Yet Another Value Podcast - Doug from Fabricated Knowledge on $SITM

Episode Date: October 10, 2022

Doug O’Laughlin, founder of fabricated knowledge, returns to the podcast to discuss his thesis on SiTime (SITM). Doug's SITM write up: https://www.fabricatedknowledge.com/p/its-high-time-to-look-at-sitimeDoug's first pod appearance: https://yetanothervalueblog.substack.com/p/doug-from-fabricated-knowledge-onChapters0:00 Intro2:45 SITM overview7:50 What is the market missing at SITM?12:45 Near term numbers and does management have a handle on the business?18:05 MEMS versus Quartz market size and growth24:20 SITM's MEMS market share27:00 Risk of insourcing MEMS31:45 How did SITM "win" MEMS?35:20 Apple and customer concentration41:00 More on MEMS versus Quartz43:40 Apple's "all-in" on MEMS52:45 Why isn't MEMS taking share faster from Quartz?1:00:30 SITM valuation1:08:30 Capital allocation and insider buy

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With me today, I'm happy to have on for the second time, Doug, from Fabricated Knowledge. Doug, how's it going? It's pretty good, man. I mean, it's of all time in markets, especially semiconductors the last two weeks. But other than that, pretty good, a fun time. Lots of interesting things going on. So at least a lot of content and things to think about. So yeah, that's how I've been thinking about it, at least. As a non-semiconductor expert, it feels like it has been a bloodbath in semiconductor. So interesting times might be putting it kindly. But yeah, anyway, Let me start this podcast the way I do every podcast. First, with the disclaimers, to remind everyone that nothing on this podcast is investing advice. You know, that's always true, but I'll

just remind everybody, as we said, semiconductors can be a very volatile and very kind of cyclical industry. So keep that in mind when you listen to the podcast. Please do your own work, consult a financial advisor, all that type of stuff. Second way I start every podcast, a pitch for you, my guess, people can go listen to the first podcast that we did together back in June on R-M-B-S, if they want the full pitch, I'm not going to do it again because that was probably the nicest, gushiest pitch I've ever done, and it might just embarrass both of us, but I'm just thrilled to have you back. I know people love the first podcast we did together, and I'm super excited to have you back for the second time. So, anyway, second time, the stock we're going to talk

about today is Sight-Time, I believe, is how we pronounce it. Yeah. The ticker there is S-I-T-M, and I'll just pause there and ask you, what is S-T-Time, and why is it so attractive? Okay, so Sightime is a MEMS timer company. Timing goes into every single device in all the electronic devices in the entire world. Essentially, your devices have to have a time, a clock so that everything can work synchronously together. So up until very recently, 2006 is when Sightime essentially got founded, 100% of timers globally was via Quartz. Quartz is the legacy incumbent technology.

It's super reliable. It's been around for 100 years. Sightime is kind of this company that did one of like the holy grails of semiconductor like technology that everyone like everyone wanted to make happen. But the technology roadmap took quite a while to get there. So in 2006, they essentially put down a patent for this special type of packaging to create a MEMS resonator.

So quartz resonators, essentially are the legacy technology, and like, to be clear, they're very good. And then Mems technology is the new. And Mems, by the way, stands for micro electrical, like mechanical system. So essentially think of it like a tiny mechanical system, but at a semiconductor size. And so the difference between Mems and Quartz is quartz essentially uses like Piazoelectric stuff where essentially if you put electricity into it, it resonates at a certain frequency. Mems, however, does something very similar, but it resonates like mechanically using energy as well. And so think of it as like a tiny, tiny, tiny tuning for it.

Like you know when you like slap a ruler and it like vibrates, essentially it's vibrating consistently at a frequency that you want. So these timers are really important. They're super niche, but they're in all devices everywhere. The total address market is about $5 billion. And just why do, why do products need these timers inside of them? well first and most importantly is to like keep the time of day right like so a perfect example is garmin garmin smart watches smartphones everything needs to have time and so the way time is done

is there's you know you can actually do it with a circuit but that's actually very noisy and and kind of has like a lot of electrical problems but so so quartz is extremely um is extremely stable and mems is a new technology that's becoming a lot better so everything needs to be to keep traffic of time for your devices to work. So imagine if you, you know, one device was telling device number two to do something, but they did it at the wrong time. And so this does it like 15 seconds late. Like what's the point, right? Everything has to be, all the instructions have to be going together at the same time. And it's like, it's called a clock, like a clock frequency. And so each of these clock cycles kind of decide what, what actions happen. And that's like on a CPU.

But anyways, all in, everything needs a clock. Like in order to keep track of time. in order for the semiconductor devices and electronic devices to work, everything has to be on time. And yeah, so it kind of has a torque in that way to semiconductor devices because semiconductors are probably the most popular device that it's used in conjunction with. So that's the way to think about it. And Quartz is kind of like a legacy technology in that it's actually not made of silicon versus Mems is actually made of silicon. It's kind of close to a real semiconductor that makes sense. So that's kind of the difference technologically. You and I were talking for 10 minutes before the podcast about a bunch of different stuff and moving and everything.

And I got to tell you, I just love how passionate you are once you start talking about semi-conductors and stuff. Your inflection picks up. Like, it's contagious how passionate you are about these things. It's just one last stupid question. And this, I'm going to say iPhone, but we'll talk Apple and iPhone later as it pertains to this item. So don't take anything on iPhone. But, you know, somebody might say, oh, timing, like my iPhone, it connects to the Internet for It doesn't need a time in there.

And I would just say, you're wrong. There's obviously lots of timers in there. It needs to, but please tell me if I'm correct, incorrect, just to give everybody that's very simplified example. Yeah, so that's true. You can obviously, there's actually like this whole thing called stratum, which is like this cascading network of timing and how time is distributed across the network.

But so the time gets distributed across the network, but you also have to hold the time at each and every unit. They're not constantly pinging. Think about the data for that as well as, not everything is connected to the internet all the time. So imagine, so it would be like, okay, well, now we can't take a photo if it's offline. It has to be connected to the internet. Stuff like that.

Like every aspect of your semiconductor device, whatever, has to have some kind of context of time. And so, yeah, that's like the quick example. But yeah, I think that answers the question, yeah. So obviously, this is a little bit more technical podcast than a lot of the podcasts I do. But, you know, we look at stocks, we invest in companies because, we're trying to generate alpha. So we're going to go into lots of technicals. But let's just go high level. First question I like to ask every guess, you know, the market is a very competitive place. You're obviously looking at this company. You think it's very attractive. We'll talk about valuation,

all that reasons. But just high level, you know, it's tough to get edge. What do you think the market is missing that you're seeing inside that will lead to kind of risk adjusted alpha from investing in the company? Okay. So we'll just say it's like variant perception, right? Let's kind of like, what we're trying to focus at here. So I would say side time in particular is probably one of the biggest poster child for like things that you don't like right now in this market environment. One, it was definitely a COVID beneficiary. There's no way to say it wasn't.

And two, it's extremely high duration growth. So those two things are the things that markets hate right now. And third, there's kind of a near-term air gap because this is a semiconductor company's. This is this semiconductor's company's first cycle, essentially, and they definitely overshipped. So near-term revenue is getting absolutely hammered. And so the stock was doing wonderful until last quarter. They guide it down for 50 to 35 percent year-of-year growth, which implies a negative Q4. And then, since then, almost every incremental bit of news has been very negative.

