SiTime Q3 2024 Earnings Call Transcript

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November 6, 2024

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to SciTime's Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this conference call is being recorded today, Wednesday, November 6, 2024. I would now like to turn the call over to Brett Perry of Shelton Group Investor Relations.

Operator

Brett, please go ahead.

Speaker 1

Thank you, Amber. Good afternoon, and welcome to SciTime's Q3 2024 financial results conference call. Joining us on today's call from SciTime are Rajesh Vaziste, Chief Executive Officer and Beth Howe, Chief Financial Officer. Before we begin, I'd like to point out that during the course of this call, the company may make forward looking statements regarding expected future results, including financial position, strategy and plans, future operations, the timing market and other areas of discussion. It's not possible for the company's management to predict all risks nor can the company assess the impact of all factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward looking statements.

Speaker 1

In light of these risks, uncertainties and assumptions, the forward looking events discussed during this call may not occur and actual results could differ materially and adversely from those anticipated or implied. Neither the company nor any person assumes responsibility for the accuracy and completeness of forward looking statements. The company undertakes no obligation to publicly update forward looking statements for any reason after the date of this conference call to conform statements to actual results or to changes in the company's expectations. For more detailed information on risks associated with the business, we refer you to the risk factors described in the 10 ks filed on February 26, 2024, as well as the company's subsequent filings with the SEC. During the call, we refer to certain non GAAP measures, which are considered to be an important measure of the company's performance.

Speaker 1

These non GAAP financial measures are provided in addition to a substitute for nor superior to measures of financial performance prepared in accordance with U. S. GAAP. This GAAP to non GAAP reconciliation includes stock based compensation expense, amortization of acquired intangibles and acquisition related expenses, which include transaction and certain other cash costs associated with business acquisition as well as changes in estimated fair value of contingent consideration and earn out liabilities. Please refer to the company's press release issued earlier today for a detailed reconciliation between GAAP and non GAAP financial results.

Speaker 1

With that, it's now my pleasure to turn the call over to CyTime's CEO, Rajesh, please go ahead.

Speaker 2

Thank you, Brett. Good afternoon. I'd like to welcome new as well as existing investors to Sitime's Q3 2024 Earnings Call. Sitime is the leader in a dynamic new semiconductor category that we call precision timing, which is the heartbeat of modern electronics. Whether it is an AI data centers, networking infrastructure, automated vehicles, personal mobility or IoT, Cytamp's precision timing delivers better performance and reliability.

Speaker 2

This precision timing uses semiconductor technology to reimagine time and transform the $10,000,000,000 timing market. Our 3rd quarter results demonstrate broad strength across financial metrics, customer segments and regions. Revenue for the quarter grew by 62 percent to $57,700,000 and net income increased to 17% of revenue. Each of our customer segments and regions continued at least double digit growth with CED or Communications Enterprise and Data Center, Greater China and EMEA all growing at triple digits. Bookings for the 4th quarter are strong and we expect Q4 to grow sequentially as previously forecasted.

Speaker 2

Looking back, November 2024 marks our 5th year as a public company. At the time of our IPO, Citime made a commitment to building high value timing products for high growth applications and markets, and we have significantly delivered. We have built high growth, high margin businesses with a diversity of revenue, customers and applications. Since markets grow at different rates and on different timelines, we believe that this diversity benefits Sitime and makes us a unique semiconductor company. Our comms Enterprise Data Center or CED business demonstrates the value of our products.

Speaker 2

In both Q2 and Q3 2024, CED has been a major driver of our growth driven by cloud service provider investments in AI infrastructure. CED revenue grew over 200% year over year in Q3 and for FY 2024 it will more than double. Looking forward into 2025, we believe that the AI market will continue to grow as newer generations of AI servers and networking equipment are rolled out. We expect CED to continue to lead Citan's growth next year. In AI data center infrastructure, Citimes products are solving difficult timing problems in applications such as top of the rack switches and optical modules.

