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Good day, everyone. My name is Jamie, and I'll be your conference operator today. Welcome to Silicon Labs' Third Quarter Fiscal '22 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please also note today's event is being recorded.
At this time, I'd like to turn the floor over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.
Thank you, Jamie. We are recording this meeting and a replay will be available for four weeks on the Investor Relations section of our website at silabs.com/investors. 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 the recent business activities. We will take questions after our prepared comments and our remarks today will include forward-looking statements 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 would now like to turn the call over to Silicon Labs' Chief Financial Officer, John Hollister. John?
Thanks, Giovanni. Revenue for the third quarter grew 46% year-on-year, ending at $270 million, in line with expectations and well above our target model growth rate. During the quarter, we saw sequential growth in both business units, Industrial & Commercial and Home Life. Areas of particular strength for the quarter were in smart home applications and commercial automation. Geographically, Q3 revenue growth was strongest in the Americas, followed by Europe, then Asia Pacific. All regions grew in the quarter.
Distribution sales were consistent with expectations of approximately 80% of total revenue, reflecting the broad diversity of our customer base. Our largest customer in Q3 was mid single-digits of our mix and our top 10 customers comprised around 20% of our revenue. Our distribution inventory level at the close of Q3 was slightly lower at 59 days. We continue to see a challenging operating environment in China due to ongoing COVID lockdowns impacting our distributors ability to ship POS to end customers and resulting in higher than average channel inventory.
During the quarter, we experienced volatile booking patterns with some weeks continuing to show above average strength, while in other weeks, our bookings levels were relatively low. Certain customers have indicated that they have accumulated output inventory levels. And while our cumulative backlog declined in the third quarter, it remains high by historical standards. In Q3, even though we began to see signs of foundry capacity opening up on certain nodes, there continue to be lagging process nodes where we have meaningful supply constraints.
That said, lead times have come down closer to 26 weeks, which is still above normal levels. Non-GAAP gross margin for Q3 was favorable to expectations on product mix, ending at 61.5%. Consistent with the overall trend for fiscal 2022, Q3 gross margin was down about 90 basis points from Q2, reflecting ongoing second half input cost increases. Non-GAAP operating expenses were slightly favorable to expectations on reduced outside services spending ending at $112 million. Non-GAAP R&D expenses were $69 million and non-GAAP SG&A expenses were $43 million.
Non-GAAP operating income was $54 million, representing operating margin of 20.1%, which is above our target model for profitability at this revenue level. Our non-GAAP effective tax rate for the quarter was 27%, and non-GAAP earnings for the quarter ended at $1.21 per share. This earnings result is approximately a 250% increase from the same period last year, a dramatic improvement following the I&E divestiture.
On a GAAP basis, gross margin for the third quarter was 61.4%. GAAP operating expenses were $135 million. R&D expenses were $85 million and SG&A expenses were $51 million. Stock-based compensation expenses were $16 million and amortization expenses for intangible assets were $8 million, both in line with expectations. GAAP operating income was $30 million, representing 11.2% operating margin. The GAAP effective tax rate was approximately 40% and GAAP earnings were $0.60 per share.
Turning now to the balance sheet. We ended Q3 with cash and cash equivalents of $1.4 billion. Operating cash flow for the year-to-date period ending in September was $127 million. During the quarter, we executed open market repurchases of our common stock, bringing our total year-to-date repurchases to nearly $700 million, and the total completed since the announcement of our divestiture last year to more than $1.8 billion. Our fully diluted share count declined again in the quarter to 34.8 million shares.
Our accounts receivable balance in the quarter increased to $77 million with day sales outstanding at 26 days. Our inventory balance grew in the quarter to $88 million, representing 4.7 turns. Our debt balance as of the end of the third quarter is unchanged with the principal balance on our 2025 convertible notes at $535 million. The company's balance sheet and liquidity position are very healthy, and we have ample capacity to continue our capital deployment strategies.
