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

Good afternoon, and welcome, everyone, to the Future of Technology Series. This is John Vinh, senior semis analyst at KeyBanc Capital Markets. We are pleased to have Thurman Case, CFO; and Carl Alberty, VP of Mixed-Signal Products from Cirrus Logic to join us. Format of this session will be a Q&A fireside chat. If you have any questions, feel free to submit them online at the bottom of your webpage.

So Carl, obviously, starting off with kind of Shareholder Letter, I think what was really interesting in the last quarter's earnings call, you had disclosed that you're taking out a power conversion and control IC. I think you clarified that this is not a PMIC, per say. Wondering if you could just provide some clarification on how it's different or why it's not a PMIC? And the power management space, as you know, is obviously a very competitive space, and you guys seem like kind of an early entrants here. What gives you kind of the confidence and visibility that you're going to be able to compete and grow your share in this area?

Sure. John, thanks for hosting us today. Regarding the power domain, we're certainly not trying to be a new entrant in a very crowded kind of space when you just maybe talk about PMICs. But if you think about the nature of our product development and our product lines and IP portfolio, really rooted in our amplifier products for the last almost decade. We have been developing and kind of working our way towards having a pretty broad portfolio of power and battery related IP that I think has led us to this point. And I think we're continuing to evolve our identity at Cirrus Logic from, not just an audio and voice supplier, but to a mixed-signal supplier who can be trusted and relied upon. And I think when you look at this new opportunity we're pursuing, it's obviously still pretty early days, so we don't want to get too far ahead of ourselves. But I think it's been this kind of gradual buildup of IP over the course of the last decade. And as we built these high-power, high-voltage boosted amplifiers and more recently the haptic drivers, we've had to learn about all the core kind of power-related IP and how it interfaces and how it kind of integrates into the rest of the system. And with 2 speaker amps pulling a lot of current to deliver high SPL and loud audio for consumers, that's also forced us to get really intelligent about how to be nice to the battery and just how to deal with the overall power and kind of system demands for all the different use cases, obviously, when our products are pretty active. So I think that's kind of geared us up to have a portfolio of IP and technology that the customer finds relevant. And much like we've seen in some of our other product categories, this blending of high-voltage and high-performance analog with ultra-low power 55 nanometer processing capability allows us to be really uniquely positioned to deliver monolithic silicon that helps consolidate port space, improve efficiency and give a customer a really, really cool platform to kind of build around in that new power domain. So we're excited to kind of begin venturing into another kind of technology and market adjacency. But we've been working on it slowly but surely over the last 8 to 10 years.

Got it. Thanks for clarifying that. When I look at your SAM chart, out of the $30 billion plus mixed-signal opportunity, it looks like 9% of that is kind of related to kind of mixed-signal analog. I'm wondering just consistent with how you're deploying engineering resources internally. Are you starting to deploy incremental resources kind of consistent with how your extended TAM is playing out? And then Carl, maybe talk about as you've had to kind of build out a team of mixed-signal analog designers here, have you had to recruit a different set of skill sets from kind of your audio engineers in the past? And from a resourcing perspective, has it been hard to find kind of the right fit and talent there.

