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Silicon Laboratories inc (NASDAQ:SLAB)
Q3 2021 Earnings Call
Oct 27, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello. My name is Sarah, and I will be your conference operator today. Welcome to Silicon Labs Third Quarter Fiscal 2021 Earnings Call. [Operator Instructions] I will now turn the call over to Austin Dean, Silicon Labs' Investor Relations Manager. Austin, please go ahead.

Austin Dean -- Investor Relations

Thank you, Sarah. We are now recording this meeting, and a replay will be available for four weeks on the Investor Relations section of our website at silabs/investors. Joining me today are Silicon Labs' Chief Executive Officer, Tyson Tuttle; Matt Johnson, President; and John Hollister, Chief Financial Officer. They will discuss our third quarter's financial performance and review recent business activities. This information, along with accompanying financial tables and the earnings press release is available on our website. We will take questions after our prepared comments and our remarks today will include forward-looking statements subject to risks and uncertainties. We base these forward-looking statements on information available to us as of the date of this conference call and assume no obligation to update these statements in the future.

We encourage you to review our SEC filings, which identify important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. Additionally, during our call today, we will refer to certain non-GAAP financial information. A reconciliation of our GAAP to non-GAAP results is included in the company's earnings press release and on the Investor Relations section of the Silicon Labs website. For clarity, all information detailed in the call today will refer to results from continuing operations. Any references to discontinued operations will be explicitly noted.

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

Tyson Tuttle -- Chief Executive Officer

Thank you, Austin. I'm excited to announce the achievement of record quarterly revenue for Silicon Labs. We recorded $185 million in third quarter revenue, a 9% increase from our previous high achieved in the second quarter of this year. I'm very proud of how our team has executed in such an unusual and at times challenging environment. First, John will provide further details on our financial performance. Then Matt will discuss our execution and accomplishments for the quarter. I'd now like to turn the call over to John Hollister. John?

John Hollister -- Senior Vice President and Chief Financial Officer

Thank you, Tyson. I'm pleased to report excellent results for the third quarter. IoT revenue for Q3 ended strong at $185 million, which is above the high end of our guidance range and represents a growth of 39% year-on-year. We saw strong growth in both of our primary end markets during the quarter, Industrial and Commercial and Home and Life. Key areas of strength in the quarter were in home automation and security, smart retail, portable medical and sports and fitness. Our wireless IoT solutions continue to be the primary driver of revenue growth and share gain. Wireless products delivered robust 48% year-on-year growth during the third quarter, and we saw increases across all our wireless IoT protocols, including Bluetooth, Wi-Fi, Z-Wave, Zigbee, Thread and Proprietary. By geography, we saw the greatest strength in the third quarter in the Americas and Europe, which were up significantly, APAC was up slightly.

Distribution revenue in Q3 was 81% of total sales. Our business remains highly diverse. For example, our largest customer in the IoT business is only 5% of our mix and our top 20 customers represent approximately 31% of the total. Non-GAAP gross margin exceeded our expectations for the quarter at 59.4% with favorable mix. Earlier this year, we implemented price increases to recoup cost increases from our suppliers and we are seeing positive effects. The supply situation remains dynamic with tight supply and rising costs across the manufacturing landscape. We expect to continue to pass along supplier cost increases to our customers to preserve our gross margin performance. In doing so, we remain committed to applying our pricing strategy in an equitable and constructive manner to maintain our strong customer relationships and long-term growth in the IoT market.

Given the variable timing associated with costs and price increases, we are experiencing greater volatility in gross margins and expect that to continue in the near to midterm. As expected, our non-GAAP operating expenses increased significantly in Q3 to $93 million, primarily due to increased investment in our pipeline of new products, which brought R&D expenses to $57 million. The SG&A expenses were up slightly on higher variable compensation with upside business performance and costs associated with our works with Developer Conference. In its second year, the conference drew nearly 8,000 IoT customers, partners and prospects. Non-GAAP operating margin for Q3 was better than expected at 9%. Non-GAAP earnings per share from continuing operations were $0.34 above the high end of our guidance range. Our non-GAAP effective tax rate was approximately 8%. Turning to our GAAP results.

