three months ended April 4, 2020. The decrease in interest income and other, net was primarily due to lower interest rates on the underlying instruments.



Interest Expense


Interest expense for the three months ended April 3, 2021 was $11.3 million compared to $5.5 million for the three months ended April 4, 2020. The increase in interest expense in the recent three-month period was primarily due to a loss of $3.4 million recorded on the early extinguishment of the remaining 2022 Notes and a net increase of $2.4 million in interest resulting from an increase in the aggregate balance of notes outstanding.


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Provision (Benefit) for Income Taxes




                                                Three Months Ended
                                        April 3,     April 4,
(in millions)                             2021         2020        Change

Provision (benefit) for income taxes $ 0.2 $ (0.6) $ 0.8 Effective tax rate

                            1.5 %     (35.4) %         -




The increase in the effective tax rate for the three months ended April 3, 2021 as compared to the prior period was primarily due to the decreased impact of excess tax benefits from stock-based compensation and federal research and development credits on increased pre-tax book income.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2021 1 071 M - -
Net income 2021 68,8 M - -
Net cash 2021 219 M - -
P/E ratio 2021 94,5x
Yield 2021 -
Capitalization 6 308 M 6 308 M -
EV / Sales 2021 5,68x
EV / Sales 2022 4,98x
Nbr of Employees 1 838
Free-Float 98,3%
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Number of Analysts 12
Average target price 167,00 $
Last Close Price 140,97 $
Spread / Highest target 38,3%
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Managers and Directors
NameTitle
George Tyson Tuttle Chief Executive Officer & Director
R. Matthew Johnson President
John Carter Hollister Chief Financial Officer & Senior Vice President
Navdeep S. Sooch Chairman
Daniel Cooley Chief Technology Officer
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