Cirrus Logic, Inc. (CRUS) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and good afternoon to some of you out there. Thanks for joining us today. My name is Adam Gonzalez, and I cover the U.S. semiconductor and electronic design automation sectors on Vivek Arya's team here at Bank of America Securities. Today, we're really excited to have Thurman Case, CFO of Cirrus Logic as well as Carl Alberty, the VP of Cirrus' Mixed-Signal Products division join us. We'll start off with a little bit of an introduction before diving into some Q&A. We'd like to keep this session as interactive as possible. So if you do have any questions, please feel free to submit them to me in the web portal, and I'd be glad to ask them as time permits. And with that, let's just get started. So to kick things off, Carl or Thurman, can you just give us a high-level overview and history of the company for those who aren't familiar with you? What markets do you serve? What products do you supply? And what are some of your core or differentiating strengths in terms of IP?

Sure, Adam. Yes, I'll take that. So the company has been around since the mid-80s. And obviously, we've seen a lot of evolution in the company, in the strategy and the culture over nearly 4 decades. But over the last 15 years or so, we've been pretty hyper-focused on high-precision, high performance, mixed-signal processing solutions. The bulk of that has been voice and audio centric in terms of technology focus. And a lot of that -- 15 years ago, a lot of that focus was really to get back vectored on low power battery -- battery-powered portable devices. So I mean that continues to be the lion's share of our revenue and continues to drive a meaningful portion of the opportunity looking forward for growth as well as just our R&D investments. And that covers the entire kind of signal chain for audio. So on the kind of front-end voice or audio capture side of the data conversion to allow for processing of voice signals or audio signals, be it for things like voice recognition or noise cancellation. And then also on the output side of rendering, we have digital-to-analog conversion to kind of get that signal back into something that people can actually hear and listen and enjoy, and that can be funneled through headphone drivers for headset applications, speaker apps for speakers, line outputs. So it's traditionally covered that entire signal chain. We call those devices codec, they bolt up to amplifiers, et cetera. So again -- so that's been the lion's share of our focus. I think more recently, as we've built out a really broad portfolio of low power IP, we've used that to kind of gain entry into new adjacent markets. Haptics being a really good example of that. I'm sure we'll talk about that through the course of the discussion here. But years of execution with big customers on tough mixed-signal kind of products has given us the credibility and the IP portfolio to kind of move into some of these adjacent spaces to really drive meaningful growth opportunity for us beyond just audio as we look out into the future. Again, handset has been a big driver of that, but we've seen more recent market share gains in other kind of portable consumer products from tablets and mobile computing to wearables and headsets and hearables and -- but again, if we look at the opportunity for growth in audio, we're excited. We look at the opportunity in these new adjacent spaces, and we get really excited about what that looks like for Cirrus long term.

Great. Thanks for that overview. And you touched on this a little bit, and you spoke about the haptics and amplifier momentum. And you've really consistently highlighted strong momentum in that market, especially in the Android area over the last several years. And you're designed into 8 of the top 10 handset OEMs currently. Can you just recap some of the progress you've made there to date? Has the growth come from -- more from new sockets or competitive displacements or a bit of both, again, just the amplifier and haptic opportunities?