Our gross margin was 59.2%, GAAP operating expenses from continuing operations were $119 million with R&D at $73 million and SG&A at $46 million. In addition, GAAP expenses included stock-based compensation of $14 million and amortization of intangibles at $12 million for the quarter. As a result, we generated a GAAP operating loss from continuing operations of $9 million. We closed on the divestiture of the Infrastructure and Automotive business in Q3 and recorded a onetime gain from the transaction of $2.1 billion during the quarter. As a result, our total GAAP earnings per share, inclusive of discontinued operations was $46.76. Turning now to the balance sheet. We ended the quarter with $2.7 billion in cash and investments. We had strong operating cash flow from continuing operations in Q3, bringing our year-to-date total to $48 million. Cash flow from discontinued operations was $2.8 billion, primarily due to the divestiture transaction.

Accounts receivable declined in the third quarter to $73 million on solid collections, representing DSO of 35 days. Despite the supply chain challenges we are experiencing, our team delivered both upside revenue in the third quarter and growth in inventory to $59 million or turns of 5.1 times. We expect our inventory balance to decline in the fourth quarter. Shortly following the closing of the divestiture in Q3, we completed a modified Dutch auction tender offer under which we repurchased approximately $640 million of common stock at a price of $160 per share. This retired about four million shares or 9% of our Q2 ending fully diluted share count. Furthermore, we supplemented the Dutch auction with additional open market repurchases, bringing our year-to-date total on the open market program to $54 million out of $150 million authorized. As a result, the total share repurchases completed through the end of Q3 is nearly $700 million.

We also expect to enter into an accelerated share repurchase agreement today pursuant to a Board authorization to repurchase an additional $400 million in shares. This accelerated share repurchase is the next step in our capital deployment program and demonstrates our continued commitment to deliver value to our shareholders through a prudent capital allocation strategy. I will now cover guidance for the fourth quarter. We expect revenue for the fourth quarter to be in the range of $195 million to $205 million. We expect non-GAAP gross margin to be approximately 59.5%. We expect non-GAAP operating expenses to be around $95 million. We expect the non-GAAP effective tax rate to be about 8% and non-GAAP earnings per share to be in the range of $0.50 to $0.60. On a GAAP basis, we expect gross margin to be around 59%, GAAP operating expenses to be $126 million and GAAP loss per share to be in the range of $0.41 to a $0.31 loss.

I will now turn the call over to Matt. Matt?

Matt Johnson -- President

Thanks, John. I'm happy to report record revenue in Q3. We are on a path to sustained growth and continued leadership in the wireless connectivity market while achieving our profitability model. We've grown nearly 40% since Q3 of last year, which is remarkable. We've also captured greater design win lifetime revenue in the first three quarters of this year than we did in all of 2020. In the third quarter, Silicon Labs became a pure-play IoT company, and we're excited by the early results. The team is energized and laser-focused to capture the significant market opportunity that providing the wireless connectivity for the Internet of Things represents. We achieved nearly 50% growth year-on-year in our core wireless business despite supply chain constraints. We saw gains across all product lines. In particular, our Wi-Fi revenue more than doubled from the third quarter last year. the first full quarter after the Redpine acquisition.

Supply remains a challenge as we work to meet customer demand and do the right thing for our long-term business. We were able to build inventory slightly, though we are still not at what we consider a normal operating range. In addition to strong financial results, we executed well across the board. I'd now like to share some of the highlights. In September, we held our second annual Works With Developer Conference. The response from our ecosystem was incredible. We drew nearly 8,000 registrants, an increase of almost 20% over last year. We featured multiple keynotes including industry leaders like Amazon, Google, IKEA, Landis+Gyr and Schneider Electronics. By popular demand, we also expanded the conference to add tracks on rapidly growing markets like smart retail, smart industrial and portable medical. We estimate that Works With 2021 helped us identify more than 500 new opportunities with the potential for more than $1 billion in lifetime revenue.