Before I turn the call over to Matt, I will cover guidance for the fourth quarter. We expect revenue for Q4 to be in the range of $245 million to $255 million. We expect the industrial and commercial business to increase slightly on a sequential basis with continued tight supply on certain product lines. We expect the Home and Life business to decline in Q4 due to a slowdown in customer demand on certain programs. We expect non-GAAP gross margin in Q4 to be approximately 60%. We expect non-GAAP operating expenses for Q4 to decline to approximately $109 million.
We expect our non-GAAP effective tax rate to be approximately 25% and non-GAAP earnings to be between $0.93 to $1.03 per share. On a GAAP basis, we expect gross margin to be 60%. We expect GAAP operating expenses to be approximately $132 million and GAAP EPS to be in the range of $0.35 to $0.45.
I will now turn the call over to Matt. Matt?
Thanks, John, and good morning, everyone. Despite a challenging macro environment, Silicon Labs delivered sequential and year-over-year growth in both revenue and EPS in the third quarter. As highlighted in the prior quarters, design and momentum is propelling our new business pipeline as we gained share across all of our applications, [indiscernible] where revenue grew by almost 50% year-over-year.
The Industrial & Commercial business saw its eighth consecutive record quarter, growing on both the sequential and annual basis. The Commercial Automation segment delivered strong results with revenue up 12% sequentially and 116% year-over-year. Additionally, Smart City applications continued to demonstrate robust annual growth up 60% year-over-year. Energy conversion and agriculture applications showed strong growth rates, both sequentially and year-over-year as well.
This past quarter, we are pleased to be recognized as a supplier of the year by multiple customers with whom we partnered to increase industrial adoption on [indiscernible]. A key tenet of our strategy is being a trusted partner across our diverse customer base. We demonstrated this throughout the recent supply chain challenges working closely to their customers, supporting stronger relationships.
We were honored to receive Cisco's Emerging Supplier of the Year Award, which recognized the Silicon Labs in all of Cisco's core performance areas, including quality, technology, flexibility, and productivity. We were also selected by Acuity Brands as a finalist for the Supplier of the Year Award and named Collaborator of the Year and got Supplier of the Year by Schneider Electric. We're grateful for those close relationships and proud that these awards has recognized the significant efforts of our team.
As John mentioned, within the Home segment, Smart Home products were towards up 6% sequentially and 40% year-over-year. It's important to highlight that smart home applications are not confined in single-family homes. Smart solutions are also being incorporated into large-scale building projects including the neighborhood and apartment complexes as well as upgrades that improve value in our lives.
We were thrilled with the turnout at our third annual Forsman Developer Conference in September, which drew more than 7,000 registrants from over 1,600 companies signing up for over 67,000 individual tests. The caliber of attendees and key notes, which included speakers from Amazon and Google, among others, underscored our leadership in IoT and our increasing role within the industry.
Silicon Labs Series 2 platform continues to be a growth engine as we extend our leadership position within IoT. Series 2 represents the fourth generation of Silicon Labs wireless technology and incorporates all the learnings we learned 15 years of work in this space. It's a wireless connectivity platform that is purpose-built for the IoT with industry-leading security, battery life and advanced features by the industry's first bolt-on hardware acceleration from machine learning edge.
Silicon Labs has nearly doubled its IoT revenue in the last two years, driven by the first few products on its platform. Building on the strength of our Series 2 product cycle being our [indiscernible] products during the opening work keynote, it will help shape the future of the IoT, including products that support technologies such as Matter, Amazon, Sidewalk, Wi-SUN and Wi-Fi 6.
We announced a complete nano development solution, providing support for Matter of Wi-Fi, Matter of Opera, and Bluetooth Low Energy and Matter brings both [indiscernible]. We also announced the Silicon Labs Pro Kit for Amazon Sidewalk, the first end-to-end development platform with complete connectivity support for Amazon Sidewalk.
