Silicon Laboratories Inc (SLAB) 2018 Q4 法說會逐字稿

Good morning. My name is Anita, and I will be your conference operator today. At this time, I would like to welcome everyone to Silicon Labs Fourth Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jalene Hoover, Director of Investor Relations and International Finance. Jalene, please go ahead.

Thank you, Anita, and good morning, everyone. Tyson Tuttle, Chief Executive Officer; and John Hollister, Chief Financial Officer, are on today's call.

We will discuss our financial performance and review our business activities

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After our prepared comments, we will take questions.

Our earnings press release and the accompanying financial tables are available in 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 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 obligations 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'll 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 also in the Investor Relations section of our -- of Silicon Labs' website.

I would now like to turn the call over to Silicon Labs' Chief Financial Officer, John Hollister.

Thanks, Jalene. Revenue for the fourth quarter ended at approximately $216 million, $5 million less than the low end of our guidance and down 6% sequentially.

We saw a deceleration in revenue as we exited Q4 with broad market weakness, primarily impacting IoT and infrastructure. For the full year, we grew revenue by a $100 million or 13%, ending at $868 million with $63 million derived from our organic portfolio and $37 million from the addition of Z-Wave.

IoT ended the quarter at $119 million, down 5% sequentially, and up 9% Q4 year-on-year. Fourth quarter Wireless revenue was roughly flat sequentially. Q4 MCU revenue was down due to a weakening macro environment.

Revenue from Infrastructure products was down, ending at $46 million, declining 13% sequentially and up 18% Q4 year-on-year. Isolation product sales declined more than we expected on industrial weakness, particularly in China. Timing revenue was down slightly.

Fourth quarter Broadcast revenue was slightly better than we expected, ending at $35 million, down 3% both sequentially and year-on-year.

Q4 automotive revenue was down, while consumer revenue was up sequentially.

In 2018, we increased our global market share in flat-panel TVs to more than 80% with our industry-leading TV Tuners. Access product sales declined for the quarter, ending at $15 million, down about 7% sequentially and 8% Q4 year-on-year.

Looking at fourth quarter revenue by end market. We saw broad sequential declines in the industrial, communications and automotive segments. The consumer end market was up for the quarter on strength in Broadcast. Looking at full year 2018, we saw the greatest strength in the industrial end market, which grew over 20%. The communications and automotive end markets were also up for the year.

Geographically, we saw the greatest weakness in fourth quarter sequential revenue performance in the Americas led by declines in Wireless, Automotive, Isolation and Access. APAC was down slightly with declines in broad-based MCUs and isolation products offset some by growth and access. Europe was up slightly for the quarter on strength in Wireless. Looking at full year 2018, we saw a growth in all geographies, led by the Americas and followed by APAC.

Distribution revenue was 69% of the total Q4 revenue. For 2018, at our 10 largest end customers accounted for 20% of our revenues and no customer represented more than 5%.

Non-GAAP gross margin for the quarter ended slightly better than we expected at 60.6% on products mix.

Q4 non-GAAP OpEx ended at $88 million in line with expectations. Non-GAAP R&D expense for the quarter was $49 million, up slightly on seasonal fringe and new product costs and non-GAAP SG&A ended at $39 million, flat to Q3.

Non-GAAP operating margin for the quarter ended at 19.6%. For the full year, non-GAAP operating margin improved 70 basis points over 2017, ending at 21.2%.

Our non-GAAP effective tax rate was 6.4% for the quarter, driven primarily by lower taxes on our offshore earnings and a benefit from the annual U.S. R&D tax credit.

Non-GAAP EPS ended at $0.91, at the low end of our guidance range, primarily due to lower fourth quarter revenue. Non-GAAP earnings for the full year improved to $3.71, up 14% versus 2017.

On a GAAP basis, our Q4 gross margins ended at 60.4%. GAAP operating expenses were $112 million, in line with expectations with R&D expenses at $63 million and SG&A expenses at $49 million.

Stock compensation expense was $13 million for the quarter with amortization of intangible assets ending at $11 million, both in line with expectations.

We had a $2 million or 15.6% GAAP effective tax benefit in the quarter and GAAP diluted earnings per share were $0.35. Full year 2018 GAAP earnings ended at $1.90.

