Silicon Laboratories Inc (SLAB) 2020 Q1 法說會逐字稿

Good morning. My name is Chuck, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Silicon Labs' First Quarter Fiscal 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please note that 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, Chuck, and good morning, everyone. Tyson Tuttle, Chief Executive Officer; and John Hollister, Chief Financial Officer, are on today's call. Tyson will provide a brief introduction before we discuss our financial performance and review our business activities for the first quarter. 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 four 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 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 the Investor Relations section of Silicon Labs' website.

I would now like to turn the call over to Silicon Labs' Chief Executive Officer, Tyson Tuttle.

Thank you, Jalene. Silicon Labs is a global company, with our headquarters and about half of our employees based in Austin. We have a substantial global design and sales presence, including design centers and sales offices in Europe and Asia. Our international headquarters is in Singapore, where we manage our operations and supply chain and engage in design and customer support.

As we face the unprecedented COVID-19 pandemic challenge, the health and safety of our employees, customers, partners and communities remains a top priority. Today, most of our employees working worldwide are working from home under local shelter-in-place mandates, and some with roles deemed "essential" to the business have onsite access. We are thankful to have the collaboration tools and remote-working infrastructure in place to facilitate a relatively smooth transition as our global teams advance towards well-established goals.

We are delighted to announce the close of our acquisition of Redpine Signals' connectivity business yesterday, which we first announced in March. I credit the successful acquisition to the hard work of everyone involved as well as our ability to collaborate on a global basis, even in the face of a challenging environment brought on by the pandemic. I'll talk more about our Redpine acquisition later in the call.

In addition to closing Redpine, our global sales team serves as another great example of how we are leveraging technology and tools to maintain and even increase customer engagement as evidenced by strong attendance in our new live Tech Talks, virtual training sessions. Design activity continues to be robust as we actively engage with customers, enabling them to evaluate our products and technologies with easy-to-use development kits and Simplicity Studio software tools.

And finally, to date, we have committed approximately $300,000 to the global COVID-19 response and continue to work with community leaders to explore additional opportunities to help.

I'll now turn the call over to John to discuss first quarter financial performance and our second quarter outlook, and I will follow-up with additional business highlights. John?

Thanks, Tyson. On March 12th, we hosted Silicon Labs' third Analyst Day at our global headquarters in Austin. Our first-ever

"virtual Analyst Day" attracted more than 250 attendees. It was a great opportunity for our leadership team to provide updates on our strategy and long-term growth potential. If you were not able to join our virtual event, we encourage you to review the presentation and replay, which are available in the Investor Relations section of Silicon Labs' website.

At our Analyst Day event, we announced our decision to revise our external reporting categories from four into two. The two categories are now the Internet of Things, which is unchanged, and Infrastructure and Automotive, which combines the Infrastructure, Broadcast and Access product categories into one. This simpler approach reflects the evolution of our business, with IoT now representing more than half of revenue, as well as an increased focus on the growth drivers within our primary two reporting categories.

Moving on to first quarter financial performance, revenue ended stronger than we expected at $215 million, which was about $10 million above our updated guidance range, and up 14% year-on-year.

IoT revenue ended at $118 million, down about 8% sequentially and up 11% year-on-year. We saw sequential growth in 32-bit MCUs, Bluetooth and Z-Wave, with other products down primarily related to softness in China through mid-quarter. Year-on-year IoT revenue growth was led by MCUs, followed by strength in 15.4 wireless products for home automation, security and lighting applications.

Infrastructure and Automotive revenue ended at $97 million, exceeding expectations and up 6% sequentially with Infrastructure and Broadcast products delivering sequential gains, and Access down. I&A grew 19% year-on-year, led by strength in sales of isolation products for industrial, automotive and solar applications, and ramps in TV and automotive radio tuner programs using our Broadcast products.

By end market, Automotive revenue was up sequentially following a depressed market in 2019. Revenue from Consumer products was also up for the quarter. Revenue from Communications and Industrial markets was down.

Looking at sequential revenue by geography,. results were mixed, with first quarter APAC revenue down sharply, whereas revenue in both the Americas and Europe were up.

Revenue from our top ten end customers was 21% of total revenue, consistent with 2019.