Yes. I mean, we've certainly seen a lot of market share gains in Android. Apps is a bit more mature relative to haptics. The haptics kind of trend has been emerging over the last 1.5 years or so. I mean in amplifiers, certainly, the majority of those gains have been competitive displacements. And I think that's reflective of us developing products that are really laser-focused on that particular application space. I mean, Android handsets. And our move to 55nm technology for the amplifiers, the codecs have been in that process now for quite some time. But the move to integrate processing with the high-voltage amplifier capability allowed us to deliver a product to market that was all self-contained and has the kind of closed-loop feedback for measuring and monitoring and protecting speakers with ultra-low power integrated processing capability, that when you looked at competitive solutions from TI or Maxim or NXP, just our process node and the combination of our IP just represented itself in a really compelling product. It was smaller, lower power, and ultimately, through our kind of acoustic and personnel expertise of being able to help customers along that design process and make these things sound as good as they possibly can. All kind of came together and allowed us to really leapfrog competition and just deliver a better product that's resulted in meaningful market share gains and displacement of other solutions over the last 18 to 24 months. So the haptic side of that is a little bit earlier, just with the trend towards displacing mechanical switches and notably with the home button replacement that's been going on for quite some time in handsets. And so that's a bit earlier, and there's a lot of innovation happening in that space of replacing buttons. I mean not just on the haptic feedback that kind of mimics the feel of an actual button. But obviously, the system itself or the phone needs to detect that a button event -- or a button press event has actually occurred. And so for us, being able to integrate more of that touch-sensing capability into a complete system solution to minimize chip count and cost and power has positioned us pretty well with our latest haptic solutions to capitalize on that growing trend, much like we did with amplifiers a couple of years ago.

Got it. And then just double-clicking on the haptics trends that you started to talk about. If I recall correctly, I think you had a press release out late last week where you announced a new suite of haptic driver products there. Can you just talk briefly on what's new there? And just anything to be excited about?

Yes, sure. So I think it's a lot of what I was just talking about. I think, obviously, the trend really was on the back of home button replacement. And that's certainly becoming pretty standard at this point. And frankly, if you do a side-by-side comparison of a basic haptic solution versus our kind of more high definition, kind of fully customizable haptic driver solutions to be able to really allow customers to model and customize the feel of whatever kind of use case they want to provide for a user. It's that customizable, high-performance closed-loop system that allows us to measure and monitor the position of the vibrator, which, in this case, is typically an LRA or a linear resident actuator. The high-voltage drive capability, much like we see in our speaker amplifiers allows us to accelerate the mass very quickly and break it very, very quickly and allow that to be tunable such that, again, a system designer can deliver whatever experience they want. And doing a side-by-side comparison with a basic haptic solution, it maybe existed for 5 years in terms of vibrating a device for notification purposes is night and day. And that night and day difference is hugely critical of the customer experience if they think they're pressing a button. And so that's the kind of foundational piece of it. I mean the more interesting kind of evolution, I guess, is this touch-sensing capability. There's a variety of different techniques a system designer might use to be able to detect like, is the user trying to press what used to be a mechanical switch, and how do I sense that? How do I allow for what used to be a single purpose button, volume up or volume down, that could now be a programmable surface to do pretty much anything the system designer may want. And how do you integrate that with the haptic field to make the user feel like they've pressed a button and then to have a low latency experience that yields what somebody is going to expect when they're pressing virtual buttons on a device. So again, the products we introduced over the last week are products that are shipping in high-volume kind of handsets today, and we allude in that same kind of news -- news bit about products coming out that leverage more of this capability on the touch sensing and allow for full system integration to kind of ease that design process for customers wanting to take advantage of these kind of virtual button opportunities and to kind of have that blank canvas to start creating unique user experiences for customers.

Great. I want to circle back on -- you mentioned that word closed-loop in your response to my prior question. And that takes me to my next question. When we look beyond the Android market and haptics and amplifiers, what are some of the growth opportunities that you're most excited about, particularly in the non-audio and voice domain? There's been a lot of buzz around to closed-loop controller socket that you could be on track to win in a premium handset later this year. And it's been a bit difficult to decipher what exact feature this chip is going to enable. And I think the term closed-loop is really meant to be more of an architectural description that applies to your haptic drivers versus the real name of a product. Can you help us understand what this closed-loop chip is designed to do, what you mean by that? And how it potentially foreshadows what we can expect to see from Cirrus in the coming years?

