Silicon Laboratories Inc. Stock

Thank you very much. Welcome back to the Barclays Global Tech Conference. I'm Tom O'Malley, semi and semi-cap equipment analyst. Very happy to have Dean Butler with us and also Thomas Haws with us from Silicon Labs. How are you guys doing today?

Yes. Good. Thanks for having us, Tom.

Thank you for being here. I appreciate it.

Okay. So I think in prior conversations, the way that we start is with a larger thematic, which is talking about how does this AI spend in your vision look? Is it premature? Is it front-end loaded? Do we see this bubble? I think like a better question tailored for Silicon Labs is, one, I'd love to hear your opinion on just where we are in the investment cycle in aggregate. But two, how do you guys intersect this trend? Obviously, you guys are going to be more towards the edge. I'd love to hear about your products and your vision for the AI dollars coming into cloud.

Yes. I mean my opinion, Tom, is we're super early innings. And look, Silicon Labs, we're not data center focused. So we don't really have a great opinion on sort of how the data center sort of rollout is and where they are in their investment cycle. But I look at it as, look, this edge opportunity will ultimately be in addition to what we're seeing in data center. Right now, you see billions and almost trillions of dollars getting sort of invested in the data center. Why? All the data exists there. It's easiest to train on, it's easiest to deploy. That's still early innings. Like I don't think as a society and sort of technology leap that we've fully figured out what the data center AI is and where it's going. I think there's several years of runway left just in data center.

Then from there, like that's where all the investment going now. From there, what has yet to happen is -- it goes from data center, most likely into enterprises. Those are the next set of class of people that have large data sets that can learn on them, that can deploy them, they can add intelligence. I think we're super, super early in enterprise-level AI deployment. So I think there's a lot of upside sort of room to grow within enterprise AI deployment.

And then finally, what's just now starting as percolating as an idea, not even deployed yet is at the very edge, like that physical AI. And that, if you just look at the number of devices that are deployed around the world, you're talking billions and billions of devices, that's added on top. So I think I look at it as a multiyear journey that's starting with data center that will morph into enterprise that will ultimately become even bigger and expanded as it gets to sort of far edge physical AI. So I think we're super early, Tom.

Yes. And when you think about the edge, something that I always kind of go back and forth with is you've got a device today in everyone's pocket that has run 99% of your applications for most of your life. You have this fork in the road, right? Do you think that it's your smartphone that brings you Edge AI? Or do you think that there's a variety of other devices that come into play? If you look at where other products have tried to intersect this, it's glasses, it's wearables, it's watches. Do you see future content for SLAB making its way into this device? Or do you think that you see this burgeoning of other products at the edge that are AI intelligent?

Yes. My view is the other products become more intelligent over time. And I think it really is around what is the computational requirement? Like what is the user, if it's machine-to-machine or person-to-machine, like what is that user trying to accomplish? So if you're at the data center level, you're trying to accomplish, hey, crunch a lot of information, do a lot of correlation.

If you're AI PC, AI PC is sort of a new over the last couple of years, a lot of effort has been going there. that's a next level computation. It's not data center, but it's also not phone, right? So you can do a lot more on the laptop at that level. And then phone, right, you're doing a lot of query. Like today, most people on the phone might use it for videos, Google Search type applications, and that has a lower processing power, although it's very powerful.

Lastly, when you get out to the physical edge, the Edge AI, that is machine-to-machine or automating sort of things around you. So I think ultimately, all of those links will have these intelligence engines in them. You'll have training at one end of the data center and inference for the most part at that bigger far edge.

Helpful. So I want to go into the technology first and then kind of go into the verticals because your technology does cut across both of your verticals. But maybe talk about why the connected MCU is so important when you look at the edge. You have a variety of different radios that you're attaching to your MCU. I think that you were very early in this transition to offering a suite of different connectivity options with your MCU. In fact, like we're hearing about more companies coming into the fold today. So maybe spend some time talking about what differentiates you in the connected MCU space. I know you're moving from Series 2 to Series 3, both on the connectivity side and then also on your microprocessor side.

Yes. I mean I think one thing that people don't always appreciate is almost everything that we sell is an MCU, right? Most of them have radios attached to them. So MCU plus radio, they're fully integrated. In some spaces, we'll sell people just a vertical MCU or just a vertical radio. But the vast majority of our products are the intersection of these 2 integrated radios plus MCUs. So there's different needs depending on different applications. So to give you an example, if you're running an application today that might be a fairly basic, call it, a commercial HVAC controller.

While commercial HVAC controllers have sort of always existed, and there's always been an MCU in there and that's sort of controlling that, a lot of our market opportunity comes from, hey, we now want to network that. Like how do we take what we've already got and network it. And that means sometimes you're augmenting an existing MCU with the radio, sometimes you're replacing that in its entirety. The biggest inflection we see is more and more move toward networking things and that's sort of the -- at the very basic level, the investment thesis that Silicon Labs has is, hey, there'll be more connected devices in the world going forward, and that requires both MCUs and radios.

To give you an example on -- so we're always out in front of most of the end markets that we service. In Series 3, which is our next-generation device coming out, we've designed that to be ready for the future of AI coming to the Edge. And that comes in a few flavors, but primarily in processing capability. So our Series 3 device at the higher end will support up to 100x the processing capability of a Series 2 device. So really sort of extending the processing capability on the next generation. It also adds a lot of features that I think people underappreciate today that we will learn over time that will become more and more important in our world as there's more connected devices and these devices are doing processing with real-life data, I think security elements come into play as well. I think that's an area that Silicon Labs has done a super job over time is actually adding leading-edge security protocols that -- whether that's PSA, so PSA is the third-party standard. Silicon Labs was the first to achieve Level 3. It's first to achieve Level 4, which is the current existing state-of-the-art.

On next-generation Series 3, you have all this extra processing power 100x. We're also upping the game in security around that. So as you're processing, how do you're encrypting these communication flows, there's one version that is likely to be post-quantum computing resistant, like how do you really sort of spin your ciphers in the most encrypted way possible. And look, not every application is going to require that level of security, but we think the world is underappreciating what security will be needed in this much more processor-intensive feature.

Yes, we're definitely hearing more of that. We had Synaptics up on the stage yesterday, and they talked about a specific AI core that they were using within their next-generation processor that's going to be connected as well. They play more in the WiFi space. That's not an area that you spend as much time in. But like when you say more processing power, does that just mean dedicating more cores to AI processing? And then maybe what does the Series 3 bring from an ASP uplift perspective? Should we be thinking about this as a tailwind to total revenue on kind of like flat units sold?

Yes. I mean, first, generally, I mean, across almost all semiconductors, you can generally assume that, hey, a next generation comes with higher ASPs. And why is that the case? Because next generations either are faster, more efficient or have more features. So that would also be the case for Series 3. But I think it's important to note that a lot of applications, our existing Series 2 is still hands-on winning in the marketplace. And I think many semiconductor players, it's all about sort of the next process that's coming out, the next set of features.

For Silicon Labs, actually, the things that we have in hand actually are servicing most of the market needs today. And as we go into Series 3, it's out ahead of the need. So like we think that we're sort of future-proofing for the most part. When it comes to processing power, what does that mean? I think, was kind of your first question, Tom. It's not just that the AI accelerators and NPUs that are onboard the chip, like that's not how the processing power is going up. There's different sizes that you need. So depending on the complexity of the algorithm that needs to run, you need big NPUs or small NPUs. So there's sort of different flavors on size and capacity.

But for the most part, these are multi-core processors that are running on the MCUs. And there's sort of bigger processor might be used for operating systems. There might be accelerators that are linked in. There might be network co-processors. And then there's a whole array of things that are running on chip and things that are running even off chip, and we're as computational power goes up, one of the sort of constraining factors is memory. So customers are wanting to run more and more software on chip. And that I don't think is actually going to slow down anytime soon as AI sort of keeps moving forward at this fast rate, software is going to more and more important and the computational power is able to keep track of that.

