Profitable Sticky Growth - SiTime Q1 2022

Amid the gloom and doom of the stock market and here on the board, some companies are reporting great quarters and great plans. Let us keep our eyes, ears and hearts open so we don’t miss out on buying opportunities when they present themselves.

SiTime reported some consistently awesome quarterly results on 4th May. It was the only stock on Friday which was in green.

I posted the highlight numbers based on the press release.…

Listening to the conference call, however, made my conviction even stronger.

I know that many here may hesitate to get into semiconductor space. But, looking at some of the profitable growth companies - NVIDIA, AMD and SiTime - has been worth it for me. If you would like to get a better technical understanding of some of these businesses, please let me know.

My SiTime thesis in high-level bullets:

  1. High Gross Margin (>=65%)
  2. Profitable (30-39% net income) and growing (80-100% YoY)
  3. Focus of management on sticky high-end segments
  4. B2B market - their customers make the devices for consumers
  5. Technology Moat - Disruptive technology and critical for their customer’s success
  6. Monopolistic - In some cases, there are NO alternates available in market
  7. Great Management
  8. Great financial position - profitable, no debt, >500M Cash in bank
  9. Great R&D team and R&D efficiency, and only now building and beginning to flex sales muscles

What is not to like! I would love to hear any feedback!

Below is a summary of my notes from the conference call:

CEO - Rajesh Vashisht
We expect to introduce a total of six new products this year and more next year. With these new products, we believe we expect that our Served Available Market, SAM, as its known, will grow from $1 billion in 2021 to $4 billion per year in 2024, out of $10 billion per year total available market.

Sales into mobile, IoT and consumer, which consist of sales into mobile phones, wearable devices and consumer products, was $30.0 million or 43% of sales. This was down 28% sequentially due to seasonality, but up 34% over the same quarter last year.

Sales into industrial, automotive and aerospace, which includes sales into auto, industrial, medical, aerospace, military and broad-based sales were $27.6 million, or 39% of sales. This was up 20% sequentially and up 280% year-over-year.

Sales in the comms and enterprise, which consists of wireless infrastructure, including 5G, data center and networking were $12.6 million, or 18% of sales. This was up 15% sequentially and up 117% year-over-year. Sales to our largest end customer accounted for 18% of sales.

Note to self : IoT/consumer is non-sticky and low-margin business and in comparison the relative gross margins and stickiness of Industrial, automotive, aerospace and enterprise space is great. It is clear their strategy is to focus on high-margin and sticky business segments.

CEO confirms this in answer to his question:

Tore Svanberg: Yes. Congratulations on the very strong results and outlook. My first question, Rajesh, is on your outlook for this year. So Arthur said you expect to grow more than 50%. I was just wondering, maybe qualitatively talk a little bit about your visibility there? And perhaps also talk about which of the three segments that you expect to drive that 50% plus growth rate? Thank you.

Rajesh Vashist: Yeah. So I think Art said that we would grow by at least 50%, not more than 50%, I’m not quibbling. But I think that it’s exactly what I spoke about, Tore, its comms, enterprise networking, data center as well as the automotive sector as well. The consumer stuff does grow, but albeit small, and the mill aerospace, as I singled out this time will also grow, but it’s going from a pretty small base. So even though the percentage growth is phenomenally high, the dollar amounts are relatively low.

So I think that’s exactly the answer. That’s how we intend to see it and that’s how we intend to grow. It’s good for us because these are high ASP, high gross margins in dollars as well as in percentage products, and they’re very, very sticky.

Supply Chain Woes

Chris Caso: Okay. Very simple. Thank you. I guess moving forward, we – I guess a two part question here, and we’ve obviously been in a pretty tight supply situation from an industry standpoint for a while that you benefited from having better access to supply. Can you speak to what you think about the industry supply-demand balance here? Do you think that these tight supply conditions from an industry’s perspective are still persisting and likely to persist? And then maybe if you could talk about the visibility that you have or you’ve spoken to half that your customers are still booking you several quarters out and giving you very good visibility with the increase in annual guidance, is that an indication that, that’s still continuing as well?