Yes, sure. I mean, it's certainly -- the phrase took on a life of its own. To a degree, we certainly did intend for that to reflect architecture of product types, certainly do not intend for that to be a noun proper form. But that being said, our speaker amplifiers, our haptic drivers have elements of closed-loop control, where we are taking an input signal, we are driving something on the output an actuator of some sort, be it a vibrator or be it a speaker and we are measuring and monitoring the output and feeding information back into the system to correct or to kind of shape what we're doing on the kind of processing side of that. So again, we do use that as an architectural kind of framework. And typically, where we -- where our value really shines is applications where they're super sensitive to the time it takes to process the signal, to render that signal and to put that feedback into the subsystem being able to compensate and deal with variations and the driver that we're actuating. So obviously, we've spoken about that in the context of amps for audio and haptic drivers. And what we've been alluding to for this fall, which we appreciate can be really frustrating in terms of the vague nature of how we describe it, but that's kind of a necessity, based on our -- it's the confidentiality of what we're up to. It's another example of us having built this IP portfolio and credibility over almost 10 to 15 years and seeing opportunity for another actuator in the system where we can take our kind of IP portfolio on 55nm and stitch together in a way that provides high-performance control and actuation of a transducer with feedback and ultra-low processing centered around this portfolio of IP and 55nm to allow our customers to control and deliver performance in non-audio applications. That is just a capability that's beyond what traditional suppliers, which may be analog or power kind of related suppliers for these domains. But just they're really good. It's just a really good capability of taking our IP and repurposing it in the new application. So there's not too much clarity we can provide in terms of the specific use cases and features that these closed-loop controllers represent. But we're excited about the robust nature of the road =map beyond the products that will get introduced this fall, just the road map for how that evolves over time and the demands that we see for products within that product line that can really add value by combining that little latency, low power signal processing. And beyond that, again, as I mentioned, this credibility that we've established over a long period of time with flawless execution has positioned us to be a trusted supplier of mixed-signal components. Again, we've talked about some of these adjacent moves, and we've got other in-flight investment opportunities that look beyond this year and next year that will continue to fuel opportunity for content gains over the mid- to longer term.

Great. I think that's a nice tie-in to my next question. And it's really about your relationship with your largest customer, which accounts for about 80% of your sales. And I know oftentimes, there's a lot of speculation around what you're winning and not winning at that customer in any given product cycle. There's -- there can be concerns expressed as your lack of diversification from a customer perspective, although the company has done a nice job diversifying from a product perspective. But not getting into too many specifics given the sensitive nature of that relationship, how would you describe your relationship and visibility -- multiyear visibility into the designs that you have in place? And how would you address some of the concerns that investors might have around sustainability of your content from generation-to-generation as well as the risk of in-sourcing?

Yes, sure. Well, I mean I think the sustainability of the business. I mean, I think we've got a pretty good long-term track record of as I mentioned a minute ago, like just execution of really difficult complex mixed-signal products on often very difficult schedules. And so what started out as a basic hi-fi audio codec that was under $1 in music players has evolved into a wide swath of technology and product types that we're typically working on several years in advance of commercialization just given the long-term nature of IP development and collaboration around kind of bespoke products that take us anywhere from 9 to 12 months to develop and customers to wrap product around it takes an additional 9 to 12 months. So we've got, obviously, pretty good visibility into what's coming down in terms of the roadmap. Sustainability, I think, again, we don't choose when to be a partner or when not to be a partner as it relates to our big customer. And that comes with doing a whole bunch of different things. But we've got a long-term partnership that has served us both really well in terms of us providing technology that allows them to differentiate and being a trusted supplier. So as long as we remain really focused on execution and bringing new technology and capability to bear, I think we'll remain a trusted supplier, and I think that, that's hugely valuable. So it's often difficult to predict what the end of products may end up looking like, and there's obviously a cyclical nature to developing products for consumer products. There's definite price pressure and just the need to be able to cost reduce products. And obviously, the fit and form and function of these end devices evolves with time and evolves with the market. So we see a shift in a kind of a cyclical way of how we're investing. I mean, from one cycle to the next, we may be investing in cost reduction. We may be investing in purpose fitting or optimizing the device-based on end product architecture. We've seen that in the past with transition to digital microphones from analog microphones in the Android ecosystem. We've seen that with the removal of the 3.5 millimeter headset jack. And so we will see design cycles where we're optimizing, making things smaller, making things cheaper. But at the same time, we see these incremental opportunities for content gains and additional functionality, the addition of extra speaker amps. And so, I think if you zoom out a bit, you'll see a long-term history of slow and steady content gains. And I think when we look at our long-term opportunity set, we're excited about the expansion into non-audio and non-voice domains, which, again, is a testament to our credibility and trust as a supplier to mixed-signal components. So not to say that there's not a shortage of products that are interesting and problems we're solving in the audio and voice domains. There certainly are, but now the ability to supplement that and expand the SAM with these other kind of adjacent spaces is really exciting for the long-term growth. I mean, as it relates to in-sourcing, which you commented on at the end, I mean, certainly, that's something that looms around as a potential risk. I mean, certainly, our customers can decide to go about developing their technologies in certain ways. I mean, I think for us, it comes back to just focusing on execution and staying several steps ahead in terms of the product requirements and expectations, such that we're delivering on everything they ask for, everything they need in a way that they probably would deem we could do better than they can do internally, which is obviously not something we can definitively say. But we feel really good about our position of being their go-to supplier, they look to when they need what used to be traditionally auto in voice, but I think, again, it's expanding based on that long-term track record of execution.