And I think we're about to have, we'll see if it's a match. But there's a guide down coming in from in this company next quarter, in my opinion. And to be fair, that's happening everywhere in the semi-cifter space as we talk right now. AMD guided down yesterday, right? That's one of the biggest darlings just did the guy down. Everyone everywhere is guiding down. Site time is not going to be immune to this at all. So what I've been noticing is that, you know, this company was essentially it had this really

rosy market grows forever. they grow penetration in this market forever. And I think they will continue to take a lot of market share. But all of a sudden, all of these near-term headwinds came at the exact same time. And this company is extremely high duration growth. Interest rates have massively exploded. And if you, like, I actually did a very full DCF, like the old school whack. Like, I did the whole damn thing.

Like, you know, and, you know, it's a high beta stock. Actually, the equity risk premium for this company is set, is like 16%. because it's a two and a half beta, risk-free, you know, market ERP is like 5%. Risk-free rates 4%. You do the math on that. It's like, oh, your discount rate is like 16, 17%. So in that, like, you know, this is maybe like a very academic way to think about valuation. But like, obviously this matters, right?

Extremely high, multiple, extremely high discount rate and extremely high equity risk premium. This is the kind of stocks that are getting hurt the worst. And it has an air gap in profitability. So all these things are making a very ugly short-term situation that, like, I think is really ugly. I feel I've been, like, I did some numbers of what I think they really can earn. And I'm like teens lower than the street for, for 2023. I think that it's ugly and it kind of hurts my stomach to think about buying the stock,

which historically back before 2020 was like a good sign. But now, obviously, it's going to be hard. So I would say the biggest, the biggest fear is it's dead money, right? it's not going to grow a high multiple COVID beneficiary and high duration. Who wants to own that right now? No, that's all great. And look, just to what you're saying, like, the stock starts the year at $250 per share. As you and I are talking, it's 85-ish per share, right?

So, stocks down 65%. A lot of people, and I always hate to sell side earnings for next year versus market. But, you know, the more you do it, the more you realize. But if sell side earnings here are, I don't know what you're at, if sell side earnings four and you're at 350 or something, right? Like a lot of people say, oh, you can't invest in that. It's like, well, the stock's down 65%. I bet you the street, like, I bet you the people who are actually buying and selling stocks have probably pretty much adjusted to. They're going to have a big meat.

The street knows it and management is doing their best to essentially disseminate, hey, first half of next year is going to be an air gap. No one really knows what it looks like on the other side because they're selling into distributors. my EPS number is $3.20 for next year. The street is at four. That's, you know, that's pretty bad. And my, and my EBIT is much worse. Like, I have an EPS that's better than, than it should be because, like, I model income, like income interest of their cash balance, right? They got $580 million of cash on the balance sheet and their free cash deposit. Again, I don't want to focus too much on, like, the near-term earnings and everything because this is a very sexy long-term story. But I did have one question. You mentioned the air gap in earnings, right? And again,

It's completely understandable giving everything that's going on the street. But there was one piece of that that was kind of curious to me, right? At the start of the year, like Q4, they say, hey, 2022, we're going to grow 35%. They report Q1 and they say things are on fire. We're going to grow 50% this year. Then they report Q2 and they say, oh, things are slowing down. We're going to go 35% this year, which based on how good Q1 was, you know, I think they said, I can't remember.

They, H1 was fantastic. So based on H1, that means H2 is going to be an absolute disaster. And again, the environment's tough. Everyone else is guiding down. But it does strike me. Like, when you find a management team that guides up and then guides down, you do start to worry like, do these guys really have a handle on the business? Yeah, that's one of the things I'm really worried about.

And I guess the one place I'm going to give them a pass on is this is their first cycle. I do think the CFO there is very thoughtful. But I also got to, like, essentially they are definitely sitting at the end of the bullwip effect. They don't really have, I'm going to guess they haven't really worked on, worked on understanding their true end market demand this cycle, whereas more mature semiconductor companies obviously are concerned about double ordering versus their biggest problem was how can we sell more stuff now? Because we, you know, like in 2020, I think in 2021, they actually were, their whole thing was we need to have more distributor relationships. So they've just been expanding, expanding, expanding, like essentially expanding the channel. And, you know, it's been one of the strongest cycles. And so, like, this is kind of where, I guess, this is their first full cycle as a semiconductor company.

And it is obviously really ugly. And they just, you know, I guess just like everyone else, they, they didn't see it coming. they also maybe got a little head over their skis. And then just we'll talk more risks later, but I do want to just go to one risk, right? Like obviously revenue going from up 50 to down 35 next year, there's going to be the air gap. Like the first thing you start thinking of with a semiconductor, like high fixed expenses and revenue swinging like that, you start worrying about the business. You know, we've all seen semiconductors with leverage go under, right?

And just to put that to bed, the company has $580 million of cash on their balance sheet. They are free cash flow positive. Maybe they won't be next year if things get bad enough. But I don't think we're talking like in the near to even medium term. I think they've got plenty of liquidity where they're not going to get like kind of cycle margin call stopped out. Please tell me if I'm wrong. But just to put that fear to bed for anybody who's looking at that. I don't think so.

I think that's one of the reasons why this like like to be to be honest with you, buying side time is very hard. Like I think it's not an easy stock. It hurts. It is high, like, it is high risk for sure. It's, um, it's relative, like, it's much smaller they had, uh, they were COVID beneficiaries. You definitely worry about them overearning. And maybe this is not a reasonable way for them to grow at all in the future. But then the more you look at it, the more like some of the biggest, the biggest de-risker is the $580 million of cash on the balance sheet. Because that makes you, you know, it's like, look, this thing cannot go under, right? Like, like there is, you know, there's about that's famous last words, Van.

Are you crazy? I can't believe you said that. Well, okay, but I mean, maybe, I mean, if they really screw up some capital allocation, sure. But it does have a little bit of put with like $25 per share in cash. And that really helps in terms of the risk reward profile because it's kind of like the margin of safety thing where you have a giant cash load that really does help de-risk some of the downside in theory. But one of the things that I'm really worried about is the gross margins. And I think that anyone who's paying attention to this company should be because it, makes a 67% gross margin at their peak last quarter, which are 66.7 or whatever, that is,

that is like a street high. That is as good as it gets anywhere in the entire semiconductor industry. And that's a little worrying to me. I was like, how is this even possibly sustainable? I did a lot of work on unit economics here. And so I would say that about 15, 10 to 15% of their stuff is fixed. They actually are a fabulous model, which is one of the benefits of their business model versus competitors is that they don't actually own the factories. And that's like one of the cool things about doing this as a semiconductor based business instead of courts is because they get to use TSMC. They get to use Bosh. Bosch is their MEMS FAB partner. And TSMC is their semi-conductor fab partner. And FABLUS companies are asset light because they don't own the FABs themselves.

They just put in the orders. They, you know, obviously they pay the money to the FABs and they get semiconductors in return. And then the FABLUS companies have to go around, turn around, sell their product on the market and try to price competitively against the market. So I think the gross margin downside and margin downside is not as bad as, say, a very fixed, a fixed cost company because they're fabulous. And that really helps. That's the appeal of being a fabulous company. That being said, their competitors, all their gross margins expanded, their gross margins expanded, they are very sensitive to ASP increases. And I think that the gross margin is most definitely going to come down to Earth a little bit.