Turning now to the balance sheet. We ended the year with $620 million in cash and investments. Accounts receivable were down for the quarter, ending at $73 million or 31 days' sales outstanding. Our operations team leveraged our scalable, fab-less manufacturing model and effectively managed inventory, which declined to $75 million or 4.6 turns, in line with our corporate objectives.

Operating cash flow for the year was $174 million. We executed additional share repurchases in Q4, bringing the 2018 year-to-date total to $39 million. Heading into 2019, we have approximately $160 million of our share repurchase authorization remaining.

I will now cover guidance for the first quarter. In light of macro uncertainty and volatility, we are broadening our guidance range and expect first quarter revenue to be between $183 million to $193 million.

We expect our non-GAAP gross margin to be 60%. In response to the anticipated decline in first quarter revenue, we are slowing OpEx growth and expect Q1 non-GAAP operating expenses to be approximately $90 million. Our non-GAAP effective tax rate for the first quarter is expected to be 13%, and we expect non-GAAP earnings per share to be in the range of $0.42 to $0.52.

On a GAAP basis, we expect gross margin to be 60%. We expect GAAP operating expenses to be $114 million.

In Q1, we expect a GAAP effective tax rate of approximately 10%, with a GAAP loss per share between $0.11 and $0.01.

I will now turn the call over to Tyson

Thank you, John. We are proud of our performance in 2018, which was a strong year for Silicon Labs in many dimensions. We completed the successful acquisition of Z-Wave and grew our revenue by $100 million. We strengthened our team with additional -- addition of critical leadership sales, applications, customer support and software expertise. Silicon Labs' innovative culture attracts outstanding talent who are foundational to our success.

In 2018, our opportunity pipeline achieved record growth, up more than 40% to $11 billion in lifetime revenue. We also achieved record design wins, which increased approximately 30% year-on-year, providing a strong tailwind for future growth and a validation of our strategy.

Fourth quarter results were weaker than we expected, and our first quarter outlook is down sharply with the broad-based slowdown in our bookings and revenue outlook. We attribute these shortfalls primarily to the macro environment and not to share loss. Economic conditions are decelerating in major markets around the world, which is causing an acceleration of the semiconductor industry down cycle.

In Q4, for example, we saw sequential declines in our MCU and isolation products, which are among our broadest product lines and most strongly correlated to overall economic conditions. China, in particular, is facing a difficult environment, with a slowdown in overall GDP performance and factory activity, combined with customers moving production to other geographies due to concerns over tariffs.

We've also seen an accumulation of inventory at certain of our key end customers. As we enter 2019, we are closely monitoring the macro environment and managing headcount growth and discretionary expenditures to drive an OpEx level that is lower than initially contemplated.

Turning now to product updates. Infrastructure delivered a phenomenal 2018 with revenue growing by more than 30% and design win lifetime revenue up approximately 50%. Isolation product revenue grew more than 40% annually and Timing products grew 25% over the same period.

Silicon Labs' digital isolation products continued to replace traditional optocouplers, enabling higher performance, reliability, integration and best-in-class safety for designs requiring protection from high voltages.

In 2018, we saw strength across a broad range of applications, including power supplies, solar, industrial and automotive. We've established ourselves as a leading provider of digital isolation technology to the cloud, telecom and electric vehicle markets.

Traditionally, our timing products have targeted the core optical networking market. During 2018, we expanded and diversified our timing revenue into industrial, data center and wireless infrastructure markets, which combined now represents approximately 40% of overall timing revenue.

IoT products grew 17% in 2018 to more than $460 million, including $37 million from our acquisition of Z-Wave in Q2. Wireless products now make up more than 60% of total IoT revenue and delivered nearly 30% year-on-year growth. We saw a modest annual growth in our MCU and sensor products.

Despite delayed product ramps in 2018 with high-volume lighting customers, the transition from SMETS 1 to SMETS 2 in the U.K. smart metering market and macro factors, we remain confident in our design win pipeline and market position.

For full year 2018, we saw approximately 50% growth in our IoT opportunity funnel to $8 billion. And nearly 30% growth in IoT design win lifetime revenue. We continue to strengthen our portfolio, driving capabilities and differentiation while advancing security and growing ecosystem partnerships.

