Silicon Laboratories Inc (SLAB) 2017 Q2 法說會逐字稿

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to Silicon Labs' Second Quarter 2017 Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to Ms. Jalene Hoover.

Thank you, Sarah, and good morning, everyone. Thank you for taking the time to dial in. Tyson Tuttle, President and Chief Executive Officer; and John Hollister, Senior Vice President and Chief Financial Officer are on today's call. We will discuss our financial performance and review our business activities for the second quarter. After our prepared comments, we will take questions. Our earnings press release and the accompanying financial tables are available on the Investor Relations section of our website at www.silabs.com. This call is also being webcast, and a replay will be available for 4 weeks.

Our comments today will include forward-looking statements or projections that involve substantial risk and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and that information will likely change over time. By discussing our current perception of our markets, the future performance of Silicon Labs and our products with you today, we are not undertaking an obligation to provide updates in the future. There are a variety of factors that we may not accurately predict or control that could have a material adverse effect on our business, operating results and financial conditions. We encourage you to review our SEC filings, which identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements. In addition, it is not our intent that the non-GAAP financial measures discussed today replace the presentation of Silicon Labs' GAAP financial results. We are providing this information to enable investors to perform a more meaningful comparison of operating results and to more clearly highlight the results of core ongoing operations. I would now like to turn the call over to Silicon Labs' Chief Financial Officer, John Hollister.

Thanks, Jalene. I am pleased to report that we achieved $190 million of revenue for the second quarter, exceeding our guidance range and establishing a new all-time record. This result represents 9% year-on-year growth in total revenue and 12% year-on-year growth in product revenue, excluding $5 million in patent sale revenue, that we recognized in Q2 of last year. These strong second quarter results mark the fourth consecutive quarter of achieving model performance of greater than 10% in year-on-year product revenue growth.

Leading our strong second quarter performance, revenue from our IoT products increased $10 million during the quarter to $98 million, representing growth of 11% sequentially and 27% year-on-year. IoT's performance exceeded our expectations and was driven by higher sales of our market-leading 15.4 zigbee mesh networking products in the Connected Home, smart metering and connected lighting markets, as well as the broad-based IoT market. We also experienced growth in our Sub-GHz, Bluetooth and MCU products.

Infrastructure was $38 million in Q2, up 6% sequentially as expected. Total Infrastructure revenue was down from the same period in 2016, due to last year's $5 million patent sale. Excluding the patent sale, product revenue increased 7% year-on-year, led by continued strong adoption of our isolation products. We saw a roughly flat performance from timing in Q2, due to continued overall weakness in the long haul optical networking market, particularly in China, partially offset by strength in industrial and data center.

Second quarter Broadcast revenue was $37 million and Access ended at $17 million, both down 2% sequentially. Geographically, we saw a growth in all regions in the second quarter, with Europe continuing to lead with a double-digit year-on-year increase in sales.

By end market, we saw the strongest performance in Industrial, nearing half of our revenue. Due to record performance in both IoT and isolation during the quarter. We also saw increases in Automotive and Consumer, whereas the communications market was down sequentially in Q2.

Distribution revenue for Q2 increased to 71% of total revenue and no single customer accounted for greater than 10% of our sales. Our top 10 customers represented 21% of first-half revenues, down from 25% for 2016, reflecting an increasingly broad-base, customer base.

Non-GAAP gross margin ended above expectations at 59.7% on favorable product mix. Q2 non-GAAP operating expenses were flat to Q1, as expected, ending at around $74 million. Non-GAAP R&D expenses were $42 million and SG&A expenses were $33 million. Year-over-year, operating expenses were up only 2% versus a 12% increase in product revenue, which allowed us to deliver non-GAAP operating income of $39 million or 20.5% of sales, in line with our target operating model. Our second quarter non-GAAP effective tax rate was 11.9%, slightly above expectations, primarily due to higher taxable interest income.

During the quarter, we delivered strong non-GAAP earnings per share of $0.79, well above our guidance range, due to upside revenue and favorable gross margins. This compares to 75% -- $0.75 non-GAAP EPS realized in Q2 2016, but please recall that the 2016 patent sale items had an approximate $0.09 positive effect on last year's results, so apples-to-apples, we saw about a 20% increase in earnings year-on-year.

Our diluted share count in Q2 was 43.2 million shares, we continue to have $100 million in share repurchase authorization outstanding.