Super helpful. Last one on the technology side. Series 3, when are we going to see that in the market in more volume?

Yes. So Series 3, the first device is already shipping in high volume. So earlier in 2025 is Q1 or Q2, somewhere around that time frame, our very first Series 3 went into general availability. So therefore, it's already shipping in high volume. The second device is out soon and the third should follow on pretty quickly. So the first sets of the Series 3 family are now starting to come to market. The first one is already shipping in its reasonable volume. But I think what you would see is the additive of revenue will continue over time.

Actually, Series 2 design wins are right now actually growing even faster than Series 3 design wins given the recent nature of Series 3 just coming out. And that, I think you will continue to see a very long lifespan of revenue generating out of Series 2. These devices are generally a 10- to 15-year life device. So we're sort of maybe not even into the sweet spot of where Series 2 is and now Series 3 is already coming out into...

Super helpful. Okay. So you've segmented your business into 2 buckets. They're both growing quite nicely in calendar year '25. I kind of want to walk through each of them. So why don't we start with home and life? A broader trend that you guys have talked about is CGM, and that's been a big vector for you guys, so continuous glucose monitoring. How big is that business for you now? And then can you describe where you're positioned in that market and what customer engagement has been like so far?

Yes. Home and Life, just maybe just to start off, we have sort of 2 sides of the business. Home and Life, which is the smaller side and then industrial commercial. And to a first order, it's 45-55, sort of the bigger on the industrial side or in some cases, 60-40. But it's a pretty balanced portfolio. Within sort of the Life side, which I think you were touching on, Tom, is that's probably the fastest-growing piece of the portfolio. We've spent a lot of time over the last couple of years sort of focused on connected medical devices. How -- there's sort of an expanding need for monitoring, so health monitoring sort of in the world.

One of the big areas we found a ton of traction is continuous blood glucose monitors. And for anyone not aware, generally, you might see them on the [ Tricseptiv ], it's measuring insulin levels for people that might be diabetic. That's going through a bit of a shift where it used to, if you recall from days of the past, you would hold up your phone to the [ Tricseptiv ], it would take the reading. That's generally an NFC communication. That's largely converted over to Bluetooth now. And our Series 2 sets of devices have really hit the sweet spot for a lot of these makers of glucose monitors.

And that's where we're seeing sort of the fastest uptick in traction and deployment. We have publicly disclosed that we've won about a dozen of these customers now in their various ramp phases. We think that, that gets to about 10% of revenue pretty soon over the next couple of quarters. This is in comparison that if you run the clock in 2024, the revenue from that application was approximately 0. So it's not too often as a company that you come across these 0 to 1 movements. So this is an opportunity that we've been able to seize on where we're literally going from 0 to very fast revenue adoption.

We said, I think, in our last public call that medical has now grown 60% year-on-year for us in '25. So that's -- it's been a great business. And look, we're not done. We're like highly confident that we can win more customers in this application and more even meaningful customers. We've engaged with 60 programs now, and we're very confident that we'll win a lot of these, although we haven't officially announced any new sort of meaningful wins yet.

We had a good conversation earlier this year around the customer set. And if I remember correctly, there's a couple of chunky customers at the top that when one customer converts, that can be really beneficial for you guys from a growth perspective. In terms of like your strategy with those customers, is it just a bring out new devices, so that they're very performant, so that they're very cost effective and you hope that one day they move over to you guys? Or is there anything more specific that you guys can point us to as reasons why you take down one of those big guys...

Yes. I think our observation around this set of applications has been our feature set is like a perfect fit for most of them. Like I said, where days past, this might have been running NFC and this market sort of transitioned into Bluetooth. What we find is the people that have actually adopted Bluetooth as a technology have put in relatively basic older sort of Bluetooth applications where they have weaker energy field sort of focus. And for something that's only going to last a week or 2, the energy sort of consumption rate, it means lower batteries, right? So smaller batteries, so less energy usage in smaller batteries. And these things are disposable. So you don't want a whole bunch of batteries going into landfills. So any extent that you can shrink battery size for things that are disposable, it's sort of better off for the environment.

And -- but in a really big way after the security element that we've added into this lineup of devices has been like a meaningful needle mover for most customers. And when we approach a new customer in this application, and we explained to him, these are the feature sets that we can bring. It's generally met with open arms on like, yes, how do we enable some of these security features? Yes, we have high interest in energy consumption and reliability of signaling on these things.

Okay. Let's go to the other side. So Industrial and Commercial. The 2 big trends you've talked about there are ESL and smart metering. ESL is, I think, a really interesting place to start. In terms of your ability to also gain chunky customers there, so why don't you start with what's the transition we're seeing in stores and in labeling in general? And like what value do you bring there? And then I think a similar trend, honestly, where you've done a very good job of getting into the market and seeing some really strong growth, but it's like kind of the next big chunky customer is the next step forward for you guys. So what gets you to that next customer as well.

Yes. That one, it's -- this one is really more about the market, ESL as a market rather than, hey, you got to win some really big customer. So that market is relatively early in its adoption, right? And I think if you wind the clock, just like 3 years, you would find, hey, a lot of people are in testing trial phases. Now we're starting to see some pretty big retailers take substantial steps forward in sort of deploying the stuff sort of really broadly across an entire geography or an entire set of stores. So that market looks really healthy and like that we're sort of seemingly out of the trial phases, if you will.

And trial phases for us, just call it the last few years, we shipped 300 million devices. So this has a huge, huge quantity potential. We've heard from some retailers that have sort of published articles around this says, in some stores, you might find up to 120,000 SKUs in just one big box store. So if you say, wow, if you put a connected price label at every SKU on every shelf in a store, one store is 120,000 units, times number of stores, times number of brands kind of worldwide, you quickly get a huge amount of volume. And I think there's just a lot of room to run like globally for the deployment of these things.

In the U.S., you'll see like retail kind of deploying this. In Europe, you see grocers deploying it, mixed bag in some of the APAC countries, Korea, Japan, et cetera. So we're early on, and this ends up being -- it comes actually back down to battery consumption. So we can make a shelf label tag last 7 years on a coin cell battery. So that's pretty amazing. No one wants to walk around and change batteries and interference. So think about if you're in one of these stores, it's got 120,000 of these radios sort of simultaneously communicating, there's a big sort of interference engineering challenge to solve, and we're super good at that. So this sort of fits right into our wheelhouse.

A longer-term trend that we've heard a lot more about is smart metering. You had some geographies that we were rolling out, including India that have been pretty successful for you guys. Where are we in that rollout? And do you think that, that continues to be a major driver of growth.

Yes. Smart metering, look, I do think a lot of people pick up India because it's a new driver. It's a geography that's deploying really for the first time in massive volume. There's a lot of people in India. But what we're seeing actually is a broader worldwide set of strength that if you asked me 2 years ago, will there be sort of a worldwide push for more and more of these meters? I probably would have said, hey, it's slow and steady typical industrial. But what we've started to see is more and more upside actually broadly in that market on people focusing on energy usage from electricity, resource monitoring for water, resource monitoring for natural gas. And we ship to all 3 electric, water, gas in just about every country in the world.

India has been much faster in deployment than we've seen. So we've been in this business for 15-plus years, supporting these smart meter deployments. We are probably market leader in most of the communication links for these years. And India has just come to market a lot faster than we've seen others. And this is a 250 million unit deployment that we're still relatively early. We started deploying these in kind of mid-2024, and the ramp sort of keeps going. It's not yet at an asymptotic sort of normal run rate. It's actually still ramping up. So that's -- it's a good sign.

I want to pivot to gross margins. When I think of gross margins, there's multiple factors, and you guys have shown some really good results lately. I think one that you get asked a lot is pricing and how pricing is trending as a business year-over-year. Two is really thinking about product differentiation. So moving from more Series 2 to eventually more Series 3. And then three is Disty versus end customer mix or sell-in or sell-through essentially, where is your revenue exposure going? And I think those 3 have kind of combined to result in some gross margins that are better than your long-term target. And so just talking about the sustainability of those gross margins, like what are the pieces that are most impactful? And where do you kind of see those margins trending in the near term?