Our connectivity portfolio is gaining significant traction as we target low-power wireless end nodes with a broad range of protocols and optimal combinations for target market segments in smart home industrial, metering, commercial, consumer and lighting.

In Q4, we launched the next-generation Z-Wave 700 on our Wireless Gecko platform, delivering on our vision and platform integration roadmap and enhancing our product offering to the Z-Wave ecosystem. Our new smart home platform builds on Z-Wave's industry-leading S2 security and interoperability, improving battery life and adding higher performance in longer-range RF capabilities.

ITC estimates the worldwide smart home market will grow at an approximate 20% compound annual growth rate from 2017 to 2022 as the market balloons to $1.3 billion devices shipped annually, with much of that adoption and growth driven by sensors enabling AI and edge computing applications. Advances in wireless technology, such as Z-Wave 700, are driving the battery-powered sensor trend and making these devices easier to install and deploy.

Silicon Labs is well positioned to consolidate the smart home experience and drive IoT adoption in this market.

Earlier this week, we announced the release of new Bluetooth 5.1 software for our Wireless Gecko platform, further expanding the capabilities of our portfolio. Silicon Labs' new solution moves beyond point-to-point connectivity, to include advanced angle of arrival and angle of departure technology for more precise indoor positioning and location services used in a wide range of applications, including factory automation, retail and smart cities.

During the quarter, we announced the expansion of our groundbreaking Wi-Fi portfolio, featuring modules and transceivers, designed specifically for the IoT. We offer the lowest power of Wi-Fi devices on the planet, enabling IoT end-node designs that weren't possible until now.

Developers can create products with best-in-class power efficiency, superior interference rejection, wireless coexistence and advanced security. The portfolio cuts power consumption in half compared to competitive offerings, providing an ideal Wi-Fi solution for power-sensitive connected products, including battery-operated IP security cameras, point-of-sale scanners, asset trackers and personal medical devices.

Earlier this month at CES in Las Vegas, we saw a growing momentum in the IoT and a lot of customer excitement about our solutions. At CES, we announced that Xiaomi, a leading IoT ecosystem provider in China, launched new smart lighting products based on Silicon Labs' Wireless Gecko SoCs and Bluetooth mesh software. We are seeing increasing deployment of Bluetooth mesh in China's fast growing smart home market. And Xiaomi is poised to ship mesh-enabled smart home products at scale, driving further adoption of this versatile, ubiquitous wireless technology.

Also at CES, Tuya, a leading AI and IoT platform provider in China, announced they are using Silicon Labs' Wireless Gecko platform, including as SoCs, ZigBee and Bluetooth software, to enable their smart multiprotocol products to easily connect to multi-node mesh networks deployed in smart homes.

Tuya's production-ready smart solutions address the real world needs of IoT manufacturers, supply chains, e-commerce channels and retailers worldwide, and we are playing a role in their success.

I am delighted to announce Christy Wyatt's appointment to our Board of Directors. As a thought leader in the cybersecurity industry, Christy brings extensive experience, developing and scaling technology companies. She is currently CEO of Absolute Software Corporation, which specializes in self-healing, end-point security technology. With more than 2 decades of leadership experience, including Citigroup, Motorola Mobility, Apple and Palm, Christy's skills and expertise will be invaluable to Silicon Labs as we chart our course into the future.

In 2018, we capped off an outstanding year by winning, for the fourth year in a row, the Global Semiconductor Alliance's Most Respected Public Semiconductor Company Award. It's a great honor to be chosen by our industry peers based on best products, vision and future opportunities.

Despite current volatility, we remain confident about our longer-term ability to outperform the market. We are focused on executing on our product roadmaps and converting a large pipeline of opportunities into additional wins and share gains. The technologies we are developing are enabling our customers to transform industries and improve lives, and together, we are creating a smarter more connected world.

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. We would now like to open the call up for your questions. To accommodate as many people as possible before the market opens we ask that you please limit your questions to one, with one follow-up. Anita?

(Operator Instructions) The first question today comes from Max Ramsey (sic) [Matt Ramsey] with Cowen.

Tyson, obviously, it's a tough and bit cloudy macro environment. But maybe you could give us a little bit more color in terms of end market weakness into the first quarter, if there's any differentiation across the end markets in the IoT business? And then, second, to what extent do you feel like the outlook you've given for the first quarter is reflecting just -- maybe inventory being taking down at some of the channel partners and distys versus the organic sort of slower growth that we're seeing in the end markets? Any context there will be helpful.