Revenue from distribution was very strong at 76% of total revenue, up from 74% in Q4. Distribution inventory increased significantly in Q1, with an approximate 20% sequential increase in units, and ending within our target range of 54 days in the channel, up from 38 days.

Non-GAAP gross margin was favorable at 60.4% based primarily on strong Infrastructure product mix. Non-GAAP operating expenses ended about where we expected, at just over $96 million. Non-GAAP R&D expenses were $55 million, up about $3 million sequentially, and non-GAAP SG&A expenses were $41 million, up about $2 million. The primary drivers behind the OpEx increase are additional salary due to the extra week in the quarter along with the typical annual increase in first quarter payroll tax expenses, which were partially offset by lower variable compensation and travel expenses.

Non-GAAP operating margin for Q1 was 15.4%, which is up about 50 basis points from the same period in 2019, driven by revenue upside and strong gross margin performance. Our non-GAAP effective tax rate ended at 10%. Non-GAAP earnings per share was $0.69, up 17% from Q1 2019 and also above our revised guidance range.

On a GAAP basis, first quarter gross margin ended at 60.1%. GAAP operating expenses were $125 million, up about $5 million from Q4 2019, with R&D expenses at $71 million and SG&A expenses at $54 million for the quarter. Q1 stock compensation expenses were $15 million, or about 7% of revenue and amortization of intangible assets was around $10 million, both as expected. GAAP earnings also ended above revised expectations for the quarter at $0.05 per share.

Turning now to the balance sheet., we ended the quarter with cash and investments of $1.1 billion. First quarter cash flow from operations was robust at $60 million, up about 90% from the same period in 2019, resulting from strong collections and effective working capital management.

Accounts receivable was down slightly from Q4, ending at $75 million and representing 31 day sales outstanding. Strong shipments in the second half of the quarter drove a $5 million sequential decline in inventory, ending at $68 million and representing inventory turns of 5 times, which is the upper end of our target range.

In Q1, we executed $16 million in our share repurchase program. At last week's Board meeting, we determined to suspend our buyback activity in light of the ongoing coronavirus pandemic.

Toward the end of Q1, we drew down $310 million from our bank credit facility to fund the acquisition of Redpine Signals, and also out of an abundance of caution given uncertainties surrounding the current environment. Overall, our balance sheet remains very healthy.

We continue to be very well positioned in target markets, and we saw very strong design win activity in Q1, surpassing recent quarters and on-track with 2020 goals. Revenue and bookings accelerated in the latter part of the quarter, allowing us to exceed revised expectations. While it is difficult to ascertain, we acknowledge that some portion of first quarter bookings' strength and upside revenue performance may be due to customer uncertainty regarding the global supply chain.

The current macro environment is challenging, with the depth and duration of the pandemic-related downturn unknown and impacting our ability to predict our financial performance. We are taking steps to protect profitability, including slowing the growth rate in operating expenses by prioritizing hiring, virtually halting travel and participation in events worldwide, and judiciously evaluating discretionary projects and expenditures. Based on these factors, we are expanding our guidance range to reflect increased market volatility and greater uncertainties. We expect near-term pressure on revenue and do see more downside risk than upside opportunity in our guidance.

I will now cover guidance for the second quarter, which includes Redpine Signals' connectivity business. We expect Q2 revenue to be in the range of $190 million to $210 million with IoT and Infrastructure and Automotive down. We expect our non-GAAP gross margins to be 61%, and our non-GAAP operating expenses to decline to approximately $92.5 million. We expect our non-GAAP effective tax rate to be 10.5% and non-GAAP earnings per share to be in the range of $0.45 to $0.68. On a GAAP basis, we expect our gross margin to be 60.5%, operating expenses declining to approximately $122 million. We expect GAAP earnings to range between a $0.26 loss to a $0.03 loss per share. As a reminder, these guidance ranges include the acquired Redpine Signals' connectivity business. I will now turn the call back over to Tyson. Tyson?

Thank you, John. First quarter revenue was considerably stronger than expected, with sequential growth in Infrastructure and Automotive products driving the upside. Q1 revenue was up 14% year-on-year. We are pleased to have seen minimal disruption in our supply chain during the COVID-19 pandemic, with bookings and revenue strong late in the quarter. We remain in close communication with our global suppliers who continue to report strong demand.