Yes. No, it's a good question, John. I mean I think the SAM charts can sometimes be a little bit tricky to really understand just given sometimes we can't be super clear about underlying details in terms of what some of the things mean. And obviously, we've experienced that with closed-loop controller. In terms of the new content, we're ramping this year. But generally speaking, we're seeing -- and we're deploying an increased amount of R&D dollars in our longer-term SAM opportunities. So in addition to the more recent haptics investments, we've got the closed-loop controller and that road map, which is pretty robust. And then more recently, the power kind of related domain. So we're certainly seeing just growing R&D dollars in those new segments, not to say that we're decreasing the kind of investments in our core audio and voice business. I mean, frankly speaking, the MEMS team was a pool of resources that we were able to plug into some of these new adjacent opportunities for growth. And we feel good that, that's going to return more predictable kind of growth opportunity for us on a faster time scale. So all in all, yes, we're seeing a shift in kind of broadening of the investment of R&D dollars. At its core in terms of hiring, we're not looking for radically new skill sets. I mean, like I mentioned, we've been slowly but surely building up that capability and skill set internally with the amplifiers and haptic drivers. So we're continuing to hire kind of power-centric and mixed-signal and power-centric people, but that's been the case in our amps and haptic driver lines for quite some time. Hiring is still as challenging as ever. I mean, we do seek out pretty specific skill sets. And that signal processing pool of people is not exactly [indiscernible]. But even in the face of a pandemic, I mean we've actually done really well in terms of acquiring new talent, which I think is a testament to the culture of the company, and just adapting in terms of how we assess cultural fit and technology and engineering fit in a virtual world. But all in all, we've been pretty pleased with our progress in 2020 in that regard.

Great. Maybe related to that, if I look back at Cirrus Logic classic, you guys were heavily focused on developing custom chips. Then when you acquired Wolfson, I think it gave you the ability and resources to develop, I think you guys are using the term, catalog parts. I don't know if that's the best word, but I'm just wondering now that, obviously, you've been making some good progress on the Android side, if you can compare just the R&D resources needed to support custom versus catalog on the mixed-signal front? Are most of your resources right now still focused on custom chip development?

I mean we certainly see a big portion of our R&D budget going towards custom or semi-custom products. I mean, I certainly wouldn't use the phrase catalog or kind of broad market, I wouldn't use it. I wouldn't read too much into that. I mean, at the end of the day, the Android market is pretty concentrated as well. In terms of the number of customers that we align with on the same perspective and then there's not too many handset makers that are really aligned with our fit. So -- but I mean, to be fair, we also do kind of semi-custom or really collaborative product developments in the Android space as well. But again, with kind of big, meaningful growth opportunities emerging in the closed-loop controller domain and then more recently kind of this power controller conversion domain, on top of the audio, which is, again, still full of problems that are worth solving, and we continue to invest in new platforms and new process now technologies for audio. So we're certainly seeing growth in custom or semi-custom product developments. And again, the term broad market or merchant market, whatever you want to call it, can be a bit misleading because we're not targeting a broad distribution-centric kind of business where we're developing tons of products to service tons of different customers. I mean most of the things we're targeting are pretty focused where few customers matter. And that works really well with our overall model.

Got it. That makes sense. Obviously, wouldn't be able to talk to you guys without talking about the closed-loop controlled. I think you guys, on your most recent earnings call, reiterated that closed-loop controller looks like it's on track. I know you're limited in terms of what you can say about it, but just wondering if you could maybe clarify, is this -- I think a lot of people are wondering how did this opportunity emerge. Is this just something where this is a new function or a socket that emerged, that you're building a solution for? Or is this a situation where you were able to figure out how to do something more efficiently and less costly? And maybe on a go-forward basis, is there an opportunity for the closed-loop controller, mostly going to be around custom opportunities? Or is there also more of a semi-custom or catalog opportunity as well, more broadly within the mobile space?

Yes, sure. So I mean, I'd say -- I mean, obviously can't talk about too much specifically. But I'd say, again, I don't want to call it classic Cirrus, but it's this intersection of having a broad portfolio of IP, really good process node choices that allow us to blend the high-performance and/or analog circuit design with really embedded low power kind of processing capability on a single die. And so I think that ultimately was what positioned us super well to be the chosen supplier to work with -- on this new socket that we, again, are on track in terms of ramping that this year. So which, again, is -- it's an interesting thing. I mean, we've obviously got a long and storied history with our major customers. And yes, we're still introducing ourselves and getting to know new people and new teams. And obviously, as we move into adjacent technology areas, that's not a surprise. But it's like your first engagement is often kind of getting to know each other, how do you work together. And clearly, the value proposition in our product really kind of shines through in terms of the ability to consolidate what could be implemented in multiple chips into a single chip with integrated processing for allowing more to be done on chip, on device, but not compromising any of the analog and mixed-signal capability you'd find elsewhere. So that all comes together. And then when the experience with a new team or with us as a new kind of supplier to that team goes well, then it opens up a bunch of broader discussions around the road map and other kind of things that could be a good fit for what we have in our portfolio and also gives us an opportunity to kind of shoot ahead a little bit and start contemplating what new technologies can kind of make the road map even more robust. So it's exciting.

