Silicon Laboratories (SLAB) Q2 2018 Earnings Conference Call Transcript

Silicon Laboratories (SLAB 2.58%)
Q2 2018 Earnings Conference Call
Jul. 25, 2018 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Silicon Labs second-quarter fiscal 2018 earnings conference call. [Operator instructions] I will now turn the call over to Jalene Hoover, director of investor relations and international finance.

Jalene, please go ahead.

Jalene Hoover -- Director of Investor Relations and International Finance

Thank you, James, and good morning, everyone. Tyson Tuttle, chief executive officer; and John Hollister, chief financial officer, are on today's call. We will discuss our financial performance and review our business activities for the second quarter. After our prepared comments, we will take questions.

Our earnings press release and the accompanying financial tables are available in the Investor Relations section of our website at www.silabs.com. This call is also being webcast, and a replay will be available for four weeks. Our comments today will include forward-looking statements subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future.

We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will make reference to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company's earnings press release and also in the Investor Relations section of Silicon Labs' website. I would now like to turn the call over to Silicon Labs' Chief Financial Officer John Hollister.

John Hollister -- Chief Financial Officer

Thanks, Jalene. I'm pleased to report that we achieved record revenue of $217 million in the second quarter, up 14% year on year and at the high end of our guidance range. Our opportunity pipeline has grown to more than $9 billion; and in Q2, we saw a record design win activity. Strong revenue performance, combined with favorable gross margin, allowed us to deliver non-GAAP EPS in excess of our guide at $0.92, up 16% year on year.

Our IoT products generated a new all-time record of $116 million for the quarter, which is about 19% growth year on year. This includes a partial quarter contribution from Z-Wave that was in line with expectations at approximately $8 million. Apart from Z-Wave, we saw strength in sales of MCUs, sensors and proprietary wireless, partially offset by weakness in 15.4 products due to delays in some large customer routes, including a pause in the U.K. smart metering rollout.

We had another outstanding quarter in our infrastructure products, with quarterly revenue exceeding $50 million for the first time, ending at $52 million and exceeding expectations. This represents year-on-year growth of 35%, well ahead of our long-term strategic growth target. Strong performance in both timing and isolation contributed to these results. Broadcast declined to $34 million, down 7% year on year.

Broadcast consumer was flat for the quarter, with automotive down. Access declined as expected for the quarter, ending at $15 million, with a portion of the decline attributable to the U.S. ban on shipments to ZTE. Distribution revenue in Q2 was approximately 71% of total sales.

Our top ten customers represented less than 20% of total first-half revenue, with no customer greater than 5%. Geographically, strong performance in IoT and infrastructure drove robust growth in the Americas, with declines in Europe on infrastructure and broadcast automotive. APAC declined slightly, with growth in IoT and isolation, offset by declines in timing and broadcast. By end market, strength in home automation and security, including the addition of Z-Wave and combined with strong performance from isolation, drove increases in industrial, which has grown to more than 50% of total revenue.

Communications was slightly up on strength and timing, and declines in broadcast drove reductions in automotive. Consumer was also down. Second-quarter non-GAAP gross margins were outstanding at 61.6%, driven by favorable product mix, particularly due to strong contributions from our infrastructure products. Non-GAAP operating expenses increased in the quarter to $88 million, which was somewhat higher than we expected.

Non-GAAP R&D expenses were $47 million, up about $3 million due to headcount increases from the Z-Wave acquisition, as well as higher new product introduction costs. Non-GAAP SG&A expenses were $41 million, also up about $3 million due to greater salary and bonus costs on headcount increases and stronger-than-expected financial results, combined with higher travel expense. Second-quarter non-GAAP operating margin was 21.2%, which is 70 basis points higher than in Q2 2017. I am pleased to report that this concludes our fifth consecutive quarter of posting target model operating performance for revenue, gross margin and operating margin.

Our non-GAAP effective tax rate was stable at 11% and our non-GAAP EPS was $0.92, which was above our guidance range due to upside revenue and strong gross margins. On a GAAP basis, second-quarter gross margins were 60.5%. Total Q2 GAAP operating expenses increased to $113 million, with R&D expenses at $59 million and SG&A expenses at $54 million. GAAP EPS ended at $0.32.

Stock compensation was in line at $12 million, and we saw an expected increase in the amortization of intangible assets to $10 million due to the acquisition of Z-Wave. Turning now to the balance sheet, we ended the quarter with cash and investments of $548 million, which reflects a $240 million reduction from Q1 due to the cash purchase of Z-Wave. Our accounts receivable balance increased to $94 million on 39 days sales outstanding, and our inventory balance increased to $87 million on turns of about four times. Please note that accounts receivable and inventory reflect acquired Z-Wave balances and that the inventory number includes about a $4 million increase due to the fair market valuation of Z-Wave inventory, which we expect to fully turn around in Q3.