Year-to-date design win lifetime revenue and our opportunity funnel were up approximately 10% year-on-year in Q1, highlighting the resilience of our portfolio.

Silicon Labs has maintained a fabless model since our inception. This enables us to adjust to upsides and downsides in demand and ride out challenging economic times without impacting our gross margin, compared to peers with large fixed costs due to internal manufacturing operations.

We believe our strategy targeting large, high-quality and diverse growth drivers in the IoT, communications infrastructure and electrification, combined with the industry-leading technologies we bring to bear, will continue to drive long-term growth and improved profitability as we scale our business.

Moving on to product category updates., in IoT, we believe the demand for connectivity and intelligence in end node products will increase.

During our Q1 Analyst Day event, we announced the acquisition of Redpine Signals' Wi-Fi and Bluetooth business, development center in India, and extensive patent portfolio, which closed yesterday. We are very excited about this acquisition which is highly complementary to our IoT strategy and will expand our leadership in wireless IoT technology.

Redpine's low-power Wi-Fi products and intellectual property provide an important technology for IoT connectivity. Wi-Fi 6 or 802.11ax, the latest evolution of the Wi-Fi standard, is tailored for IoT applications and will become a key wireless technology to meet the low-power performance, security and interoperability requirements needed in environments with hundreds of thousands of connected devices.

Redpine has been developing Wi-Fi, including MIMO and OFDM technologies, for the past two decades and has a class-leading solution with a number of important design wins. The integration of these technologies into Silicon Labs' wireless platform will substantially accelerate our road map. We expect the addition of the acquired products and technologies into our worldwide sales and distribution network will drive further momentum in smart home, industrial IoT and commercial markets. The acquisition also includes Bluetooth Classic IP for audio applications, including wearables, hearables, voice assistants and smart speakers.

In addition to gaining high-quality connectivity technologies, the Redpine acquisition brings a culturally aligned team of about 200 employees in Hyderabad, which is one of the most talent-rich locations in India. As we shift our focus to simplicity and scale in SLAB 4.0, Silicon Labs next evolution, we expect to leverage this development site to more efficiently scale our R&D efforts across the board, from silicon and software to the cloud. Fundamentally, simplicity underlines Silicon Labs' values and strategy, from our company culture to how our teams work together and the way we develop products and platforms to drive R&D efficiency. Simplicity applies to creating an out-of-the-box experience, collaborating with customers and partners, and scaling SG&A and sales efforts to drive additional growth. Achieving simplicity and scale will drive incremental profitability and growth over time.

Device security is gaining the attention of end users and regulators alike, becoming a "must-have" foundation to enable the IoT to reach its growth potential. To address this need, during the quarter, we announced Secure Vault technology for our Wireless Gecko Series 2 platform. Secure Vault combines advanced security software features with physically unclonable function hardware technology, delivering the most comprehensive suite of security capabilities for connected IoT products in the market.

Providing a combination of hardware and software features, Secure Vault makes it easier for product manufacturers to protect their brands, product designs and customer data. Integrating security within the wireless SoC helps designers simplify development, while making it possible to securely update connected devices over-the-air throughout the product life cycle. These new security features are ideal for companies working to address emerging regulatory measures, such as GDPR in Europe and SB-327 in California.

Secure Vault provides a number of important features for IoT products, including secure key and management storage and advanced tamper protection. Secure device identity addresses post-deployment authentication, one of the biggest challenges for connected devices. Silicon Labs' factory-based trust provisioning service provides a secure device identity certificate during IC manufacturing, analogous to a birth certificate for each individual silicon die, enabling post-deployment security, authenticity and attestation-based health checks. The device certificate guarantees the authenticity of the chip for its lifetime. Our wireless stacks leverage Secure Vault's key storage to provide a complete set of configurable detectors and responses, protecting encrypted keys against tampering.

During the quarter, we announced two families of Wireless Gecko Series 2 system-on-chip devices designed for power- and size- constrained IoT products. Our new SoCs' combination of ultra-low transmit, receive and deep-sleep mode power delivers exceptional energy efficiency. Additional low power on-chip features such as RF Sense, which wakes the SoC in the presence of RF energy, further extends the operating life of battery-powered IoT products.