Speaker 2

Additionally, CSPs or cloud service providers are investing in improving bandwidth and GPU utilization in the data center, which we believe results in more use of precision timing solutions with higher dollar content per application. SiTime's precision timing plays in high speed connectivity applications such as active electrical cables. We provide high performance that is virtually immune to noise in a very small form factor, which is quite valuable in these cases. Another application is the direct connectivity between GPUs through a very fast dedicated switch, which improves GPU utilization rates with faster parallel processing of the AI workloads. Our clock generators acquired from Aura play a key role here as well, delivering multiple high performance clocks from a single integrated device.

Speaker 2

In sum, we are in a leadership position in AI with precision timing and expect to grow our dollar content as this market grows. Another macro trend is in building a more precise global navigation satellite system or GNSS, which is resilient to jamming and spoofing. Such a system has used cases in defense and aerospace and extends to industrial, automotive and mobile IoT consumer. In automotive, ADAS level 2, level 3 and 4 as well as robotaxis need such an enhanced GNSS to operate optimally. Such a GNSS will depend upon precision timing and we are engaged with key players in multiple markets.

Speaker 2

In autonomous and ADAS vehicles, we are now also offering fail safe technology where the single device integrates resonators, oscillators, clocking and advanced safety mechanisms for timing. This integration accelerates functional safety development and simplifies system architecture. We have multiple design wins with key electric vehicle companies and expect to begin shipments in volume quantities in 2025. In summary, our strategy is working as intended and delivering results. I'm confident of our success now and in the future.

Speaker 2

I now want to turn the call over to Beth, our CFO to discuss our financial results in more detail.

Speaker 3

Thanks, Rajesh, and good afternoon, everyone. Today, I'll discuss the details of our Q3 results and provide our outlook for the Q4. As a reminder, I'll focus my discussion on the non GAAP financial results, which are reconciled to GAAP in our press release. We are pleased with our Q3 financial results as we continue to execute our financial model. We drove strong sequential and year over year revenue growth, expanding non GAAP operating profit and earnings per share over twice as fast as revenue, while continuing to invest in our leading product road map.

Speaker 3

Our financial performance this quarter demonstrates our ability to successfully invest in our business while delivering strong financial results. 3rd quarter revenue was $57,700,000 up 62% year on year, driven by increased volumes and favorable product mix. Looking at growth by market, sales into our communications, enterprise and data center market were $19,700,000 or 34 percent of sales, up 2 33% year on year. Sales into the automotive, industrial and aerospace market were $17,700,000 or 31 percent of sales, increasing 51% year on year. And sales into the mobile, IoT and consumer market were $20,300,000 or 35% of sales, up 14% year on year with sales to our largest customer totaling $13,100,000 or 23% of sales.

Speaker 3

Non GAAP gross margins were 58.1%, up 40 basis points sequentially, driven primarily by improved manufacturing absorption from higher volumes. Total non GAAP operating expenses for the quarter were $29,500,000 with R and D expense of $17,100,000 and SG and A expense of $12,400,000 Operating expenses were lower than expected primarily related to the shift of R and D expense from Q3 to Q4. Q3 marked the return to operating profitability with non GAAP operating profit of $4,000,000 a significant improvement of $9,700,000 versus the prior year and representing 75% flow through of gross profit dollars. 3rd quarter non GAAP net income was $9,600,000 representing 17% of revenue or $0.40 per share. Turning to the balance sheet.

Speaker 3

Accounts receivable was $30,200,000 with DSOs of 47 days. Inventory at the end of the quarter was $71,900,000 and accounts payable was $17,900,000 sorry, inventory at Thindecor was $71,900,000 and accounts payable was $17,900,000 During the quarter, we generated $8,200,000 in cash from operations, invested $15,000,000 in capital purchases and paid $12,900,000 to Aura as part of the transaction we announced last year. We ended the quarter with $435,000,000 in cash, cash equivalents and short term investments. Let me now review our outlook for the December quarter. In Q4, we expect revenue of $63,000,000 to $65,000,000 non GAAP gross margins to be in the range of 58% to 58.5 percent non GAAP operating expenses of $31,000,000 to $31,500,000 interest income of approximately $4,500,000 and diluted outstanding shares of approximately 24,400,000 shares.