On a GAAP basis, second quarter gross margins were 59.5%. GAAP operating expenses were flat at $92 million and we generated GAAP operating profit of $21 million, or 11% of revenue. Stock compensation expense was $11 million for the quarter and amortization of intangible assets was $7 million, both in line with expectations. GAAP earnings ended the quarter at $0.38 per share, which was above the guidance range.

Turning now to the balance sheet, we ended the quarter with $667 million in cash and investments, up $40 million sequentially. For the 6-month year-to-date period, we generated strong operating cash flow of just over $80 million.

Accounts receivable ended at $75 million or 36 days sales outstanding. Our inventory balance grew $6 million sequentially, to $67 million, in anticipation of continued growth, and represents inventory turns of 4.6x, which is in line with our operating targets.

I will now cover guidance for the third quarter.

We expect revenue in the third quarter to be between $193 million and $199 million, with continuing growth in IoT. We also expect our Broadcast products to grow in Q3, due to typical consumer seasonality. We expect Infrastructure to be flat for the quarter, and Access to decline.

We expect our non-GAAP gross margin to be approximately 58.5%, based on product mix, and our non-GAAP operating expenses to be in the range of $74.5 million to $75 million. We expect our non-GAAP effective tax rate to be around 11% and non-GAAP earnings per share to be in the range of $0.78 to $0.84.

On a GAAP basis, we expect gross margin to be approximately 58.5%. We expect GAAP operating expenses to be in the range of $92.5 million to $93 million for the quarter, with stock compensation at $11 million and amortization of intangible assets at $7 million. We expect our GAAP effective tax rate to be 11% and GAAP EPS to be in the range of $0.35 to $0.41.

I will now turn the call over to Tyson.

Thank you, John. Our second quarter 2017 financial results, reflect outstanding year-on-year progress with 12% growth in product revenue.

In June, I was honored to give the keynote at the Design Automation Conference in Austin on the topic of "Accelerating the IoT". The Internet of Things is among the biggest opportunities of our lifetime. For the IoT to accelerate, devices need to be connected, networked and capable of evolving over time. By 2025, it is expected there will be as many as 70 billion connected devices, which will contribute up to $11 trillion to the world economy. This trend provides a multi-decade runaway of sustainable growth and opportunity for Silicon Labs, as we leverage the existing infrastructure of ubiquitous networks, connectivity protocols, cloud services and smartphones to deploy our Silicon, software and solutions across thousands of applications and tens of thousands of customers.

Adding connectivity and leveraging this infrastructure gives companies the opportunity to develop new business models and revenue streams around "old-school devices" like power tools, utility meters, garage door openers and light bulbs. These opportunities, including developing new service offerings, adding new features to products, upgrading functions and enhancing security.

Our IoT products are benefiting significantly from these trends, with second quarter IoT revenue achieving a major milestone, surpassing 50% of total revenue for the first time. Propelled by strength in our wireless products, in Q2, IoT delivered a sixth consecutive record revenue quarter, achieving 27% year-on-year growth, well above our 20% strategic growth target. During the quarter, we saw a particular strength in sales of our 15.4 zigbee mesh and proprietary wireless technologies into the industrial end market for use in home automation and security, lighting and other industrial applications.

Ecosystem providers, such as Google, Samsung, Amazon and Comcast are driving widespread adoption of applications in home automation and security. Our close relationships with many of these key players are driving demand for our solutions in end node and gateway devices.

As the IoT matures, mesh networks are playing an increasingly important role in providing greater range, reliability and battery life for end nodes. We are seeing growing deployment of our 15.4 mesh networking technology in Wi-Fi-enabled hubs, routers and gateways, which is a significant step to providing ubiquitous connectivity for low-power end node devices throughout the home. Lighting for example, offers an enormous opportunity for mesh networking with 2.5 billion light bulbs sold per year worldwide.

Silicon Labs is the leading supplier of silicon and software for mesh networking applications. We have more than 15 years of experience in developing standards-based solutions for customers and have shipped more than 100 million mesh networking SoCs and modules to date.

To help developers simplify the design of mesh network devices for the IoT and accelerate time-to-market, earlier this month we introduced a comprehensive suite of hardware and software to support the new Bluetooth mesh specification. Addressing smart homes, lighting, beacons and asset-tracking applications, our new Bluetooth mesh offering includes development in network analysis tools, a software stack and a mobile app. By expanding our mesh networking portfolio to the Bluetooth market, we offer a complete multi-protocol solution that gives customers the flexibility to use the right mesh technology for their application needs.