Right, right. And just a follow-up on that. Is there something unique about -- because if I look back at your history, there really hasn't been a strong history of content losses or being designed out of anything? The biggest headwinds you guys faced was really the removal of the headset dongle, which is really just accessorizing of a particular socket for a lack of a better term. But is there something unique about your mixed-signal IP that protects that from being in-sourced relative to something else that might be easier to kind of put on the main applications' processor?

Well, I think if you looked at it in the context of what would be easy to put on the main applications' processor, I think you'd see a pretty big divide in just the process technologies inherent in developing APs versus kind of more mixed-signal hubs, especially things that require higher voltage like amplifiers. I mean we certainly don't blaze the trail on process technology just given the need for analog, high-performance circuits. So we continue to see a sweet spot of 55nm IP which has served us incredibly well and allowed us to deliver products that are really compelling relative to integration of low power, low latency signal processing as evidenced by these closed-loop controllers coming out that we've been speaking about. But I think, certainly, that's a very different profile from what you might look at in terms of integration into an AP. And if you look about that content relative to everything that, that AP encompasses and the risk associated with it versus frankly some of the performance in power optimization by having a separate chip. And we've seen that time and time again across a number of customers that things like always on voice activation and just kind of always on processing lend themselves very well to having external components such that you're not firing up the AP or really power hungry chipset very frequently to distinguish between noise and voice -- a voice uttering certain words, is it the right user or that sort of thing. So we still think there's long-term advantages to the kind of segmentation or lack of integration in some of the key technologies we provide. So -- and I would say that our customers, by and large, especially our big one, we kind of see similar value in that context. So yes, it's always a challenge, but I think there's a big divide and an obvious trade-off on performance capability and just the needs of some of these circuits, like the amplifiers that need higher voltage that kind of necessitates separate chips and allow us to make really transparent trade-offs on system power and size and integration and so.

Got it. That's helpful. And I just wanted to follow-up on your decision to exit the MEMS microphone business, which I think was announced sometime earlier this year, perhaps late last year. As an area that you've invested in for quite some time, and I think the decision to exit that business is really more a reflection of some of the strong growth opportunities you guys see in the pipeline coming in the next few years. In relation to some of the growth opportunities that you highlighted earlier, can you talk about what drove that decision to exit the market? And how you've sort of redistributed those resources internally?

