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

Yes. Thank you. Good afternoon, everyone, and welcome to the Stifel 2020 Virtual Cross Sector Insight Conference and the Cirrus Logic fireside chat with management. My name is Tore Svanberg, I'm a managing director and senior analyst at Stifel, covering analog, connectivity and processor semiconductors. It is my pleasure to introduce members of the Cirrus Logic management team this afternoon. With us from the company, we have John Forsyth, who's the company's President. And we also have Chelsea Heffernan, who is Director of Investor Relations. So with that, I'll get started. And for those of you that have any questions for John or Chelsea, please submit those via the webcast. And with that, I'll jump straight into it. So John and Chelsea, thank you so much for joining on the call or the line today, and maybe I'll start with you, John. Could you just give us a very brief introduction of serologic mainly to the benefit of those companies that may not be that familiar with the company. And after that, we'll get into more details.

Of course, yes. And before I do that, I just want to say thank you, Tore. Delighted to be here and be a part of this. Yes. So Cirrus Logic, for anybody who's not familiar with us, we're known mostly for audio. We're specialists in the advanced mixed signal, but we're principally known for audio devices which ship in many products, but principally smartphones. Our largest customer is a -- has a fruit-themed name and is based in California, and that represents the majority of our revenue. And historically, what we've been known for is leadership across the audio signal chain. So that includes audio data conversion in both directions. So from the digital domain to analog and back from analog into digital. So in the former case, that's when you're rendering audio, you're taking it and playing it out through an amplifier, for example. And in the latter case, when you're coming from the analog domain into digital, that's typically because you're doing some kind of processing to audio that's out in the world, maybe picking up somebody's voice or speech and so on. We provide a range of products, which deliver functionality around that. I'm sure we'll get into. But they include codecs, which go in smartphones, which do a lot of audio data conversion and mixing, along with some signal processing on the back of that. And boosted amplifiers, so the amplifiers that you hear in your smartphone and tablet devices, there's a pretty good chance that whatever you have in your hand or on your desk is using Cirrus Logic amplifiers to drive those speakers. Over the past few years, we've been growing our business in a number of ways. One of those is by taking a lot of our key audio technology further into the Android space. So building on the leadership we had in IOS device audio. So we've been making a lot of headway there with our boosted amplifiers. And we've also been growing our business increasingly beyond audio because it turns out -- and again, I'm sure we'll get into some of the detail of this, that a lot of what we do in advanced mixed-signal processing is very applicable to other areas as well. One example of that is haptics. So haptics in mobile devices has really evolved from being something quite basic to a much richer experience today with virtual buttons and the feeling of clicking something even though it's not really a mechanical movement. And often, that haptics experience, what you're feeling, is again being driven by a Cirrus Logic part. So that haptics product line has represented one of the areas where we've been growing beyond audio. But increasingly, we are looking at and investing in and indeed working actively on new designs for products, which take our technology into other new areas as well. I'm going to leave it there on the product side. I guess for everybody who's interested in learning more about Cirrus at a high level, we have a lot of information on our Investor site. We're mostly headquartered in -- we're headquartered in Austin, Texas, but we're -- most of our R&D is based either there or in the U.K. And yes, we have a kind of full suite of investor materials giving you an overview of revenues and the market opportunity we see ahead of us on the website.

Yes. Great. Thank you for that, John. Very good detailed introduction.

So maybe I could start a little bit higher end still and then eventually hold -- keep zooming in. So if we start off with your largest customer. And when investors look at Cirrus Logic, the first thing they often note is that your largest customer represents anywhere between 65% to 80% in any given quarter. I know you can't go into specifics about the relationship here. But maybe you could go through the history with that particular customer and explain a little bit how diversified the business has become. Because obviously you started, I guess, more than a decade ago with an audio codec for the iPod and now you're showing up in -- yes, and now you're showing up in all sorts of devices with a range of better technologies. So maybe kind of walk us through that history, if you will.