Wi-SUN announced the FG25 SoC and EFF01 front-end module chipset, a new flagship SoC and power amplifier for Wi-SUN, which when used together can then provide a diverse transmission range up to three kilometers in advanced urban environments and no data loss.
Finally, we announced significant progress in expanding our capabilities within Wi-Fi and BLE with Silicon Lab's first Wi-Fi 6 BLE SoC family called the x917, which is the industry's lowest power, longest battery life Wi-Fi system BLE combo solution. Another significant milestone this quarter was the inauguration of Silicon Labs Development Center in Hyderabad, India which has grown to more than 500 employees. The study is focused on being the leading IoT wireless development center in the region.
As part of this, Silicon Labs in Hyderabad launched India's first campus-wide Wi-SUN network at the IIIT-Hyderabad Smart City Living Lab. This network will support an innovative street lighting application with 30 built-in network nodes connecting street lamps for remote monitoring and control.
In closing, we had a great quarter that showcases the strength of our execution and strategy. We are uniquely positioned with our unracked breadth, depth and focus in our space. Our breadth of support of wireless technologies, ecosystems, applications and markets is the largest in the world. Our depth and domain expertise is driving leading wireless performance, battery life, security and ease of use in the adoption of our products and 100% focused and commitment on driving phenomenal growth in IoT wireless connectivity has enabled us to double our revenue over the last couple of years in the middle of the supply chain crisis.
We are confident in our ability to now meet the current challenging environment and continue to extend our IoT growth.
Thank you, Matt. Before we open the call for Q&A, I would like to announce our participation in the Stifel 2022 Midwest One-on-One Growth Conference on November 10 in Chicago. We'll now open 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 with one follow-up if needed.
Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Matt Ramsay from Cowen. Please go ahead with your question.
Thank you very much. Good morning guys. I guess for my first question, Matt, if you just kind of go through the guidance as John laid it out and Industrial and Commercials up a hair in Q4. That means you're down, Home and Life down, I don't know, mid- to high teens, something like that sequentially. I just wanted you to maybe provide some color and walk us through what sort of order patterns you're seeing. I think in the commentary, you guys mentioned some -- maybe some programs that were slowing. It sounds like some customer inventory might have built up in some cases. I'm just trying to get a feel for that Home and Life segment and what you guys are seeing in real time. Thanks.
Sure, Matt. No problem. So yes, this picture, if you look at Q4, we're seeing that consumer life -- particularly consumer kind of starting with China seeing softness than in Europe, than in the U.S. And in that space, there are still a demand supply gas. But if you look at Industrial and Commercial, you definitely see more strength in that space. There's definitely a pocket where we've seen softness there as well, but nowhere near the same is what we're seeing on the consumer side.
In the Industrial and Commercial space, the demand supply gap remains pretty substantial. An easy way to think about it is if we had the ability to close that gap, we'll be looking at good growth going from Q3 to Q4. The other thing that were kind of mentioned in that little color is because of the diversity of business that we have across technologies, across markets, applications, geos, we're seeing a little bit of everything, honestly.
We're seeing some customers were still in and out, strong growth and strong growth cycle, seeing other people kind of just right and others that are over inventory and not needing as much supply from us. So it's a pretty diverse set of circumstances that we're seeing out there. That being said, we still expect our market space to outgrow the overall market. And given the share gains we've seen over the last couple of years, we expect ourselves to be able to outperform whenever this market develops.
I appreciate all the color there, Matt. It's definitely a dynamic environment. I guess for my follow-up question, I wanted to ask sort of a bigger picture topic. During the last, I don't know, 24 months or so when supply for your company and most of your competitors have been insanely tight, we've noticed many of your microcontroller competitors really over-indexing their allocations toward automotive and industrial and maybe much less so towards IoT customers. And you mentioned the share gains that your company has taken as a result.
I guess going forward from here over the next couple of years, would you expect that sort of land and expand share gain story to continue for you and those customers that you guys service to be loyal or on the flip side as the tightness eases for your competitors, are they diving back into IoT and that becoming a focus? Just how is that dynamic playing out with customers as maybe supply opens up for some of your competition? Thanks.