Most of our $100 million share repurchase authorization remains outstanding, with some buyback activity completed in Q2. Year to date 2018 operating cash flow was $51 million and reflects the above mentioned increases in working capital. We expect to see stronger cash flow performance in the second half. Before turning to guidance, I'd like to report on the Z-Wave integration progress.

We have fully integrated Z-Wave into our operational systems and flows and this process has gone very smoothly. Through many acquisitions over the years, the Silicon Labs team has developed robust processes to identify key data, onboard and train new employees, work with new factory partners, comprehend opportunities for synergies and develop coordinated technology strategies. On the operational side, the time required for us to execute required integration steps is measured in days and weeks, which we believe has become a core competency. We have spent much time over these past months at our new Copenhagen, Denmark location.

The Z-Wave team is happy to be with us, and we are thrilled to have them on board. I will now cover guidance for the third quarter, which reflects a full quarter of the acquired Z-Wave business. We expect revenue to be in the range of $224 million to $230 million, with IoT, infrastructure and broadcast up and access down. We expect non-GAAP gross margin to be approximately 60%, and we expect non-GAAP OPEX to be between $87 million and $88 million.

We expect our non-GAAP effective tax rate to be around 11%, and we expect non-GAAP EPS to be in the range of $0.95 to $1.01. On a GAAP basis, we expect gross margin to be approximately 58.5%, with some impact from the $4 million fair market valuation of Z-Wave inventory recorded in Q2. We expect GAAP OPEX to be around $111 million and GAAP EPS to be in the range of $0.40 to $0.46. This reflects an estimated $13 million in stock compensation expense and $11 million in amortization of intangible assets, including a full quarter for Z-Wave.

Please note that the GAAP guidance I've just provided does not comprehend any adjustments that may arise out of the Altera tax ruling from yesterday. The company is currently evaluating the impact of this decision and such effects could be material to our financial statements. Before I turn the call over to Tyson, I would like to comment on recent activity involving tariffs. We do not believe that the U.S.

government's tariffs enacted on imports from China, thus far, will have a significant direct effect on our financials. We will continue to monitor and evaluate the possible impacts of additional tariffs that are being proposed. Given that most of our manufacturing activity is outside of China, we believe that we are well-positioned relative to our competition. That said, global supply chains in the electronics and industrial markets are tightly interconnected and we remain vigilant as we comprehend potential broader indirect implications of trade restrictions with China.

I will now turn the call over to Tyson.

Tyson Tuttle -- Chief Executive Officer

Thanks, John. We are very pleased to report outstanding second-quarter 2018 financial performance, including more than 14% year on year revenue growth. Record performance in IoT and infrastructure drove top-line growth and now represents nearly 80% of total revenue. Our diversified product portfolio, with more than 50% of revenue derived from industrial markets, is driving greater consistency in financial results.

IoT is our largest market opportunity and now represents more than half of total revenue. Our connectivity portfolio continues to gain traction as we target low-power wireless applications with the broad range of protocols and a common hardware and software platform. We are well-positioned to extend our leadership as a supplier of silicon, software and solutions for IoT end nodes. In Q2, we completed the purchase of Sigma Designs' Z-Wave business.

Z-Wave is a proven, broadly deployed mesh networking technology for the smartphone, with more than 100 million devices shipped to date. This strategic acquisition complements Silicon Labs' comprehensive wireless hardware and software portfolio, drives collaboration while expanding access to a diverse set of ecosystem partners, including ADT, Alarm.com, Amazon and Ring, Comcast, Google Home, Samsung SmartThings, Vivint and Yale, and significantly strengthens our position in the smartphone market. Z-Wave's focus on product interoperability, advanced security and ease of deployment, combined with the Silicon Labs' Wireless Gecko platform and multiprotocol expertise, offers a great opportunity to enhance our combined road maps. We believe having multiple connectivity standards under one roof strengthens our influence on the evolution and adoption of wireless standards in targeted IoT market segments.

Combining multiple capabilities under the same platform, developing our own standards-based wireless protocols rather than licensing stacks from third parties and optimizing our hardware and software to work seamlessly together, are all examples of how we differentiate ourselves from the competition. Silicon Labs' unique platform approach to supporting thousands of IoT applications is resonating with our customer base, enabling them to reuse more hardware and software in ways not possible with single-point solutions. We see the proliferation of innovative, platform-based customer designs across the IoT, especially in industrial applications. Many of our customers leverage their investments through efficient reuse, amplifying the stickiness of the software element of our platform solution and contributing to R&D efficiency.