Yes. Of course. I would certainly, yes, emphasize one point upfront on that, Tore, which I think is in the background of what you're asking there, which is at first sight from a distance with Cirrus, when you're looking at our revenues, you may see that customer concentration and that might give you pause. I would draw a major distinction between having revenue -- or having customer concentration where your revenue is really tied up in one socket or one product versus what I think we have now, which is a very diverse portfolio of products with that customer. So yes, as you indicated, that began with a codec win for the iPod. They -- on the back of that, there was a win in the iPhone, which, obviously, providing again the codec for the iPhone had the -- more or less had the effect of strapping rocket boosters to the company given the growth of that particular product. And Cirrus invested very heavily in that and continuing to bring more products and technology to that customer as that product category grew. Principally, beyond codecs, the main area of growth within the phone was the amplifiers. So initially, codecs incorporated amplifiers within them. These mobile devices, everybody wants them louder, whether that's for speakerphone or music playback. And the amount of space you have to play with to put a loud speaker in there is very, very limited. And that means that one way or another, you need to figure out how to move a lot of air to make a phone produce sound that's reasonably loud. And that meant driving more power into the speaker. So the amplifiers came out of the codec became -- first one, boosted amplifier and then stereo-boosted amplifiers. And then on the back of that, there was a transition which took a lot of the core amplifier technology and moved that into driving haptics. So it turns out that sending a waveform to an LRA, the actuator, which gives you that feeling of clicking a button in a device, is very similar to sending a waveform to a loud speaker, at least at my simplistic level, my understanding of that. But that's meant that our boosted amplifiers made ideal haptics drivers, and that gave us another socket. So then you see this picture where you have a codec, 2 boosted amplifiers, a haptics driver. And then at this point in our evolution, we're still even significantly beyond that. The main products that we deliver into, the headsets, the dongle that came with the smartphone, but then also expanding into other device categories because we recognize that one of our key vectors for growth was in leveraging the audio technology and the relationships we had with that customer to get our products and our IP into other categories. So in recent times, that's included our amplifiers showing up in the wireless earbuds, the Pro level wireless earbuds from that customer. And recently, there was a Pro level tablet launch, which went on down, probably represents in some sense, as a poster child for how many devices we can get into our customers' products when our technology lines up with their needs. And that tablet has 11 Cirrus Logic parts on the board.

That's very helpful. And I think the one thing that investors sometimes struggle with is -- so you think about Cirrus Logic and the competitive landscape, and obviously, your biggest competitor would probably be larger analog players like TI or an NXP. Why do you think they haven't really had a similar business model? I mean, I do know that they do have a different business model, but it's almost like they've decided many years ago to not invest as much in that particular customer. And certainly, from an audio perspective, why do you think that's the case? And is it safe to say that the competition right now for Cirrus with that particular customer is extremely limited?

Yes. I have to tell you that it's limited -- it is limited and I always get a slightly kind of superstitious feeling that I shouldn't say that when I say it because it sounds like it's tempting fate. But the truth is across our key sockets and the key areas where we serve that customer, a lot of the competition has progressively fallen away, and we've been able to take business from people who, yes, you would think of as competitors. And I think that's really -- that really reflects a pretty pronounced difference in our attitude to serving that customer. And I don't want to criticize any of our competitors, but I think it's clear that they have a kind of different approach. We tend to look for customers who are going to be very strategic to us, who are going to make themselves a significant investment in the relationship and who are demanding and kind of need or want and have a high desire for us to invest and bring them new IP on a continuous basis. And we kind of -- that's worked very well for Cirrus as a model, it's something we'd like to invest in. It is quite far from kind of a very broad, relatively low-touch model, if you want to serve the wider market. I think there are places where the needs of the actual product themselves just diverge a lot. In particular, with our largest customer, there are very often architectural solutions to problems which don't show up in the broader market. And they take a kind of a unique view. They do what they think is right for the product. And we invest in serving them in that way, even though it may not be the case that whatever we're making translates well to the broader market. So there are cases where -- which we've talked about, where our investment has, in fact, translated well to the wider market. Haptics is a good example of that. So we had obviously, a collaboration for several years with our largest customer, delivering their haptics drivers for them and supporting them with tools and so on around that. But the -- and on the back of that, we're able to start building a lot of momentum in Android on haptics. But there are many other areas where that just hasn't been the case or it's not going to be the case because the particular nature of the technology, the product, is just quite different from what the general market needs. And I suspect that, that kind of puts the brakes on or limits the appetite of some of our competitors to continue investing when our response to that is to step forward and grab the opportunity.