In Q3, we also announced the xG23, the latest addition to our award-winning Series two wireless platform. The xG23 is a sub-gigahertz wireless SoC that brings an industry-leading combination of wireless range, energy efficiency and security. This new solution can operate over a mile for more than 10 years on a coin cell battery while supporting our industry-leading Secure Vault security features. And because it's from Silicon Labs, the xG23 supports a wide range of protocols, including Amazon Sidewalk, mioty, wireless M-Bus, Z-Wave and Proprietary IoT networks. It's the optimal feature set for a growing number of smart city and industrial deployments as well as home and commercial building automation. Next, we announced our unified software development kit, or Unify SDK, which brings a new level of interoperability between industry protocols. Silicon Labs is committed to simplifying wireless connectivity.

By making it easier to connect devices, we are paving the way for wireless ubiquity. The Unify SDK provides ready-made software for gateways and application processors that enables translation between wireless protocols. With Unify SDK, IoT developers can design their solutions with confidence knowing they can easily bridge to support multiple protocols, including matter once it arrives. This kind of interoperability brings a significantly improved consumer and developer experience to the industry. Finally, we announced our Custom Part manufacturing service or CPMS. Silicon Labs is the first in our space to allow customers to customize their devices in the final stages of manufacturing before the products leave the facility. This secure provisioning service enables greater security, simplified supply chains and greater product differentiation for our customers.

This is a big deal. CPMS offers customers a trusted and economical way to add unique part numbers, custom marketing and application-specific programming as well as highly advanced security features such as secure boot, secure debug, encrypted over-the-air updates, public, private and secret keys and secure identity certificates. The world is facing an increased need to protect against security breaches, intellectual property compromises and counterfeiting. Our customers are moving to implement more secure device protection and this service is available at a great time for our industry. I'm really proud of what our team has accomplished. We brought the industry together, delivered significant innovation and drove record revenue, all while navigating a uniquely challenging environment.

Now I'd like to take a moment to recognize Tyson in his decade as CEO of Silicon Labs. He had a clear vision for the potential of smart connected devices to transform the world. His leadership and passion for innovation brought us to where we are today. Silicon Labs is a leader in a thriving and fast-growing market. The Internet of things is here and the impact is being felt in homes, cities and industries around the globe. Tyson's commitment to employees, customers, partners and the communities we live in has been deeply felt and will continue to be a part of our values as we move forward. It's no surprise that the Austin Business Journal awarded him their 2021 CEO legacy award.

Thank you, Tyson, for your leadership and support. I'm excited to pick up the baton and carry it forward. And now I'd like to hand it over to you for a few words.

Tyson Tuttle -- Chief Executive Officer

Thank you, Matt. I joined Silicon Labs in 1997 as the tenth employee, and I am so proud of what we accomplished over the last 25 years. It's been a great honor and a privilege to lead the company for the last decade as CEO, driving our transformation into a pure-play leader of secure intelligent wireless connectivity for the large, diverse and fast-growing IoT markets. Throughout this time, we have stayed true to our values, and one of those values is to hire the best. I want to thank all the employees past and present who help turn the vision of a smarter, more connected world into a reality. Going forward, I'm excited about the future of Silicon Labs. The thrive and connectivity becomes ubiquitous in our lives and throughout the economy. As I pass the torch, I have full confidence in Matt's ability to carry forward our values and culture.

And under his leadership, I know the team will continue to build on Silicon Labs' strong foundation to capitalize on the opportunities ahead. Finally, since this is my last earnings call, I want to thank all of you for your time and attention through the years and sometimes patients. I've enjoyed sharing Silicon Labs vision for the industry, our stories of innovation and the great work of our engineers with you all.

And with that, I'd like to turn the call back over to Austin.

Austin Dean -- Investor Relations

Thank you, Tyson. And thank you for joining Silicon Lab's Q3 2021 Financial and Business Update. I will now open the call for questions. [Operator Instructions] Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Gary Mobley with Wells Fargo Securities. Please go ahead.

Gary Mobley -- Wells Fargo Securities -- Analyst

Hey guys. Thanks for taking my questions. Congratulations, both Tyson and Matt on the next chapters of your lives and careers. And congratulations on putting an exclamation point on the finish to the fiscal year. And that's where I want to start with my questioning. To what extent is this roughly 9% revenue upside that you're posting here in the second half of the year being driven by better wafer supply, easing of the supply chain in general. And to what extent is it being driven by demand upside?