Silicon Labs' new MG22 SOCs target echo-friendly IoT products deployed in 15.4 mesh networks. Optimized for Zigbee Green Power applications, the MG22 family is an ideal choice for Zigbee devices powered by coin cell batteries or energy-harvesting sources. Target applications include smart home sensors, lighting controls, and building and industrial automation.

Our new FG22 SoCs deliver an optimal combination of features to allow Industrial and Consumer customers to address proprietary protocols in the 2.4 GHz band, including advanced security, class-leading energy efficiency and easy-to-use software tools. Target applications include electronic shelf labels, building security, automation sensors and lighting modules.

Turning now to Infrastructure and Automotive, we saw robust design win activity for our timing products in Q1. The COVID-19 pandemic has underscored the Internet's foundational importance for people and businesses everywhere, driving a substantial increase in the demand for bandwidth. For example, at the end of March, Verizon reported a 25% increase in network traffic since large-scale social distancing measures were first put into place in the U.S. The critical need for Internet connectivity, combined with government surplus, stimulus in China, will expand demand for communications and optical infrastructure, where we are well positioned.

We continue to expand our Infrastructure and Automotive portfolios to address new markets and application needs. For example, during the quarter, we introduced a comprehensive Power over Ethernet portfolio that reduces the cost and complexity of adding PoE to power sourcing equipment, such as enterprise switches, and powered devices, such as 5G small cells. Our IEEE 802.3bt standard-compliant portfolio more than doubles conventional PoE performance while expanding the capabilities of wireless access points and IoT gateways, helping to make PoE-powered 5G small cells and digital buildings a practical reality. Spanning both ends of the Ethernet cable from 15 watts to 90 watts, our new PoE portfolio gives developers flexible options for a wide range of applications.

Isolation achieved record revenue in Q1, with strength in sales for industrial, automotive and solar applications. Our isolation products continue to replace traditional optocouplers and outperform competing digital isolators, enabling superior surge performance, greater reliability, higher integration and best-in-class safety for system designs requiring protection from high voltages. We have established ourselves as the leading provider of digital isolation technology for the cloud, telecom, solar and electric vehicle markets.

Since Silicon Labs' inception, we've delivered on our vision of being a leading provider of silicon, software and solutions for a smarter, more connected world. The technologies we're developing are connecting people everywhere, driving supply chain efficiencies, reducing energy consumption and ultimately making the world a better, safer place. Our focus on this vision permeates our culture and our strategy.

We believe the COVID-19 pandemic is creating a new reality for how people work and live in an increasingly connected world. We are more certain than ever that we are developing the right technologies and are competing in the right markets, enabling Silicon Labs to exit this pandemic in a stronger position.

Thank you for your time and attention. Before we take your questions, I'd like to take a minute to thank Jalene for her many years of service and outstanding contributions to Silicon Labs and I wish her the best in her future career endeavors. I'd also like to welcome George Lane, who will be taking over for Jalene. So Jalene, now I'd like to turn the last call back over to you. Thank you.

Thank you, Tyson. Silicon Labs is a very special place, made so in large part by the amazing people throughout that make the company. I'm very proud to have been a part of Silicon Labs' success over the past 17 years and happy to pass the torch to George. Before we open the call for the question-and-answer session, I would like to announce our participation in Cowen's Technology, Media & Telecom Conference on May 29 and Stifel's Cross Sector Insight Conference on June 8, both using virtual platforms. We would now like to open the call up for your questions. (Operator Instructions) Chuck?

(Operator Instructions) And our first question will come from Blayne Curtis with Barclays.

Just kind of curious, either Tyson or John, just you talked about getting some kind of $5 million shipments at the end of the quarter. So it sounds like things are getting a bit better. You've seen some recovery in China. But I think you made a comment that as you look at the guidance, there's maybe more risk of downside than upside. Could you maybe just walk us through how orders have been in April? And any perspective on, if you're seeing a recovery in China? And then I guess, kind of flip the two together, but outside the end of March to your bias lower looking forward?