Very good. And John, I promise to move away from your largest customer here in a second. But one last question. So given what you just said and given I leave my perception that some of the bigger analog semi companies, they don't want to, let's say, go all in on that customer or invest significantly with that customer. I mean doesn't that mean that, eventually, Cirrus will capture more and more opportunities? And when we think about this cost of control or even that, that is an example of that just because other suppliers are just not spending either enough time or enough R&D to that particular customer.

I think that certainly creates opportunity for us, where the needs are particularly demanding. If that lines up with a situation where one of our competitors doesn't, for example, have an off-the-shelf solution to that problem, and therefore, it's going to require a lot of novel investment in IP, yes, I think that favors us because our appetite will typically be greater to go and do that. I would say that a lot of it also sits outside the IP space. It has to do with trust in us as a supplier. So we've got a really good track record of working with our largest customer, both in terms of excellent IP, but also just really solid execution and great communication with them, both in the good times and when you hit difficulties on programs. And I think that stuff is very hard to replicate for others. It has to be built over time. So I think if we -- yes, if we look at other mixed-signal sockets where there is a reason for the customer to be looking for something new, then I'm generally very bullish about our opportunities to go and challenge most other competitors to win that.

Right. Right. So John, you came from the Wolfson acquisition a little more than 6 years ago now. And when that acquisition was announced, I think there was this whole idea that this is a way for Cirrus to kind of expand into Android. And you fast forward 6 years, I mean, if anything, the company has maybe even strengthened their position with your largest customer. Not to take away your success in Android. But again, if anything, because of the merger of the 2 companies, you're now probably offering even more things to your largest customer. So how should we think about that especially as it relates to dynamics going forward? Because obviously, you guys are trying to do both. You're trying to penetrate your largest customer with more technologies, but then you're also trying to penetrate Android more meaningfully. So how should investors think about that particular topic going forward?

Yes. I think that's a great question and I -- and yes, and that's a fair observation as well. I think there was a lot of the -- a lot of narrative around the Wolfson acquisition was precisely that. And indeed, that certainly there've been very notable places where we've had success in Android that just wouldn't have been possible for Cirrus Logic without that acquisition. We had a great run with Samsung and smart codecs on the back of that and so on. But another big part of the rationale for the acquisition was also just expansion of R&D resources. The highly skilled, mixed-signal, specialist engineers are not easy to come by. And so in part, it was a question of expanding the raw talent pool that Cirrus had to work with. And that -- the reason I mentioned that is our guiding principle for our investment of R&D resources is really driving growth, and we'll kind of worry about what that represents in customer diversity as a second order consideration because I think the first responsibility for us and to our investors is drive profitable growth. It so happens that the -- there would be many times in Cirrus' history, and recently we've been going through another one, where we have more things in front of us even from our largest customers than we could resource. And so in that case, while it might be -- of course, it's desirable to have greater penetration of Android and so on. I think our focus has been on just looking -- okay, taking the name -- taking the customer names out of it, let's just look at what the biggest opportunities are for us and, of course, making sure that we serve our largest customer as well as we can, given what they represent for us. So there have been times when that has -- the cyclical nature of that has meant that we've had more resources to dedicate to Android and efforts which we think will drive diversification, but there've been -- from a customer perspective. But there've been periods when we're kind of, yes, it kind of feels like it's moving in the opposite direction. But typically, it will be diversifying our product portfolio within that largest customer, to go back to the earlier point. When you step back, maybe zoom out a little bit, though, from that kind of cyclical nature, I think we have, over the past few years, made a lot of progress in some key areas of diversification and growth into Android. I think at times, it's a little masked by growth -- if our largest customer's revenue is growing at the same time, then it can be a little bit harder to see that. But our boosted amplifiers have been shipping now in a number of Android OEMs for a couple of years to the point where we have amplifiers in 8 out of the top 10 smartphone OEMs worldwide by volume. So one of those is, obviously, our largest customer. The other 7 out of those 8 are Android, Android smartphone OEMS. So obviously, the largest of those on the Android side is Samsung based in Korea. But we've been, again, making a lot of -- building a lot of momentum in China with Chinese OEMs as well.

Very good. So moving on or maybe zooming into some of the products. So obviously, this year, there's been a lot of talk about the closed-loop controller. There's also speculation on what it exactly does and so on and so forth. But help us understand a little bit -- and I'm not asking you to give me specifics about this product, but help me understand a little bit how this particular product expands opportunities beyond audio. I don't know, functionalities or does it really open up new doors for other things that you can potentially provide into a smartphone.