Perfect, perfect. So let's take a step back, right? We started talking about how this is a company that does MEMS. They're taking care of from Quartz and stuff. So I just want to put that in perspective because I think the thing you really like about this company is you think this is a multi, not multi-year, multi-decade growth story, right? So I guess just to start, you know, I wrote the numbers down if you don't remember. Just to start, you know, how much of the market is Mems versus Quartz?

currently. And how are the two kind of evolving over time? I'll start there. So that's just market. That's not even sitem. That's just the mems versus quartz. How are they growing? And then we can talk about how that impacts sitem. So mems is probably, I would say, this is the other thing, too, is the percentage of market is a little bit debatable. But the number I kind of use is about four to five percent today. Sight time is 90 percent of, or actually, I think 92 percent of all them. Essentially, they don't have any meaningful competitors at all. So essentially, when you talk about mems, you talk about side time. They're about four to five percent. A few years ago, they were like two to three percent. And I think over the very long term, they could be something like, say,

20 to 30 percent of the market. And when I mean very long term, I mean 2040. Like this is, you know, and so I'm not saying like, hey, they're 20 percent of the market in the end of 2030, which would be really aggressive, I'm saying they continue to take share at the rate they have been over the last several years. And now this company is kind of in this part of the S curve where they actually are starting to, so they've been unprofitable for a really long time just because the revenue base never really covered their cost. Now all of a sudden, this company has like legitimate gross profit dollars, legitimate revenue, legitimate like earnings to reinvest and start to grow and really become like a mid-cycle growth company and like really chop away at the tam. And they're

There's just a lot of, like, little things that they have against courts because, like, that's, that's like the big story. It's like, how are they going to disrupt courts? And this is kind of where this, this whole thing takes, like, if you talk to the people in the industry, it takes like a whole turn different because side time has actually been, frankly, very promotional about their performance, like, promises. They essentially will tell anyone who will listen, we're 10x better in every way, shape, and form.

You actually do a lot of work on it, and you're like, oh, that's some real apples to And so the courts guys hate it. Like they're like they're just liars. Like they're comparing their highest end to our lowest end, whatever. And so like when you try to do some real work on it, it becomes like it's like a, it's it's it's like a religious war that you have to like get your. So it's like very hard to be very objective in this space. And I've been trying to kind of parse out what makes them win. There's a few things that really Mems has an advantage over courts. And so the biggest one is miniatrization. Courts event can only be shrunk so small as a crystal, whereas Mems is a semiconductor, it can go like another half, or maybe even like a half after that. Like, it's microscopic that we're talking about the Mems resonator itself. It can be much smaller. And that matters for, like, total packages

and stuff. The second thing is that it's programmable. Programmability is really interesting because courts, whenever you make a quartz, you have to quartz crystal. It takes like three to six months to grow. So it has this extremely like jerky supply chain that it takes a long time for you to grow the exact crystal, cut the crystal, and then make the design. Well, imagine if you have some kind of hiccup in that like three to six month period, that's a pain in the ass. So side time can literally press some buttons change to frequency tomorrow. And so they have that ability to like choose your own frequency. Quartz has a product that does this, but the ASP is just like not even comparable. And that just comes built into MEMS. So I would say MEMS has these little things on the edge,

and also it's an improving technology. This is the third generation of Resonator, and each subsequent generation has had meaningful performance increases. And when you talk to people who work in the industry in an extremely academic sense, they're like, there is a theoretical limit to how much better MEMS can get, but we are not there yet. It will take quite a bit, and it will take a lot of R&D, which Sightime is able to spend. But it is, it's going to improve over the coming decades. And I feel very confident in that. Perfect.

So what you've got is you've got a new technology that is, you know, there's debates on how much better, but probably better than the old technology. It's improving pretty rapidly. And, you know, I said new technology choice, but this started in 2006, right? So we're 14 years into the cycle or 15, whatever it is versus, I don't know when Quartz started, but Quartz has been around much longer than that. There's actually a really cool documentary of, in 1942, Quartz's go. to war. Like, it's, it's an old technology. Like, we're talking 1930s, 1920s. It is probably a hundred

year old technology. So new technology, more customizable, a little bit more flexible, all this sort of stuff. So you can see, right? We said about 4 to 5% market share currently to you said 20% market share by 2040 or something along those lines, right? So we're talking 4x market share over 20 years and you can see why that's happening with all of that. But then I guess the second piece of that is, hey, it's not just 4x market share, but it's the market for semiconductors, which is growing very quickly. So you could say at 4x, it's market share, but the underlying market grows, I don't know, 2x, 3x, 4x over that time. So you're talking the whole market as a whole, go ahead. Yeah. So that's a little debatable because timing and semiconductors have a

relationship, but quartz tends to, like, it grows with volume, but it doesn't grow with price. Quartz has been able, like essentially has a price erosion. So let's say semiconductors in the long run has done six or seven percent, or we'll just say six percent Kager. I think, and I think it might be more like five. Horts is probably doing like three. So, but at the same time, I do think semiconductor devices is growing quicker than it has been. So there is some kind of growth in this market.

I would say the number I kind of like use in my like whatever big Tam, my shot up to Tam because everyone else takes a shot at it too is like 3.7% Kager, which is like kind of a lazy, slightly above, let's say, long term growth, but not exactly. like nothing, nothing to sneeze at. But it will, that market will double, you know, eventually. So, yeah. Perfect. Okay, great.

No, sorry, I was going to mute there. That's great. So, and then I guess the other thing is, so they've got this really quickly growing market, right? We just said maybe it's 5x over the next 20 years. Maybe it's 10x, but it's growing a lot. The last thing is side times market share, right? So what's side times market share currently?

And hence, it's big. Why can they expect to kind of keep a big market share in this? rapidly growing market with huge addressable, with a pretty big addressable market. So it's 92%, which effectively rounds up to 100%, right? That's their monopoly. So Sightime is actually pretty interesting to me because there was like six startups in MEMS trying to do this exact same thing. They survived the arms race, essentially.

The most successful, the second most successful startup ever is called DeSera, and it was bought by Microsemi, and now that lives within Microchip, M.C. One of the reasons why I think the threat of entrant in at least the medium term is pretty low is because the absolute size of the market is not that big. So imagine investing cumulatively like $200 million to take a 30% share of a, you know, and 30% would just be like the most amazing entrance in a two year period of a, we'll say, you know, 2025, it's like $700 million. So you're just really not talking like really.

big numbers here in terms of making the quick payoff. It just really is pretty hard. So cumulatively, let's say you have to spend $200 million to catch up at a microchip to then get $200 million of revenue. And that $200 million of revenue will be much less profitable than side time will be at that because, you know, as they scale larger. So it's kind of one of these things. I think the entrant comes when the market gets bigger. And right now, the math really doesn't work because if you look at the total mems market, I would say it's 400 million, something like that. So 25% shares 100 million. So you have to spend two times the revenue just to have a shot. And that's assuming a pretty amazing first year. So there's just a lot of

hiccups. Sightime itself toyed away. They were founded in like 2007. And I would say the profitability started in like 2019. So it's a long road. They also were owned by a corporate who just essentially gave them money the entire time to kind of bridge the cash burn. So you have to, someone has to seriously put up some money. And frankly, I think the down cycle is actually very nice for them. That gives them two years of cover probably in terms of pushing an entrance back. But what? I guess I'll jump to next to you. Like you do see a lot, especially these big tech giants with lots and lots of money, right? Apple, and again, we're going to talk Apple's side times history specifically because it's interesting, but, you know, Apple, Tesla, all these guys, they do like

to in-house a lot of different products. And if this is something that is going to go into every one of their products, I don't think they would consider it strategic because I've already got it, but you could see how they want to in-house it at some point. Like, why wouldn't you start seeing big companies in-house this technology? Because it doesn't seem that thing, that great. Or the counter would be, hey, you know, yeah, maybe Mems has a little bit of an advantage, but do the big companies just keep access to quartz just because, hey, we don't want men, we don't want side time to get that much negotiating leverage on us? Yeah, so I think Quartz is going to be around, right?