Proprietary sub-gigahertz wireless protocols are widespread in smart energy, industrial and commercial applications, including metering, lighting and home and building automation. During the quarter, we released new software for our Wireless Gecko portfolio, which enables dynamic switching between subgigahertz networks and bluetooth low energy on a single chip. Silicon Labs' new solution makes it easier to set up, control and monitor a wide range of sub-gigahertz wireless IoT devices in the field through bluetooth and easy-to-use mobile apps on smartphones, while speeding time to market and reducing bond cost and size by up to 40%. Moving on to infrastructure, second-quarter revenues surpassed $50 million, with records in both timing and isolation.

Timing enjoyed continued broad share gains in Q2, with participation in the communications end market flat sequentially. We see growing diversity in our customer base beyond core optical networking and into industrial data center and wireless Infrastructure applications with the development of new timing standards resulting from a migration to faster data rates. Faster speeds drive demand for higher-performance timing products which plays to our core strength and leadership position in clocks and oscillators. Leading manufacturers are migrating to 56-gig SerDes technology to support higher bandwidth ethernet and optical networking designs.

During the quarter, Silicon Labs became the first timing supplier to provide a fully integrated single device, clock IC solution for 56-gig and emerging 112-gig SerDes designs. We offer the industry's broadest portfolio of frequency flexible, ultra-low-jitter timing devices for the latest communications at data centers designs, scaling from 100 gig to 600 gig. Isolation products represent one of our fastest-growing and most-diversified product lines. In Q2, isolation delivered record design win activity, with strength across a broad range of applications including power supplies, solar, industrial and automotive.

We are the No. 1 supplier of digital isolation technology for electric and hybrid electric vehicles, which is the fastest-growing component of isolation revenue. Our digital isolation products continue to replace traditional optocouplers, enabling higher performance, reliability and integration for designs requiring protection from high voltages. Before closing, I want to congratulate Daniel Cooley for his new role as senior vice president and chief strategy officer.

Daniel will focus on Silicon Labs' overall growth and M&A strategy, business development, new technologies and emerging markets. Under Daniel's leadership we have grown IoT to more than half of our total revenue. I look forward to Daniel's continued impact on Silicon Labs' success. I'm also delighted to welcome Matt Johnson to Silicon Labs' leadership team.

As senior vice president and general manager of IoT products, Matt has a proven track record with more than 15 years in the semiconductor industry, most recently at NXP/Freescale, where he served as SVP and general manager of NXP's Automotive MCU and Processor Product Lines and Software. With these executive appointments, we are expanding our ability to execute on large and growing market opportunities in the IoT and infrastructure. Together, these two talented leaders will help Silicon Labs scale the business to the next level. We continue to focus on long-term, high-quality, strategic growth vectors, including IoT, green energy and data communications.

The insatiable demand for data will persist. The electrification of the world will accelerate and the value in connecting things will increase exponentially. The diversity of our business supports strong fundamentals and is driving greater consistency in our results, and we are very pleased with what we have accomplished and even more excited about what lies ahead. I'd like to turn the call back to Jalene.

Jalene?

Jalene Hoover -- Director of Investor Relations and International Finance

Thank you, Tyson. Before we open the call for the question-and-answer session, I would like to announce our participation in upcoming conferences, including KeyBanc Capital Markets 20th Annual Technology Leadership Forum in Vail on August 13; and Citi's Global Technology Conference in New York on September 5. We would now like to open up the call for your questions. To accommodate as many people as possible before the market opens, we ask that you please limit your questions to one with one follow-up.

James?

Questions and Answers:

Operator

[Operator instructions] And your first question comes from the line of Cody Acree from Loop Capital. Go ahead, please. Your line is open.

Cody Acree -- Loop Capital Markets -- Analyst

Thanks for taking the question, and congrats on the progress. John, just a quick housekeeping. Beyond Q3, can you give us any help on what you're thinking about acquisition amortization-related charges?

John Hollister -- Chief Financial Officer

Yes, Cody, the third-quarter guide is a reasonable view on that looking forward, certainly over the next couple of years. So that's a good benchmark to use for you going forward. This would give us a full-quarter of amortization on the Q3 GAAP guide.

Cody Acree -- Loop Capital Markets -- Analyst

OK, great. And Tyson just maybe if you can give us any more details on your Infrastructure business, just visibility in the data center and optical networking. Obviously, that's been a bit lumpy, but it seems to be doing better. I guess, can you kind of break down some of the drivers and visibility you're seeing?