Yes. I mean, certainly, when we looked at all the opportunities that we had and the resources we have at our disposal to go drive those opportunities, yes, there were certainly some difficult decisions and trade-offs to be made relative to the opportunity cost and just kind of shareholder value and just return on investment that we viewed in the various opportunities. So that was certainly a factor. The MEMS microphone market, I mean, as anybody in that space would tell you is a really, really difficult market. And obviously, Cirrus invested in that space for quite some time, even going back to the Wolfson acquisition and their investments that had pre-dated that for quite some time as well. And I think at the end of the day, when we were looking at that market opportunity and what customers would expect from us, and what we would expect from ourselves to put our name and our stamp of quality on that product set, we just -- we felt like there was just so much there that we still had to do to really get ourselves to a level of comfort that we're going to stand up, and we're going to put our name and reputation on the line as it relates to quality and robustness and capability of the product set. When we looked at that kind of ongoing investment, and we looked at these other opportunities, it was obviously a difficult trade-off. But at the end of the day, we prioritized things that were more impactful to the company and to our customers and to shareholders. And those people -- the people, by and large, were redeployed pretty immediately on really big, meaningful opportunities that will drive great growth opportunity over the coming years. So it's certainly a difficult decision to make, especially given the customer engagements that were in place. But at the end of the day, it was that combination of us feeling comfortable with the investment and time required to really get it to a product level of quality that we feel good about and just how that was an opportunity as a comparison to the other deals that we were working on.

Got it. And then shifting gears to the digital headset and hearable market. Can you just provide an update on that business? I know Cirrus has been pretty successful in penetrating some of the truly wireless earbud form factors that have come out in the last year or so. You've been successful getting some amplifier content in some of the top-tier devices. How should we think about that opportunity moving forward, and particularly as it relates to your codec and your active noise cancellation solution?

Yes. Cirrus has been investing in digital headsets for quite some time, arguably a little bit before the market's time in terms of wired headsets and -- but I think our traction over the last 12 to 24 months has been a testament to that kind of commitment of underlying investment in technology that spans in a variety of form factors from truly wireless to over ear and on ear headsets. And so I think we've built up a pretty good portfolio. As you talked about, we've got really high-quality class D ultra-low power headphone drivers that represent one opportunity set. And then the more sophisticated codecs that add in capability for processing. And those opportunities are really exciting. I mean, it's one of the fastest-growing segments in consumer right now. And certainly, we view as a really great opportunity for customers to deliver new compelling features and capabilities that people have never really experienced in headsets before. So we're going to continue to invest in those product types from just high-quality headphone capability to the more sophisticated codecs and start introducing elements, you referenced noise cancellation. Certainly, implementation details will vary by customer. And a lot of that comes down to trade-offs of battery life. I mean, these TWS headsets are obviously massively space constrained and really small, and therefore, the batteries are really small, which makes every microwatt of power just super critical to understand. And so adding in features like noise cancellation are obviously a trade-off as it relates to battery life, and there's just a bunch of emerging interesting things in the realm of hearing health and hearing augmentation to allow users to seamlessly interact between enjoying content on their headset, but also interacting with thing, the people around them in the world. So those present really cool challenges and problems, as it relates to extension of battery life in really small kind of battery constrained products. So we're excited about the long-term growth opportunities there. We certainly have several irons in the fire across our top customers with products and products in development that we feel really good about. So that's certainly the exciting part of the market, meaning the wireless space. And so yes, we're excited about continuing to push that forward.

Great. Last 2 questions on products before I shift gears with the remaining time to some financial questions for Thurman. But tablets, that's something that Cirrus hasn't really had high penetration in the past. But in the last few shareholder letters, you've really highlighted some recent share expansions, particularly in some marquee models. What's changed for the company? Is it an architectural change? And what's really allowed for that greater content penetration in tablets? And then on voice biometrics, this is something we've heard about for a few years, but really hasn't come to fruition yet. Can you provide a quick overview of your voice biometric solution? What problem you're trying to solve? And what are some of the big milestones that we should keep an eye out for?