My assumption here is that Quartz is still 70% of the market in a very long time from now. And I think in terms of the actual entrant for the in-housing, it's just much harder. So the places that Apple and companies like that have in-house are places where there's IP that's kind of readily available off the shelf. So arm-based chips is the perfect example, right? A-16 is an arm-based chip. The Apple modem that they might make was a business they bought from Intel to then try that. There just isn't that many people. Like, this is a really, really small niche. And essentially, the entire company is based out of the Stanford Mems Department. And the Stanford Men's Department hires, you know, Sightime just hires the Stanford Mems Department as they graduate each year. Like, it's a really

small niche. And I just don't think it's strategic enough. There is the list of things that Apple could outsource before the, you know, let's say $50 million a year they spend on Slytheim's business is, I would guess there's probably 40, 50 components before that. So it's just very low, low priority to niche. There isn't enough like readily available IP. And it just doesn't seem like it would make sense for them to outsources. Because that was my first problem. My first question, Apple, big customers, semiconductor gets in-house.

That's like always the big fear. And this one is just, it's just too niche. Yeah. And as you said, I think they spent hundreds and hundreds of millions over multiple years to get here. And it's like, cool, you did all that. You got to a couple hundred million revenue base. Yes, your gross margins are nice.

But, you know, at peak margins, you kind of did, what, 60, 70 million of net income, like anybody would love that, but that was absolute peak margins, 200 million plus to get there over 15 years. Like, that just doesn't, that seems kind of moody almost, right? Yeah. It just, and so that's actually, just so you know, this is my favorite semiconductor niche moat, if that makes sense, where it's like a lot of times you'll have a company, this happens in semi-cap a lot where it's extremely concentrated. Actually, my favorite example is like Camtech, a company that I used to love. Actually, I'm a little shorted it right now, but they essentially are this company that did PCB packaging.

It was just like in this extremely niche back market. No one cared about this packaging. All of a sudden, their product really mattered, and it grew like crazy. But even though it grew like crazy, we're talking like a product that grew from $100 million to like $500 million or something like that. But even then, you're like, how much would you have to invest to enter this market, $200, $300,000 to be a third place competitor? Why would you do that? It just kind of the math becomes really hard to justify any kind of competitive. entrance. So the end state for semiconductors ends up to be kind of, usually ends up kind of being

like a 60, 30, 10 market. Yep. If you have a third player. That's, and my assumption here is that it eventually does end up being a 6030 market. And that's from, again, right now, they've got 90%. And then I just want to go back to one other thing. Like mems, they were, sorry, Seidum was kind of the first one to win mems. Obviously, they have 90%. But correct me if I'm wrong, there were multiple other entrance year. I mean, I believe tens and tens of millions were suckings each one. And all of them kind of flamed out inside him is the only one who kind of got to scale. Obviously, 90% plus they got to scale. They're kind of the only ones that made it. And second place is actually within a very large company, Microchip, which in theory should should have funding. But my understanding is that

they are just like we, we're our technology roadmap is multiple years behind. And that same map still applies to Microchip even, where they're like, we don't really think investing $100 million is a like for this kind of five-year moonshop project is really worth investing $100 million in something that's very obvious with, and like they have a lot of places they can invest capital very quickly all the time. And Microchip likes to acquire companies. So oftentimes they would rather spend that $500 million to acquire some niche company and roll it into their entire corporate structure. those kind of capital decisions make so much more sense than really because it's going to be a long road like someone whoever is going to have to do that has to like see it all the way through and I just

don't think anyone really wants to do that at this market size today why was sitam able to succeed get to scale get a product get 90% market share win again there were lots of other entrance that you listed a lot of other entrance why was sitem the winner here so the thing that I think And this is like, it's kind of hard to know because, you know, the history is written by the victors. And I'm reading, I'm reading the winner's version. But the thing that they really point out to is this package called this package technology called Epi-Seal. And in particular, it was an extremely novel way to, like, design a silicon package to isolate the resonator. Because that's really important.

Mems resonators, like, we have tons of them, actually. I was reading some, like, extremely academic papers about, like, the, the theoretical limits of the MEMS, like we have tons of MENS graduated. We have stuff that is like 100, 200 times better in terms of the current MEMS technology. But the problem is you have to put it into a package and you have to like get it to work. And when you're in the package, it has to be like sealed from the outside. That's really important. And the way you seal it, like you can't like the more anchors you have makes it like it's a, it's

an extreme engineering problem. So it's like you have to have one anchor. It has to be hermetically sealed. And it has to be a certain size. and you have to be able to manufacture it using current technology that is available to everyone. And so Sightime kind of did this all, and that's called their epistle technology. And so that they have a, they have a patent on that. I don't think they have patents.

I mean, I'm sure they have some patents on like the actual, like sizing of like the resonators. But the resonator shapes, that's like relatively like relatively known. So having the resonator is not the problem. Having the resonator and getting it stable and isolated in a package. That is where Sightime has, like, a legitimate patent moat. And the company that, like, they also have a deep partnership with essentially the best company in the world. The patent was awarded to Bosch and the founders of Sighton.

I think there's some kind of relationship agreement there. But Sighton and Bosch have, like, a very intense relationship. And they are like, they have to be one of the largest customers there. So, yeah. Anything else you want to talk about on this? Because I was going to switch to some other. questions on customers and stuff, but anything else you want to talk about on the technology, why they won, partnership with Bosch, anything else there?

I maybe want to mention Megachips really quickly, just because I think it's really interesting. So actually, one of the parts of the story of Seidheim itself is that they came out of Bosch. They were funded by private equity, venture capital, rather. And then Megachips bought them in 2014, which was really weird, if you ask me, because Megachips, giant Chinese, no, Japanese conglomerate, kind of sleepy, bought them for 400 million dollars. And megachips is actually really important because megachips is cash cow, the stock went nowhere for a long time. And they just managed to reinvest it into side time. And I'm sure they had like no financial constraints. They were free to lose money. And then that

kind of like that little safe haven, that little petri dish for like five years, really helped kickstart them and make it through the most painful, hardest time of side time's business. So that was really important in terms of like the path dependency. And now we're here. Sight times all grown up. It only took them 15 years. So. I'm laughing. I can't find it now, but one of the articles I looked up when I was looking it up is like around the IPO, there were some snarky articles that were like, can you believe how much this tiny little company is losing? Like, can you believe this giant corporation's been bunning it? But that's kind of what it took to get here. Let me switch to another

question, customers, right? Anybody who's done semiconductors, and obviously you do a heck of a lot more semiconductors than me, but customer concentration is something you want to think about. You know, some semis will be like, hey, we have a cajillion customers and nobody's over 1%. Sometimes I'll have the semis that are, hey, Apple is 90% of our portfolio here. Right. So I want to ask you about customer concentration here. And then hints, we're going to dive a little bit deeper into their major customer and their relationship, their historic relationship with them. So the big customer that really matters is Apple. And Apple is really interesting because Apple adopted them very, very, very early in their business.

And so Apple, Apple was like 40% of revenue for a very long time in like 2018, 2019. And essentially, as Slytheim has grown and become more mature, they've kind of grown outside, out of the Apple crutch, if it makes sense. 40% of revenue in 2018 is like the number. Now they have tens of thousands of customers and a lot of the customers are new to them in the last two years. But in particular, the thing that's really interesting is like Apple,

all end on mems really early, actually. I was actually very surprised, and that's something that I think is really curious and something that, like, made me, gives me some confidence in the long run of this company, if that makes sense, because Apple is probably the most sophisticated semiconductor design company in the world. Another big customer that we really can't parse how large they are is Tesla. Tesla is a company that also all end on mems. And so these companies all end on mems for, I presume, programmability as well as size very early and have continued to this day to be large customers. I think that will continue. And as we talked to earlier, I don't think Apple is a risk of in-housing relative to other semiconductor companies where it's a

little easier to do. But now we have a lot more uses. And I think the use cases are very levered to IoT. And so that's one of the reasons why Apple is such a big customer, because the Apple AirPods is probably my favorite example of this. That product might not be able to be the size it is if it wasn't for stuff like mems because quartz has like the smallest package or something is like one and a half millimeters by one on quartz or something like that whereas they do like point seven or even smaller packages i i don't have it off the top of my head but i know that there's a there's like a you know another halving of mems over quartz and so those kind of devices that are really really small and power efficient that's kind of where si time has really taken off and so i think that that kind

of stuff is a perfect example of like the iot long-term bulk just to So you said, hey, AirPods wouldn't be able to be as small if it wasn't for Quartz, or if it wasn't for MMS, right? And then you said, quartz is one millimeter or one and a half millimeters versus MMS half as small. And I hear that. I'm like, oh, well, no, we're talking less than a millimeter difference. How much bigger would an AirPods be? So I don't know if you know the exact number.