Tyson Tuttle -- Chief Executive Officer

Yes. So I mean we delivered 5% sequential growth, 35% year on year, and that's both records in timing and isolation. I mean, some of the trends we've seen -- we had a bit of a pause on the timing business last year. It was -- the overall infrastructure product group was up 7%, which was a little bit below our long-term 10% strategic growth target.

And that was really the optical market down. We saw a stable optical market in Q1 and now in Q2, and see that persisting. What's really driving the growth on the timing side has been industrial data center and wireless, areas outside the core optical market where we've been investing quite a bit in recent years. The -- and that's being driven by a lot of these in data centers; and in wireless, the drive to higher data rate applications and our parts have very good performance and specs and features to address that market.

So in timing, we've seen really the investments that we've been making pay off. In isolation, it's -- we've been consistently growing. It's a very broad and diverse business. We've got a lot of business in power supplies, solar inverters, seeing a growing presence in the electric vehicle market, that's becoming a larger piece.

And so that's been a very consistent, multiyear performance with steady growth all the way through. So we're really happy about the performance in infrastructure in Q2 and see those trends continuing.

Cody Acree -- Loop Capital Markets -- Analyst

Thank you very much.

Operator

Your next question comes from the line of Matt Ramsay from Cowen. Go ahead, please. Your line is open.

Matt Ramsay -- Cowen and Company -- Analyst

Thanks very much. Good morning, everybody. Tyson, maybe you could talk a little bit about the IoT business sort of near-term organic growth trends. The long-term strategic target is 20%, I believe, and obviously the results look really good with the integration of Z-Wave.

But if I backed that out, I think I'm 10%, 11% year over year organic. And maybe you could just talk about the near-term trends there versus the longer-term growth objectives, and sort of what you're seeing as maybe some near-term positives or headwinds in the business and how that might reaccelerate as we get into the back half of this year and next year? Thank you.

Tyson Tuttle -- Chief Executive Officer

Sure. We had 9% year-on-year growth that includes a little bit less than $8 million from Z-Wave. So if you back that out, it's about 11% year-on-year growth without, which is below the 20% target. We also had a little bit light organic growth in the first quarter and those trends persisted into the second quarter, with some delays in higher-volume customers that we were planning on kind of moving out into the second half and even into Q4.

We also had a transition in the U.K., the smart energy metering market. There's a first-generation platform moving to a second-generation platform, and we expect that to resume shipping in higher volumes in late Q4 or early 2019. So we see those two big things really responsible for a bit of a slowdown. We've seen very strong performance in the MCUs.

That's been a single-digit grower as we've seen devices move over to the more integrated wireless products. We've seen continued -- if you look year on year, we've been growing the wireless business 30%, 40%, and we see continued strength on the opportunity pipeline around the wireless applications. If you look at the design win activity in the quarter, we had a record design win activity. It was up 30% -- 38% year on year from last year.

And so we look into the second half, and particularly as we move into 2019. And we stand behind our 20% strategic long-term growth target. That is every year -- last year, infrastructure was a little behind. This year, we're a little ahead there.

In the organic growth in IoT, we see the design win pipeline supporting that 20% strategic growth target. It may be lumpy based on a few customer ramps and things like that. I think if you look at the CAGR from 2014 to 2017 and you include pro forma Z-Wave, you've got about a 24% CAGR that we've achieved over the last three years. That's inclusive of the historical Z-Wave.

And so going forward, we think, both on a pro forma and an organic basis, that 20% is a reasonable target to use.

Matt Ramsay -- Cowen and Company -- Analyst

Gotcha. Thanks. That's really helpful. John, just a couple of things for yourself.

With the higher mix in infrastructure, I mean, is this 60% gross margin number, is that sort of a sustainable level? And the second bit is how do you see operating expense trending? I know we're going to get to a point after a couple of quarters of Z-Wave integration where we turn to some really strong leverage. Or how do you think about spending? Thank you.

John Hollister -- Chief Financial Officer

Yes, Matt. So looking at gross margin, we had very strong results in the third -- second quarter, with 61.6% gross margin. We saw strength in infrastructure. We saw consumer down a bit in the second quarter.

That's total consumer end market and also some favorable mix effects in IoT. So that was a good result. Looking ahead, we see 60% in third quarter as our guidance. We're holding our model at 58% to 60%, and think that continues to be a rational way to view the business.

IoT coming in a bit below corporate average as those volumes had to do a stronger route. Coming ahead, we think holding the model is the right way to view that. Looking at the OPEX, guiding basically flat OPEX in the third quarter with some fringe costs continuing to roll off in the third quarter, with some additional headcount activity. Looking into the fourth quarter, we see likely an uptick a bit in the OPEX for fourth quarter in the -- to the tune of up to a couple of million dollars for fourth quarter.