Speaker 3

As a result, we expect non GAAP EPS to be in the range of $0.39 to $0.45 per share. In closing, we are pleased with our strong results and remain focused on driving revenue and profit growth. Our product portfolio continues to expand with differentiated products that address large and growing markets, and our customers are clearly recognizing our value proposition. All in all, we are executing our strategy, and our strategy is working. With that, I'd like to hand the call back to the operator for questions and answers.

Operator

Thank you. We will now conduct the question and answer session. Our first question comes from Suji Dalsilva at ROTH Capital. Please go ahead.

Speaker 4

Hi, Rajesh. Hi, Beth. Congrats on the progress here. Maybe you can talk about the data center market, Rajesh, the content here. I'm curious, optical top rack switch versus expanding into AECs.

Speaker 4

And it sounds like you have some content in the AI server or somewhere in the rack other places and you can elaborate on that maybe. What's the mix of those today and what's the mix of those content positions maybe 1 to 2 years out, maybe some of those are growth opportunities?

Speaker 2

Yes. Thank you for that. We see that all of these will continue to grow over time. The tricky part is forecasting what how they are configured. But in general, we're talking about in the next few years seeing that server content grows quite substantially.

Speaker 2

Where we see particularly large content growth is in the switches and some of the CPU servers as well as the pluggables as well. So I think we see growth all across the market depending upon the configuration of these systems.

Speaker 4

Okay. And maybe just a follow-up there. I know you've started off with strong traction in the optical pluggables. And I'm wondering, is there a multiplier of content to think about for a server switch or CPU server versus a pluggable or are they similar content wise for you opportunity?

Speaker 2

The pluggable is probably the least in dollar amount. But the switches, the servers, the GPUs, of course, they all go up quite a bit. We do have SuperNIC cards, which are used for compute, those that are used for storage. So depending upon again, it's a pretty complicated architecture, but those are all important places for Citimes sales and revenue.

Speaker 4

Great. Sounds like a great opportunity. I'll pass it along. Thanks, Rajesh.

Speaker 2

Yes. Thank you.

Operator

One moment, please. Our next question comes from Quinn Bolton of Needham and Company. Quinn, your line is now open.

Speaker 5

Hey, guys. Congratulations on the nice results and outlook. I wanted to follow-up on Suji's question. Rajesh, you I think perhaps mentioned GPU to GPU networks or others may know them as the scale up networks in AI being particularly content rich for your TCXOs. Wondering if you could just dive a little deeper into what the content could be in those scale up networks.

Speaker 5

If you look at NVIDIA's latest generation NVL 72 rack, 9 of the 27 trays in that rack are dedicated to switching and there's a lot of content to be had there and it sounds like those switch trays could potentially use multiple DCSOs from the company. So just wondering if you could kind of expand on the use cases. And are these scale up networks specifically with NVIDIA? Or are you seeing scale up opportunities with some of the hyperscalers that are developing their own ASICs? Thanks.

Speaker 2

Yes. So without naming customers' names, we have not made as many inroads into the hyperscalers. We have in some, but not in all. So I think we are mostly seeing this in the people who are in the business of CPUs and GPUs. But I basically believe that we are now talking we started in with sub $100 say a couple of years ago and now per rack, but now fully populated racks are 100 of dollars, quite high.

Speaker 2

Slightly less populated racks are still 100 of dollars. So it's whether we're talking about a high 100 of dollars, a little bit more middle of the road, whether we're talking about GPU trays or NIC cards for storage compute or switches or top of the rack switches, Cytamp plays in all of them. Additionally, of course, we continue to play across a large number of OEMs in the pluggable modules as well as in the AECs that are connecting and some of the AEC companies are doing quite well. I know you cover them. So I think it's all part of a whole program and that's why we could have the kind of growth 200% that we saw year on year.