But, you know, like, why couldn't you do AirPods as small with Quartz? Like, it doesn't seem like a millimeter would make that much difference. every little bit counts because whatever you whatever savings you get in that you get to you get to use it somewhere else and and like that that piece of quartz is on a package like it's not just one it's not just like oh that's it's it's the entire thought process of we are trying to make it smaller in every way shape and and mms is really is really the one that has um they've already offered this smallest package in the industry. And I think that in the future, they will be able to offer even smaller packages. So being able to, being reliant on the mems roadmap is probably better for a long-term

device manufacturer for IoT because they're like, hey, why would we do something that we know cannot shrink anymore versus we want to use something that we know might be able to shrink soon? What do you think that? How big do you think the AirPods would be if we use quartz instead of mems in them? I have no idea, man. That's a really hard technology. Because like it's a PCB. like there's tiny there's like tons of little devices too and like i wouldn't say like mems is like the thing that made it smaller if it makes sense mems is just one of the many things that made it yeah but each incremental thing builds on each other yeah i was just it would have been so cool if you're like look if it wasn't for mems air pods would have to be the size of oranges or

something you know no i don't think it's quite like that if it was like that then it'd be like obviously that would make me feel really comfortable but i i actually think it's really interesting because miniaturization is like not a new it's not a new thing actually um it's it's probably one of the oldest things in semiconductor history is that if you make the semiconductor smaller it becomes more power efficient takes a less space and so um mems has that ability whereas quartz doesn't because what mems is semiconductor courts isn't and so um and something um that i may want to talk about I feel like I don't know when to put this in is uh just put it in right now you got it well as I say mems versus quartz we'd also talk about uh something that's really interesting from the

the MEMs side is their gross margins are on an absolute basis much better than ports. I think that's probably one of the most interesting parts of this entire story. Imagine having a price competitive product where there are two, and I mean, maybe Mems tends to have a slight premium, but I think if they were to be price even, mems would have like, let's say a 10 to 20% better gross margin, not like, sorry, I guess 10,000 basis points or whatever. So 10% for 20%, not like over one, it would be like one would be a 20% gross margin. the other would be a 40% gross margin.

Yep. So you mentioned, you mentioned in 2021, I think Citum had a 65%-ish gross margin. So you're just saying, hey, look, they would set, if you were looking at a quartz manufacturer, they'd sell for about the same price roughly, and they would have a 45% cost structure. So not only is MEMs, more programmable, smaller, all this type of stuff, it's also cheaper to manufacture. And right now, Citam is keeping that as gross margin for the. themselves, probably because they have 90% share and 90% share of mems and there's only 5% of

it. But in the future, you could see a scenario where maybe they accelerate their growth by cutting below quartz a little bit, but having a superior product and having the same gross margins. I think the thing that they're trying to do, and this is like, this is like my take on their strategy, which I think is like very rational is they want to continue, like they don't want to blow it up. Why blow up your really good gross margin, gross profit dollars? But when you can incrementally improve the technology, because, like, right now, there are still cost downs going into Quartz. Or no, going into MEMS. MEMS is still improving the cost to manufacture, and that will probably continue to exist. I would say, like, I don't know when the end roadmap of that

it is, but, like, you know, this was invented in 2006. There's, you know, this is maybe their first decade of them really pursuing this challenge. I think they probably have two or three more decades of improving this manufacturing process. And so if you have a price that is competitive on the current market, and you could continue to win back and forth in the year, and you know you can reinvest into the manufacturing to then in the future lower your cost even more. So you can make money now and make more money in the future. Instead of having to do the profit nuke in the short term and then obviously recoup it in future periods, which would be like really painful for investors or frankly, any company to withstand, they kind of can slowly but surely take market share

while reinvesting in their product, meaning that they're going to eventually have a better and cheaper product over a long period of time. And that's like Quartz just doesn't have that available to them. They've been doing this for 100 years. Like the technology is pretty tapped out. Yeah. Let's go. So you mentioned Apple, largest customer.

They're all in on mems. and that means they're basically all in on set of them, right? But they're all in. But if I go back 2018, revenue drops year over year. I believe their Apple concentration goes from about 40% of sales to 15% of sales. And correct me if I'm misremembering, but that's related to the iPhone. So I just want to, that's a red flag, red flag question mark, anybody who's investigating the story is going to have. So why don't you just relay the story in whole? And then probably talk about why you don't think it applies to non- iPhone products at Apple. Yeah.

So this is actually a really good one because that was like the first thing. That was like one of the first questions, right? Because revenue goes down in 2019, over 2018. And you're like, I thought this was a, you know, a growth. A 20% plus grower early cycle. And then you see, hey, at a pretty good time for the industry, revenue goes from 85 to 84. Like, what the heck? Yeah.

So you're like, what the hell happened? And so actually, I had to hunt this down. At one point in time, so there's like this giant MRI helium leak in a, like a medical facility, and everyone's iOS device bricks. Every single iOS device in the entire building bricks. You said brick, not break, just to confirm. Yeah, bricks, yeah, breaks. Brick is essentially, it completely breaks and there's like no recovering, if it makes sense.

So that's kind of like slang. So they all break. Every single iOS device breaks in this building. And then someone is like, what the hell is happening? and so they do a test and they realize if you fill a bag filled with helium and you put your iPhone in it, it will break. And the reason for that is actually was Sightime. And so Sightime obviously is like, holy shit. And iPhone is like, okay, well, they design Sightime out for 2019. And they do that. So in order to like, I mean, it's really unlikely that you're going to be in a room filled with helium. But like,

it's just one of these things where like it made some headlines and iPhone Insider was like, how could they, you know, how could they ship this with this clear? design flaw. And so they got designed out of the iPhone, which is a big deal for them, given that Apple was 40% of their revenue. And so, you know, fast forward a few years, if you go to the website, I believe they fixed it because they're like, it's now impervious to all small molecule gases. And that would include helium into my understanding. So going forward, this is less of a big deal. But it seems like when they were designed back in, they did not, like, like the volley, they went from 40 to 35% to 40% to 40% of revenue. So it's like a little

dip, but it didn't quite have the, like, torque back. But that being said, I think that in the, for the most part, they're still in the iPhone today. There are still time. So I was about to ask that, because my understanding was they're not in the iPhone currently. But so you're saying they get signed up, but they get designed in because I was kind of thinking in the back of my head, oh, maybe there's a leg up when they get fully into the iPhone or something. But you don't, you think they're already in. I think they're in the iPhone. No one like, no one has like a hard, like I don't really want to put my phone in helium to test. And maybe that isn't even the right answer, right, because it's the new epi-seal is impervious to gas. So I believe they're in the iPhone.