We expect to see a wave of new devices hit the market quickly, leveraging our common platform to create multi-protocol mesh networking applications which extend range and reliability and provide built-in smartphone connectivity. For example, a light bulb designed with our solution can support zigbee, Thread or Bluetooth mesh, all on a common hardware and software platform. We offer the most comprehensive multi-protocol portfolio including software stacks, SoCs in certified modules.

As applications become more complex, the need for higher performance, lower power and more feature-rich solutions increases. We continue to refresh our MCU product and just this week launched a new member of our energy friendly EFM32 Gecko portfolio, offering the most advanced capabilities and largest memory footprint in the low-power MCU market. Targeting smart metering, building automation, asset tracking and personal medical applications, Silicon Labs' latest Giant Gecko MCUs, combine very fast processing performance, extra-large memory options, a host of peripherals, hardware accelerators and comprehensive software tools, including our industry-leading, Micrium OS.

Also in Q2, we launched the CP2615, USB-to-I2S bridge chip, providing a simple turnkey solution for transferring digital audio data and offering plug-and-play USB connectivity. Our bridge device enables developers to focus on their end applications instead of firmware development and accelerates time-to-market for a wide range of power sensitive, space-constrained USB audio applications, including headphones, speakers, MP3 accessories and navigation systems.

In May, Somfy, a global leader in motorized window coverings for smart homes and buildings, honored Silicon Labs with their supplier innovation award. Our EFR32 wireless Gecko SoCs are used in a wide range of Somfy's products, enabling flexible control through a multi-protocol connectivity, including zigbee infrared for mesh networks as well proprietary protocols. Using Somfy's products, their customers can easily control their blinds and shades with a smartphone, integrating their window coverings into a connected living experience.

Now I'd like to move onto Infrastructure, which includes our timing and isolation products. Our isolation devices are among our fastest growing products, underscored by record Q2 design wins and achieving a tenth consecutive record revenue quarter. We continue to see broad-based adoption in systems requiring high voltage protection for electric and hybrid electric vehicles, solar inverters, motor control and power supplies. Digital isolation is becoming mainstream, offering higher performance and longer lifetimes than legacy opto coupler solutions. Silicon Labs' superior performance and robustness have allowed our isolation products to gain share and outgrow the market.

Despite macro softness in the first half of the year, increasing demand for network bandwidth and faster data rates continues to drive the need for higher performance timing products. During the quarter, we introduced a new family of high-performance crystal oscillators, providing industries lowest jitter and most frequency-flexible XO solution for a wide range of applications, including optical networking, hyperscale data centers and mobile fronthaul and backhaul networks. Silicon Labs' newest oscillators also provide the shortest lead times in the high-performance frequency control industry.

Five years ago, we accelerated our focus on the IoT through a combination of organic investment and strategic acquisitions. This quarter, IoT surpassed 50% of total revenue, driving target model performance in year-on-year product revenue growth, gross margin and operating income. Our strategy is coming together as we focus on core strategic growth drivers and capture share in target markets.

Thank you for your time and attention. Before we take your questions, I'd like to turn the call back to Jalene.

Thank you, Tyson. Before we open the call for the question-and-answer session, I would like to announce conferences that we will participate in during the third quarter, including KeyBanc Capital Markets 19th Annual Global Technology Leadership Forum in Vail, on August 7, and Citi's Global Technology Conference in New York on September 6. We would now like to open up the call for your questions. (Operator Instructions)

(Operator Instructions) Your first question comes from the line of John Vinh from KeyBanc Capital Markets.

John, a question for you on the guidance for Infrastructure, you guided flat. So, it seems like the metro long-haul correction is still kind of weighing on your outlook. Can you just confirm that your outlook does assume that, that's still going to remain in Q3? And do you currently have any sort of visibility in terms of when things start to stabilize and when we get past this correction? And I assume isolation continues to grow in Q3 as part of your assumptions there?

Yes, John, so we haven't broken that out, but as far as the split, but it's fair to assess some continued pressure due to macro factors in the optical space, we'll see how long that plays out. If history is a guide to us, we would expect that to be a relatively short-term phenomenon and we see over time strong growth drivers in the space, not only in optical but also in wireless, as well as in the data center and in industrial applications. But the first part of your assessment is accurate, that there is some continuing headwinds related to macro softness in that market.