Yes. I mean, look, I think people wrongly look at Silicon Labs and think, wow, that's sort of a consumer-focused business. It's really not. Actually, it's largely an industrial-focused business. Even though we may say industrial, commercial is 55%, 60% of the portfolio, most people would call medical industrial, if you look across our peers. So we're highly an industrial sort of focused company, more so the consumer. And hence, our gross margins are in the high 50s. So the longer-term model that we've communicated is 56% to 58%. We continue to believe this is a high 50s sort of gross margin business.

In the near term, like the last couple of years, this year, we will probably shake out '25 and kind of what's looking for '26. We're probably at that kind of high 50s, low 60s. And industrial has been doing super well. Distribution channel has been super well. Those sort of all sort of additive to gross margins for the company. This is something I think is sort of underappreciated from the marketplace is just the sustainability of these high gross margins relative to a lot of other of our peers. And I think the biggest difference is many of our peers are more consumer focused than we are.

When you think about 2 trends that people worry about broadly in the space, one is exposure to China, just in general across semiconductors. And then two, we're hearing about potentially memory shortages impacting consumer demand, which you just described was really a minority of your total business. And you look out into '26, are either of those a concern for you in terms of either lumpiness in revenue trajectory and/or limitation of end device sales?

Yes. I mean we haven't seen anything that's materially affecting our customers from a memory perspective. For the most part, most of our customers don't have huge memory requirements. I mean, of course, they all buy different memory products, but you're not talking really high bandwidth, like gigabits of memory generally. So I just think of like our class of customers, that's not a huge concern from them, at least not what we've heard. So I don't think that's really a sort of dynamic happening right now, Tom.

So if I look into calendar year '26, I think you guys have done a really good job of verticalizing your opportunities, showing some growth trajectories, a lot of transition from a technology perspective. I think it's been a lot of a show-me story after a recovery post pandemic where you guys have continued to build the revenue base. Gross margins have been better. I think that the question in many people's minds is just how do you get comfort around these opportunities when it's very customer-driven, and it's not really easy to do a ton of bottoms-up work on these verticals. So I know you haven't guided 2026, but I guess what are you most excited about in this coming year? And where should investors be paying attention as we look to learn a little bit more about Silicon Labs trajectory.

Yes. One, I like the verticals that we talk about. I mean people like to do a lot of homework around sort of the verticals that we talk about. And look, those are design win stories, right? These are like, hey, where we're focused and you have a bunch of design wins. But I think what's often missed is when people go, "Hey, show me, I'm waiting to see how the growth sort of materializes, people discount the history of this company. And you can do the started endpoint math differently. But if you look over the past 10 or 15 years, this company has consistently grown 15% to 18% compounding annual growth rate. So it's actually not a huge leap for us to say, yes, we think we can sustain 20%.

And I think people sort of forget the history of sort of where this company has been. And look, the supply chain over and under has created some noise around that and like how do you get very comfortable with it? But the base investment thesis is very simple, at least in my eyes, Tom. It's -- look, there's going to be more and more connected devices around us in the future than there are today. Those connections will require a wireless radio. They will require an MCU. And I think at the end of the day, that's the bet that actually I think we're all making. And I feel very comfortable that, that is a winning bet. I mean I just don't know anyone that would debate and say, "Hey, that will not be true in the future. I think that's -- at the high level, that's what we're anchored to, Tom.

Super helpful. Last one, capital allocation. You've seen a recovery in both revenue and in the stock, stock buybacks, capital returns, M&A, anything worth commenting on that you guys see as a priority?

I mean nothing new. We haven't really changed our tone and position around this, which is, sure, we'd like to do some M&A activity, but we have a really fine filter on what would make sense for us, which is, hey, we like our wireless end application -- our IoT end applications. We like wireless technologies. We like MCU technologies. We are really focused as a company on that. And I think that focus really is the magic that sort of what Silicon Labs is that focus on executing. So if we were to go out and pursue M&A activity, we would want to maintain sort of that focus, which means, hey, as cash flow continues to go up and as sort of growth comes through to the bottom line, most likely, this will end up getting deployed through buyback means rather than M&A means.

Very helpful. Thank you for being here. Really appreciate the time, and it sounds like exciting times ahead.

Yes. Thanks Tom.

Yes. Appreciate your time.

Thank you, guys.

Hello. My name is Didi, and I will be your conference operator today. Welcome to the Silicon Labs Third Quarter Fiscal 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now turn the call over to Giovanni Pacelli, Silicon Labs Senior Director of Finance. Giovanni, please go ahead.

Thank you, Didi, and good morning, everyone. We are recording this meeting, and a replay will be available for 4 weeks on the Investor Relations section of our website at investor.silabs.com. Our earnings press release and the accompanying financial tables are also available on our website. Joining me today are Silicon Labs' President and Chief Executive Officer, Matt Johnson; and Chief Financial Officer, Dean Butler. They will discuss our third quarter financial performance and review recent business activities. We will take questions after our prepared comments, and our remarks today will include forward-looking statements that are 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 on the Investor Relations section of our website. I'd now like to turn the call over to Silicon Labs' Chief Executive Officer, Matt Johnson. Matt?

Thanks, Giovanni, and good morning, everyone. Silicon Labs delivered third quarter results consistent with our outlook, demonstrating strong sales and profitability growth driven by disciplined execution throughout the company. Based on our Q3 results and Q4 outlook, we expect full year revenue growth of 34% compared to 2024. Even more exciting is the continued growth ahead with many customers at various stages of qualification and new production ramps leading into 2026 and beyond. Our industrial and commercial business continued its strong performance in the quarter, extending the momentum we have seen throughout the year. Demand for commercial applications such as building safety, lighting and access points experienced strong quarter-over-quarter sales growth, while normal variation in electronic shelf label shipments drove softened quarter-over-quarter results.

In industrial, smart meter demand continues to build as utilities worldwide deploy near real-time tracking of critical infrastructure and resource usage. The rapid rise of artificial intelligence is driving new growth in energy demand, increasing the need for intelligent load balancing across the world's electrical grids. In response, many regions, including the United States, India and Japan are expanding, upgrading or installing new monitoring infrastructure to strengthen grid resilience. This trend reinforces the importance of connected solutions that enable efficient data-driven management of energy systems. As the global leader in smart metering, we are well positioned to benefit from this trend.

Our Home & Life business grew as expected with smart home applications delivering another consecutive quarter of sequential growth with medical customers up nearly 60% year-over-year as we ramp new programs and continue to expand our market share in this area. Our strong customer engagements with high win rates in this space validate our conviction that Silicon Labs wireless solutions are setting the benchmark for continuous glucose monitoring and remote outpatient care. Markets where reliability, performance and security are critical. As connected health and smart living ecosystems mature, our differentiated portfolio positions us to capture substantial new design wins across next-generation monitoring, diagnostics and wellness devices.

At this year's Works with Austin Summit, we were joined on stage by senior leaders from Amazon and Cisco as we introduced 2 groundbreaking design tools that are redefining how customers develop and deploy connected solutions. The first, Studio 6 is a fully revamped enablement platform that streamlines development, integration and debugging, reducing complexity for engineers across product lines. It offers a powerful suite of tools that have become the hallmark of Silicon Labs' success and a key differentiator valued by our channel partners and broad base. The second, the Simplicity AI software development kit, or SDK, is a new platform we believe will become the de facto standard for IoT developers. It enables customers to leverage Agentic AI train directly on Silicon Labs software design rules and frameworks, delivering a step function increase in the speed, quality and efficiency of customers' code creation and testing.