And the thing that I think is actually more interesting is that Apple is a shop that is, so they're not in Samsung, especially in the Samsung modems and like the Samsung RF part of the chain, versus Apple right now is designing their own modems to in-house a large part of something that they do for Qualcomm does. If that happens, odds of it being side time are pretty high. And that would be another 200 million units, which obviously would probably come in at a low ASP, but odds are that would be material for revenue. And I think that's something that's like, you know, because I've been talking, I've only been talking about near term terribleness, but there's a real chance in Q4 of next year if they, if they make that, if they design that in, all of a sudden, they're like, oh, by the way, we just

had a large smartphone win and it's going to be material to sales. So yeah. And even if it comes at a low average selling price, like this is a 90% market share company and you lock up like all the iPhone. Like you're just, there's just no space for any competitor to come in and breathe in that type of market. Yeah. Well, why, why invest in number two? Like the other thing too is where would it be fab? That's something I've been thinking a lot about is like, so the semiconductor side of it is done on TSM. There's actually two devices in a MEMS oscillator. There's actually the MEMS, and then there's a semiconductor circuitry to compensate for the MEMS. Super technical. We don't have to talk about it. But one's done by Bosch, one's done by TSM. I don't think there is

another large, there are a few other as large-scale companies in MEMS, like maybe say ST Micro, but ST Micro would have to go that same problem as well. But Bosch is the number one FAB for a FABOS company for MEMS in the world. And so they have the largest company. as like their strategic partner. I think that's really, really good for them as well, because where else would you go? So I think just quick question. I think we've already discussed and addressed how difficult it would be for a competitor to come in and all of that.

But a quick question, sometimes the semiconductors, it can be tough to make a switch. You know, if you want to switch from one to another, sometimes it's easy. Sometimes it would be really hard. How difficult would it be? Let's say you and I managed to go and somehow start up a business next year. is at decent scale, you know, competitive products with Citum, how difficult would it be for Apple to switch from, to switch from Citum to our product next year?

So, this is actually really interesting because Sightime had this whole problem when they're trying to get everyone to swap from Quartz. So everyone, all the timers are on custom, or on standard packages, but Sightime has one smaller package that is for the IoT device, is very hard to swap out of. So, for example, the AirPods, the AirPods, the extremely, it's called like CSP scale packaging. That's like the smallest package that's only available through Mems. That is probably, unless if we offer the same exact Mems product, that's probably hard to swap away from.

And so then it's like mostly can we, the Mems company, the Mems startup, offer a same package. If we can, then they can, they can in theory swap back and forth. And one of the things, but then the other maybe friction there is qualification. This might not apply as much for phones. But like when things are, when, when you get a semiconductor device to work, you have to test each and every single part component. And then you're like, okay, this component works in this circumstance. We're good to go.

Now we can put the whole package together. And so for automotive, that's actually a little bit of a moat, if that makes sense. That's actually been kind of a lot of friction for them to get adopted, especially for qualification for automotive parts. And so that would probably be one of the like the things that makes it hard. for an entrant is that you have to get, like, it takes a lot of time to get qualified. But interestingly enough, one of the things that they're pitching to automotive companies in particular is, like, we know it's a pain to get any semiconductor device qualified.

Well, if you qualify with one device with Sightime, then you can choose whatever frequency you want. My understanding is quartz. You have to each device is fixed, so you have to qualify each quartz device. So let's say you have seven different types of frequency. You can do one device, qualify at once, do seven different. different frequencies versus qualifying seven different quartz frequencies. And if you want it to switch from one of the frequencies for whatever reason, there's actually a really good reason as to why

like chip designing is complicated. That's, that's by summary. But so let's say you want to swap for whatever reason. You'd have to then go back to your quartz manufacturer say, hey, we need a different frequency. And we need to qualify it. Yeah, we need qualify it. And they're going to be like, okay, great, but you're going to have to give us three to six months for us to ramp up that volume because it takes that long to grow a crystal versus side time has inventory that they can just press a button. They're like, oh, great. We can swap over tomorrow. Stupid non-engineer question. Why would you switch frequency in something once you've already got it kind of approved up and running? Okay. So actually, I came into this literally three days ago with a perfect

example. Frequencies interfere with each other. EMI, EMI, electromagnetic, magnetic interference. And so if something is vibrating, it's the same frequency in a semiconductor, they can have interference and mess up. And also, sometimes there can be resident frequency and like it will break parts of the semiconductor because everything is vibrating at a certain level they actually Tesla actually gave an example of their dojo chip which they're they kept they kept breaking and they figured out it's because the chip frequency so the the frequency that the chip is running at is very similar to the timing frequency and so it would just create resonance in the packages and the packages would break and so they're like oh well that's a big

mistake so what so what they have to do is they're like okay we need to fix this well Well, in quartz, you'd have to design the whole thing up. And so, like, my understanding is in the package, like, you have different frequencies for different applications. So, like, your radio is doing at certain one frequency. Your networking is done in another frequency. Your clock is done in different frequency. But they're all keeping time in different, like, layers, if that makes sense. Because if, like, each of these data streams have to be running at this different frequency so that it could all be working together.

But if they all ran at the same frequency, it would start to interfere. So you need different frequencies for different. different communication levels. Yeah, super complicated. That's my best. That's going to mean the best I got in terms of explaining. I've loved it. I'm starting to get a handle on it. Another silly question. All right. So we've talked about how Citam is going to dominate, but how they control mems. It doesn't seem like a competitor come in, right? We've also talked about how mems is much better than quartz. I mean, you just gave the frequency example, which I think is very interesting. We've talked about how roughly similar price, way gross

better, way better gross margins for MEMs. So if SIDM really wanted to, they could kind of cut price and try to take share on price, more programmability, more customability, all this type of stuff. So if you and I were designing a product today, why would we put Quartz in over MEMS? Because clearly people are, because Quartz is still growing. Mems isn't taking 80% of the market share by 2030, right? So why would we ever put ports on a product over MIMS? So the supply chain obviously isn't there yet. Like we're talking to a market that shift it was like 20 billion units a year. So you couldn't just be like, hey, could you give me 15 billion units?

And then be like, oh, that's like a lot of units. We don't have that. So that kind of swap can't happen mechanically, like just because it's just too much, you know, supply chains have inertia. But I, and this is something that I think that I've done a decent job at or tried really hard to do a good job at because the courts versus Mems jihad is like extremely biased on both sides. There are many places, courts is much better.

And I think that there's a potential for the Mems technology. to improve to then be able to match courts in those places. But there are places that right now, MEMS has a worst performance product. And SightTime themselves would say no. Like they're like, we're 10 times better at every way. Could you give an example of a place where MEMS is worse than quartz and why?

Okay. So there's like there's two probably like super duper duper cheap products, right? Like the absolute cheapest product you can get that's like a Chinese device or something. It's like the cheap like, you know, a $6 electronic gadget. that's like borderline junk, if you're, if you're shooting on just price alone, Mems is not quite, they don't price it that way. Maybe they could, but they don't. The other place is extremely high.

It's called phase noise. And so really complicated subject that's hard to explain, but let's just put it, random noise happens in the signal for networking. And it just enters this signal over time in this frequency. There's a way to measure this. It's like, it's called jitter. And so it's like it's RMS, which is root mean square over picosecond or something. like that. The best

Mems device today that I could find is like 0.1 or 0.23 p.2.3 like change over picosecond. Mems can do or no, quarts can do much lower than that. And so for extremely high,

high frequency, extremely low noise products, which is mostly communications, because you do not want any noise in there at all. So like extremely high end, like 5G stuff, stuff that's like really, really sensitive to noise and multiplexing and stuff like that. Like a good example is maybe like a 400G transceiver multiplexing where they're just doing like

crazy, ridiculous noise in order for them to like transmit a signal. Let me push back to be courts. You just gave two not completely niche but semi niche examples of where works is better than mems, right? So you gave communication and just the cheapest of cheap electronic products. Like the type of headphones that I buy off Amazon all the time. My wife says, you've already got four of them. And I say, no, I only have one because the other three have broken.