Great. And Tyson, a follow up question for you, you talked about obviously being a clear leader within kind of mesh networking. Can you just update us with your current thoughts on Thread and how that plays out and starts to ramp? Do you think that Thread ultimately becomes a replacement for zigbee? And is there an opportunity for you to increase your footprint and content their relative to zigbee due to the higher complexity and also to potentially increase your market share there in mesh?

We're seeing strong adoption of our zigbee products, in particularly into a variety of markets, including home automation and security and the multi-protocol capability of our platform, which allows customers to use zigbee, Thread and Bluetooth, sometimes in a simultaneous fashion, where you can have smartphone connectivity as well as being connected to the mesh network is a very attractive feature. If you look at the migration of the standards from zigbee to Thread, there are number of advantages of Thread, including IP-based connectivity, enhanced security and a number of other factors there, in terms of the application layers and the porting of the zigbee application layer on top of Thread, it makes the migration of applications from zigbee to Thread seamless as essentially an over-the-air update. So, any end-node device that is designed with our solutions using zigbee can support Thread over time. As that market matures, we've started to see the deployment of border routers and gateways, for instance Eero just announced a Wi-Fi enabled mesh, a Wi-Fi system that also includes the Thread protocol and it's our view that a number of end-node devices will be appearing in the market as we move forward, supporting the Thread protocol. I would also note that it's possible to have devices talk to both, the Thread and the zigbee network, using over solutions. And so, we're working on a number of multi-protocol solutions that would be able to support both the zigbee and Thread to facilitate that migration.

Your next question comes from the line of Blayne Curtis from Barclays.

Just curious that what the drivers were for gross margin out-performance in June, when we look at September, it comes down, obviously mix has something to do with it, but seems like even if you filter through the mix of IoT, it seems like there are some other drivers, can you just talk me through that?

Sure, Blayne. Now we were pleased with the gross margin performance in the second quarter. That really is related to mix, we saw strong results from our mesh networking ICs, we also saw strength in automotive and industrial applications, good quarter in isolation. So, we just overall had favorable trends in Q2. Looking ahead to Q3, we see high consumer mix in Q3, that's mostly in Broadcast, due to the typical seasonality of that business. As you know, that comes at a somewhat lower gross margin. We also have some consumer content within the IoT category as well, which has a bit of seasonality. And furthermore, we had -- continue to see less results from the optical networking space, then we had envisioned at the beginning of this year, which is impacting gross margins a bit. And finally, I would point to, within IoT, we're starting to see some additional larger deployments, with larger customers, which come at a bit lower gross margin as well, so it's kind of a combination of factors, but primarily around those topics.

Got you, and then just back on the Infrastructure buggy, I just want to understand the moving pieces there. It was up $2 million; I think you mentioned the timing was flat, but also was the com was down, so I was just kind of trying to understand what the offsetting factor there was in timing and then that would mean that isolation was up quite a good amount, just if you could talk about what drove that?

Yes, you got it. Both the growth and Infrastructure was from the isolation products. And the end markets difference that you pointed to, there is an industrial component of timing that performs better in the second quarter than the communications portions of timing. But your read of it is right.

Your next question comes from the line of Tore Svanberg from Stifel.

The next question comes from the line of Cody Acree from Drexel Hamilton.

Tyson, list as a strong performance and guide, not willing to guide too much for Q4 but it's looking increasingly likely that you might be able to make your double-digit growth target for the year, I guess just any color on what kind of level of visibility you have for the next quarters?

Yes, Cody, we've got quite strong traction in the IoT market, we saw a very good year-on-year performance there and strong and we're guiding that up here in Q3 with strong design win activity and a lot of customer activity going there. We also are seeing strong Broadcast consumer coming into [Q3] (corrected by company after the call), with the typical consumer seasonality, that being the seasonal peak. Looking out into Q4, we don't have perfect visibility into that, currently our view is that on the Infrastructure side, we'll continue to see modest growth out of the isolation products. But the timing products, in terms of the macro softness that we've seen in the optical market, really driven by China, that's partially offset by some of these other factors. But depending on how that plays out in the fourth quarter, we could see some strength coming into the fourth quarter both from IoT and Infrastructure but we'll have to see how that plays out. But if you look at the guide and the performance in the first half, it looks like we could very well be on track for a 10% growth this year.

Great. And then just being fabless and seeing pretty good strength across the industry, starting to see some indications of constraints and spot constraints here and there, and some lead times already fixed in, I guess. Are you having any supply constraints with your foundries or for any kind of adjacent parts that are starting to cause any concerns and then how are your delivery lead times run?

