Silicon Laboratories' Q3 2025: Contradictions Emerge on Gross Margins, Customer Inventory, and Wi-Fi Growth

Date of Call: None provided

Financials Results

• Revenue: $206.0M, up 7% sequentially and up 24% year‑over‑year
• EPS: GAAP loss $0.30 per share; non‑GAAP EPS $0.32 (beat guidance midpoint by $0.02); Q4 guide non‑GAAP $0.40–$0.70 and GAAP -$0.22 to $0.08
• Gross Margin: GAAP 57.8%; non‑GAAP 58.0%, up 170 bps sequentially and up 350 bps YoY; Q4 guidance 62%–64% (includes ~200 bps one‑time benefit; midpoint implies ~840 bps non‑GAAP YoY improvement)
• Operating Margin: GAAP operating loss $12M; non‑GAAP operating income ~$11M; GAAP OpEx $131M (includes $20M SBC, $2M amortization); non‑GAAP OpEx $109M

Guidance:

• Q4 revenue expected $200M–$215M (midpoint implies ~25% YoY growth)
• GAAP & non‑GAAP gross margins expected 62%–64%; Q4 includes ~200bps one‑time credit
• Non‑GAAP operating expense $110M–$112M; GAAP OpEx $134M–$136M
• Q4 non‑GAAP EPS $0.40–$0.70 (diluted ~33.2M); Q4 GAAP EPS -$0.22 to $0.08 (basic ~32.9M)
• Management expects full‑year revenue growth of ~34% vs 2024 and continued margin expansion

Business Commentary:

• Revenue Growth and Market Expansion:
• Silicon Laboratories reported revenue of $206 million for Q3, up 7% sequentially and 24% year-on-year.

• Growth was driven by strong sales and profitability in both industrial and commercial segments.

• Gross Margin Improvement:

• The company's non-GAAP gross margin reached 58%, which is 170 basis points higher than the previous quarter.
• The improvement is attributed to a favorable product mix and increasing sales through distribution.

• Smart Metering and AI Impact:
• Smart metering and AI applications contributed significantly to the company's growth, with a 22% year-on-year increase in the industrial segment.

• Utilities worldwide are expanding infrastructure to meet energy demand, benefiting Silicon Labs as the global leader in smart metering.

• IoT Growth and New Product Introductions:

• Silicon Labs introduced innovative tools like Studio 6 and Simplicity AI, which are expected to boost development efficiency.

• These tools are designed to streamline the adoption of wireless solutions and accelerate IoT growth.

• Asset Tracking and Strategic Partnerships:

• The company highlighted the potential of active asset tracking as a growth area, with new solutions that offer real-time GPS-like precision at reduced costs.
• The expansion of the partnership with GlobalFoundries for manufacturing Series 2 wireless SoCs will add needed U.S. capacity for competitive IoT solutions.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management: "delivered third quarter results consistent with our outlook, demonstrating strong sales and profitability growth." CEO: "we expect full‑year revenue growth of 34% compared to 2024." CFO: GAAP gross margin 57.8% and non‑GAAP 58%, "up 170 basis points from the prior quarter." Guidance raised margins into low‑60s with continued profitability focus.

Q&A:

• Question from Tore Svanberg (Stifel Nicolaus & Company): My first question is on the gross margin guidance for Q4, Dean. You talked about the one-time benefit. Maybe you could clarify exactly what that is. Even without that benefit, gross margin is up pretty significantly. How should we think about that dynamic, especially going into 2026?
  Response: Q4 includes a one‑time ~200bps credit recorded in the period; backing that out the midpoint is roughly 61%, with 60–61% expected for the next few quarters and a gradual return toward the long‑term range (56–58%).

• Question from Tore Svanberg (Stifel Nicolaus & Company): You introduced the Studio AI/SDK tool at Works—any financial impact you could talk about from that new tool over time?
  Response: The agentic AI SDK lowers the development barrier and accelerates time‑to‑market, enabling faster customer adoption and scalability that should drive more design wins and revenue over time, but not an immediate material boost.

• Question from Christopher Rolland (Susquehanna): On channel and customer inventories: could you discuss expectations for distributor days (target 70–75) and timing, and your view on end‑customer inventory levels and potential replenishment?
  Response: End‑customer excess inventories are effectively gone; distributor DSO target is 70–75 days and management aims to add ~5 days per quarter (this quarter rose ~10 days due to POS growth plus a strategic stocking agreement), progressing toward the target over coming quarters.

• Question from Christopher Rolland (Susquehanna): High‑level setup for 2026 — how do you see the year shaping up and which products will carry growth best?
  Response: While not issuing a 2026 guide, management expects to outperform the market driven by Series 2 strength, Series 3 ramp, smart metering, ESL, CGM, growing asset‑tracking momentum and some Matter revenue; positive bias for continued share gains and margin/EPS expansion.

• Question from Cody Acree (The Benchmark Company): Can you talk about the gross margin incremental drivers for Q4 — the sequential bump seems larger than normal mix would entail?
  Response: Incremental upside driven by a few specific higher‑margin parts, a higher share of sales through distribution (~74%), and strength in industrial end markets.

• Question from Cody Acree (The Benchmark Company): Any directional color on the two segments (home & life and industrial & commercial)?
  Response: Expect similar quarter‑to‑quarter mix but management declined to provide a formal segment guide due to limited visibility from short lead‑time orders and backlog uncertainty.