Yes, understood. Yes, quick answer. We definitely saw that dynamic where as it seems extremely tight, a lot of competitors return to what is there for, which was fantastic for us because our core with this space. And so we definitely know that we've gained share as a result of that. I think a few things. We haven't seen that dynamic shift yet. So things definitely have not opened up in a way that we've seen. Competition coming back for those sockets yet. I think it's too early for that. I do think it will happen.
As supply improves, people will be out there looking for socket. Two things I'd say. One is customers remember this stuff. I think memories are pretty deep. And this supply chain prices has either strengthened relationships or weakened relationships. And I'm proud to say that I think a lot of our relationships, vast majority of them have improved in this cycle. So I think that will serve us well as we go into the next few years.
The other thing that's really critical to understand, we are in an incredibly strong period of our product cycle. I mentioned our Series 2 platform. So as I said in my prepared comments, we have literally almost doubled the size of our revenue in the last couple of years on the first two products coming out of that platform. And there's -- we just announced four more, and we have a lot more coming in development. So that strength of platform where we're at in the cycle positions us really well going into whatever this is in the sense that we've improved our customer relationships, and we have that strong product pipeline. So there will be competition, but I think we're pretty well positioned going into that.
Thanks Matt. Appreciate the color.
Our next question comes from Gary Mobley from Wells Fargo Securities. Please go ahead with your question.
Hey everyone. Thanks for taking my question. I wanted to ask about what Matt mentioned in his prior questioning, perhaps in a little more direct fashion. Given the trends that you're seeing in your bookings on a week-to-week basis or a month-to-month basis. Do you feel like your fourth quarter revenue guidance is reflective of the trend or is this just a node on the way down? And against that, do you think you can grow your top-line in calendar year '23?
Yes, Gary, this is John. That's a good question. It's a hard one to answer. Based on everything we see, we see outstanding design win momentum in the company. We are at 90% of our annual goal for design win achievement through the first three quarters of the year. That's a tremendously positive statement. We are not immune for macroeconomic effects. No company really is at the end of the day. So we'll see. We'll see what the Fed comes out with next week and where the capitulation cycle may begin to kick on, et cetera. But we're as well positioned as we could be, as Matt has articulated very well to grow the business.
And putting aside macro conditions, we see fundamental drivers in the business that indicate to us, yes, we expect the business to grow in fiscal '23, and we are not changing our long-term CAGR for growth of 20%. I hope that answers, but I'm happy to follow-up if that didn't quite helpful for you.
No. No, it's quite helpful, John. I appreciate the comments. So if I'm not mistaken, you have some China-based fab partners. I'm curious to know, against the backdrop of tightening U.S. export restrictions targeting China. Have you begun the process of trying to reshuffle your fab partner -- excuse me, fab partner footprint to try to mitigate the risk associated with these restrictions?
Yes. This is Matt. I'll pick it here. So big picture of the company. We have a relatively low percent of our overall business in China, I think around 13%, 14%. And even smaller percentage of our supply coming out of China from a foundry perspective. And we do not have any of our -- think of it as our next generation or Series 2 or growth products sole-sourced anywhere in China. So we believe that we're relatively well positioned. To be clear, it's fair, there's a lot of uncertainty of geopolitically that's growing there, but we are not sole sourced on any of our future growth and next-generation process there.
That's helpful. Thank you, Matt.
And our next question comes from Blayne Curtis from Barclays. Please go ahead with your question.
Hey guys. Thanks for taking my question. I just want to go back to Matt's first question on the guidance. Because you did mention some certain programs and then I think your answer was more kind of about geographies. So I'm just trying to understand is the quite a sharp decline in December, is that kind of like a onetime thing. I mean I know you're still saying demand above supply and supply is the issue, but you did also mention some programs, if you could just elaborate on that?