Yes, Cody, this is John. So, short answer is no. We have ample capacity at the fabs, where we operate and we represent a very small portion of their total capacity even today, so, we feel good about that. That said, we are continuing to operate with a reasonable amount of inventory and did accumulate a little bit of inventory before the end of Q2, so we're positioned for growth and I think we have plenty of inventory and available capacity of the fab partners.

Your next question comes from the line of Anil Doradla from William Blair.

So Tyson, one question, if I look at the composition of the $98 million from IoT, can you give us a sense of how much of it is driven by standalones, say MCUs, versus integrated Wireless plus MCU?

So we do not specifically breakout the micro-controller versus wireless components. We did talk last quarter and actually have, for some time, where the wireless piece of the revenue is now substantially larger than the microcontroller. We were seeing growth year-on-year in microcontrollers, we saw growth in Q2 in microcontrollers, but that is a lower level of growth than the wireless. So, wireless, this year, is driving growth on the order of 40% year-on-year. so the growth in the IoT area is really being driven by wireless. Within wireless, you have a combination of transceivers, which essentially do not contain a microcontroller, SoCs, which contain a microcontroller and then modules which contain an SoC. So, there's a mix of those, we've been seeing the strongest growth in the SoCs as well as good performance out of our 15.4 modules and Bluetooth modules, in particular. And so, those -- the integrated portion of the wireless continues to grow, but we still have a healthy business in the proprietary area, where we're selling transceivers, but the predominance of the wireless revenue now is based on our SoC platform.

Very good, and if I dig a little bit deeper on the wireless, clearly mesh is turning out to be a huge success. Now is there a way for you to qualitatively give us a sense of the breakdown between mesh applications and non mesh applications?

The proprietary area is one that we've been in for over a decade and we've built a substantial business there, the 15.4 mesh is now of a comparable size, actually somewhat larger than the proprietary area. And we also are seeing good traction in the Bluetooth area. But if so -- if you rank them, the 15.4 mesh is top, then proprietary, and then Bluetooth, with substantial growth across all 3 of those areas.

Good, and if you don't mind me speaking one final thing Tyson, the success of the mesh application, did that surprise you? Or, was that something that you guys expected all along?

Well, we're pleased to see the adoption of mesh technology in the Wi-Fi enabled routers, in gateways and see the deployment of those, even within set-top boxes. So, the mesh networking technologies based on 15.4 are starting to see wide-spread deployment now. This is something that we -- when we acquired Ember back in 2012, we believed that there was a need for a separate network away from Bluetooth and Wi-Fi, that would enable low-power devices, which are lower duty cycle, smaller data rate, but that's really what you need to connect a wide range of these IoT devices, we saw a need for that and now we're seeing the market respond to that need as these networks and devices get deployed. And so, I would say that we anticipated this and we've been working diligently to get that capability integrated with Bluetooth and other wireless technologies in a way that it's highly flexible and we think that mesh is an important part of the rollout of IoT as we're moving forward.

Your next question comes from the line of Tore Svanberg from Stifel.

Yes, can you hear me now?

Yes.

All right. So, congratulations on the record revenue. First question for you, Tyson, with the Bluetooth sig announcing the mesh networking capability last week, does that mean you'll start to see a meaningful amount of designs now? Or is there still going to be a process for ratification before customers actually move ahead?

The Bluetooth mesh standard has now been released and we also simultaneously released our Bluetooth mesh protocol stack as well as the network analysis tools and the -- an application, which supports that capability on smartphones. So, you can actually design a product and an application today using our stack and the new Bluetooth mesh protocols. And that is supported on our multi-protocol SoCs as they exist, so this is a firmware upgrade, based on existing products. You can also run a 15.4 zigbee or Thread protocol stack on that same device. So, it's our view that people that have our SoCs designed and end node devices can very rapidly, enable those with Bluetooth functionality and get those out of the market fairly quickly.

Very good, and that's my follow-up, could you just elaborate a little bit more on what you said about your bridge products. I mean, I do assume that these are bridge products for IoT, they're probably more interface-related but I'm just trying to understand if you're being selective in that market or you actually going after a whole host of different applications?

Well, we have quite an extensive portfolio of what are essentially fixed-function microcontroller products, and so the one that we announced recently, is targeted at audio applications and it connects from USB to a digital audio format. That is one of a suite of products that we've had a long-term strategy around USB and have a substantial business in USB, both in terms of adding USB function to microcontrollers. So, we offer a number of microcontrollers with USB, but also those fixed-function devices. So, that's part of an overall strategy within our microcontroller group to address a wired connectivity with USB and there's a lot of different applications that USB is used for, so this was an example of one of those.