Yes. So let me take the first part and, I'll let John talk about the second part. In terms of end market weakness, if we talk about IoT, we've had continuing weakness in the U.K. smart metering market, which we expect to recover in 2019. And we also have had some weakness in the lighting market, which has continued and some excess inventory there. But again, we believe that, that will be ramping as we move throughout the year. So those 2 did contribute to the Q4 results and continued into Q1 -- or are continuing into Q1.

If you look at really the MCU business and our Isolation business are both very broad in terms of the applications and customer base. And both of those were impacted by the macro, and just down overall and particularly in China. And so, I think that we've seen a number of customer pushouts and inventory situations in the China market, in particular. And so that was -- that's a factor as we exited Q4 and into Q1. So it's really the broad product lines have the most significant impact on the numbers and overall. And timing was okay, and in Wireless continued to see some ramps, but overall, the general direction was down as we exited Q4.

Yes, Matt, this John. I just like to add on that on the inventory side, we do think there is a tick-down of end customer inventory and process, and we also see that distributors were aggressively managing inventory as we rounded out the fourth quarter, heading into the first quarter. That should bode well for a recovery as the days of inventory and distribution are not excessive. But it did impact our final Q4 results last year.

Just to follow on to the last comment. John, maybe, I know it's a tough environment to look out, too far, we're just trying to get our heads around here and questions that I'm getting around the full year for the IoT business. You guys give longer-term targets and that target's been 20% growth for a while and, obviously, we're starting off a rough spot for the year. So any thoughts about annualized growth for 2019 would be helpful, realizing that's a tough ask in this tape but appreciate it.

Yes, you bet, Matt. The commentary there is, we do expect a rebound in the second quarter that's based on strong design win performance last year, combined with inputs from our customers and distribution partners as well as healthier bookings rates for the last couple of weeks, certainly, versus what we saw in the month prior. So rebound in Q2, followed by onward growth in the second half is our expectation right now and, of course, we'll be able to provide better indications of that as the year progresses here.

The next question comes from Gary Mobley with Benchmark.

Given that we're starting the year out in a bit of a hole with respect to the top line, even if we see it better than seasonal trends as the year unfolds, it's going to be tough to grow revenue in 2019. And, as well, just given where operation margin's expected to start in the first quarter, it's going to be a pretty tough comp on the operating margin in 2019. So the question is, how long are you willing to go before becoming more proactive and rightsizing the OpEx to deliver some stabilization there, if not improvement?

Yes, Gary. This is John. I mean, first off, I think your observations there are sound, but we think the thing to do is to be diligent and cautious in our spending but not overreact. And we do see very strong design win momentum in the business. We have a leading position in strong secular growth markets and feel it's very important to maintain that position. We'll see how the year unfolds, and we will remain diligent in that. But right now, we've taken steps to control the OpEx here in the first quarter, and we'll continue to monitor this as the year progresses.

As a follow up I just have a housekeeping question. John, what would you expect your full year 2019 non-GAAP tax rate to approximate?

13% is the best view. I can give you at the moment, Gary.

The next question comes from Cody Acree with Loop Capital.

So Maxim last night said that they were starting to see some improved order trends, per bookings, over the last few weeks, broadly. It did sound like your comments, just on the last question or two, were somewhat similar. Are you starting to see any improvement in linearity?

Yes, Cody. This is John. The answer is yes. We have seen better performance there in the last few weeks, over the month prior. Yes, we have.

Can you, maybe give us any visibility as to end markets that you're starting to see that in?

You know, it's fairly consistent. And I just want to add on to some of the commentary Tyson was talking about moments ago. We also have seen a relatively weak automotive market in the second half of 2018 and heading into the beginning of this year. We've seen that begin to improve a bit. But it's -- improvements in the booking has been fairly broad-based.

And, I guess, lastly then, just for your weakness in China, where are you specifically seeing that? And are you starting to see any trends change in China?

A little too early to call it there, specifically. But just adding on to what Tyson was saying, MCU and Isolation were particularly weak in China as we rounded out the year.

The next question comes from the Blayne Curtis from Barclays.