Yes, sure. So to be clear, this is more broad in consumer. So it's a complex situation where we're definitely seeing consumer softness, right? We're not seeing more to cancellations, we're seeing more to push outs. And at the same time, we still have more demand than supply. So matching those up is becoming increasingly difficult given that volatility that we're seeing out there. This is less in Q4 about one or two customer programs or ramps or anything like that. And this is more of a market statement about what we're seeing in consumer across, really, like I said earlier, strongest and most acute in China, but then some consumer softness in Europe as well.
So think of it as we're seeing broad softening in the consumer space, still some demand-supply gaps. But this isn't about one or two ramps or a few customers or products or anything like that. It's also important to reference, relative to the last year, it's definitely weaker than what we've seen. But if you step back and look at the pre-supply chain prices, our backlog and outlook would be stronger than ever going into a quarter or going into a year. So if the context matters in this case.
And then I just wanted to ask on pricing. You kind of took the position of raising once and not having to go back to customers, but it has been the primary driver of growth this year. So just your thoughts as things soften and capacity becomes available elsewhere, your ability to hold pricing that you've had this year into next?
Sure. Yes, we're not seeing any indications of supplier pricing softening yet. In fact, we're still seeing some increases and expectations to increase especially there's still some pretty sharp demand supply gap, particularly in the nodes that we trade in the company, but the industry consider more mature process nodes. So that's important to realize that not all nodes are the same in the semiconductor space. So that's the first thing.
The second is, we do believe that we are well positioned to navigate -- not getting stuck for lack of better terms as a company, especially given the way we manage customer relationships and the strength of that product cycle I mentioned earlier. So as we mentioned consistently over the course of the last year or so, our goal in this was not to change our model, raise our model, but to pass those prices along they not get stuck in the middle. And I think we're still in a very good position to continue to do that.
Yes. And Blayne this is John, if I could just add a couple of quick points. On the ASP dynamics are also driven by product mix, where at times we're selling higher value-add products not just [indiscernible] higher prices. And this final point is you in Q3, we're up double-digits year-on-year just as a big point.
Thank you.
Our next question comes from Raji Gill from Needham & Company. Please go ahead with your question.
Yes, thank you for taking my questions. Just a follow-up again on the Home and Life. So it's a fairly steep deceleration in terms of year-over-year growth. The growth is decelerating to about 11% year-over-year and on a sequential basis for Q4, it's down about 17%. And so when we're thinking about going into the first half of 2023, if there's kind of continued softness in the consumer market, if this is mainly driven due to order pushouts -- I mean trying to match the demand-supply. Is there a concern that those order pushouts are going to lead to kind of order cancellations, and we have more of a pronounced -- even more pronounced kind of decline in the Home and Life. I'm just trying to get a sense of the steep decline on a quarter-over-quarter basis. You're attributing it to order pushouts and matching demand-supply yet -- but not necessarily straight out order cancellations. So I'm trying to reconcile those two ideas?
Yes, sure. I think -- this is Matt. I'll comment on that, and I think it would be good to hear from John as well. Things are dynamic right now and changing, right? So what we're giving you is the best picture that we have sitting here right now. When we look customer like customer go through this, as I said earlier, there's quite a mix of what we're seeing, right? Some customers are still going strong, some are just right and some have more inventories than they should, and they're also seeing the demand soften, so they're trying to work through that.
So as we go forward, we definitely know that Q4 will be working through inventory that customers have, which is good. And I think that's what we want to see going into next year. I think what you'll see in next year is a pretty wide range of things that we mentioned earlier, right? We're going to see some customers that still need to run off some inventory and are seeing also demand softness overall. But we also see some customers presenting a lot of strength in consumer. And we also know we have those share gains in those sockets and applications.
So the confluence of those still gives us good confidence going into 2023 that we're going to be able to do better than wherever that space ends up being all instances. And John, go for that.
Yes, I would just add that in terms of calculations, we really have not seen that handful, but really it's more pushouts. I understand your point, Rajiv, but so far, we have not seen meaningful cancellations.