What I'm really trying to get to some of the forward-looking demand metrics like your ending backlog or your book-to-bill ratio for the quarter?

Matt Johnson -- President

Gary, this is Matt. Thank you. I guess the way I'd like to answer that is what we're seeing is continued constraints in the supply chain in the coming quarters. With that being said, we see the opportunity each quarter to increment up on our supply. And at the same time, as we see costs coming in from our suppliers, we're passing those on to our customers but only to the extent that it makes sense and trying to maintain our margin model. With that being said, looking forward, we see that supply will continue to be constrained and demand is continuing to increase widening that gap moving forward.

So even though we're incrementing up our supply, demand continues to increase at a faster rate.

Gary Mobley -- Wells Fargo Securities -- Analyst

My follow-up question is a bit boring. But important, nevertheless, John, can you share with us what you would expect the share count to be following this $400 million ASR that you're, I guess, concluding this week, is it roughly 37 million shares outstanding?

John Hollister -- Senior Vice President and Chief Financial Officer

Yes. Thank you, Gary. The estimate there would be around 39 million shares for the fourth quarter. And that's really what is in view right now. So that's what I suggest you think about.

Gary Mobley -- Wells Fargo Securities -- Analyst

Got it. Thanks guys.

Operator

Our next question comes from Matt Ramsay with Cowen. Please go ahead.

Matt Ramsay -- Cowen -- Analyst

Thank you very much. Good morning guys. First off, Tyson, congrats. It's been a hell of a run. And I think most importantly, the culture you've built there is something that we can certainly observe from the outside. So just wanted to -- for my question, and it kind of touches on a couple of things that Gary mentioned in his first question. But what I wanted to touch on is pricing and the environment that you're seeing. There's a lot of companies talking about some being really successful, some maybe slightly less so in passing along increased input costs given the tight environment that we're in, through to their pricing.

And obviously, the big upside that you guys showed in the back half of this year, folks just kind of kicking the tires to see how much of that is units? How much of that is supply, how much of that might be pricing and how throwable any pricing upside might be as you work through the next several quarters.

Tyson Tuttle -- Chief Executive Officer

Matt, this is Tyson. I'll start off and then I'll let Matt continue to comment on that. But I appreciate the kind words. It's been a great ride, and we've had a lot of success in building the IoT business, and I couldn't be happier for Matt to take over the reins here and take it to the next level. Just a few comments on the revenue upside here and what that's going to look like going forward. We have substantial pricing power in the IoT markets, strong demand. I mean, certainly, in a supply constrained environment, you're going to have pricing power.

We're also seeing some increased costs coming in from our suppliers. And we've seen some of that this year and expect that to continue to a certain degree. And we are passing on those price -- those cost increases in terms of price as we go forward. We can't get caught in the middle of -- we've got to hold our margins and we're taking that as a goal. But at the same time, you don't want to damage your long-term relationships with customers. We want to do this in an equitable way, in a way that is sustainable going forward.

We don't want to create headwinds in the future and we want to maintain our relationships with customers. So there's a real balance with that. I'd also say that the team has been putting substantial effort into increasing supply, both with our existing customers or with our existing suppliers as well as bringing on new supply in the future, putting R&D into increasing supply as well as driving the road map. And we see that in terms of securing additional supply going into the new year, but really as we go through 2022 and into 2023, making sure that we can support our long-term growth for the company that we've got the supply to do that.

So it's really a combination of things, very good execution, very good ability to manage our cost and our pricing and increasing the supply going forward to support our growth.

Matt Ramsay -- Cowen -- Analyst

Yes. I really appreciate it. As my follow-up, I guess this is from both Matt and John. when the deal got announced, the divestiture of Skyworks, I think the IoT franchise was somewhere in the low single digits from an operating margin perspective and the fourth quarter guidance and it adds about 10 points to that. I think we're at 12% in the fourth quarter. And really, really early to ask about the long-term model, I get that. But just want to make sure that you guys are still comfortable with the leverage you forecast out in that medium-term model that was announced with the deal.