Maybe just turn around as you look at this year, now it's probably difficult to give full year guidance. So maybe, can you highlight some certain products or areas that you actually expect to see as some kind of secular growth versus, obviously, the macro slowdown.

Yes. So I think the best indicated -- indication of the growth potential in the businesses is in the pipeline and in the design win traction. So we had a 50% growth of our infrastructure design win pipeline, and you know, in IoT, we had about a 30% year-on-year growth in the design win pipeline. And so that's -- not in the pipeline but in the design wins themselves. And that translates into revenue and would be anticipated to ramp and we move through 2018 -- or 2019. So you look at the number of customers, CES was fantastic and tons of opportunities, multiple programs, multiple large customers. The question is just how quickly will that turn into revenue and how will the macro impact us. We're going into Chinese New Year, we got a trade war. We've got debt concerns and other things but at the same time, we're quite bullish in terms of our product portfolio. The areas that we're in, in terms of IoT, in smart home, in lighting, in commercial and lots of things around IoT are doing well.

The trend towards all the data out in the market, going into data centers and high-speed communications and wireless, and our expansion into those areas and timing and then, in isolation, the trend towards electrification, electric vehicles and you know all of the power devices that go out into the market, solar, motor controls, power supply.

So we're well positioned in terms of the portfolio, well positioned competitively and well positioned in terms of the design win traction that we have. But that's really not -- you're not immune to macro, and we'll see how we come out of the first quarter. Right now, things are looking like they're picking up a bit, but it's still a little bit early. And we need to get through Q1 and see how the rest of the year is going to turn out.

I just wanted to ask you the one area that it seems to be good is 5G infrastructure. I know your timing has been more wired focus, you did mention some early ramps in wireless. Can you just give us a picture as to when you see that being more material for you?

We have design wins in some of the early 5G, we're calling it 4.5G, base stations that are going to start ramping this year and then, certainly, 5G, as we look a little bit further out.

So we've got a strong roadmap and strong engagements on the wireless side with our timing products. There's also a little bit on the isolation products, within the power supplies for all of those types of devices. But just overall, having 40% of the timing revenue now outside the core optical networking market really shows -- and we've been talking this for a long time, but a lot of these are very high-quality long-term wins that take a while to ramp. But seeing industrial, data center and wireless all ramping on timing bodes well for the portfolio.

The next question comes from Suji Desilva with Roth Capital.

So maybe you could kind of step back, Tyson, to describe this downturn that you're seeing, industrial or broadly. How it compares to past cycles? If you can give us some color there that might be helpful, it kind of came on very quickly, so that context would be appreciated.

Yes. I mean, it's been nearly a decade since we've had a -- any sort of a macro correction. The question is, is this one going to be short-lived with a quick rebound? Or is it going to be more protracted? And I think that really depends a little bit on how the U.S.-China relationship turns out in terms of Huawei, ZTE in terms of the tariffs. We've certainly seen a bit more churn, in terms of moving production from one location to another and inventory and lots of movements there, which has caused a pause in a lot of the ordering patterns. I would say that the geopolitical factors and the trade factors are much more turbulent now than they were before. This has been caused by different set of factors out in the macro economy. It's not a housing bubble. You've also got -- U.S. consumer confidence remains strong, and we finally have a let up on the -- or at least a pause on the government shutdown and hopefully that -- we can sail through that. So if we can keep the consumer confidence up, and we see a more normal return to growth, I think that then we can start seeing the results of the design wins. So hopefully, this is a little bit shorter term than what we saw back in 2008. But we really have to get through the year to see how it's all going to turn out.

That's helpful, Tyson. And then one quick follow up on the Wi-Fi part of the business, which is newer. Can you just talk about your expectations for how much -- how quickly that ramps and grows or does that remain a kind of a niche effort relative to your Bluetooth and Zigbee kind of activity? What's your prospects -- where are the prospects for that business?

Yes, we're excited about our Wi-Fi portfolio. We've been out sampling this to a lot of customers for about a year. It creates the lowest power Wi-Fi solution, and we have a lot of customers that are using multiple protocols, that are using Wi-Fi and Bluetooth or Wi-Fi and ZigBee and different configurations. And as we integrate these solutions together and are able to offer that, that further strengthens both the Wi-Fi portfolio but, certainly, our position in the rest of the portfolio as well. So we see that product ramping modestly this year, and it's a very important standard. There were a lot of Wi-Fi devices out in -- at CES, and we'll see how the market uptake is on a number of these things that we're designed into. But it's an exciting new expansion of our SAM, and I think reflects our long-term commitment to be the leading provider of IoT wireless technology.