Yes. Blayne, this is John. I'll take a crack at this and then Tyson can add something. But bookings have been volatile. We saw pressure clearly through mid-first quarter with the shutdown in China, where we saw a lot of companies and suppliers under pressure in China due to the pandemic. That began to stabilize later in the quarter, and we saw an uptick in bookings to round out the quarter. So we revised our guidance around the time of our Analyst Day event and then ended up actually outperforming that given the later strength and the bookings to round out the quarter. There is uncertainty out there, I guess, is the best way to say it. Uncertainty and volatility that has us indicating probably a little more risk in the system than has been the case before, but we were pleased to see the upside in first quarter.

Yes, Blayne, I'll just add on that. This is Tyson. We've got -- there are -- the volatility is really around, there are a number of customers where plants are shut down in different geographies, and they're pushing out orders, and we have an equal number of customers pulling in orders. We see China as rebounding strongly. We also are encouraged by the fiscal stimulus activity, in particular, around some of the communications infrastructure side. And that will also bleed over on to the IoT side as well. So there are puts and takes. But -- and then we also have slowdown in the automotive market. We see a number of plant shutdowns there. So there's kind of an equal number of push-outs and pull-ins, but it is more highly volatile than we see. And I think that as you look at the U.S. economy and the European economy, out of an abundance of caution, it's not that it's seen -- we've seen that clearly in our booking patterns. The bookings have remained fairly strong as we come through the earnings call here in April, but the flow-through of that, that's the reason for the abundance of cost that we have in our comments around the downside risk versus the upside risk.

And then maybe a follow-up. You kind of answered part of it, Tyson, but in terms of the supply constraints you're talking about, is there any supply constraints that are Silicon Labs related? And then I guess, downstream, you mentioned autos. I'm kind of curious where else you think about supply constraints that could add to this kind of order visibility in the upside?

Yes. From our perspective, our supply chain is performing very, very well. We are able to meet customer demand and upside within our lead times and are not really seeing major impacts due to anything within our supply chain. So we continue to operate virtually. We've got a work from home posture, and we've been able to transition to that very effectively. What I'm really talking about is that our end customers and then their customers are seeing. There are a number of factories, for instance, automakers in the U.S. and Europe have had shutdowns. And you've got some factories that are rolling through these coronavirus-related challenges. And so those are having an impact on the ordering path. And there are other customers that are accelerating orders to meet demand. So it's really a mixed bag right now. But overall, if you just look at the end markets and what we're looking at here in the U.S. and Europe, we believe that, that is going to begin to flow through here at some point, not just from the factory closures, but also the decline in consumer demand. And so we're being cautious in our posture, both from an OpEx perspective and from a guidance perspective relative to those concerns.

Yes. Just a quick add on there. You all have seen the news about restrictions in Malaysia and the Philippines. We have very limited production in those regions. We do have some products, but it's fairly small volume. Most of our production is in Taiwan. And Taiwan has dealt with the pandemic challenge exceptionally well. So as Tyson said, we're doing well in that area.

And our next question will come from Gary Mobley with Wells Fargo Securities.

I wanted to start out, under the -- acknowledging the fact that things are very fluid and things are probably changing week-by-week for you guys and thus the $20 million guidance range for Q2. So I'm wondering if you can share some additional details with us regarding the difference between hitting the high end and the low end of that guidance range, maybe focusing specifically on what's assumed in turns business as we conclude the balance of the quarter?

Yes, Gary, this is John. It's really going to depend on how our bookings roll in. I think we see opportunities in communications and isolation as clearly areas where we have upside opportunity. Automotive is a part of the market that is logically going to be under pressure this year. On the other hand, we have some new platforms that we have been designed into, which are beginning to ramp into volume. So that is serving as a countervailing effect on the overall automotive pressure that we believe is likely to materialize later this year. And then just in the broad industrial part of the world, we'll have to see how things play out with businesses opening back up and factories coming back online as a swing factor. And the final point I'll make is China. China has come back strong, to round out Q1 and begin Q2. And we'll see how that plays out as well. So those are some of the factors.