It looks like you might be running a little ahead of that. So just any commentary you might have now that you've had a quarter or two with the business running stand-alone would be really appreciated.

John Hollister -- Senior Vice President and Chief Financial Officer

Yes. Matt, you bet, this is John. We are committed to the model and are really guiding our actions to deliver on that. And we are pleased that we're running ahead of it right now. It's a good start and no change to that longer-term outlook at this time. That remains our goal to grow the business and drive the profitability model. That's exactly what we're focused on here.

Matt Ramsay -- Cowen -- Analyst

Thanks very much guys.

Operator

The next question comes from Tore Svanberg with Stifel. Please go ahead.

Tore Svanberg -- Stifel -- Analyst

Yes. Thank you. Congratulations on the strong results and Tyson, congratulations on your retirement. We're going to miss you greatly. First question is on the CPMS program. Can you either one of you just elaborate a little bit on that? What exactly does it mean as far as continued share gains? And is there any way that you could tie it into financials?

Matt Johnson -- President

Sure, Tore. This is Matt. So a little bit more detail on what it is and how it works. This is a service that we give our customers access to that allows them to basically program and add customization in the late stages of our manufacturing before it leaves the facility. And in doing so, it allows them to, as I said earlier, really simplify their supply chain. They don't need to send devices somewhere else for flash programming for any customization.

And it also really helps with the security as well as the security configuration can be done before it ships out versus sending it somewhere else, multiple places in some cases, to add those security configurations. So this is a capability that we're really excited about because the timing is right in our industry, whether it's the supply chain challenges the whole industry is seeing or the cybersecurity and security threats in general, this is something our customers are really looking for and the ability to further differentiate their products as well.

So it's an awesome combination. It's a service that we charge for. And it's really a good economical value for our customer base because these are things they have to pay in multiple stages of complexity in their supply chains to accomplish today. So this is a capability that we just announced that works with. And so far the reception has been really strong.

Tyson Tuttle -- Chief Executive Officer

Yes. Tore, this is Tyson. I'd just like to add, we have a custom test platform that's really targeted at the broad market. It enables us to do this customization in a very efficient way. It also saves the customers a lot of work. In other words, they don't have to program up the parts as they go through their manufacturing flows. It also protects them from somebody switching a different type of part into the -- so that it's custom for them. And that allows us -- we are charging for this. It gives us a premium pricing model.

And it's kind of a good element of agility that we get because of the way we've done our manufacturing. I'd also say that, that's also given us some advantage in the supply prices. Just our custom test platform enables us to scale the back end very, very efficiently without having to acquire new big iron testers and things like that. And that's proven a big advantage for us. But we see the advantage in the CPMS program as kind of even widening that further going forward and plays into the margin and pricing model that we have.

Matt Johnson -- President

The last thing I'd add, Tore, just to make it real. Imagine if a customer wanted to customize top marking or part numbers for their own manufacturing schemes, they wanted to do their application programming at that phase or if they needed to inject certificates in support of multiple wireless standards like Wi-SUN or Matter, they could do that there as well as adding their secure keys. So all of that can be done there through a secure portal, which really allows them to simplify their supply chain and increase their security. So it's pretty cool. We're excited about it.

Tyson Tuttle -- Chief Executive Officer

Being able to do that across a broad range of customers, you're talking the ability to do this over thousands and thousands of customers is a unique capability for Silicon Labs.

Matt Johnson -- President

No touch on our part.

Tore Svanberg -- Stifel -- Analyst

Yes. That's great context. Just one quick follow-up for John. John, when you take the divestiture, you talked about gross margin 50, 60 this year, but sort of moving to mid-50s longer term. Obviously, you're quite a bit ahead of that now. Does that mean that the gross margin should be higher over time? Or are you still sticking to the mid-50s gross margin longer term?

John Hollister -- Senior Vice President and Chief Financial Officer

Yes, Tore, we're seeing favorable mix here in some cases, price increases to recoup cost increases are contributing there. And the timing of that is an important thing to think about of exactly when costs and price increases are being implemented and coming into effect. No change in the longer-term outlook. And it is an unusual time in the industry. We'll see what comes in the future, but we do not have an update for the long-term model today.