Speaker 2

I mean quarter

Speaker 6

on quarter.

Speaker 5

And just that and Rajesh, just to confirm that, that high 100 of dollars per rack, that's across all applications that would include AECs, pluggables, top rack switches, scale up switches, super NIC cards, like everything you do. Okay, got it. Okay, thanks.

Speaker 2

I'm aggregating all of that because, yes, it's a little bit tricky, and I don't think it should be that specific, so.

Speaker 5

Yes. Understand the customer sensitivity there. I guess the next question, CED was up over 200% in the quarter. It will double in 2024 versus 2023. I know you're not giving guidance for 2025 yet, but what kind of growth rate do you expect in 2025 out of CED?

Speaker 5

I think you said in the prepared comments that CED would again lead to growth. So I assume if you're targeting 30% overall for the company that CED is probably going to be well in excess of 30% next year. Is that kind of the right framework to be thinking about for 2025?

Speaker 2

Yes. So as you recall, Quinn, several quarters ago, we took the unusual step of forecasting that we would grow by give or take 30% and looks like we are in target to do that for this year. We also took the sort of unusual step a quarter ago of saying that this growth of approximately 30% would carry on into the coming year and the year beyond. We still maintain that. I think it's fair to say that given the diversity of our revenue, which is the strength of the company, there's always something that's growing at more than corporate growth rate.

Speaker 2

And I think in this case, CED qualifies for that because there's also something on the other side, which is not growing at a corporate growth rate. So, I think it balances itself out nicely so that we can deliver the promised 30%.

Speaker 5

Perfect. Thank you. I'll get back in queue.

Speaker 2

Yes.

Operator

One moment for our next question. Our next question comes from Melissa Fairbanks at Raymond James and Associates. Your line is now open.

Speaker 7

Hi, guys. Yes, I'll add my congratulations. I have a couple of questions for Beth actually to start. I'm surprised normally this is the first question that gets asked. Are you able to give us any sort of specificity on segment guidance for the Q4?

Speaker 7

Obviously, CED is going to lead the growth, but any kind of color that you can give us on the other segments?

Speaker 3

Sure. So as we look at the segments again, we expect growth in CED to lead the way. I think if you look at our Consumer IoT Mobile segment, that as well, right, we've got holiday season that should show good growth as well. And then as we look at the auto, industrial, aerospace, we expect that to continue to grow as well. That's had some strong performance this year.

Speaker 3

But I'd say, again, growing across the board, but CED definitely leading the way.

Speaker 7

Okay, great. And then as a follow-up, maybe I know this is like way less boring or way more boring than talking about CED, but on the OpEx line, understand that some of the R and D got pushed to the December quarter. I think in our prior conversations, maybe we talked about going forward maybe a couple $1,000,000 a year in OpEx growth and then that drives a lot of leverage in the model. What are you thinking now that you've got all of these new opportunities? Should we expect a greater increase in OpEx?

Speaker 7

Or how should we be modeling OpEx going forward?

Speaker 3

So we look at Q4, I'm expecting OpEx to be kind of $31,000,000 to $31,500,000 for the quarter. So that's for Q4. And then I think what you're asking is looking forward into 2025 and how to think about that. So if you annualize that number, you get to 124, 125 ish as kind of a baseline. And then I think, again, we'll grow a bit from there.

Speaker 3

As we've been talking about, I expect that revenue to grow much, much faster than OpEx, but we do want to be investing in the business. We want to be investing in R and D. We want to be investing in go to market. So for those key growth areas, and we see a good ROI on investment, whether it's people or programs, we're going to make those investments. But again, as I said, I expect revenue to grow much faster than OpEx.

Speaker 7

Okay, great. Thanks so much, Beth. Thanks, Rajesh.