And that puts us close -- very much in line with the annual guide we had given on OPEX at the beginning of this year. Now longer term, heading into next year, we will be talking about this in our AOP planning cycle that now begins this fall, and I expect to be would be in position to talk more about 2019 as we head into the early part of next year.

Matt Ramsay -- Cowen and Company -- Analyst

Fair enough. Well done. Thank you.

John Hollister -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Gary Mobley from Benchmark. Go ahead, please. Your line is open.

Gary Mobley -- Benchmark -- Analyst

Thanks. Good morning, everybody. I had a question about ZTE. If I recall correctly, your expectation was for -- you'd miss about $2 million in revenue relating to ZTE in the second quarter.

Now that we've seen some easing of the shipment ban, what's your expectation for business with ZTE looking into the third quarter? And was there any benefit from the migration from ASC 605 to 606, at least on a year-over-year comp basis?

John Hollister -- Chief Financial Officer

Yes, Gary, so this is John taking the first question. The ZTE ban has been lifted. And we are engaging with ZTE to determine their resumption of production activity and consumption rates. So that is comprehended in our third-quarter guidance that we have provided this morning.

Relative to the change in the accounting methodology, yes, there is some beneficial effect of that. And that is incorporated in our second-quarter results as well.

Gary Mobley -- Benchmark -- Analyst

OK. Thank you, guys.

Operator

Your next question comes from the line of Blayne Curtis from Barclays. Go ahead, please. Your line is open.

Blayne Curtis -- Barclays -- Analyst

Hey, guys. Thank you for taking my question. Maybe just following up on the gross margin answer. I was actually curious, I mean, you said a mix within IoT, is that just the modular shift? Or are you seeing some benefit on a product basis? And I'm just kind of curious as you look at the Z-Wave and improving the gross margin structure there as well.

Thanks.

John Hollister -- Chief Financial Officer

Yes, there's a fair amount of mix within IoT, that's a broad product base with products and customer mix effects across what is now a $100 million per quarter plus type business. So yes, we see -- we'll see some fluctuation within that from time to time. The Z-Wave integration is proceeding smoothly, including looking for opportunities for manufacturing synergies. And we will continue to optimize that as we go forward here.

Tyson Tuttle -- Chief Executive Officer

Yes, I would add that on the -- the strength in the proprietary wireless side, that's also an area that is higher on the gross margin. So that led to a little bit of favorability as well.

Blayne Curtis -- Barclays -- Analyst

And then a question for you, Tyson, just of more strategic nature. The question I get most is when you look out over the next couple of years in home automation, why bluetooth wouldn't eventually win out. Obviously, you have bluetooth capabilities for sync and such. But just curious for Zigbee and Z-Wave, what is the pitch there for a customer to continue to use that technology versus something like bluetooth, which is more ubiquitous?

Tyson Tuttle -- Chief Executive Officer

Yes, so Bluetooth is more of a point-to-point solution, and it's really the gateways in bluetooth typically involve a smartphone. So -- whereas a Zigbee or Z-Wave device would have gateway connected to the Internet and would be kind of more of an autonomous network. It's also a mesh network. So there's a higher level of maturity and robustness to those that many of the operators and service providers have chosen these mesh networking technologies, and we see those only solidifying their position in the U.S.

and in Europe. There's quite a bit of interest in China, in particular, around the Bluetooth mesh technology. And we were the first company to launch bluetooth mesh stack and are heavily engaged in the China market around bluetooth mesh and see that as a very interesting solution. I mean, given that we have a common hardware and software platform and we can run these protocols on the same hardware essentially and even are able to run bluetooth and Zigbee.

And in the future, bluetooth and Z-Wave on the same device that will bring in new use cases. And some of the advantages you would see in the bluetooth and to the other mesh networking technologies, that also drives a higher level of efficiency for us because we're riding all of the stacks and making them operate on the same platform. So I think that IoT is a very broad market. It's thousands of applications, lots of different end devices, lots of customers, and you see a diversity of technologies across those.

So I think the fact that we can support the variety of technologies on a common platform is -- no matter which way the market goes and which application, a particular protocol, a particular customer wants, we're able to support that. So we feel like we're quite well-positioned no matter which way the market goes.

Blayne Curtis -- Barclays -- Analyst

Thanks.

Operator

Your next question comes from the line of Craig Ellis from B. Riley FBR. Go ahead, please. Your line is open.

Craig Ellis -- B. Riley FBR -- Analyst

Yes. Thanks for taking my question. And congrats on the strong execution, guys. Tyson, I wanted to go back to some of the comments in your prepared remarks regarding infrastructure.