Tore Svanberg -- Stifel -- Analyst

Okay, Fair enough. Thank you, John.

Operator

Our next question comes from Srini Pajjuri with SMBC Nikko Securities. Please go ahead.

Srini Pajjuri -- SMBC Nikko Securities -- Analyst

Thank you, good morning guys. Tyson, congratulations on your retirement. So just going back on pricing, John, maybe you can help us understand how the mechanics work actually here. So I think it will be helpful to understand what percent of your business you have already implemented these price actions and how much more is left? And the other thing I want to understand is that some of these cost increases may not be permanent. So I'm kind of trying to figure out as the industry kind of normalizes whenever that is, as some of these costs come down, should we worry about pricing coming down as well?

John Hollister -- Senior Vice President and Chief Financial Officer

Yes, Srini, we're not going to get into a really precise detail here, but suffice to say, we're seeing price relief from cost increases that we've realized more may be coming as we head into next year, as Tyson alluded to. So there may be more work to do in this area. And our -- as we said in the beginning, our objective is to not get stuck in the middle and to leverage the pricing power we have to that end, but also to maintain the strong customer relationships that we have and ensure that our long-term growth will be there for us. So we'll see what the future brings in terms of normalization of industry conditions, but those are the principles that we're operating from.

Srini Pajjuri -- SMBC Nikko Securities -- Analyst

That makes sense. And then...

Matt Johnson -- President

Yes, Srini, I can also...

John Hollister -- Senior Vice President and Chief Financial Officer

Hold on just one -- just in terms of the cost increases and the durability of that, I think that we are going into kind of a new phase of the semiconductor industry, where we've got Moore's Law and advanced nodes becoming more and more expensive and you've got mainstream technology now full. And it used to be that the digital guys would move out and the N minus one, N minus two, N minus three nodes would those would be fully depreciated fabs that you would move into. We have now reached a point where the mix, the ratio between advanced and mainstream is causing fabs TSMC and others to build new mainstream technology, and that means that those fabs are not fully depreciated.

So a large element of the cost increases that the industry is seeing right now is because of the additional Capex that's having to be put in to build new capacity across the nodes, not just at the advanced nodes, but across. And so if you look at the cost increases that we're seeing in other -- it's across the industry, there is a certain element of that, that's durable over time. And so this is a step function in terms of the cost structure of the industry to match the demand that we're seeing and the increasing content of electronics throughout the economy and the acceleration of demand that we've seen through the pandemic has really push that forward and driven us into the supply constraints.

We'll work through that, but to work through that is requiring a lot of Capex, and that's got to be recouped. And that's got to flow upstream from our suppliers to us, to our customers and that's what you're seeing right now.

Srini Pajjuri -- SMBC Nikko Securities -- Analyst

Makes sense. And John, quickly on the channel inventory, if you could give us what -- whether that went up or down, also I think last quarter, you said bookings were stable at about six months or so. And if you could give us some color on that, that would be helpful.

John Hollister -- Senior Vice President and Chief Financial Officer

Yes. Channel inventory is relatively stable and the bookings have remained consistent. We've continued to have an elevated booking level. And as Matt indicated, actually, the strength in demand is not only persisting but widening a bit in terms of our supply chain, and that's why we're working on all the things Tyson talked about to expand our ability to supply.

Srini Pajjuri -- SMBC Nikko Securities -- Analyst

Got it. Thank you.

Operator

[Operator Instructions] Our next question comes from Raji Gill with Needham & Company. Please go ahead.

Raji Gill -- Needham & Company -- Analyst

Thank you and Congratulations and Tyson, best of luck for the future. Question on the demand landscape. The demand for IoT across all these end markets is extremely strong. Back in July, you talked about total booking hitting about $1 billion plus in the last nine months that obviously appears to be increasing. I wanted to get a sense of what's driving the demand this year relative to previous years. Are there specific end markets that you're seeing that are kind of outliers that are better than what you anticipated that's driving the growth?

And a similar question on the wireless component, you grew almost 50% year-over-year. Wi-Fi, obviously, is helping as well? Is this -- are there other particular protocol that you're seeing or end markets that are pulling in the adoption of wireless components as well?