• Question from Kyle Bleusignon (Barclays): What has changed since analyst day on margins — has product mix surprised and is the >60% level sustainable or mix‑driven?
  Response: No material change — analyst‑day long‑term range remains 56–58%; current >60% is a shorter‑term, mix‑and product‑specific phenomenon and should gradually revert toward the long‑term range over time.

• Question from Kyle Bleusignon (Barclays): Update on Series 3 rollout — expected percent of mix and pricing implications as it ramps?
  Response: Series 2 remains a multi‑year growth engine; Series 3 is early and will ramp product‑by‑product with material revenue impact over time (not immediate); sets up long‑term opportunity; no specific pricing changes provided.

• Question from Quinn Bolton (Needham & Company): Is active asset tracking a fourth company‑specific driver (alongside CGM, smart meters, ESL) or smaller?
  Response: Early but promising — it fits Silicon Labs' technology and scale and could become a meaningful, company‑specific growth driver over time, though it's premature to over‑index today.

• Question from Quinn Bolton (Needham & Company): Is the active asset tracking capability based on Bluetooth LE channel sounding or another wireless technology?
  Response: Yes — BLE with channel sounding is one applicable technology and is attracting customer interest because it enables relative positioning and high‑accuracy, low‑power tracking.

• Question from Quinn Bolton (Needham & Company): Is the path for continuous glucose monitors to reach ~10% of revenue by early 2026 still intact?
  Response: Yes — management still sees a path to CGM reaching about 10% of revenue in the first half of next year.

• Question from Joe Moore (Morgan Stanley): Are you still open to M&A and how are you thinking about acquisitions vs returning cash to shareholders?
  Response: The company remains open but with a tight, accretive filter (must accelerate growth and fit core markets/tech); given limited compelling targets, management expects excess cash is more likely to flow to buybacks.

• Question from Joe Moore (Morgan Stanley): Are customers building inventory in response to geopolitical risk (e.g., line‑down events)?
  Response: Broadly no — management is not seeing customer inventory builds tied to geopolitics; overall customer inventory levels have decreased, though pockets may exist.

• Question from Peter Peng (JP Morgan): With revenue above $200M and decreasing end‑customer inventories, are you still under‑shipping to end demand and if so, by how much?
  Response: No — management believes shipments are aligned with end consumption and not under‑shipping.

• Question from Peter Peng (JP Morgan): Can you share updates on Wi‑Fi programs and trajectory over the next one to two years?
  Response: Wi‑Fi grew ~30–40% YoY this year; it's currently the smallest of four pillars but the second‑fastest growing; Series 3 will introduce more Wi‑Fi products and management expects continued accelerated growth and share gains.

Contradiction Point 1

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

What was the Q4 gross margin benefit, and how will gross margins evolve in 2026? - Tore Svanberg(Stifel Nicolaus & Company)

2025Q3: The gross margin benefit in Q4 is a credit due to a specific part that has better margins. This benefit is expected to be a one-time event. Looking into 2026, we should expect to maintain margins in the 60%-61% range due to our product mix and production ramps. - Dean Butler(CFO)

Will gross margins remain at current levels or improve further in future quarters? - Nathaniel Quinn Bolton(Needham & Company)

2025Q2: Our financial model targets a non-GAAP gross margin range of 56% to 58% in 2025, and we expect to finish the year at the high end of that range. - Dean Butler(CFO)

Contradiction Point 2

Customer Inventory Levels

It involves changes in expectations regarding customer inventory levels, which have implications for revenue and demand visibility.

What are your expectations for the DISTI channel and customer inventories over the next few quarters? - Christopher Rolland(Susquehanna)

2025Q3: Customer inventories are now at the lowest levels since tracking began, indicating no significant excess inventory. - Matt Johnson(CEO)

Did revenue mix change geographically in Q2, and what drove the gross margin improvement? - Thomas James O'Malley(Barclays)

2025Q2: Our inventory levels are down now to 5 days, down from the 15 days we booked in Q1. And we're now down to the 5 days, which was our target level. - Matt Johnson(CEO)

Contradiction Point 3

Customer Inventory Levels and Alignment with Consumption

It highlights differing perspectives on the alignment of shipments with end customer consumption and inventory levels, which are critical for understanding the health of the company's supply chain and demand.

Are you still underselling demand given revenue and customer inventory levels? - Peter Peng(JPMorgan)

2025Q3: We are aligned with consumption, and end customer inventories are at the lowest levels. We are not undershipping, nor are we overshipping. - Matt Johnson(CEO)

Where are we on shipment versus end consumption trends? - Peter Peng(JPMorgan)

2024Q4: As long as there's excess inventory, we're not at consumption yet. Inventory is no longer the primary driver but is working its way down. - Matt Johnson(CEO)

Contradiction Point 4

Wi-Fi Growth and Market Position

It involves differing statements regarding the growth and market position of Wi-Fi products, which are key components of the company's product portfolio.

Can you provide an update on Wi-Fi’s trajectory over the next 1-2 years? - Peter Peng(JPMorgan)

2025Q3: Wi-Fi is growing and winning share. The Series 3 platform will bring new Wi-Fi products, setting us up for continued growth in this segment. - Matt Johnson(CEO)

What are your thoughts on the Synaptics-Broadcom agreement for next-gen technologies like Wi-Fi 8? - Christopher Rolland(Susquehanna)

2024Q4: Wi-Fi is earlier in the cycle compared to Bluetooth, but we expect more products and derivatives to further accelerate growth in Wi-Fi. - Matt Johnson(CEO)