While currently available to select customers, we believe this first-mover advantage demonstrates our continued innovation and leadership in this space. The combined impact of these tools is powerful, easier wireless adoption, faster development cycles and over time, entirely new applications created through human AI collaboration. Another emerging trend we see as a significant future growth opportunity is accelerating demand for active wireless asset tracking. Customers increasingly want to monitor high-value assets in real time, moving beyond today's passive RFID tags and costly cellular solutions that limit scalability in battery life. Silicon Labs' latest solutions make this possible with advanced radio location features that deliver real-time beaconing with high accuracy and ultra-long battery life.

This enables real-time GPS-like precision at a fraction of the cost, which is an ideal for an increasing set of emerging applications. As supply chains and operations become more data-driven, secure and accurate asset tracking will become increasingly essential across logistics, shipping, retail, manufacturing and so many other environments. Looking ahead, we believe our technology leadership and scale in IoT uniquely position us to enable a new wave of IoT growth. Consistent with our existing plans to strengthen our supply chain resilience, this past week, we announced the expansion of our partnership with GlobalFoundries to manufacture industry-leading Series 2 wireless SoCs at its Malta, New York facility. This long-term partnership will add needed U.S. capacity for competitive IoT wireless solutions for the next decade and beyond and production will ramp over the next several years.

Finally, the continued strength of our Series 2 platform, combined with the ramp of Series 3 that will be even more impactful, extends our leadership position in ultra-low power performance with next-generation compute, connectivity and security to bring more secure, interoperable IoT devices to market faster. The Silicon Labs team continues developing and deploying the next wave of IoT innovation, I'm proud of their consistent execution and remain confident in our strategic direction. Looking forward to next year, we expect continued momentum from our share gains converting into revenue, gross margin expansion and the benefits of disciplined operational management, all of which will support our commitment to delivering sustained earnings growth. With that, I'll turn it over to Dean for a closer look at the financials. Dean?

Thanks, Matt, and good morning to everyone. I'll first review the financial results for our recently completed quarter, followed by a discussion of our current outlook. Revenue for the September quarter was $206 million, up 7% sequentially and in line with the midpoint of our prior guidance. Year-over-year, consolidated revenue was up 24%, which is twice the performance of our most comparable peer. The industrial and commercial side of the business was $118 million or 57% of consolidated revenue, up 7% sequentially and up 22% from the same period last year. Sequentially, the growth was driven by a diverse set of industrial applications like building automation, commercial lighting and access points.

Strong demand from smart metering customers also contributed. Home & Life September revenue was $88 million or 43% of consolidated revenue, up 6% sequentially and up 26% from the same period a year ago. Sequential growth was driven by strength in smart home automation customers and year-over-year growth is dominated by new ramps in continuous blood glucose monitors and other medical applications. During the quarter, distribution made up approximately 74% of our revenue mix, channel inventory ended at 61 days and channel point of sale saw a sequential increase in the September quarter as some of the stocking activity is anticipation of customer production plans. September gross margins saw another positive progression driven by strength from our product mix and increasing sales through our distribution channel.

GAAP gross margin was 57.8%. Non-GAAP gross margin was 58%, which was above the midpoint of our guidance and up 170 basis points from the prior quarter and better than the same quarter a year ago by 350 basis points. GAAP operating expenses were $131 million, which includes share-based compensation of $20 million and intangible asset amortization of $2 million. Non-GAAP operating expenses of $109 million was consistent with our expectations. GAAP operating loss was $12 million and non-GAAP operating income was approximately $11 million. Our non-GAAP tax rate remained 20%. GAAP loss per share was $0.30 and non-GAAP earnings of $0.32 per share beat the midpoint of our guidance by $0.02, driven by our better-than-expected gross margins in the quarter.

Turning to the balance sheet. We ended the quarter with $439 million of cash, cash equivalents and short-term investments. Our days of sales outstanding was approximately 30 days. Balance sheet inventory remained essentially flat, ending the quarter at $82 million of net inventory. Days of inventory on hand was also relatively unchanged at 85 days at quarter end. Our normal survey of end customers shows further decreasing of customer inventory and is now at the lowest levels since we began tracking this data point.

Turning to our current outlook. We anticipate the revenue in the December quarter to be in the range of $200 million to $215 million, which at the midpoint would imply a 25% year-over-year growth and continued sequential growth. Q4 sequential revenue factors in seasonality effects, which is historically flat to slightly down sequentially. Product mix continues to support a further expansion of our gross margins into the September -- December quarter with both GAAP and non-GAAP gross margins expected in the range of 62% to 64%. At the midpoint of this guidance, it implies an 840 basis point non-GAAP improvement year-over-year. Q4 also includes an expected onetime benefit to gross margins, which adds approximately 200 basis points to our current forecast.

Given our improvement in profitability and our fiscal year-end, the variable portion of compensation will add approximately $2 million sequentially. resulting in expected non-GAAP operating expense in the range of $110 million to $112 million and a GAAP operating expense between $134 million and $136 million. As a reminder of our stated plans, we expect to limit our operating expense growth going forward and increasingly focus on driving earnings per share accretion faster than our top line revenue growth. The company has reached a level of technical capability where the need for further expansion of spending is reduced, and our shareholders should expect to see this accelerated earnings growth going forward. December earnings per share on a GAAP basis is expected to be in the range of $0.22 loss to a profit of $0.08 per share on a basic share count of 32.9 million shares. Non-GAAP earnings per share is expected to be in the range of $0.40 to $0.70 on an expected diluted share count of 33.2 million shares. This wraps up our prepared remarks. I'd like to now hand the call over to the operator to start the Q&A session. Didi?

[Operator Instructions] And our first question comes from Tore Svanberg of Stifel.

Congrats on the progress here. My first question is on the gross margin guidance for Q4, Dean. So you talked about the onetime benefit. Maybe you could clarify exactly what that is. Even without that benefit, gross margin is up pretty significantly. I think you mentioned mix was the main reason. Just wondering how we should think about that dynamic, especially going into 2026, just given how much higher the gross margin guidance was?

Yes, Tore, good question on gross margins. This is an area I think the company has done really well for the past year is continue to improve our gross margins. Last quarter, we ended at the high end of our long-term stable rate. Now we're pressing up above that. You're right to have cut about 200 basis points is a onetime benefit that we'll get in the December quarter. It's a credit that we're receiving and the way to recognize the credit is it has to be recorded all in one period. That's not expected to continue on a go-forward basis, which means at the midpoint, 63%, backing out 200 basis points, we're sort of at a stabilized 61%.

When I look into 2026, I think where we are at sort of this normalized 61%, we're probably going to be able to maintain that from what I can kind of see in mix and production ramps and over the next couple of quarters, we'll kind of be in the 60% to 61%. Eventually, it will go back toward our long-term range. But for now, at least for the next few quarters, I think we stay in this 60% range, Tore, if that's helpful.

That's very helpful. And just my follow-up is for Matt. Matt, you talked about the Works with conference and you introduced those 2 new tools. And particularly interested in the SDK-based Studio AI that you announced. I'm just trying to understand what that means for you financially over time because obviously, this is going to really accelerate the way third-party developers design a new product. So sort of any financial impact you could talk about from that new tool would be really interesting.

Yes, absolutely. So just a reminder for everyone, what this is, is an agentic AI development environment for our customers. And what we showed them is using this environment, it absolutely streamlines the steps, it accelerates the time and really eases the development. So what I would expect Tore to be very direct is for experienced developers, this will allow them to be more efficient. For new entrants, it will allow them to lower the bar in terms of what they need to know in terms of entering the IoT space and developing with a wireless solution. So what this should do over time is allow us to scale faster because one of the toughest things in the wireless domain is for someone who doesn't know how to use wireless technology to adopt wireless technology.

So this essentially makes it easier and opens the door to more people being more efficient, faster time to market with their IoT wireless development. So for us, it should result in scalability and more efficiency in terms of acquiring customers' designs and scaling. Not going to happen overnight, but we're already working with our first customers there. And as you've all seen, this space is moving fast. So we're pretty excited about this, and our customers are excited about it now, too.