Matt Johnson -- President

Sure. This is Matt. I'll answer that coming from a few directions. First of all, in terms of how we're seeing the demand come in, it's strong across technologies and it's strong across markets and applications. So there's always bright spots each quarter, but all in all, it's a very broad strength we're seeing in the overall IoT market. If you take a step back, if you look at our design win trajectory over the last few years, we really started seeing an acceleration in design wins that we're seeing coming through now in a lot of these applications and customers.

And it's -- I think another way to look at it is we're seeing an acceleration or pull-in of multiple markets and applications that were expected to grow and take off and now we're seeing that happen very broadly and across the board. And we probably have the most insight into this that we've had in a while because of the supply constraints, we've had to spend a lot of time with customers understanding what's driving the ramps, the durability of the ramps and why we're seeing those demands increase as we move into 2022.

So that's where we see it. It's broad. It's across technology and application, and we do expect it to persist in the IoT space, given what's driving these.

Raji Gill -- Needham & Company -- Analyst

Yes. Thanks for that insight, Matt. I appreciate it. So just shifting to the supply component of the equation. So your IoT revenue is on track to do over $800 million your previous annual guidance was $650 million to $700 million. So you're surpassing that. You mentioned that you're getting incremental capacity from TSMC, but the gap is going to still wide -- still pretty wide. When you're looking at -- can you give us a sense in terms of the capacity commitment that TSMC has given you in 2022.

I think that's going to be important for investors to focus on next year's capacity and how that capacity commitments correlate to your long-term IoT growth rate of 20%. In other words, has TSMC secured capacity for you to make you feel comfortable that you're going to continue to grow at least 20% in your IoT business next year and going forward.

Matt Johnson -- President

Sure. So I won't speak to any specific or individual supplier, but we are spending a tremendous amount of time working to secure additional supply moving forward through multiple angles, including using some of our development resources toward that end as well. And as a result of that, we're able to, as we're seeing now, drive incremental supply each quarter, and we expect that to continue well into 2022, where we'll be able to increment up supply each quarter moving forward. So that's something that we are happy to see and proud given this environment.

But with that being said, to my previous comments, at the same time, we're seeing demand increase much faster than we're able to increment up supply. So I do feel good that we've been able to increase our supply next year and that, that's going to help our customer base significantly. But those gaps continue to widen, given the dynamics that we're seeing in the industry right now.

Raji Gill -- Needham & Company -- Analyst

Very good. Just last question, John, on the gross margins. Obviously, it's a moving target. You mentioned it's a bit volatile, it's running above target. The price increases, the pass along, those are contributing. But you also mentioned a favorable mix shift. Can you maybe elaborate a little bit further when you're talking about a favorable mix shift within IoT, are there specific end markets, protocols that are higher margin? And how do you see that going forward?

John Hollister -- Senior Vice President and Chief Financial Officer

Yes. I think we'll see normalization there, Raji. And you've got certain product lines carry a bit higher margin than others. A way to think about that is more proprietary-based technologies versus standards-based technologies, for example. But over time, we think that that's comprehended in our various modeling goals that we've put forth.

Raji Gill -- Needham & Company -- Analyst

Appreciate it. Congrats again.

Matt Johnson -- President

Thank you.

Operator

This concludes our question-and-answer session. I now hand the call back to Austin Dean.

Austin Dean -- Investor Relations

Thank you, Sarah. And thank you for joining the Q3 earnings call. Remember, you can find our financial information at silabs.com/investors. We look forward to discussing our business further during our participation in several upcoming conferences. Sarah, you can now conclude this call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Austin Dean -- Investor Relations

Tyson Tuttle -- Chief Executive Officer

John Hollister -- Senior Vice President and Chief Financial Officer

Matt Johnson -- President

Gary Mobley -- Wells Fargo Securities -- Analyst

Matt Ramsay -- Cowen -- Analyst

Tore Svanberg -- Stifel -- Analyst

Srini Pajjuri -- SMBC Nikko Securities -- Analyst

Raji Gill -- Needham & Company -- Analyst

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