Gary, I would also add on to that. The -- we have come into the quarter with solid bookings. And are well -- our bookings, we're ahead of where we would typically be during the quarter. I think that's an evidence that folks are ordering ahead a little bit. It makes things a little bit hard to predict. And those bookings have remained strong as we've come into the quarter. There's just -- there's a lot of churn underneath the covers there in terms of customers pushing out and pulling in, and that's the reason for that expanded guidance range. But where we sit right now, things are looking pretty solid. But given the level of volatility, we felt like we needed to open up that guidance range to give us a little bit of breathing room.

Okay. Want to move on to gross margin. You're guiding Q2 gross margin at the high end of your long-term guidance range. And I'm just curious to know what's contributing that. I'm assuming a large chunk of that is mix related. But is it at all affected by the acquisition of Redpine? Is it all impacted by maybe some better cost structures from your supply chain and whatnot?

Yes, Gary, this is John. So it really is largely mix driven with more Communications and Industrial mix in the numbers, a bit less Consumer mix there. And the Redpine business, though not a large factor in Q2, given that it's a partial quarter, but the gross margins from the acquired Redpine business are complementary with our gross margin profile. So that helps a little bit.

And our next question will come from Tore Svanberg with Stifel.

Yes. And thank you to Jalene, wishing you all the best. First question is on the Redpine contribution. I think you had talked about this being a $20 million run rate business. So should we assume the contribution is about $5 million then for the June quarter, John?

Yes, Tore. So we've just announced the final closing. We estimate the contribution to be at about half of that level for the partial quarter, so roughly $2 million to $3 million of contribution this quarter.

Great. And as my follow-up to Tyson. Tyson, this year is supposed to be the year of Bluetooth for you guys. You had some pretty big announcements at the beginning of the year. Could you just talk a little bit about how the design activity is going there? And where do you expect to gain the most traction with your new Bluetooth products throughout the year? What types of applications?

We are very excited about our new BG22 device that we announced last quarter, and we continue to engage in a variety of power and cost and size constrained applications within the Bluetooth market. You've got lots of consumer and industrial and medical applications. But actually, there's a lot of really exciting stuff going on, given the pandemic, around personal medical and connected devices. Basically, these devices connect up to your mobile phone. And we're doing this with a device that has just extremely low energy consumption and a very high level of features at a very attractive cost point. So we continue to engage and get kits out into the market and develop developer tools, and we're holding a number of seminars and virtual training sessions. And I would say that the activity there is very, very high. This also, the Bluetooth market represents a substantial portion of our funnel. We've got about $3 billion of lifetime revenue opportunity in the funnel. And we continue to engage strongly across the globe with these new Bluetooth products as well as the new MG22 and FG22 that I talked about in the call. So those other products that we developed are also on the 15.4, on some of the proprietary products as well. So we continue to drive innovation on the hardware side and on the software side, with Bluetooth being just a great opportunity for share gain and growth in IoT as we move forward.

Our next question will come from Srini Pajjuri of SMBC Nikko.

John, I want to go back to the bookings comment. I think you said distri inventory, you went up from 38 days to 54 days. Just curious what your expectation for this quarter is, distri inventory, whether it's -- whether you expect that to go up or stay flattish or come down?

Yes, Srini, this is John. So we did see distributors build some inventory, which is good. That is in line with our expectations. We had inventory levels somewhat depressed in the second half of 2019. So where we see them now is normal, in the mid-50s on days. We expect it to hold there. Of course, the absolute amount will depend on the underlying commercial activity, but mid-50s is a reasonable range, and that is where we expect that to hold.

Got it. And then maybe for Tyson. A couple of areas. One, isolation , it looks like that's tracking well. I'm just trying to understand what's driving the strength there? And then on the communications side, there's been a lot of talk about 5G builds in China. If you could give us some color as to how much exposure you have there now? What's the content? Because we're hearing about almost 0.5 million base stations being rolled out this year. Just trying to understand how that might impact your business?