And our next question comes from Christopher Rolland of Susquehanna.

I guess mine are around both channel and customer inventories, which you did address in the prepared remarks. I guess, first of all, good job on filling the disti channel a little bit more here. I was wondering what your expectations are there? Could we eventually get to the 70, 75 target? And how long might that take? And on the customer side, you guys talked about kind of the lowest days ever. Perhaps if you could -- I know this isn't a perfect science, but if you could talk about a range, and obviously, we're at the bottom of the range, but your expectations for customer replenishment as well over the next few quarters?

Yes. So Chris, this is Matt. So quick answer. Customer side, I'd say any excess inventory effects at end customers are effectively gone now. I think we can say that with confidence. And we're now operating with the market again and those inventory effects are gone. So that's an important milestone, and that's been something that we've been dealing with for a pretty long time as part of this cycle. So that's one. I think, two, on the disti side, we've been running on the lower end of our DSI closer to 50 with a target of 70 to 75 days and a goal of working that up each quarter if we can, on average, around 5 days. And this quarter, we went up around 10.

And it's important, we saw strong POS growth, but we did make progress on those 5 days we wanted to make. And in addition to that, we had another 5 days that was around strategic stocking agreement with a customer in anticipation of their ramp. So that's the combination of those is how we got to the 10 days. Moving forward, we're going to keep trying to push around 5 days until we get to our target. That hasn't been linear. It's been lumpy. So I wouldn't expect it's perfect each quarter, but that's our goal, and we're continuing to push in that direction. And we'll get there over the coming quarters.

Excellent. And without being too specific, maybe broad strokes for next year for '26, how you guys see that setting up, I guess, starting in March, I think you guys are you seasonally buck some of the other guys that are down in March. Perhaps if you could give us the setup for that year and which products are you kind of most excited about or do you think are going to carry growth the best through '26?

Okay. Sure. So obviously, we're not calling '26, and I think it's a difficult time to call the broad market or macro with the uncertainty that's out there. But what we can say with confidence is just like this year, I think this year -- full year with this guide for Q4, Chris, we'll be at around 34% year-over-year for '25 versus '24, which I think is really strong. And at the same time, we've seen really good progress on gross margin and EPS. Next year, not calling the market, but whatever the market ends up being, we see a path to doing better than the market and taking continued market share. And as Dean was indicating, we see strong gross margin in there as well and solid EPS progress over that time frame.

In terms of what's driving that, it's the same stuff. So we've been talking about the strength of Series 2 and increasing strength of Series 3 mixing in. And we have our metering space that's continuing to drive strength, ESL and CGM. We like what we see in each of those areas. We also shared that we're seeing increasing strength in asset tracking as a category that will mix into our growth over time. And I'd also add one other kind of tailwind is we've been talking about matter for a long time. I think next year, you're going to start to see matter revenue feathering in as well, which all of these serve as a foundation for continued growth for the years beyond that. So we're excited for 2026. And maybe easy takeaway, we have a positive bias right now, all things considered.

And our next question comes from Cody Acree of the Benchmark Company.

Congrats on the great numbers. Dean, if you can maybe talk a bit about the gross margin incremental for Q4, even with the onetime and just the sequential bump is much more than I would think just normal mix shift would entail. So can you just talk about the details of the drivers sequentially?

Yes, Cody, there is -- within the mix, there are a couple of specific parts that have much better margins than the rest of the profile, which is actually incrementing it up. We don't want to get into too much detail on which specific part that is that way we -- customers don't get upset at us that might be buying that. The other element that we've also returned back into is above 70% of distribution is coming our sales. We just ended Q3 at 74%. That continues to sort of move margin up. But I would say within the mix, probably there's a couple of specific parts that's driving it incrementally higher. Throughout the year, just sort of as a macro trend for the last kind of 4 quarters or so, industrial has been performing extremely well for the company. That tends to come a little bit better gross margins for us as well. And that's sort of been kind of the yearly march as we've gone forward these last 4 quarters. And so hopefully, that helps give you a little bit more color, Cody.

Sure. And then I guess just any directional color on your different segments, Home, Life and I&C?

This one, we -- you've gotten this wrong a couple of times so I hesitate to give you sort of a formal guide. Look, I will say it the way I said it last quarter, which is knowing no real differences, probably we're looking at a similar mix sort of quarter-on-quarter. Kind of the hesitation around that really is just around visibility of short order lead times. So turns are coming in right now inside of lead time. So we never really know how the total backlog is going to shape out for the entire quarter, and that's really our only hesitation.

And our next question comes from [ Trip Smith ] of Barclays.

This is Kyle Bleustein on for Tom O'Malley. I wanted to dig into the gross margin commentary a little bit more. I was just kind of curious like what has changed since the Analyst Day? Like has the product mix surprised you at all? And then when you're talking about it being stable for the next few quarters and coming back down, is that again on the mix side? Or is there anything to do with pricing? Just kind of your thoughts there?

Yes. Nothing's really changed, Kyle, just to give you a little context from Analyst Day, that's intended to be our long-term sort of sustainable range that we think we run in, and that's 56% to 58%. Throughout the year, we've been pressing into that range and then at the high end of that range is where we landed at the end of the September quarter. Now piercing above 60%, sort of mid of our guidance 63%. That's really a relatively short-term phenomenon. We'll probably see that for the next few quarters, and Cody asked on his question on sort of specific product mix. That specific product mix probably is not a long-term multiyear sort of sustainable mix. I do think as we come up into the 60s, it takes a few quarters, but we'll gradually start moving back towards kind of the stated long-term range.

But at least from what we can tell right now, that's not a fast movement back down. I think it's a fairly gradual movement back down. So I wouldn't say anything has really changed other than a couple of product-specific things that have done better. And of course, I also gave Cody some additional color on industrial throughout the year has done better as well. Distribution, we're making progress. So all those things sort of help. So I hope that answers your question, Kyle.

Okay. That's helpful. And then just for my follow-up, can you kind of give an update on how the Series 3 rollout is going, either like expected percent of the mix? And then just overall, as that kind of ramps into your product portfolio, how we should think about overall pricing trends?

Yes, sure. This is Matt, Kyle. I'll take that. So the easy setup to remember is Series 2, we've stated even in our Analyst Day, we have not even ramped -- we've ramped a small portion of what we've won there in the current platform, and we're still winning in Series 2. So Series 2, we're looking at many years of growth before we see that peaking. And as, I think, data point or testament to that, we just announced a partnership with GlobalFoundries to bring Series 2 to the U.S. as a U.S. manufacturing option because given the life we see there, that's going to be needed.

So Series 2, think of that as ultra-successful de facto standard in the market today as we see it. Then bring in Series 3, which our expectation based on what we've done there will be even more impactful than Series 2. It's early days. We're just ramping our first product, and we're going to start -- you're going to start seeing a series of products come out at an increasing acceleration. So each year, more products coming off of that base platform and IP, and it will start feathering into our design wins and revenue over time. But just like Series 2, these things take time. So I wouldn't over-index on the revenue impact this year, next year. I think you're looking after that before material impact come. But why that matters is it's all about setting ourselves up for the future. And Series 3 is set up for the future, just like Series 2 was, and that's why it's so successful now.

And that's important because I can say here, and I'm proud of this, we have the largest opportunity funnel as a company we've ever had because of now the combined strength of these 2 platforms. And remember, they're software compatible, which is an awesome strength. And we're on track to record design wins once again. So the combination of all those things really sets us up good for the next few years and beyond, and we're excited and proud of that. And that's why I think we can say we have a positive bias sitting here today.

And our next question comes from Quinn Bolton of Needham & Company.