Yes, I appreciate that insight. And just for my follow-up on the gross margins. The gross margins, even though they've been trending down of kind of a high base, are still quite healthy relative to your long-term target, 60% for Q4 guide. If we're entering into a period where there could be volatility around the Home & Life business, I'm just curious, how are we thinking about gross margins as we trend into next year? And why have the margins been relatively healthy, given kind of the mismatch that you saw with price and cost? Is it a mix shift towards industrial commercial that's helped? Just curious on kind of the dynamics of margin in Q4, and then how should we be thinking about the margin trends next year at a high level? Thanks a lot guys.
Yes, sure, Raj. It's John. So we've performed well in this area this year. As we look at the guide for Q4, we're near the model indication of high 50s gross margin, given the current situation. And no real change to the overall messaging on gross margin. We continue to allow for some potential compression there over time due to the factors we've talked about previously on growth in standard-based technologies growth and certain volume customers, et cetera. But we're going to try it continue to outperform. And to the extent we do that, that's a win. So really no major change in our messaging more.
And our next question comes from Tore Svanberg from Stifel Nicholas. Please go ahead with your question.
Yes. Good morning. This is actually Jeremy calling for Tore. Maybe if I could ask firstly on -- is there a way to get a sense of maybe where your lead times are at, both in terms of what you may be quoting to your customers and also what you may be getting from your suppliers? And has that shifted in the last quarter or so?
Sure, absolutely. This is John. We've seen lead times come in a bit. We're running in the 26 to 52 weeks depending on the product. It's more averaging now about 26 weeks. So it has come in some. That said, that continues to be well in excess of where we have traditionally operated. In the past, we ran with roughly seven to eight weeks of lead time. I think those days are over. Going forward, we'll systemically have longer lead times, more likely in the roughly about a quarter worth of lead time. So we're still roughly about 2x our expected long-term lead time. They're not coming in a bit.
Great. Thank you. And turning to the design wins. I think you mentioned you're at 90% of your initial target and just about three quarters of the way through the year. Can you give us a little bit more color in terms of is there a way to quantify that opportunity, maybe potential pipeline or lifetime revenue or also maybe in comparison to the design wins you achieved last year, how does that compare?
Sure. Just a few points to help maybe frame it and give some context. So, we've seen honestly, just a remarkable progress on our demand win. We share that our opportunity funnel has grown to over $16 billion lifetime revenue, which is, I think 50% more than it was the same time last year, which is an amazing progress. But it doesn't matter if you have the opportunity unless you don't get the win business. So, the team has been hyper-focused on winning business in this supply constrained cycle. And it's not just the desire we had that product cycle that's incredibly strong, I mentioned, right? So, you have the strength of the product cycle, which gives our sales team the awesome and best combination you could hope for. They have strong products to go win business with. They have the ability and relationships that are improving in this cycle. It's the best combination you could hope for.
And maybe another way to think about it, everything to kind of quantify it for you, we set our targets to always win as much as you can. But at a minimum, you got to win at least as much to drive our model, which is the 20% compound annual growth rate revenue growth. So, it's always -- the floor on that is always that because we always want to grow that much or faster. So right now, we're trending well above that, which is a few things. We know that positions us really well for the future. And we know we're gaining share in these design wins.
So we fully recognize the uncertainty that's out there right now in the semiconductor space and the overall economy, but we do believe that whatever this ends up being, because of those share gains and that strong product cycle, we're going to gain share and outperform just like we have when things were strong, when things are uncertain, we think we're going to outperform there as well. So that's the best way I think I can find for the design win momentum, and hopefully, that answers your question.
It's very helpful. Thank you.
And with that, ladies and gentlemen, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Giovanni Pacelli for any closing remarks.
Yes. Thank you, Jamie, and thank you all for joining us this morning. This concludes today's call.
And with that, ladies and gentlemen, we'll conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.