I think you said that timing had strength in its noncommunications businesses, and I wanted to just follow up on that for some more color. And then with respect to isolation, it had been a stellar grower last year. It looks like it's continuing that same track record. Can you provide a little bit of a look ahead and give us a view of what isolation could look like as we look into 2019 and what the incremental drivers are longer term?

Tyson Tuttle -- Chief Executive Officer

Right. So if you look at the infrastructure business -- let's peel this apart and just talk first about timing. We've got a very broad portfolio of oscillators and clocks. And in -- as communication standards in data center and wireless, as we move into 5G, there's a need for higher data rate speeds that really require the high performance that we're kind of famous for.

And we've got patented technology that allows us to achieve a high level of integration, a high level of functionality and very low jitter, which is critical to these applications. So that's been really in the optical market where we've seen higher performance requirements, that's where we had initial success in timing, and now that's being extended into these other applications through the -- a lot of the MPI pipeline that we've been driving here over the last five years. So that's finally starting to take hold. I would add that the stickiness and the -- these are very high-quality, long-lived high gross margin products and applications, and we're really pleased with the mark progress that we're making there.

On the isolation side, this is a -- probably it's one of our, if not our most, broad business. There's just a broad range of industrial applications in power, basically dealing with high-power, high-voltage type systems, where traditionally customers have used optocouplers. That's mainly provided by companies like Avago or Broadcom now. And there's been a trend toward moving these to a bit of isolation which requires -- gives you higher degree of performance, higher robustness, higher channel counts.

There's -- it lets you build higher-efficiency power supplies and higher-efficiency motors. And then you see a lot of new emerging applications like electric vehicles, which use similar technology; solar inverters, those use similar technologies. So there's -- and this is -- it's been a multiyear performance. I mean, we've been growing this business from what were small numbers to now, it's about over 40% of the infrastructure business is on the isolation side.

I would say the isolation products are growing out though faster in timing, although we've seen a really strong performance out of timing here over the last couple of quarters as well. We had records in both of those areas. And certainly on the isolation side, we've seen no letup in the growth that we're able to achieve there. There's just a very strong design win pipeline, record design wins in both timing and isolation here in the second quarter which bode well for going forward.

That being said, we stand behind our 10% strategic growth target for the infrastructure market. Timing has been lumpy based on market conditions and rollouts of various standards. If you look back over the last three years, we had a 12% CAGR for the infrastructure business and timing went down in 2017. So we still remain cautious but very optimistic about the positioning of our products in the market.

Craig Ellis -- B. Riley FBR -- Analyst

That's very helpful. And then the follow-up question is less of a financial question and more about the organizational and corporate implications of the chief strategy officer move that was announced, so congratulations to Daniel. But what does it mean that, for financials longer term, the evolution of the business that is moving into a chief strategy officer role? And how do you expect to tap the expertise of that role as we look at the financial performance of the business going forward?

Tyson Tuttle -- Chief Executive Officer

Right. So as IoT has become a larger percentage of our business, very complicated, lots of customeractivity, lots of product development, lots of software, we felt that augmenting our team with someone with operating at a larger scale and with experience in microcontrollers and software developments and all of that, was the judicious thing to do, growing the bench strength of the team. Daniel has had a great, great run at running the IoT business. He's got deep understanding of the company's strategy, of what's made us successful in IoT.

And I expect him to apply that -- those capabilities and that knowledge more broadly across the company as we look at the infrastructure opportunities sitting in front of us, as we drive for continued growth and leadership on the IoT side. And then also, we've got a target to execute on M&A. That we've got $500-and-some million in the bank, and we want to make sure that we put the proper level of diligence and focus on growing the business that way as well. So I'm really looking forward to working with Daniel more closely and also really delighted that Matt has joined the team and really well-positioned to take the IoT business to the next level.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks and good luck.

Tyson Tuttle -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Raji Gill from Needham & Company. Go ahead, please. Your line is open.

Raji Gill -- Needham & Company -- Analyst

Yes. Thanks and congrats as well. Tyson, a question on the IoT, to piggyback on the different kind of competing connectivity standards. What are your views on 802.11ac, as well as the next-generation 802.11ax, which is both more range, higher data throughput? Do you view that as a potential competitive threat to mesh networking? Or are you incorporating these new Wi-Fi technologies in your portfolio? Any color there will be helpful.

Tyson Tuttle -- Chief Executive Officer

Yes, so we are -- we've launched Wi-Fi in the market this year. It's using the 11n standard, which is really the simpler standard that it drives long range. ac is really used for -- it's really a five gigahertz standard, shorter range but much higher data rates. So those are used for like more streaming video and very high speed connections.