Congratulations on the nice outlook, especially on the margin side. I wanted to just come back to the active asset tracking, Matt, that you talked about in the prepared comments. It sounds like it could be a pretty meaningful opportunity. In the past, you guys have talked about CGM, smart meters, ESL as 3 of your more company-specific product ramps that can drive outsized growth. Wondering, would you start thinking about active asset tracking as maybe a fourth company-specific driver? Or would you not put it in the same sort of magnitude as the other 3 that you've previously talked about?

So we're being intentional and deliberate, Quinn, about introducing this as a concept. And that means we believe it has a lot of growth potential as an end market. And we believe that we have a lot of potential for strength in that market. We don't want to be talking to you all about a space that's not growing long term, and we don't have a very strong position. So we think it has that potential. That being said, it's early days. We're just introducing it as a concept for you all, but it does have that recipe. And we do see an acceleration in our engagement and position in that space. What we have as a company is very attractive to customers, just a great fit for us in terms of what we can do in technology. We're the largest company in this space. That's something our customers want to see. And we have the ability to turn products really quick to address the needs of this marketplace. So yes, it has potential, and we're excited about it. Don't want to over-index on it. It's early. But I think over time, it has really exciting potential.

And Matt, just maybe a quick follow-up there. Was that the Bluetooth-6, I think it's channel sounding technology that's the basis for that active asset tracking? Or is that another wireless technology?

Yes. BLE with channel sounding is and can be used in those applications and is interesting to a lot of those customers because not only can they kind of figure out where the things are, but they can figure out where they are relative to each other, which is really important in some applications. So that is one of the things that is driving interest.

Okay. Great. And then a follow-up question, just I think in the past, you thought the CGM could get to 10% of revenue by Q4 of '25 to the second quarter of 2026. Is that time line still sort of in the cards for the continuous glucose monitors?

So the last thing I remember is us believe there's a path to being 10% in the first half of next year, and we still see that path.

And our next question comes from Joe Moore of Morgan Stanley.

Congrats on the good margin performance here. I wonder if you could talk about sort of inorganic opportunities at the Analyst Day, you said that you were open to that. Is that still something that you're contemplating? It seems like you have a lot of organic growth here. Just how are you thinking about M&A opportunities?

Yes, Joe, if you recall at the Analyst Day, we said we are open to M&A opportunities, but we have a pretty tight filter. And I think that hasn't changed, which means we're looking for things that can help accelerate our growth level, which is a tough filter to find these days sort of with Silicon Labs just posting a 34% year-on-year. And that growth doesn't look like it's changing anytime soon. We also don't want to add on technology or end markets that are not in our wheelhouse. So it has to be in our wheelhouse, accretive to our growth, which really means that there are not a whole lot of assets that are going to fit that stage. We also have a lot of the technology that we need.

And so while we're open, I think the reality, what ends up meaning is M&A is probably something we're open to, but the more likely is to flow that excess cash flow back in terms of buyback. I think with the increasing profitability that we see now and as gross margins sort of keep going up and our operating expenses are starting to be held flat, that looks like increasing excess cash flow, and that's likely to lead us more down the path of buybacks going forward, just given that tight narrow lens on M&A.

That's very helpful. And then with regards to your customers kind of drawing down inventory to these lower levels, I guess, just do you have conversations about some of the geopolitics of the situation? And I just -- I know you're not impacted by stuff like Nexperia, but it seems like that's creating line down situations. Like did the customers sort of feel like, okay, given these geopolitical uncertainties, I need to hold more inventory? Or just -- I don't think we've seen a lot of that activity, and I'm a little surprised that we haven't.

Yes. We're not seeing customers building inventory around this. In fact, broadly, it's come down, not up. So -- and we're watching that very closely. I do think that the uncertainty, Joe, is just not helping anything. And I think that's worth saying that when you talk to customers, they're trying to navigate all this and they don't have as much clarity and visibility as they'd like. So I do think that, that weighs on their -- the way they talk about the future. But big picture, we're not seeing inventory builds around this. There might be a pocket here and there, but broadly, it's going the other way.

And our next question comes from Peter Peng of JPMorgan.

Just a follow-up to that point. So you guys are above $200 million in revenue levels and your end customers' inventories are decreasing. Do you still -- do you believe you're still kind of undershipping to end demand? And if so, how much?

No, we don't, Peter. We think we're as aligned with consumption and consumption as we've been in a very long time.

Got it. Okay. And then my follow-up is just on your Wi-Fi. Can you probably share some updates on that and some program ramps? And maybe how you're thinking about that trajectory over the next year or 2?

Great. Thank you for asking. I should have mentioned that more proactively. So Wi-Fi this year, strong growth. I can't remember the exact numbers, but 30% to 40% year-on-year. That's an area that is our newest of our 4 major technology cornerstones. And it's growing and winning share. And we have our existing products out there, but also we started hinting and teasing as part of our Series 3 platform, you're going to see a lot more from us in Wi-Fi, and that's coming soon. So I think the combination of that sets us up really well for -- simply said, relatively small compared to our other areas, but accelerated growth.

And maybe easy framing, right now, BLE is our fastest growing. Wi-Fi is our second fastest growing, even though we have leadership positions in the other 2 areas, 15.4 and -- yes, sorry, I just lost my train of thought, guys. 15.4 and subgig. So 15.4 subgig, leadership positions, strong growth, but the new areas, the newest areas for us are the fastest growing, and we're making really fast progress there. So an easy way to frame it, big funnel for Wi-Fi, strong design win momentum should set us up for continued growth and share gains in Wi-Fi for a long time to come, but it is still our smallest of the 4 areas.

Thank you. I will now hand the call back to Giovanni Pacelli.

Thank you, Didi, and thank you all for joining this morning and for your interest in the company. Before concluding today's call, I would like to announce our upcoming participation in RBC Capital Markets Global Technology, Internet, Media and Telecommunications Conference on November 19 in New York City. This now concludes today's call. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Good afternoon, everyone. Welcome to day 2 of Citi Global TMT Conference. My name is Atif Malik. I cover U.S. semiconductors, semiconductor equipment and networking equipment stocks at Citi. It's my pleasure to welcome Matt Johnson, President and CEO of Silicon Labs, as well as Thomas Haws from Investor Relations. It's the final session before the semifinals kick off at U.S. Open. So let's do this.

Matt, in terms of the market outlook, your revenues troughed last December 2023, and you've seen some good consecutive sequential recovery for the past 1.5 years. Before diving deep into share gains and prior cycles, could you share with us what you see in the end market demand now?

Sure. So big picture, I think being transparent with everyone, there's not a lot of great visibility out there in the marketplace right now. There's -- I think between uncertainty around trade and a lot of other things going on like geopolitics, I think customers are not leaning in, I think they're taking a safe and conservative approach and kind of ordering well within lead times. And we've seen this consistently over much of this year. So visibility isn't as strong as we'd like.

What we do like is from a data perspective and actuals, we like what we see in bookings. It's been consistently moving in the right direction, pretty stable and steady over those 6 quarters. We like where inventory is at. Our inventory is in line, if anything, on the lower side. And we continue to see steady progress over the last 6 quarters.

So I think the actuals are moving in the right direction and pretty stable. Visibility is low. And I think that uncertainty is probably likely to continue for a few quarters until there's answers to some things out there that everyone wants to see in here.

The other thing is worth pointing out, our growth this year, as we've said the entire year, is really driven by share gains and these ramps in these new applications and products, and that's what's allowing us to grow as fast as we are this year. We're not banking on a broad market recovery. I do think that's going to happen at some point, but not seeing it yet to call that that's happened. I think it'll take a little more time.

Okay. Going back to the June quarter, did you guys see any kind of pull forward in demand or in your bookings pattern, anything that will make you think things could normalize more in the second half?

Yes. So the quick answer is nothing meaningful. Like everyone, we've been watching very closely for that. And I think it defies logic to say that that's not happening at some level, it has to be. But in the data, just not seeing it. We're seeing the orders coming in very linearly, no spikes. We can monitor -- we've gotten a lot better at this as an industry and as a company in this last crisis in the supply chain that we're watching in customer inventory. We're watching order patterns. We're looking for anomalies or deviations, and we're just not seeing that. So even though we're looking for it, if it's happening, it's happening on the margins and not in a meaningful way.