Yes. Yes, I think it does. I think its representative of something we can do in terms of diversifying our product offerings. It's us taking expertise into a new area of the system and demonstrating that, that expertise is relevant there, that our customers want to do business with us there, even though it's not audio, and that we can execute. So I want to just back up for a second and just apologize to anybody scratching their heads and trying to figure out what a closed-loop controller is. Basically, the world's divided into 2 buckets of people here. One is people who are just like confused by that term, so what is that? And the other is people who have studied some engineering and kind of know it to be -- yes, there's a million things that fit the class of closed-loop controller. That doesn't really tell you anything at all anyway. The reason we use that expression is, of course, the difficulty in talking about what we're doing for new areas of our customer products, we don't want to be in that position of divulging product details on their behalf. But it reflects the fact that what we're very good at is taking some kind of stimulus from the analog world, converting it to digital, doing some very, very low latency processing on the back of that, and then driving something in response to that. So as it happens, loud speakers are an example of this or amplifiers are an example of this because we're monitoring the temperature of the voice call and the loud speaker the whole time to make sure it doesn't get too hot. So we're constantly monitoring that signal, feeding it back in this loop, back into the amplifier and modulating the amplifier output so that we can drive the speaker hard without damaging it. So that's a pattern, really, which is all about low latency processing of things crossing the analog and digital boundary. And that's really what we've come to understand as being a specialism of Cirrus, where we have stuff that's very close to the boundary. It's very power sensitive. It needs to happen incredibly quickly. So you're not going to farm it out to the applications processor and so on. And it's a loop where you've got some external stimulus and then you're driving something in response to that. So in the back end of this year, as we said, we have a closed-loop controller part that's coming in a new part of the smartphone system for us, new for us. That -- it's non-audio, so that represents content gain in another new area. Now whether that translates to other customers, as I've said, I don't think you can always read across to the general market from what we're doing with our largest customers. But it is very significant for us in making meaningful gains and wins in mixed-signal areas beyond audio. And we've indicated that we anticipate further wins in -- a further win in another new area, most likely at the back of calendar '21 as well, which again would represent diversification of our product portfolio in terms of technologies and in terms into subsystems that we're in within our customers' products, which would be really exciting. When we ship -- one final comment on that. When we ship a V1 into any customer at all, we -- I mean, I tend to think that once we get in, we're really difficult to dislodge because a lot of our business success has been built around building engineering to engineering relationships and understanding the kind of deep problems that our customers' engineering teams are grappling with. So in terms of other potential for future growth, what we will typically look at is when we've landed something in a new subsystem, we will be very active in terms of understanding, okay, what other problems can we solve here, what other features around our part on the board could we integrate to make our customers' lives simpler and how do we grow the value in the ASP of what we're providing there.

Okay. Well, I mean, it's -- not to kind of confuse the listeners even more, but yes, I mean if the boosted amplifier already is a version of a closed-loop controller, maybe that's the first product. And then, obviously, we'll see the upcoming products as well. So one last question because we're running out of time, John. So the -- and I apologize for asking you a financial question because I know this is obviously more of a Thurman question. But has this sort of diversification you think helped the company's gross margin? Because I think historically, investors have always thought that, hey, that 45% gross margin that you did historically is probably as good as it gets. But obviously, you're quite a bit better than that today. So do you think that's a function of the diversification? Or do you think it's more a function of the company's own sort of cost-down initiatives?

I think that's a great question. I mean I personally think nothing helps gross margin like new IP. So I think as we've scaled R&D -- and this is true as we get diversified into new areas, I think our ability to invest in bringing our biggest customers new IP is -- that's the single most important thing in driving gross margin ultimately. That means new products and added features to products. And when a product is fresh and it's gotten new stuff in it, that is what's going to drive -- for us at least, that's what's going to drive -- have the biggest impact on our gross margins. Outside of that, of course, diversification has the added benefit of increased scale. And both internally and with our suppliers, that helps us on the cost side. Yes, that has also contributed in a meaningful way.

Right. That makes sense. Well, with that, John, we've actually run out of time. So I wanted to thank all the participants on today's call. And I also want to thank John and Chelsea for participating in the Stifel 2020 Virtual CSI Conference. So with that, thank you so much, and have a good afternoon. Bye-bye.

Thank you, Tore. Have a good -- great afternoon.