Our focus in IoT is on the end node. So it's the end devices, many of which are cost and power constrained. And our focus on IoT is to deliver very low power solution at a very cost-effective point to be able to scale across this multitude of IoT end node applications. So we view that -- the other thing to note about Wi-Fi is that it's a star network, so it's connecting a device an access point.

There's deployed access points, and 11n is essentially the ubiquitous standard that can connect across everything. And an ac access point and an ax access point will be backward-compatible to the 11n. We think that the vast majority of the IoT end nodes are going to stay 11n for the foreseeable future. As the 11ax access points get rolled out, that is something that is interesting on the road map, but that will take some amount of time.

The end nodes will have to support 11n, and that's provides really the most cost-effective way to address the end node applications. So we're looking at the ax applications and that technology, but believe that we're really sitting in the sweet spot of technology. In terms of the Wi-Fi as a higher power, it burns down the batteries a lot faster in a device. And so there are many, many applications that require of Zigbee or a Z-Wave type of solution to be able to operate at the cost points, and in particular the battery life that's required for IoT.

So we see these as really compatible and complementary standards. Just like in a phone, you have a bluetooth to stream audio and you have Wi-Fi to connect to the Internet, I think that there's going to be a proliferation of applications that require each of these standards. And the fact that we can support all of those within a common platform is a big advantage to us in terms of being able to, depending on the application, use the appropriate wireless technology.

Raji Gill -- Needham & Company -- Analyst

Very good, Tyson. And a housekeeping question, John. You mentioned $8 million contribution from Z-Wave partial in June 2018 quarter and you have a full quarter in the guidance, what's the kind of the fourth-quarter revenue for Z-Wave in Q3 contribution?

John Hollister -- Chief Financial Officer

Yes, Raji, we haven't broken that out. Last quarter, we had a goal of $40 million, we might come in a little bit behind that. But on overall, we see the Z-Wave business on track and encouraged by the progress we're making with it.

Tyson Tuttle -- Chief Executive Officer

Yes, that's $40 million for the year. So we had about -- two-thirds of the year, we had about a little bit less than $8 million in the second quarter, and then we'll have a full quarter here in Q3 and then another full quarter in Q4. The total we had talked about last quarter was $40 million, and we're essentially on track for that.

Raji Gill -- Needham & Company -- Analyst

Yes, that's perfect. Thank you.

Operator

[Operator instructions] Your next question is from Suji Desilva from Roth Capital. Go ahead, please. Your line is open.

Suji Desilva -- ROTH Capital -- Analyst

Hi, Tyson. Hi, John. Congratulations on the results. I just want to dig one more time into the timing of the business and the non-optical improvement in data center.

I wanted to know if data center was driving the majority of the non-optical improvement. And if it is, what lines would be driving the upgrade sweeping in your content, is that 100-gig -- plus gig bring in the 56-gig SerDes? Any color there would be helpful.

Tyson Tuttle -- Chief Executive Officer

Yes, it was actually -- if you look at the growth, it's a mix of industrial data center and wireless applications, really not a majority contribution from any of those. And I mean, you've got the 56-gig SerDes, there's a 100 gig, 400 gig rollouts that are driving some of this within the data center and on the wireless side. So it's a real mix. The customer base and the number of customers and the diversity of that business is getting broader.

Suji Desilva -- ROTH Capital -- Analyst

OK, great. That's good to hear. And then separately on the auto, I think it declined, maybe it's pausing here. Is there any share shift in the auto broadcast business? Or is that auto and demand driven? And then just curious, hiring -- the new hire with Matt with an NXP experience, are you going to potentially be expanding your auto product portfolio beyond broadcast?

Tyson Tuttle -- Chief Executive Officer

Yes, so in auto we just had a little bit of pause, there's no share shift or anything like that. It was a little bit of -- just some movement of orders quarter- to quarter in -- mostly in Europe that drove the slight shift on the automotive side. In terms of other automotive business, we've got a fair amount of business within our isolation product line, although the majority of the automotive business today is on the broadcast, the radio products. But we are seeing good traction on hybrid electric vehicles.

We also have a little bit of microcontroller business on the eight-bit side on the automotive. In terms of new hires, we're certainly adding on the infrastructure side to our capabilities in isolation and timing, and also, certainly in IoT around software. That's been a big focus for us this year as we've brought in new folks, as well as the Z-Wave acquisition coming in. On the broadcast automotive side, I think we've got a pretty complete team.

We're focused on leadership on the software and winning market share there in the automotive radio space.

Suji Desilva -- ROTH Capital -- Analyst

OK. Thanks, guys.

Tyson Tuttle -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Tore Svanberg from Stifel. Go ahead, please. Your line is open.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Yes. Thank you, and congratulations on the strong results. First question, Tyson, maybe you could talk a little bit about the IoT business as it relates to customers going from a Gen 1 to a Gen 2 platform. Maybe you could talk a little bit about what happens there.