Your next question comes from the line of (inaudible)

Tyson and John, congratulations on hitting, not only IoT at 50% of sales but in the same quarter, hitting the target operating margin model. So, great execution there. Tyson, I wanted to follow-up on the comments, regarding participation in gateway products within IoT, can you help us understand a little bit more the breadth of your customer penetration and in a degree to which gateway, as an application group, can be material to segment sales, either this year as you look out over the next 12 to 24 months?

So the trend of integrating 15.4 mesh networking capability in gateways, routers and other Wi-Fi connected devices is a significant trend. It's -- from our view, while it's an interesting revenue opportunity to both get our software and our mesh networking ICs into these devices, the more significant aspect of this is all of the devices that are going to connect to those devices. And so, we are working with the gateway providers, across fairly a large number of folks we're working with the Wi-Fi gateway chipset providers to look at interoperability and make sure that the performance of both the Wi-Fi and the 15.4 is adequate and performs correctly, in terms of being able to back off so that you can talk to both networks seamlessly. But again, the significant thing is that this really expands the number of end-to-node devices that can connect to these gateways supporting both Wi-Fi connected devices as well as the 15.4 Thread and zigbee and even Bluetooth devices into those networks and then all of the interoperability in the way that all those devices talk to one another. I think it's a significant trend beyond just the revenue -- near-term revenue opportunity for us in the gateway but really driving multiple tens or greater number of end node devices that will connect to those gateways over time.

That's very helpful. And then I'll follow it up with a longer-term question, at Analyst Day, the company outlined the goal of $1 billion in sales in 2020 and certainly we've seen a strong quarter and at mid-year we're tracking well towards 10% growth this year. The question is, with the timing business in softness in one key end market, are you still confident that $1 billion in sales is possible or any discomfort, given some of that intermediate-term end market weakness in (inaudible) product groups?

So if you take our growth model and apply that to the profile of our business today, our fastest growing business is IoT and it's over 50%. It's -- in the last quarter, grew 27%. So, I think that if you apply that model to the revenue profile that we have today, the result will get you over $1 billion in 2020. I just want to -- I want to take this opportunity to really talk about, where we've been putting our R&D and we have put a large fraction of our R&D into IoT, where we're able to provide the silicon, the software and really provide the SoC into these devices and we view that as a long-term growth path, it's a very, very large market and it provides a long runway for us to be able to grow. That $1 billion mark is just a milestone in what I think can be growing a large business. I think combined with that, we have also been investing in our power products, in the isolation products and we see a lot of trends in terms of the electrification of vehicles of motor controls, of high-efficiency power supplies, of green energy applications. And that again, is a trend that has been driving our isolation products and I think is a long-term trend that we can capitalize on in our isolation products, within our Infrastructure group. And if you look at that 10% growth target that we have there, I think that, that is sustainable, especially if you look at -- we have a short-term softness in the optical market, but the trends of driving data growth across wireless, across data centers and the connection of all those together, that trend is not going to stop and our timing products fit into these. And while we may have a little bit of softness right now in terms of the CapEx and the rollout, that rollout of 5G is going to provide a great opportunity for us. So, I feel confident in our strategy across the bandwidth applications, the green energy applications in IoT. And with those now over 2/3, over 70% of our revenue, coming from those areas I think it positions us well to continue to grow into the future.

Your next question comes from the line of Harsh Kumar from Stephens.

One quick question. As Tyson, as you look out longer-term, now you're doing more than 50% from IoT. So, let's just assume that, that continues to grow and gets bigger and bigger, what is the margin profile that is possible, let's just say, a few years down you're doing 70%, 80%, 90% in IoT and some other from Infrastructure, what can we look at from a margin angle?

I think if you look overall at the company, we are comfortable with our operating model. The board, the management team, are all looking at that and saying that, that is the right operating model for the company and are committed to maintaining that as -- going forward. So, the goal within that model is to grow as fast as possible. And certainly, we've got a great opportunity within IoT and continue to be aggressive about gaining share. Our goal is to be the #1 provider of silicon software and solutions for the IoT market, focused on end node devices. And so, it's really a matter of optimizing growth and optimizing the margin within that target operating model. There is a mix, we have certain aspects of the IoT that are above that range. There are -- we've talked about modules being below the range, some of the high-volume applications that are starting to emerge are coming at a little bit below that target operating model but again you have a mix of timing, you have a mix of isolation and higher-value of IoT devices that mix within there. So, while we'll have seasonal variations and we'll try to keep those within that range, we believe that, that target operating model for the overall company is something that is sustainable going forward.