So Matt, yesterday and today, a couple of your peers talked about weakness in China on the auto side. You guys don't have any exposure on the auto side. But just curious if you're also seeing some sort of weakness in China, if you just could talk about the regional sentiment.

Yes. I don't dare say we're seeing new weakness in China. So as a starting point, we don't have an autofocus or big exposure there. I think we have had more business in China historically, but we've seen weakness there that's persisted. So I wouldn't say there's something new. I think what we're seeing for us is a continuation of what's been the case now for quite a while.

And just to make that real, I think we saw the business go from, say, 35% of sales down to maybe 15% over the course of the entire market cycle. And a lot of that was allocation strategy. So that was by design. When you have allocation, someone has to be a lower priority, and that's what we did strategically, and that really hasn't recovered.

And we've been consistent publicly. We see China as opportunistic, not strategic. If we can get business there, we support it and do, but we're not investing in R&D. We see the deck stacked against us strategically, but -- geopolitically. So we support what we can, and we don't expect that to meaningfully change or pop in the coming quarters. So compared to most companies, we don't have a lot of exposure to China, and that's by design.

Okay. Can you touch on the competition in China? Some of the weakness in the auto side is because of the indigenous competitors and -- but on the microcontrollers and IoT side, what sort of competition you see in China?

We haven't seen any meaningful change there. And again, I think we were faster to change our posture compared to a lot of other companies on -- we don't have R&D there. We don't have strategic growth there, just opportunistic.

But what we see is if I were to say changes, we've always seen local suppliers are favored over international suppliers. We are only used when we offer something that a local supplier cannot offer. That's been consistent. I think what's changed is that headwind has started to increase for local suppliers. It's more difficult for them to sell into the West now than before. We see that particularly in the U.S., big brand companies less likely to use Chinese silicon. So that's change 1.

I think change 2, we're now seeing another kind of tier of local suppliers start competing with the top-tier local suppliers. So the competition has intensified within China. So if -- the Tier 1 local suppliers, they're in a tough spot because tough to sell out, and they're competing internally now against a new class of up-and-coming competitors.

So a really tough place to be. We do not compete on price in China, full stop. We don't believe that that's our model. We compete on differentiation, and that's when we're used in China. So we're quite comfortable with our position in China and where we're at.

And with respect to the recovery that we have seen so far in your businesses, is your sense that this is still kind of inventory replenishment or now you're starting to ship to real demand?

You want to comment on that, Thomas?

Yes. The inventory cycle for us, the excess inventory that was at the end customer, that has largely played out, that drove our sequential growth kind of through 2024. But where we sit today, the kind of excess inventory destocking has played out. The predominant driver for us in '25, it's been the case through the first 2 quarters and into the September quarter as well is just these secular design win ramps that are happening.

Well, let's put cycle aside. I mean, cycles matter to you guys. But fundamentally, you guys are a product cycle story to us where you have good design win momentum on Series 2, and you're talking about Series 3. So let's talk about that design win funnel, where we are in terms of the adoption on Series 2, and then what are the aspirations for Series 3?

Sure. So I guess first things first. For anyone not familiar, Series 2 is our current generation of platform that we could not be happier with the market response or momentum that has achieved. Just incredible opportunity funnel, design win momentum and share gains from that platform. And it is still continuing to deliver design wins and share gains sitting here today, just loving what we see.

At the same time, we're now introducing and ramping production on our next-generation Series 3, which will take that industry-leading capability on Series 2 and takes it to the next level. So everything that we brought to the industry on Series 2 that was leading, industry-leading security, industry-leading wireless performance, industry-leading battery life, we're doing that again at the next level on Series 3. In addition, we're putting much greater levels of compute and AI capability on Series 3 to really set us up for the future.

So maybe just an example to help make that real. On Series 2, we were the first company in the world to achieve PSA Level 3 security. That was years ago. We still have competitors trying to get to that level of security today. And we just announced recently Series 3, our latest and greatest, just achieved PSA Level 4, which is not only the first company in the world, but the highest rating that they currently have available. So we just keep pushing that boundary, just like we did in Series 2, which is still doing great in the industry. Now we're bringing new-to-industry capabilities with Series 3. So we just love the setup that we have that momentum still on Series 2, and now we're bringing even more with Series 3. That puts our competition on their heels in a really tough spot to compete with us as a supplier and as a competitor.

Design wins, easy way to think about it, we shared at our Analyst Day that on our last 3 years, we've achieved over $10 billion of lifetime revenue on the total design wins over those few years, which is more than all the prior years combined. And that sets us up for a great growth in the coming years. And you're already starting to see that in 2025 where we're growing this year well above market, and that's not our market strength. That's on ramps and share gains. We see a path to continuing that for the next few years.

So as we know, it's really tough to say what's 2026 going to look like, 2027, in terms of the market, but we feel confident that we'll be able to continue outgrowing the market because of those wins and those share gains that we have that have already been secured and are just starting to ramp now.

All right. Matt, which end markets are you seeing the most traction on Series 2 products?

Thomas, do you want to?

So the Home & Life side of the business, that's where the continuous glucose monitoring ramps are, Atif. So in that market, we have 12 customers that we're currently ramping. Really like what we see there. We think that as an application, CGM will be about 10% of revenue kind of sometime by the end of '25 or the second quarter of 2026.

On the Industrial side of the business, we have smart metering where we are a -- we are participating in every global metering rollout. Currently, we're seeing a lot of traction in the India smart metering rollout, which is about 250 million units over about a 5-year period. So we've been starting to ship that over the past couple of quarters.

On the Commercial side of the business is the electronic shelf labeling, which has been one of our fastest-growing applications over the past 3 years. A couple of quarters ago, we said that we shipped about 300 million units of ESLs. So as that market continues to grow and adopt, we are going to continue to be very well positioned.

And coming back to outgrowing the market, I remember a few years back, this is pre-COVID, your goal was to grow like 1.5x the market growth. And so what are the aspirations these days on outgrowth?

Yes. So what we shared at our Analyst Day is our goal is -- we set a target of 20% CAGR for our space. And where that comes from is, roughly speaking, we believe total semis, on average, seems to be 5%, 6%, 7%. Our SAM can be 10%, 12%, maybe 15% some years. So we always want to make sure that we're doing meaningfully better than that. So I think we have a pretty good track record of doing that for multiple years, and we see an even stronger path moving forward, which is what we're so excited about, that big picture, we've been gaining share, and we see a path to continuing to gain share. And we have the design wins to back it up, and we're really starting to see the revenue growth to back it up.

At the same time, while we have those engines, I don't think anyone would dispute that over time, we're going to see AI moving from the data center to our edge. And that's going to create a whole another wave of growth. I'm not saying it's going to happen in the next year or 2, but we have plenty of growth catalysts between now and then. But over time, that will start to accelerate, and we couldn't be better positioned for that. So the combination of those things is pretty exciting for us.

Yes. The Edge AI is coming. Are there opportunities within the data center for any of your products or mostly on the edge?

Not materially. I think we've always been hyper-focused on edge wireless and really the compute that goes with that, and that's worked well for us. There's plenty of opportunity there, and we just see this end market accelerating. If you think about it, the end market is getting shinier. We see more people wanting to be in this space. And we're the largest company dedicated to it, and we couldn't be better positioned. So we just want to connect those 2 things as best we can, as aggressively as we can and not get distracted by any other market that's not really our strength.

All right. Let me pause here and see if there are any questions in the audience.

[indiscernible]. The question talks about, how much of your growth is product ramp and -- or independent largely from the macro?