I mean, I'm sure the business is pretty sticky. But when we started thinking about the type of approach and software so on and so forth, how accretive to your business would sort of a Gen 1 to Gen 2 platform really be?

Tyson Tuttle -- Chief Executive Officer

Yes, so the Gen 1 platform is essentially the set of products that we have out in the market today. And so that is our complete multiband, multiprotocol solution with integrated microcontrollers, integrated energy management, integrated wireless with the stacks and everything running in there. Those have been very successful out in the market, and we're seeing broad adoption across the wide range of applications. And certainly as we move -- that's in the 90-nanometer technology.

As we move into a 40-nanometer technology for the second gen, that drives really three different vectors. You've got -- there's certainly costs that you benefit, that you see by moving into a finer-line geometry. You also see significant improvements in power consumption that helps just to enable a lot more of the IoT battery-operated applications. And then you see an increase in functionality, in particular around security, but in terms of additional added functionality.

A lot of the cycles of learning that we've had in the first generation as we've engaged into the market are getting adopted and embedded into the Gen 2. With -- throughout this process, we're trying to leverage our -- both our design and especially our software investments to be able to seamlessly move customers as they go from a Gen 1 to a Gen 2 device and continue to build on a lot of those customer relationships. And as you see the rollouts of these technologies across industries, I think it just is a continuum of broadening differentiation that we're able to deliver in a consistent way across all of these markets. So we're really excited about the developments on Gen 2.

That's well under way. We're also adding additional protocols with the Wi-Fi coming in on the Gen 2 platform. So that's very exciting. So we see it as a SAM expander, but also a deepening of the relationships with customers and a deepening of the differentiation that we're able to deliver.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

That's really helpful. And as my follow-up, if we look at the infrastructure business, you obviously started with share gains and timing, and then the last few years you've done a tremendous job in isolation. What are some of the other components or technologies that are obviously Silicon Labs, either from an internal capital investment or even M&A?

Tyson Tuttle -- Chief Executive Officer

Well, if we look at really the three pillars that we have at Silicon Labs, we've got IoT now over half of our revenue. We've got infrastructure, both in timing and in power and the isolation, as really deepening technologies that are very, very interesting for us in terms of sustainability long term and then the highquality nature of those markets. And then also the automotive applications, a little bit more targeted. But in the infotainment space, where we've got a very competitive solution and a very large market to go after.

The electric vehicle area, which touches on the power area, but some additional targeted applications within there. So those -- we believe that the SAM that we're addressing today is substantial and growing now until 2022, about $12 billion. And we've got -- we're focused on converting the opportunity pipeline. We've got about a $9 billion opportunity pipeline within that area and focused on converting those into design wins and driving growth, and we believe that we're well-positioned to do that.

In terms of M&A investments, we really look at it through the lens of -- it needs to be strategically aligned with what we're trying to accomplish. You saw that with the Z-Wave acquisition and alignment with IoT. And I would say that we also consider opportunities within the power and in the timing space to be equally attractive. So those three areas are going to continue to be our focus, both for organic investments, as well as M&A, right? I would add that on top of that the cultural compatibility.

I mean, we developed a very strong culture here at Silicon Labs around design and around approaching the market and around product strategy, as well as many different areas. And that's also an important factor as we consider these, as well as the accretive nature of these to be able to add to the top line as well as the bottom line. So I think we're really well-positioned with the strategy. We're really pleased with the progress that we've seen here over the last couple of years, really proud of the quarter that we're just able to deliver and really excited about what we've got coming forward second half of the year and in 2019.

Tore Svanberg -- Stifel Financial Corp. -- Analyst

Very helpful. Congrats again, and thank you.

Tyson Tuttle -- Chief Executive Officer

Thank you.

Operator

And I would like to now turn -- hand the call back over to Jalene Hoover.

Jalene Hoover -- Director of Investor Relations and International Finance

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

Duration: 52 minutes

Call Participants:

Jalene Hoover -- Director of Investor Relations and International Finance

John Hollister -- Chief Financial Officer

Tyson Tuttle -- Chief Executive Officer

Cody Acree -- Loop Capital Markets -- Analyst

Matt Ramsay -- Cowen and Company -- Analyst

Gary Mobley -- Benchmark -- Analyst

Blayne Curtis -- Barclays -- Analyst

Craig Ellis -- B. Riley FBR -- Analyst

Raji Gill -- Needham & Company -- Analyst

Suji Desilva -- ROTH Capital -- Analyst

Tore Svanberg -- Stifel Financial Corp. -- Analyst

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