Yes, Srini, the Infrastructure and Automotive business, in particular, around isolation and comms is doing very, very well right now. The communications Infrastructure part, the timing parts, we've had a multiyear effort to engage with the telecommunications equipment providers. We have -- we're designed into 4 out of the top 5, including the top 2 in China with our clock and oscillator products. And that includes into the new 5G base station. So there's a good attach rate to those and content per base station in that business, just China specific, in terms of the stimulus and is going to drive demand. I also think that if you just look at Internet demand around the world, as core networks are upgraded and data centers are upgraded, all the connectivity there, where we have a lot of historical strength, it's going to continue to bode well for our timing products. So we saw year-on-year strength. We've had very good design win traction, but the devices that are out there in production today, we've got very good share. So I'm bullish on the communication market.

In terms of isolation , we had a record quarter in Q1, and that was really driven by strength across the board. Isolation is a very broad product line for us in terms of the number of different applications and the number of customers. There's a lot of Industrial for motors and power supplies and monitoring and just a whole bunch of different applications within Industrial. You certainly have electric vehicles. And I think that within the automotive market, electric vehicles and our leading share there and penetration with the leading providers longer term, although we see potentially the automotive market slowing a bit, but overall, I think that electric vehicles are going to be a very important driver for isolation growth going forward, given our content that we have in each car. And then you've got things in green energy applications, like solar and wind. And a lot of things -- any time you're connecting to the electric grid, you need isolation , and that's where these products come in. And we have a number of innovative features around that. And we also have a good position in isolation with data center power supplies. So within data centers, the power system is one of the critical areas. And within isolation , we have a particularly strong business in that. So we're kind of across the board on isolation . Those sets of applications, I think, net-net, are going to benefit from some of the longer-term trends that we're seeing due to the COVID-19.

Our next question will come from Rajvindra Gill with Needham & Company.

Congratulations on good momentum in this tough environment. Tyson, just regarding the IoT traction that you're seeing, do you see any risk regarding installation of home automation equipment or smart lighting systems or smart energy systems because of COVID, because of the situation regarding the infectiousness of the disease? Is that slowing down any of the installation of this type of equipment using your chips?

Yes. It's really a little bit of a mix, if you take the home automation space. You've got a number of customers within the U.S. and this would relate to our Z-Wave and our Zigbee products. So you've got operators and security installers that are installing home automation and security systems using our devices. And there is an impact on those in terms of their ability to Access homes and some of that. So we are -- that's a mix -- you've also got -- there's a strong retail channel and do-it-yourself, and everyone is sitting in the house trying to figure out something to do. And so there's demand from that, quite a bit of online ordering. You also have some of the retail channel in terms of stores that are going to see a little bit of a hit. So the -- on the home automation front, there's a component of that that's consumer, there's a component to that that's more industrial installer type based. And both of those are going to see some impact as we roll forward here, offset a little bit about the -- and I'm speaking mostly about the U.S. and Europe.

And then you've got, I think, China in terms of some of the applications for IoT and these connectivity products. We see actually increased very urgent engagement on design win activity and on demand out of China. So I think there's going to be some puts and takes there as this all flows through. I'm also very excited about the Redpine Signals acquisition with Bluetooth and adding that protocol. And that's more of a longer-term comment there. But in terms of having now all of the home -- the technologies really driving the home automation and the opportunities around that. Longer term, I'm very, very positive in terms of the deployment of these technologies and our ability to compete and gain share.

And next question for me, Tyson, you talked about volatility around a number of your customers, some who are pushing out orders, some that are pulling in orders. Can you elaborate further in terms of what end market you're seeing that and what's the nature of those decision-making?

Yes, Raji, it's not really isolated to a particular part of the business. We've seen this affecting industrial customers. We've seen it affecting automotive customers. I will say communications appears more steadily strong in contrast. And on the consumer side, durable goods are likely under some additional pressure as well looking ahead. But it's spotty and not really isolated to a particular area.

I can give you an example of one of the things that's pulling in. We have a number of customers in the portable medical area that provides parts for ventilators or thermometers or other connected devices that -- or the microcontrollers and the sensors, number of different things. And we've got a number of customers in there. We actually elevated those customers up the priority list in terms of shipments and in terms of support to be able to expedite activity in that area. So that's an example of something that has an increased level of urgency, whereas if a factory shuts down and they don't need parts, that's getting pushed out, for instance, in the automotive area or in some of the -- some of our customers' cases. So you've got a real mix there that is going to shake out over time, but it definitely increases the level of volatility overall.