Speaker 2

Yes. Thank

Operator

you. Our next question comes from Tore Svanberg of Stifel. Your line is now open, Tore.

Speaker 6

Yes, good afternoon. This is Jeremy on for Tore. And let me add my congratulations to a very strong quarter and outlook. I wanted to dig a little bit more deeply into the automotive segment. I know software defined vehicles is something that's kind of been coming on pretty strongly in the industry.

Speaker 6

I was wondering if you could give us more insight into your timing content and how it plays into the opportunity there? And how does that compare to legacy or more traditional vehicles in terms of your potential content and potential TAM? That would be great. Thank you.

Speaker 2

Yes. So starting with the SAM, we probably have something like about $400,000,000 to $500,000,000 SAM in the automotive market, which is up substantially from the time when we went public, when it was almost negligible. Most of the business that we have comes from the more innovative power companies, which tend to be electric vehicles, although it's not limited to that. We're not connected to that, but many of them are significantly EVs. So with that in mind, we do rather well in China, where as you know, there's a lot of automated driving and new car companies that have really ramped up volumes.

Speaker 2

We have done well in the United States with those electric car companies that have done well. And in terms of use case, the use case is mostly centered around automated driving, whether it is the full ADAS at level 2 or level 2.5 or design wins at level 3 and level 4, but also in the cameras or the sensors or the radar, the LIDAR and the GPS that connects some of these to positioning. So it's really mostly in that ecosystem. Although I will say that we are also in infotainment, we are also in some of the Ethernet cabling and so on. So it's a pretty diverse use case, but it's mostly centered around automated driving.

Speaker 2

And as I mentioned with our new fail safe technology, which is getting rolled out right now, we are likely to be used in other cars that want to increase the safety of their operation.

Speaker 6

Great. Thank you for that color. I was wondering if you could also step back a little bit and look at the precision timing market versus quartz. If you can give us an update there, whether it's can you talk about your penetration rate maybe for new applications or emerging applications or even if you can segmented versus like high performance versus areas that you're not targeting, how are you seeing your uptake in precision timing versus courts? And things like how programmability impacts that decision for customers?

Speaker 6

Thank you.

Speaker 4

Right.

Speaker 2

So our total market TAM is $10,000,000,000 and that is divided into oscillators, which is 4,000,000,000 clocks, which is a couple of 1,000,000,000. So that's 6 plus the remaining is the resonators, even though we don't have any resonator products shipping, but we do have products in the other two categories. Our SAM or our market that we serve is a little bit less than $3,000,000,000 but let's say it's 3,000,000,000 and our revenue as you know is in the range of little bit lower than $200,000,000 as forecast by many of you. So really our penetration, our precision timing market is in that $3,000,000,000 category and SiTime's penetration in that is significantly has a lot of room for growth from $200,000,000 all the way up. The real issue here in terms of what makes up that $3,000,000,000 is as we've said before, right now data centers are doing very well.

Speaker 2

Enterprise technologies and communications are very important. I think they probably take over about $1,000,000,000 of that. We also have a significantly large consumer mobile IoT business and that is a very large portion of that as well, whatever consumer devices you can think of that we can go into. The rest of it is around military aerospace defense, industrial, medical and so on. So we and as mentioned, we are probably around $500,000,000 for automotive.

Speaker 2

So I think it all adds up to about $3,000,000,000 and we have about 300 different applications inside that $3,000,000,000 SAM or served market. So it's a very diverse business which is by design because we think that that adds significant strength to the company at the same time while we get a growth of 30% annually.

Speaker 6

Great. Thank you.

Operator

One moment for our next question. Our next question comes from Quinn Bolton of Needham and Company. Quinn, your line is now open.