The next question comes from Tore Svanberg with Stifel.

First question. Tyson, you talked before about how security is becoming a very important part of your IoT offering, and that you were starting to embed security in a lot of your newer products. Could you talk a little bit about what that means for you, when it comes to content or maybe growth reaccelerating in IoT?

Security is an absolutely important technology and a set of capabilities for the IoT. And I think, to the extent that we can make security bulletproof and easy to use, it will accelerate the market for these devices. If you look at our first-gen devices, we have a strong offering of security technology and the ability to drive very low-power encryption and advanced algorithms and that's integrated within our SDK. As we move out to our second-generation platform, we're integrating additional secure-element functionality into the devices. Think of it as payment-level security, where you can store keys and you have very advanced hardware, so you can't tamper, anti-tamper, and you can't hack into these devices, even more than you would have in the first gen. So it's something that we're investing in. It also opens up some additional opportunities to add key management, and you can individually address devices and push software updates in a very, very secure manner. And that opens up some potential new capabilities for our customers but also capabilities for us to potentially monetize that, as we move out in time. But the security is absolutely essential to the deployment and security of all these IoT devices and making people confident that it's bulletproof is I think really essential. So it's a huge amount of investment and attention that we're putting onto the portfolio around security, and we think that can be a significant differentiator for us.

That's helpful. And as my follow up, for John. John, you're talking being prudent on OpEx, yet it's guided to be up sequentially. I believe it's about 48% of revenue. Will you take further actions here to try and get the OpEx down somewhat?

Yes. Tore, we -- there is a seasonal aspect to the increase in the first quarter. You have a multimillion dollar increase just naturally, given the seasonal fringe reset that we go through every year or so. Putting that aside, we are managing the OpEx cautiously. And we'll continue to monitor this as we go forward and look for a recovery in the business, really as the key next factor to monitor here.

Next question comes from Alessandra Vecchi with William Blair.

Just as a clarification, when you said your wireless revenue was roughly flat sequentially, was that on organic basis or was that including Z-Wave?

That was including Z-Wave.

Okay. And then additionally, as you pointed out your Broadcast business came in better than expected and quite better than I had modeled, how should we think about that going forward into next year? I know your strategic goal has been down 10% annually, but do you think there's sort of -- the strength on the consumer side can hold up a little bit longer than expected?

Yes. If you look at broadcast overall for the year, while Q4 was relatively flat, it was down about 8% year-on-year. And we have a target of 10% down, and so we actually held share a little bit more. We had an 80% design market share in the flat-panel TVs with our tuners. And we see that model of 10% down, both for Access and Broadcast as being consistent for the long-term performance of those. So we outperformed that in both Access and Broadcast this last year and maintained share and feel good about our competitive positioning in those markets.

(Operator Instructions) The next question comes from Rajvindra Gill with Needham & Company.

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Z-Wave and organic...

Raji, it's John, we didn't catch you at the beginning. Please begin your question from the top.

I apologize if this question was asked. I joined a bit late, but the IoT kind of breakdown between organic versus Z-Wave. If you look at your 10-Q, in September, you did about $20.5 million of Z-Wave since March. So that equated to about $13 million of revenue from Z-Wave in September. So if we assume kind of a similar type of rate in Q4, the organic IoT business, is going to be down about 3% year-over-year in Q4 and maybe down again on a year-over-year basis in Q1. You had mentioned that you see -- you saw continued weakness in the U.K.'s smart metering. I was under the impression that those customers had transitioned to the SMETS 2 standard, and that we were going to start to see more proliferation there. Is this has to do with more macro-related issues in England itself, related to Brexit? Just wanted to get a little bit clarity on IoT breakdown in U.K. smart metering and expectations of a ramp in the second half. Because that's very -- your IoT organic growth is very dependent on those -- in those specific areas.