I'd say a majority is the quick answer. Difficult to pinpoint exactly. But maybe this year, I think the Street has us around 35%. And probably total semis is somewhere around, I don't know, 10%, 12%, 13%. And that's, I think, lifted quite a bit by data center. So I think we're meaningfully outgrowing the market on share gains and those ramps, not riding on market growth.

I do think at some point, we should see some market strength more than what we're seeing right now, but really tough to call when that will be. And we've got plenty of gas in the tank on design wins and share gains to cover us between now and then. So I feel with confidence we're in a good position to outperform the market in the next coming years.

Can you talk about the growth opportunities in Bluetooth and Wi-Fi and how large have they become of your portfolio?

Yes. Bluetooth, for anyone not familiar, our historical strengths as a company were really in the sub-gig and 15.4 wireless spaces, which are multiple wireless technologies, but those are the core technologies. And we have the market-leading position in both of those areas. Years ago, we decided to focus and add Bluetooth to our capability. And I honestly think that's gone better than we expected and better than we could have hoped.

We've seen significant share gains in that space. We've shared publicly we're growing 80% year-on-year this year in BLE. And just to help make that real, that is now a similar size to our other wireless technologies in 15.4 and sub-gig. So seeing really good progress there. And we see share gains that not only are happening right now, but we expect that to continue based on opportunity funnel and design win momentum. So we like what we see in BLE is the quick answer.

Wi-Fi is a newer area for us. So not as big in terms of magnitude, but we've shared we're growing, I think, now over 40% year-on-year in Wi-Fi, and we see a good path to continued growth there. Products are starting to come out. We have a real distinct advantage that we brought to that space in power consumption. We just shared on our last earnings call that Roku has adopted that technology for security cameras that are wireless, battery-powered, and they're bringing really a step function in battery life that's enabled by our technology. And that's available at Walmart and Amazon for this holiday season. So we're going to see those types of things continue to accelerate that Wi-Fi growth. So we like what we see there as well, just earlier days and a lot more room to grow. And anything there is really going to be share gains as we start to enter that Wi-Fi market.

So Bluetooth, much further ahead. Wi-Fi, good progress, not as far ahead, but plenty of runway in both.

Thomas, I was curious if you guys are breaking this out, the Wi-Fi versus microcontroller, that you used to do in the past. Are you breaking out the business and giving us the percentages?

No, we're not breaking out that. I think the order of magnitude that Matt kind of just described is kind of the -- how we've currently broken it out. Yes.

Okay. Great. Tariffs, could you talk about the impact of tariffs you've seen so far to your business? Understand it's not material given you only shipped 100% within the U.S., but what is the impact of tariffs?

Just broad tariff -- yes. It's difficult to know, right? There's, I think more than anything at this point, more than real demand impact. What we're seeing is uncertainty that comes from this, right? We're seeing questions about are there delays in orders because of this, are there pull-ins or build aheads in orders because of this. Customers are trying to -- there's so much uncertainty that we're probably getting less visibility than normal. So I think the real first order impact is just uncertainty in the marketplace, and I think less on real demand impact at this point in time.

So -- because that's the thing we get asked most frequently is, is it really impacting demand? And it's pretty difficult to put our finger on that right now if that's happening. But you can't deny, it's created a lot of disruption and uncertainty, and that's telegraphed and kind of permeated throughout the landscape.

Great. And then gross margin, they're expected to trend higher in the second half towards the high end of the target model. Is this a sustainable level we should look at going into next year?

Yes. So the gross margin model is 56% to 58%. We're trending at the higher end of that range as we move into the September quarter. That's primarily a function of mix, Atif. So right now, the industrial-type customers tend to be served through the distribution channel. We're seeing some strength there, which is benefiting gross margin. We can continue to see that dynamic playing out over time, but that target range of 56% to 58% is intentional, and that's kind of where we see the business going longer term.

Perfect. On the manufacturing side, your partner, TSMC, is regularly raising pricing on the leading edge. But on the nodes that you operate at, are you seeing any impact to your margins from the pricing increase from the manufacturing side?

It's been relatively stable, and I would expect that to continue. I mean, it's difficult to know because I think -- it's not popular to say this, but we believe most of these things that are happening are probably inflationary towards wafer pricing, if you think about it. Any excess capacity, someone has to cover the cost of that. Putting manufacturing where it's not as cost-effective, someone has to pay for that. All this capital acceleration, someone has to pay for that. So I think we're happy that it's been as stable as it has over the cycle, but definitely don't see any big swings up or down. I think it's pretty stable.

And Matt, you touched on this earlier, the use of machine learning and AI. I think you guys were the early adopters of machine learning to add to your Series 2 and 3 products. So when we look at the bigger competitors like TI and others, just trying to understand the level of the moat that you have in your markets, how sustainable that is as these large incumbents also start to incorporate ML/AI.

Yes. So just a moat overall or specific to AI?

Both.

So broadly, we are just really in unique territory. Almost, not all, but almost all the companies we compete against, this is not their core focus. They wouldn't admit this, but it's a side show. Their core business is something else. And then they also do this. That has served us very well from a competitive perspective. We are 100% dedicated and focused on this, and there's very few companies that can say that. And that's what we found it takes to do what we do. And that's why whatever you want to measure, whether it's the performance of the wireless interface, the security level, the power consumption, we're bringing the industry's leading capability there.

We've been able to do the exact same thing in AI/ML, and this isn't aspirational. We've had these types of solutions in production for years before generative AI was even a thing and as exciting as it is for all of us. What we've seen is the end market and customers were not ready for broad adoption yet. A lot of our customers are not experts in this space and native at this. And it takes a lot of work and effort to get your data where it needs to be, to learn how to train and develop this capability, and figure out what are the right applications to really bring to the market.

But what we've seen is the interest and engagement has really accelerated in the last couple of years. And our position is just as unique there in the sense that we have always had a combination of compute and RF on every solution that we make. And we've been able to bring benchmarked industry independent data showing the best combination of power performance for battery-powered applications, which is where we thrive.

So we're seeing a lot more engagement, and we expect that to only accelerate. Not saying that it's going to be a major revenue driver in the next year or 2, but I do see those engagements turning into design wins, which will turn into revenue in the years to come. And I think that will continue to meaningfully accelerate. So easy way to say it, our moat is that breadth, depth and focus that we talk about. And there's no other company that has the differentiation and capability. And now, honestly, the scale and focus in the space that we do, that's going to serve us well moving forward, whether it's in wireless performance or ML performance at the edge.

Great. Two questions on the capital allocation. You guys used to be a lot more acquisitive historically, and you guys have kind of slowed down. And we're just curious in terms of your strategy. Is this a function of the macro, the cycle or is...

By design. Yes, something's changed. We historically acquired companies for capability in our space, in our market. But we found ourselves here where there's not a capability that we're looking for that we want or need. We have more-than-enough opportunity in the markets we're in. We have the requisite technologies that we need. So any acquisition we do at this point would really be for SOM acceleration or for scale in our space, not for SAM expansion or technology that we want and need. If there was a technology, we would absolutely go after it because that's part of our value prop is having all the key technologies. But right now, we really like our positioning. We have plenty of growth in the markets we're in, and we're covering more than 80% of the core technologies that our customers want and need.

So it would really be for scale and growth. And there's just not a lot out there that fits that bill, especially because most of our industry is tucked into larger companies that are focused on other spaces.

Yes. Obviously, we're a big fan of all your products, and that I&A piece that you sold to Skyworks was also a good piece. But are there areas within your current portfolio that you could divest to improve profitability or everything is fine as it is?

It's fine as it is. I mean, we should always be looking at that to be doing our job and be diligent about managing our portfolio well. But honestly, if we look at it, we divested all the things that were truly not affiliated with our core focus in IoT wireless. And everything we've been investing in from an R&D perspective for years now has been for that. So there's really not anything sitting out there on the side that doesn't fit or not part of that core.

Great. We're almost out of time. And thank you, Matt and Thomas, for coming to Citi conference.

Thanks for having us. Thanks, everyone. Appreciate it.