Understood. And for my follow-up, I was wondering you talked about long-term growth, so maybe from that angle, in the past Silicon Labs has done technology acquisitions, do you feel at this point in time, based on what you see today, of course, things change, but based on what you see today did you have all the parts and features to be able to sustain in a high growth for some time?

We believe that we have all of the pieces necessary today to continue to thrive within the IoT market. We have the SoC technology, we have -- we are developing our own protocol stacks, we have our own development tools and we continue to expand that portfolio and evolve it over time. That being said, we did raise $400 million back in March in a convertible bond offering and have a cash balance of $667 million at the end of Q2 and continue to be active in looking for attractive businesses to bolt onto, both our IoT products, so that is -- that's been the main focus of our M&A activity here over the last 5 years but also looking within the Infrastructure area as well. And we see that there are opportunities to deploy that capital. Nothing to report at this time but I think that, that is an important part of our growth strategy going forward.

Your next question comes from the line of Matt Ramsay from Canaccord Genuity.

Tyson, it's hard to ignore the strength in isolation over the last few quarters and it's a pretty broad space to buy into, but I wonder if you might explain a little bit on the opportunity in the electrical vehicle market, I know there's one customer that's pretty prominent that you guys have talked a little bit about publicly, but from some work that we've done, I think the engagements in that market are a bit broader across the industry than some might realize and I just wonder what's the potential for that businesses overtime in a competitive landscape in [this space]?

Specifically around the EV opportunity, we have a large number of engagements in that, we've logged in a number of design-ins across battery management systems, motor controls and chargers for electric vehicles and our isolation products are uniquely appropriate for these types of applications, the robustness that you're able to achieve, the integration levels you're able to achieve, make them ideal for electric vehicle applications. And as we see the ramp of electric vehicles across the world, as we transition from carbon-based fuels into hybrid electric and electric vehicles, I think that, that is a good growth driver for isolation. I would kind of reiterate, our isolation products, it's one of our broadest product lines, it spans across -- electric vehicles is one area but the efficiency of power supplies, especially in applications like data centers, motor controls for a lot of industrial applications, where you're trying to improve efficiency and flexibility of the motors and in the green energy applications, like solar inverters and other ways of converting from AC to DC and various types of energy, these types of products are very attractive and if you look at the robustness of our solutions and the integration that we're able to achieve with our architecture, it's a very promising area for us. We just logged our tenth consecutive revenue growth quarter and we don't really see any end in sight in terms of the opportunity for isolation products.

And then as a follow-up, I don't know if it's for Tyson or for you, John. You talked about, and I think Tyson expanded on it a little bit in the previous answers that the comfort around the operating margins range that you gave at the Analyst Day and I think that gets up into the mid-20s, as the company grows here but if you, I guess, juxtapose the revenue growth and the potential for that to accelerate a bit with mix again, 3% OPEX growth or there about this year. You can get operating margins above that range, so maybe you could talk us through the balance there. What would be the incremental investments be to keep us within the range? And why not confident that the margins will move a bit above that over time?

Sure thing, Matt. Yes, we are pleased with the operating margin performance thus far this year and we are committed to operating toward the -- within the target operating margin range. Within that, we have to balance the opportunity to grow this business with delivering profitably. And we see, really an enormous opportunity in IoT in particular, with an opportunity pipeline that continues to grow and expand and we need to continue to feed that success and allow that to come fully to fruition. So, we'll be looking at this carefully this fall as we work through the annual operating plan cycle. I think that most likely in January, we'll have better visibility to provide some better indications on the 2018 operating expense growth rates. But we are committed to operating in the model but at the same time, we do need to continue to grow this business and there are some areas of additional investment that we see that could accelerate our growth. So, those were all the things we'll be looking at more closely this fall.

We can take a couple of more questions. (Operator Instructions) Your next question comes from the line Rajvindra Gill from Needham & Company.

The RF integration in the IoT market has been a material competitive advantage, and I don't think it should be overlooked. I was wondering if you could maybe highlight that competitive advantage in your ability to gain share against microcontroller suppliers, the traditional microcontroller suppliers on one hand, and then the RF suppliers on the other hand, your ability to develop an RF SoC, having it being multi protocol, maybe you can talk a little bit about that.