Yes. So if you look at the organic growth, and we kind of break that down within IoT. We saw microcontrollers down fairly, fairly strongly, double-digit down, from Q3 to Q4 and anticipated to take another step down here in Q1. So that's the microcontroller portion. So that's definitely a strong drag on the year-on-year compares. And that's really macro across the board, 8-bit, 32-bit, low-power, automotive, broad-based, all of the microcontrollers are consistently seeing those trends. If you look within the wireless portfolio, we've actually seen our -- the more industrial proprietary wireless stuff be fairly stable, as we go from Q3 to Q4 into Q1. And those are heavy industrial, compatible with legacy networks and also upgradable to more advanced things so that's actually held in fairly well. Where we've seen a stronger impact has been in the ZigBee and the mesh 15.4 area. And we'd seen -- we saw pretty solid growth as we came through the year in Q3, but then as we came into Q4 that took a hit. That was -- overall for the year, it was impacted by the smart energy and lighting. And we thought it was going to be stronger, and we'd got those design wins in place. But here, Q4 and Q1, some of that is, kind of -- I wouldn't call it consumer but it's light industrial, it's more of the smart home type stuff. And we've started seeing Q4 and Q1, some weakness there although very strong design wins. And as we look out into the year, both lighting, those ramps really taking hold and that inventory burning off. And then the smart energy, we think in Q2, the SMETS 2 transition is going to really start kicking in, in the smart energy stuff. So on the 15.4, ZigBee side, this really looks like that kind of a 2-quarter hole with some rebound in Q2, and then a very strong second half with the 15.4. And on the Bluetooth side, we've been ramping -- we talked about Xiaomi and a lot of these Chinese ecosystems, and they've been very, very successful out in the market. So we see continued -- a little bit of weakness in Q4 and Q1 although that's on the backs of -- back of what should've been stronger growth. But then, as we go out into '19, that the Bluetooth portion, we actually anticipate some share gains there and also just the deployment of the Bluetooth mesh technology. So overall, wireless kind of flat from Q3 to Q4, which should've been growth, had we not had the macro impact that we saw in December and coming into the quarter. And then, we do see a rebound in that coming -- going into Q2, and then the design win traction should really take hold in the second half. So that's on the IoT side. As -- you know, in terms of year-on-year compares, we're optimistic about the year, but we're definitely starting off with Q1 weaker than we would've hoped. But we'll see how it turns out but, overall, the design win up 30% year-on-year last year, and that's on a pretty big number. We feel good about what we've been able to do on the sales side and driving the pipeline and driving the customer engagement and the conversion of that into revenue. We'll see if we -- as we come into Q2 and into the second half. But it's looking solid from my perspective in terms of the validation of the strategy and the road map, but it's got to turn into numbers.

No, that's helpful. And for my follow up, with respect to your direct China exposure, products that are consumed in China. It might be difficult to quantify but what percentage of the MCU, the isolation is exposed to China directly? And I'm just a little bit cautious on this idea that the booking rates are improving the last couple of weeks. What is the basis of the booking rates improving? What's the rationale? Any kind of insight on that would be helpful.

In terms of the direct China exposure, we're about -- it's about 30% of our revenue is designed into domestic China customers that then either ship worldwide or would ship into the domestic China market. We do have about 60-plus percent of our revenue ships into China but then that's really an ODM relationship or something like that. So it's about -- and that's fairly, you've got microcontroller, you got isolation, you've got the Infrastructure business, Broadcast. All those are -- do have business within China. I think just relative to a number of other semiconductor companies, I mean not only do we have fab-less model where we can really scale our supply-chain but, yes, we do probably have a little bit less direct China exposure than some of our direct competitors.

Yes, Raji, on the bookings -- this is John. It's really -- seeing an improvement in what we're seeing from our distribution partners, and that's coming on the back of relatively light inventory levels and distribution, which bodes well for us. And I would say, from here through the balance of Q1, with I would say moderate bookings performance for the remainder of this quarter, we're confident in our guidance that we've provided this morning. And seeing how that's affecting Q2 in terms of the bookings, we're in line with a rebound in business for Q2 based on what we see so far. Now all of that said, yes, there's greater volatility right now than what we've seen in the past and what we'd like to see. But we do see those as positive indicators.

This concludes the question-and-answer session. I will now like to call -- turn the call back over to Jalene Hoover. Please go ahead.

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

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