And I'm sure this one will break at some point in the near future. Right. So you gave two. But what about other products? Like, why are cars using quartz instead of mems all the time? And obviously there's capacity constraints, but why isn't everyone just banging down their door saying, give us mems, give us mems? It's so much better than quarts.

The noise is another example. So like the Ethernet stuff within within the car. But another example that I've been given a lot is inertia is the fact that Quartz is very well understood. When you're designing a chip and you're an engineer, you've been doing this for 30 years, man. Why are you going to do something new? Can you explain? Like every bug that's ever happened to Quartz has already been fixed. MMS still is immature in that way.

So you've already talked about how there's this market chair taking tailwind over time for Mems. And one of the other things that will probably be driving market tailwind is like, hey, your 60-year-old engineer is retiring, he's getting replaced by a 25-year-old grad student and the 25-year-old grad student. He doesn't have that legacy background of doing everything on Quartz. He might just say, oh, Mems is superior. I will learn how to do everything I design on Mems. And honestly, that's one of the reasons. That's probably, that's probably realistically the reason why they grow a lot of penetration. Like my favorite example is like Tesla and Apple are kind of the newer kids on the block and the like the big semiconductor picture, right? And

they all end on mems. Like Tesla is like one of the newest kids on the law. That was that was the most bullish thing you said like right at the front when you said Apple and Tesla all in a memm and your your product mentioned several, you're right at mentioned several times. Apple all on a mems. I was like that's the best validation I think you can you can give to a product that it's probably going to take a lot of share over time. They all end early. Yeah. They all end super early. And you're like why? And so there's like I don't know like what that design choice was. But it's seriously it clearly was like a long term decision. And if you. You talk, like the Tesla AI, like the AI day where they talk about their dojo chip,

they, the mems broke and you'd be like, well, does that mean they're going to switch back to courts? They're like, no, our solution is we just have a better memes resonator. And I was like, okay, like, that's great. Like, I thought that was really interesting. And so, but at the same time, like, I'm just, like, these industry shifts take a really long time. There is definitely a world where that, that, that rate of adoption really starts to accelerate

randomly. I don't know when or how that happens. Like, that's completely out of the purview of, like, my forecasting horizon. But I do think that there's just a lot of ways to win over the very long term because right now, I would say the product is good enough. Like, it isn't, there are, courts is, high end courts is better in a lot of ways in terms of like performance, stability. Like, it's just a more, more like mature product.

They figured out how to do this like 10 years ago. But, you know, the catch up. has been really intense. And the other thing, too, is like, so I talked a little bit in my, my super long piece on like the low end versus the high end. The high end, they're actually not competing in performance alone. They're actually kind of trying to do the 80-20 strategy of like, we have 80 or 80, 90% of the performance, but we have a 40% discount.

And so they kind of are like attacking from below. And then on the low end, they're actually attacking from above where they have, I think it's really interesting. It seems like they have like three or four out of five attributes. they'll be better than quartz and then they'll have like a 20% pricing premium meaning the only attribute they're they're worse than quartz is price so they're beating them out in performance on like the low end time of day which is like you know just to keep the time and then like the stuff that's being used for communications networking and stuff like that that what they're doing

there is they're like we're trying to have a product that is um very comparable like for the most part it's probably good enough and it's like price competitive and it's programmable and like so they have like and it's smaller so they have like all these other ways that they kind of like shade in around and we presume or whenever they make their fourth or fifth generation resonator, then all of a sudden they'd be like, and now we have absolutely better performance. When do you think the next generation comes up? That's something I don't know.

I'm going to guess it's going to be like five. It's going to take a few years. Let me switch to just a couple of quick valuation questions. Look, 70% drawdown roughly your state, roughly your state. That's going to get a lot of people just looking and saying, oh, you know, I wanted a semiconductor with some beta. It's down a lot. Like, that seems pretty interesting. We don't have, we already talks about how bankruptcy is not a risk here on like some levered semiconductor. So a lot of people say that, but then a lot of people would probably look at and say, oh, well, this is kind of like 25-ish times

free cash flow. Yes, Doug makes a nice story about growth. But, you know, 25 times free cash flow for a cyclical business with, it doesn't look screaming cheap, right? You know, it's 25 times this year, next year, which we don't even know, it sounds like numbers are coming down, right? So it might actually be your pain 40 times forward. It doesn't look crazy, Cheat. Like, what would you say to someone who pushed back on that? How do you look at what the valuation should be here? So this is the hard part. And I would say my biggest, like, I have a risk section of my write-up. And my biggest risk is trough numbers or actually could go much lower than it is today. Like, I don't know when that number is, like what that number is. Like, I think something that's really important for a name like this is,

It's a long-term story. There's a real chance, like a very real chance I'm early to this. And that's probably the biggest thing I fear, if that makes sense. The things that I've done to maybe de-risk that is I would say my base, my base case of numbers is like much more realistic. And I have them more at like 30 times free cash flow for 2023. So it's expensive. That's my problem.

Let's put aside 2023 because one thing that we can definitely get caught up on is the free cash flow number for next year and everything. And it does matter. But if you start from that and work backwards, like what really matters is, hey, what is kind of the mid-cycle of sustainable earnings? And then we talk about the growth from there and stuff. So let's ignore the next 12 months where there's an air gap and the past 12 months where, you know, everything was, what's the on kind of two years out if we just said, hey, this is middle of the cycle. We're not at absolute everything rushing through capacity. We're not at, hey, everybody's considered every order. what's a two-year-out mid-cycle free cash flow number look like for this company?

So I would say 80% free cash flow conversion, and I would say it's like $5.5 per share in EPS, something like that. That's kind of what I'm thinking in terms of. I think that the problem is, is I don't know. Actually, the other thing that I have a little problem with is I think my numbers, my out-year numbers for like the recovery is actually very, is not steep enough. So let's say like $5.5.6 of a per share of earnings. That's kind of what. I think is the number. Five and a half to six dollars of earnings. As we said, this is about an $85 stock.

You know, today we're recording Friday, October 7th. The market was down quite a bit. And it seemed like side them every moment, another dollar down. So by the time we're done with this podcast, maybe it'll be $75. He knows. But, you know, $85. So we're talking 15x or maybe even a little cheaper than that. You're normalized two-year-out number.

That's pretty good for a company that you think, you know, again, over the cycle should be a double digit grower, free cash flow levers a little bit better than that. Am I kind of thinking about that correctly? I think that's the right way to think about it. And I think that like something that I keep trying to, because like I feel like I've done a lot of work about framing the long term really well. And I've like absolutely just murdered the crap out of the near term numbers to be like, how painful can this be? And like, I feel really good about the numbers that I have for the next year. I think that I'm a little mean on gross margins, probably meaner than I should be. I feel like I'm a little mean on like the snapback.