Sure. Yes. I mean on the tablet front, I mean, that market falls off pretty rapidly after the first couple share leaders. And -- so we certainly don't view that entire market as fertile ground for top line growth. But there's been some -- there's been shifts to more speakers. And as you introduce more speakers, you introduce more strain on the battery. We've got a bunch of interesting investments in technology and IP that is designed to be friendly towards batteries and to deal with really significant peak power demands. And so as you start adding speakers, and you see evolving architectures in some of these newer tablets, you see a lot more need for those kind of IP and technology sets. So it doesn't represent a big shift in our strategy or our view of the market, but it's -- look, it's market share opportunity we have to take and an opportunity that's accelerated by shifts in architectures and the additional speakers and just our IP playing well into those problems and solving problems that are valuable ones to solve for our customers. So again, we're going to continue to stay focused on some of those architectural evolutions and how our kind of technology as it relates to being friendly to battery is relevant, and we'll certainly capitalize on those opportunities. And we see other areas of the market that are getting more and more space constrained and starting to use smaller and smaller speakers, which make those problems exacerbated in terms of delivering good sound quality and doing it in a way that's nice to the battery. And so we're excited about those opportunities. But again, they don't reflect any fundamental shift in our strategy outside of partnering with our big customers and agreeing on a little problems to solve and going off and do that in the context of taking share and working together to deliver the best product. On voice bio. Yes, it's certainly been a long and winding road for the last 5 years as we started to embark in a brand-new kind of greenfield of space in terms of having secure user authentication on a mobile device or an embedded kind of implementation. So that's resulted in us delivering our first product of its type, which those are difficult to make hugely financially successful. But they're used as tools to validate technology to allow customers to do real-world benchmarking and testing and evaluation of new technologies and allows -- and has allowed us to work within industry associations like FIDO to like really understand and quantify like how does voice and modality get used as an authentication methodology that's unique and secure. And so we've learned a ton, and the product development has been super informative and super helpful in terms of real customer engagement and collaboration. And we're now using all of that to kind of guide the roadmap in terms of how we're developing new products and how we look at the customers we're choosing to work with. A lot of those customers have investments in digital assistance and have investments in natural language processing and complex kind of voice recognition, some of which that resides on device, some of which resides in the cloud. And so it's a matter of us understanding what we have to work with in a given customer engagement and how do we complement each other and how do we leverage our strengths in terms of protecting the voice print and allowing that to be a secure element that doesn't have to leave the device and how do we prevent against spoofing attacks and things of that nature, and ultimately work together with the customer to derive a solution that's based on this technology we've been developing. So we've certainly seen evolution in the roadmap that allows us to consider integration of some of the key ingredients of this technology we've been investing in as we see it in the roadmap for some of our future processors and future smart codecs.

Great. With the last minute that we have, really briefly Thurman, I just wanted to touch on fiscal '21. I know you typically refrain from providing revenue guidance beyond the current quarter. But at a higher level, would you be able to outline some of the puts and takes that can help frame how we should think about your near-term growth prospects this year? Thanks.

Well, okay. So going into the year -- going into the fiscal year, there was a lot of choppiness and things that were happening in the supply chains. We, in particular, our supply chain is in good shape. Our major suppliers are not located in Mainland China. So we -- they had some challenges, but we really have been able to keep our flow of product. If you look on the other side, the contract manufacturers and a lot of the suppliers out of Mainland China certainly had some slowdown. So when you look at the rest of the year, though, our products, we're going to be able to supply whatever we need. Some of our customers may be still trying to catch up. There's timing differences between launches across -- we have multiple launches every year, and the timing of those can move around. So to be honest, what it gets down to for us is we can't -- the market seems -- the phone market seems to be strengthening some, and there are some signs that it may not be as dire as some of the earlier discussions on that. But for us, it really starts getting down into demand for the different SKUs and really consumer demand and the timing of that. So for us, when you're within 1 year, that's really what's going to drive it at this point. Once -- and mainly, it's associated with the fact that it feels like that the supply chain is recovering well, and it will get down to demand.

Great. And with that, we're at the end of our time. I just wanted to thank Thurman and Carl and the Cirrus Logic team for joining us today. Apologies for anyone in the audience, if I didn't get to your question. Feel free to follow-up with me afterwards. Thanks.

Thanks, Adam.

Thank you. Appreciate it.

Yes. Thanks, guys.