Rajesh Vashist: Right. Well, I don’t want to be a spokesman for the semiconductor industry because we play in certain markets. And we, for example, don’t play in 28-nanometers and tighter markets. But speaking for the markets that we are in, generally speaking, we don’t see a real significant loosening up. It’s hard to tell the wishing for it to be so from the actual events. We still believe that there are – there’s pretty good take rates from our customers. One of the advantages, of course, we have is that we have 15,000 customers. So we have a very, very broad base of customers. So we don’t have that massive concentration and our concentration continues to grow to decline from that one customer.

And so I would say, in my book, even for 12 months, even outside this calendar year between now and 2023, second quarter, I continue to see a generally tight supply. And regarding one more point, which is that we are a premium supplier with very specific use case of our products. So we may be seeing a particularly tighter supply because there are fewer customers, there are fewer customers for it, but there’s also fewer suppliers for it, if at all. So generally, that’s how I feel.

Art Chadwick: And Chris, I’ll add to that. You asked about customer lead time. I just looked at this yesterday looked at our statistics, and our customers are still booking orders on average six months out, some a little more, some a little less, and that has actually remained relatively constant for a number of quarters now. So no real change in that. But that gives us really excellent visibility. We’re sitting here at early May and our average customers booking six months out. So that gives me a lot of comfort in my comment that we expect to grow revenue by at least 50% this year.

Gaurav here: It is comforting to hear about predictability of revenue and that it has only seen tailwinds with the supply chain constraints. I find it very surprising that they limit their revenue projection to grow by ONLY 50%. There is a lot of sandbagging going on here, which can be a two-edged sword in this market environment.

Alessandra Vecchi: Congratulations on a very strong quarter. Art, maybe one for you just on gross margins and the tremendous gross margin performance you’re able to put up in this tight environment with input costs. I think in the past, you guys have said that you viewed 65% is the long-term target, at which point you’d be giving up revenue growth for margin. But it seems like between data center, automotive, traction and higher-margin IC product that you have maybe stronger gross margin tailwinds than we would have thought. Can you sort of walk us through how to think about the structural margin we can expect going forward?

Art Chadwick: Yes. I think – first of all, thank you, Alex. I think your observations are valid. We are getting two premium pricing in terms of the value that we provide our customers, and that is even more so the case in some of these high-value, newer products and higher performance products that we have introduced and we’ll continue to introduce.
We’ve always thought that 65%, plus or minus, kind of mid-60s is the sweet spot for gross margins. And I think that’s still a good way to look at it, though we are seeing upward bias to that for the reasons that you mentioned.

I mentioned on the call that I expect our gross margins to remain very strong in the mid-60s for the balance of the year. I’m very comfortable with that. There is that upward bias that we just talked about. So, in the back half of the year, we generally have a slightly higher percentage of consumer sales than other sales and that will put a slightly lower bias. So without getting too granular, I think the best way to think about our gross margins are mid-60s with a slight upward bias going forward.

Alessandra Vecchi: Great. That’s incredibly helpful. And then, just on the inventory and the increase in your inventory dollars, I understand that’s for the revenue. But I’m more interested in how you were able to procure such a market increase in dollars. Is that part of the investments you’ve made on the back end? Are you seeing capacity free up? Is it you’re becoming a more important customer at the foundry? Any color you can give on that?

Art Chadwick: Yeah. I think all of that is true. As I’ve mentioned in the past, we have been purchasing capital equipment to support our back-end capacity. That capacity has been going in, in the last couple of quarters, and that helps us to get more throughput. That’s also helped lower cost part of what I talked about earlier in my script.

I think our operations group has done a great job of securing the required wafer that we need from both TSMC for our CMOS wafers and from Bosch for our MEMS wafers. And obviously, we have to – if we’re going to grow revenue, we have to grow inventory. So, our ops group is making sure that we’ve got the inventory to support our expected sales growth.

Gaurav here: Great commentary on gross margins. Supply-side is solid and under control (both from TSMC and Bosch) and they seem to be ready to take on growth.