I really don't have them snap back quickly. I kind of assume a tepid out cycle, like 20% revenue growth for 2024. I think that there's a lot of things that like the entire write-up I've tried to bake in a lot of conservatism through trying to, like my entire job has been trying to frame how bad it could be. And I haven't put like an ounce of thought of the good things that can happen for. frankly. Like there's a lot of things that can happen that make it a lot better. The thing that I think is really interesting and like is probably one of the reasons why I think it will persist over

a long term. And so this is I guess the Tegas, the sponsor Tegas shout out call. This podcast is sponsored by Tegas too. I know. You go ahead and call out the sponsors whenever you want. Yeah, the post. So essentially, you know, I did some Tegas calls on this. And the thing that I thought was really interesting is a former sales manager and a currently, a current distributor of their products was like, I've never known anyone to swap from ports to mems and back to ports. Maybe the super low end products, but most people keep mems to some degree. Like maybe as a second source, but it's like they just do not swap away. And so what's happened in 2022 and 2020, so there's actually this huge, this huge story is actually

they were a huge kind of beneficiary because there's a fire for like this huge part of for a timer I sees. And so created this huge supply shortage and they were essentially the only one there to pick it up. So everyone rushed to design them in. And so now they have like literally, they've probably been introduced to more customers in 2020 and 2021 than they have in cumulatively as a company. And so now they have all these design wins that they've been built into, maybe dual sourced into. And we have like qualitative, qualitative understanding that customers tend to like and they're sticky with them, mostly because, of the supply chain programmability. It's like, hey, you can't run out of one random

course device that's running at one frequency because they can just press some buttons and boom. Now you have all the 40 megahertz devices you want. That's like the supply chain advantage that they keep talking about that I think is interesting. And then the second advantage is programmability. You just have so much more flexibility whenever you're qualifying, building these designs. You know, it's a real, it's more like a semiconductor than it is like this passive device that core. is. So this is kind of like the thing that I think is really interesting because, you know, take a big old step back. Like think about S curve penetrations, right? Like it is, it is a, it is a

classic like two or three, two to five percent super early adopters. Like we are early adopter curve. And then we have this, this event where, uh, this early adoptive technology got introduced to tens of thousands of customers because of, um, because of the supply constraint issue. And we know that the customers don't tend to to design them out. I think there's a real chance that, like, S-curves don't, like, look as linear as I project it to be, right? Like, when things go to, when things go to 30%, they don't just, you know, they don't just, like, linearly happen at 100 bips a year of share gain. What happens is there tends to be a freaking, like, a penetration curve where it goes like, two, five, six, and you're like, two percent a year. And then it's

nine, you're like, oh, that's interesting. 15, 30, 70, boom, done. Yeah. I don't. I don't. I don't think we've, I have not baked that into the number. Like, that is not even a consideration at all. And that is a possibility. Again, you've got Apple and Tesla all in. As you said, nobody switches back to quartz. Like, those are pretty powerful signals here. Okay, last question. And then I think we've run long. I love talking to about this stuff. Last question. So we talk about you as we talk about that. The last thing that jumps out at me, and I have to ask, because you know I love share mybacks, right? But you've got a company here, as we're talking, 1.8 billion market cap, right? Almost $600 million in cash on their balance sheet. They are free cash flow positive. So, yes,

they are cyclical, but they are free cash flow positive. A third of their balance sheet is in, a third of their enterprise value is in cash, and they're not buying back shares. And then I would add on top of that, I mean, congrats to them. They did a nice job. But, you know, the second thing I look at in anything that's not buying back shares, I go look at the insider transactions. And When I look at the insider transactions, every insider all year, sell, sell, sell, sell, sell. Now, a lot of them are three-digit prices that start with the two. And again, the stock is now at 80, 85. So they were getting great sales.

But as recently as last month, I see here's a, here's some officer who's selling a decent sluggish stock at under $100 per share. So, you know, like I see lots of insiders selling. I see no buybacks, no insider buying. and I say, hey, what is Doug seeing here that maybe the insiders aren't that they don't see enough value to buy shares either with the company's cash or their own cash? Yeah. So on one, the buyback question, we'll do the buyback versus the insiders first. The buyback question, I think it's really interesting, actually, because whenever they first

were floated, they were 50%. So this is like a float problem. The CFO, I actually kind of like the way he frames this. He's like, we don't, well, they ask about buybacks. And then let's say, we don't want to buy back because we don't want to ruin our float. Our float is already. It's the toughest answer. I've got so many companies that tell it.

And I know, and they're probably right. But it's just like, hey, your stock's cheap. There's nothing you can be better than buy back shares. Yeah. I think, I don't think it's quite to the level where it's like, okay, this is just like the best cash on cash IRA that can get. I think that they do probably, I think would be really interesting is actually if they bought another MEMS company because they are kind of, they do have a big socket. and they like that cash is going to be used i would frankly like to see a buyback as well or frankly i would like to see them buy back the mega chip because it's still 25 percent of the

company yeah five million shares yeah it's a big slug yeah so it's like they could they could maybe take some of that off like that'd be really interesting to me um i i don't know they have this big war chest what are what are they going to use it on i know they want to do some m&A they want to buy some like IP on the side that is something i feel pretty confident that they're thinking about and looking at. And then like the buyback thing, there may be a little worry about float. I think that maybe they should just do something like, like, I don't know, maybe like a dividend.

Like that would be crazy to me like one cent of share or something, but it's like, hey, like it's something because I would like to see it like them to talk about it. I think that is like optionality that could be really good, but also your biggest fears that they're going to piss it away and something really stupid. That is probably another huge risk that I'm like very concerned about because that's like right now the big put on the stock is, hey, $25 a cash a share, but you're also like, what are they going to use it for? I don't know. I would love for them to answer that. I think that would give a lot of confidence for shareholders in the longer term. The other thing, the other question on the

insiders thing, I think that one's really interesting because I've actually looked a lot at the granting history. They had like this really hyper-aggressive grant in the beginning of this year, like with PSUs on price hurdle stuff. I think they've been a little burned. They've been pretty, they've been giving themselves a lot of shares along the way. Like a lot of shares along the way. So I think, I think them getting a little lighter, I'm not going to, I'm not really going to chastise them. And insiders for the longest time have thought their shares were expensive to be clear. Like, I followed this company for a technology perspective for a very long time. Like one of the, one of my friends who's a really interesting semiconductor technologist is like,

hey, you should really check out this company. And I look at shares on like 150 times earnings. hell no. I'll read the earnings calls. I'll keep up with it. And they did giant equity offerings all along the way. They did. And those equity offerings obviously ended up being super awesome because they have now $580 million to share of cash on the balance sheet. But I think that that insider selling, it continues. Some of these might be 1040, 41B plans. Yeah, some of these are 10, 10 B51 plans so they are like automated and continuous selling that's where you're seeing most of the continuous selling from the insiders I hear you and look everybody's got their own thing but at the same time if they thought it was cheap enough they could you can cancel your 10b51 at any time if you

want right so they could cancel and there's price they can do prices too where it's like under this price you don't sell um I think the the rate of selling at least has slowed the hell down from beginning of this year like you know if you're looking at like the beginning when there is a when there was a two in front of the triple digit stock, there was significant insider selling the entire time. That pace has kind of slowed down, especially since we've gone to 130, 100, you know, whatever. The last insider sale I see is there's one guy selling a nice little like 150,000 at 97, but the insider is selling as like a rate of change just really slowed down. I would love to see some insider buying, truly. That's what I would like to see.

It's just, you know, sometimes you have this with companies, right, where they're really, good at capital allocation and they issue a bunch of shares when their stock is dear, right? So the stock's at a thousand and they issue a ton of shares and all the insiders are just hammering the sell. And then the stock comes down to 500 and they stop selling and they don't buy back shares. And you're kind of like, hey, like these guys are good and they've got a lot of cash on their balance sheet, but they're not buying back shares. They sold a ton of them. They're not buying back. They sold a ton for their personal accounts and they're not insider buying. And you're like, maybe they just kind of think it's fairly valued at this point. Like, and if they

think it's fairly valued. I should probably think it's fairly valued. And I should wait until they give me the like, we are greedy. We're buying back shares. Because, you know, the insider ownership is okay. But the CEO, he made $11 million in 2021. 10 million of it was stock. So he should be incentivized, but it was stock issued at 200. So anyway, Doug, I think we've run super, super long. I've really enjoyed having you on this podcast. I'm super excited that you're doing the TIGS deep dive thing. I believe we're taping this October 7th. I believe you're going to post it publicly. kind of alongside when this podcast comes out. So we'll link back and forth so everyone can see it. But Doug, thank you so much for coming on. Have a great weekend. And I'm looking forward to

time number three. Yeah, thanks for having me, man. Appreciate it. Until next time, you know. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks. Thank you.