(Operator Instructions) Our next question will come from Matt Ramsay with Cowen.

John, you guys guided OpEx for June, and you've always been good with cost controls. And I assume that includes a couple of months of the acquisition. Maybe you could just confirm how much of the OpEx is incremental from the business that you're acquiring? And then just how you're thinking about, given all the moving parts here with demand, managing OpEx through the back half of the year would be helpful.

Yes, Matt, sure. So the OpEx incremental for the balance of Q2 is approximately $2 million, and that's for a partial quarter. Back in the January call, we talked about a 6% estimate for the year. With the acquisition -- and that was on an organic basis. So with the acquisition, that would naturally come up. We are taking steps to control costs in light of everything that's going on. And our objective at this point would be to hold the prior view of approximately 6% increase, including the acquisition, maybe a little north of that, but we'll have to see how it plays out as well. It's going to be dynamic as we monitor bookings and watch profitability through the course of this year, but that's about the best view I can give you right now.

Matt, I would also just add to that, that we talked about our manufacturing model where we've got our gross margins hold because we're a fabless company and so we don't have the fixed cost on our manufacturing. We also have a variable cost model on our OpEx, so the bonuses and a number of things to the extent that we get a downside hit would naturally push the OpEx levels down over time. So we're -- in those comments, we're not assuming that things would go down, but I think that we're very well prepared, both in terms of our posture, the actions that we're taking and the variable costs and structure, the variable OpEx structure that we have as a company to be able to weather a downturn situation. I would also mention we don't -- from our debt situation, we're in good shape in terms of our balance sheet. We don't have a huge debt load. And John, maybe you want to make a few comments on that. But from a capital standpoint, we also feel like we have a very robust situation.

Sure. On a gross debt basis, we are about 3.5x levered now with the credit facility drawn. We have ample cash to refund that. We're just monitoring conditions around the optimal time to repay that. And then, of course, the convertible bonds are outstanding with about a 2-year horizon on those. So we feel comfortable with the level of leverage even in a downside scenario. And we have done some scenario analysis to plan for contingencies around that.

Got it, guys. Just as a follow-up, sort of bigger picture question, Tyson. I mean you talked extensively on this call about some pull-ins of orders and maybe some push-outs of orders depending on different customers in the really near term. But as you talk within the customer base about engagements on long-term IoT programs around things like efficiencies and automation, et cetera, are those conversations sort of tempered given what may come in the economy over the next 4, 5, 6 quarters or whatever it is? Or the momentum to getting efficiencies out of IoT deployments, are those accelerating? It's kind of an interesting balance and just love to hear some high-level thoughts there.

Matt, thank you for that. The amount of activity that we have, and I would say, in particular around IoT, has gone up dramatically in terms of the engagement of customers. And we have Tech Talks that we're doing virtually. We've got record numbers of people that are attending these. We're supporting customers virtually. And it seems that the pace of excitement and adoption of these IoT technologies, whether it's for improving a supply chain but -- for just -- we're living in a more connected world now. There's a new reality that is accelerating the pace of changes due to technology in our economies, in our companies, in our lives. You've got people working from home, not everybody is going to go back to the office. We're hosting our earnings call here remotely. We're going to have to monitor and sense things and connect things up. And so I think that both within the company, I think there's a tremendous amount of focus and drive to get these technologies implemented and to accelerate our product developments. But I also think that within our customer base, the level of activity that we have in terms of being able to get these products out to market, get them designed in, move to the next-generation technologies and push the envelope, I think that, that's going to continue and going to accelerate. And that's what we are just laser-focused on in terms of our IoT products, very excited about being able to get the Redpine team and those products into the portfolio. But you look at our position in home automation, with Bluetooth, with Z-Wave, with Zigbee and in the broader industrial space. And I think, overall, we see an increased level of customer engagement. And that's specifically referring to your kind of long-term big picture, is this going to be a more important part of the semiconductor industry and a more important part of the economy longer term? And I think the answer is an unequivocal yes.

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

Ms. Hoover, your line may be muted.

I think she may be muted. I'm going to thank everybody for the call today, and this concludes today's call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.