Speaker 5

Hey, I had a quick follow-up for Beth. Beth, I think last quarter you had mentioned the gross margin was sort of weighed down by some new investments in tooling. Obviously, you guys have done a really nice job here in the near term, delivering higher than expected revenue. Just kind of wondering if you might be able to give us your latest thoughts on gross margin, what the trajectory might look like beyond the December quarter into March, would you see a seasonal downtick as revenue may decline seasonally? And then any thoughts on when you can get back to that 60% or higher gross margin target?

Speaker 5

Thank you.

Speaker 3

Sure, Quinn. Let me talk a little bit about our gross margin. As you said, we did see some good improvement sequentially, 40 basis points. And I'd say we're on track with where we expected to be as we ramp these new products and bring them in production. Long term, we still expect to be north of 60%.

Speaker 3

And in fact, if we continue on track as we expect, we would be getting back to kind of that 60% mark, probably the second half of twenty twenty five as we get these products into production and really ramping there. So again, I think we're on track with where we expected to be. We've seen nice improvement here sequentially. To your point, we typically see a seasonal decline Q4 to Q1. I think the average is roughly 20% seasonal decline in revenue.

Speaker 3

And so that's a little bit of a headwind there just for the March quarter. But long term, even into 2025, I think we're on track with where we want to be.

Speaker 5

Perfect. Thank you.

Operator

Thank you. Our next question comes from Chris Caso of Wolfe Research. Your line is now open.

Speaker 8

Yes, thank you. Good evening. I wonder if you could talk a little about your penetration or your attempts to penetrate the clock market in terms of the timing of that and what sort of magnitude of benefit do you expect as you start to penetrate that? And is it really a function of just the pace of product development there? How quickly can you get products out into the market for that segment?

Speaker 2

Yes. Thanks, Chris. Actually, it is the pace of this is predicated by the design win and the deployment of the product. So because of the Aura acquisition, we now have significant number of the products that we want. There's still some in the pipeline that are getting rolled out, but most of the products are already out and getting design wins.

Speaker 2

So what is predicating that rollout is the design win, which takes anywhere from 9 months because a lot of these go into CED markets, industrial markets, automotive markets, which have about 9 months to 12 month design win and then another equal number of months for the rollout of the product in volume, so call it 2 years. So because of that, we think we are very much on target with both our organic growth products in clocking, like the Corus product that we launched recently, but also with the aura based products, such that our revenue over the coming years, coming few years, not a long time, we expect to be from clocking to reach about 100,000,000 dollars And we are well on that trajectory even though the revenue from clocking is still relatively small this year and in fact next year as well.

Speaker 8

That's helpful. Thank you. As a follow-up one for you, Beth, and I guess you've been there a bit of a while now. Luckily, it appears that the market has now stabilized. So we have a better idea of what we're dealing with here.

Speaker 8

What's your view of the margin structure for the company and kind of where you'd like to see it? And how should we think of not just for the next few quarters, but a little longer out, or we should think about OpEx growth relative to revenue growth and what sort of operating leverage we should see as the revenue grows?

Speaker 3

Thanks, Chris. So as I talked a little bit about, we haven't really, again, given guidance for 25%, but as I think about some thoughts on the operating model and how we're thinking about it, as I've been saying, we are growing revenue. And given kind of our recent trajectory and the OpEx that we had coming into 2024, I think I still think that we can grow revenue much faster than OpEx. And so we've got good or great operating leverage in the model. This quarter, you saw that with a 75% flow through of gross profit to the bottom line.

Speaker 3

And so while we do want to invest in OpEx, as I was telling Melissa, we do want to make those strategic investments where we see good ROI. I do expect us to continue to grow revenue much quicker than OpEx, at least 25%. And we'll see again, at some point, we'll make more investments. But right now, I expect to see a lot of flow through and operating leverage in the model.

Speaker 8

That's great. Thank you.

Operator

I am showing no further questions at this time. I would now like to turn the conference back to management for closing remarks.

Speaker 4

Well, thank you very much.

Speaker 2

We are very glad that we've returned to a growth rate and it's good to be here and we look forward to talking to you in further detail as the quarters roll on. Thank you very much.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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