Silicon Labs has a long history of RF integration and standard CMOS process technology. Back at the founding of the company, over 20 years ago, our first product was to integrate the RF front end for a mobile phone. And we're one of the pioneers in that area, but then moved, after we sold our cellular business in 2007 really redeployed that into multiple areas, which include our timing products, our Broadcast products and now the IoT SoCs, the integration essentially of microcontrollers and RF capability and into a single chip. And so, I think that our capabilities in that area are leading the industry. If you look across our product portfolio, over 2/3 of our products contain some form of RF in CMOS. If you look at -- that is a different history than a lot of the microcontroller vendors, where the integration of this RF circuitry with the microcontroller and digital functionality is difficult to achieve at the right level of performance and so we think that, that is a competitive advantage. But I -- as we've gotten into the RF SoCs, it's also the protocol stacks, that the understanding of networking technology of mesh networking and of how devices talk to one another, it's the development tools. And then when you're really talking about IoT, it's how to spread that across a large number of customers and applications. And that is the microcontroller model. So, if -- you really have to put all of those pieces together, so the RF vendors, I think don't have the digital integration, they don't necessarily have strong software capabilities, the microcontroller vendors don't necessarily have the RF capability or the communications expertise to put that together. And then when you start talking about multi-protocol and the expertise required to get that out into those different applications, we think that we have a unique position. We don't have any illusion that we're the only ones in the industry that are capable of this. But I think we've been looking at this, over an extended period of time have built the platform, built the infrastructure to really leverage this opportunity and are -- have a chance to lead the industry in the deployment of this technology going forward. So, I think competitively we're well positioned versus both the MCU and the RF providers but nobody's standing still and we're pushing forward as hard as we can.

That's great. And last question. So, you're seeing a lot of growth within IoT from wireless, your wireless portfolio of mesh networking, BLE and Sub-GHz products, what is your plan then to integrate low-power Wi-Fi to round out the portfolio?

Yes, we've been talking about Wi-Fi as an important technology for a number of years, we've actually been working on our own internal development for Wi-Fi over that period of time, doing a number of software developments. We did an acquisition of Zentri, back in January, which brought in the software capabilities as well as cloud and device management capabilities. But -- so we have developed that, actually, earlier this quarter, we taped-out our first Wi-Fi low-power device and we'll be rolling that out into the market. We also sell Wi-Fi enabled modules today with third-party silicon but we look at, as we have all of our IoT SoCs into the next generation platform, that we are essentially, organically, adding Wi-Fi capability to that platform. If you look back a couple of years, this was really a make versus buy solution and we really felt like to be able to offer a true low-power, high-performance solution that is really meeting the requirements of the IoT end nodes that we really had to do this the right play. So we're well on our way towards building Wi-Fi capability optimized for end nodes into our next-generation platform.

Our last question will be from the Suji Desilva from Roth Capital.

Congratulations on the IoT progress here. So a question on the Infrastructure side, the Telco, I understand, has macro, we sense weakness the next quarter or so but can you talk about what the non-Telco data center is in the mix and whether -- and the design win mix and whether -- if that non-Telco portion of timing can be material and help the business in '18 or whether it's still going to be Telco-dominated?

Yes, Suji. This is John. So, the business does still have the majority of the revenue from the Telco part of the market, we do have data center and industrial within that but those are relatively small portions. It does help to offset the Telco concentration a bit but the predominant factor continues to be Telco and while we envision continuing progress in data center and industrial next year, we think Telco will continue to be the majority of the revenue.

Okay, that clarification helps. And also, just a follow up on something you said earlier on the gross margin commentary, you said one of the drivers that being slightly slower next quarter, is some larger customers ramping in IoT, I was curious what sub segment those larger customer ramps are in? Is it smart home, or some other area or mix of areas?

On the IoT side, we've got ramps in multiple application areas. Lighting is an exciting new area for us. If you look at -- there is 2.5 billion light bulbs sold globally per year, and so this is a high-volume application and there is a lot of elasticity in that market and integration required. We see that there is a favorable integration path there of both the IoT, SoC and specific functionality for lighting that can be interesting over time. But that is an example of one of the areas. We also have a number of consumer ramps for consumer type IoT applications that are also ramping in Q3 and are factored there as well.

Thank you, I would now like to hand the call back over to Jalene Hoover.

Thank you, Sarah, and thank you all for joining us this morning. This concludes today's call.

Thank you for your participation. You may now disconnect.