Great. Maybe you want to talk a little bit about truly wireless audio. Can you just give us an update on kind of the progress you're making within the truly wireless headset market? I know you've got a lot of early traction with your class D amps there. I think you've talked about ANC coming to market next year, which is encouraging. But you guys have had ANC for quite some time now. And it seems to me that it's just taken a lot longer than I would have expected for kind of ANC to get to market. I know kind of the requirements and kind of what you're targeting in the media. It's been a little bit of a moving target. But when I think about your kind of leading position in audio and ANC and in battery efficiency, I would have thought that kind of ANC and truly wireless would have been kind of a prime market for you guys to have a pretty substantial stake in by now?

Yes. That's certainly -- the ANC stuff didn't materialize at the pace or magnitude that we had hoped. I mean, honestly, on some level, I think we're a little bit ahead of our time, developing really world-class ANC technology. I mean it was rooted in handset, and then we evolved that into several different products. For headset applications, it's just the architecture and design choices we made for those products were for wired solutions, where you've got both channels in a single piece of silicon. And clearly, the wired market, especially the wired in box accessory market just didn't materialize and wasn't that kind of greenfield innovation space that we thought it could be. I mean, frankly, Apple then lost a really world-class product with the original AirPods. And I think that just further drove that line in the sand in terms of where customers are going to really invest time. And clearly, TWS has been a hugely and rapidly growing market with tons innovation. And frankly, tons of problems that are right up our alley, just given really, really tiny batteries, really, really space constraints, kind of form factors. So our products that we've built for ANC headsets, given they were kind of structured around wired interfaces, weren't really architectured for a TWS form factor. Anyway, so flash the story forward, and we've obviously -- we've got some exciting design wins in that market space with some of the leading customers, and we're excited to play a part in those designs. We do have a new product in the hands of customers now that is kind of in the early stages of new product development that does incorporate our ANC technology and that product is designed specifically around the TWS form factor. And in addition to that, you're starting to see a whole bunch of new just voice and hearing-related features in some of these TWS headsets. And so this new product kind of builds on the momentum of the product that's shipping today. So overall, we're excited about bringing some new products to market and finally seeing a couple of key customers engage and start doing product development around ANC in that form factor. But yes, we've been tilting at it for quite some time. But we didn't predict that the whole market really shift to be TWS-centric.

Got it. Maybe we can talk about Android a little bit. Maybe a little bit of a surprise that we saw kind of a 7% decline in your Android business. I want get to a few pages. Help us understand how much of this was really more driven by kind of end customer demand related versus potential kind of share shifts. And just on the other side of this, is there a path or tempering or you think you can get back to kind of the run rate that you saw in the last fiscal year? Where I think you're remaining roughly in that $30 million to $40 million a quarter range?

Yes. I mean, we've certainly -- the headwinds that we've seen most recently kind of reported on in that segment. There's certainly a combination of a few different factors. Obviously, the environment we're in now with COVID-19 has certainly hindered a lot of just fundamental demand just based on retail being closed down for so long. And -- so that -- I mean, that was obviously a factor, but we've also been up against some just evolution and product architecture. I mean clearly, we've been seeing the headphone jacks go away from products for quite some time. We've seen in the Android ecosystem, a lot of customers transitioning from analog mics to D mics. And we've got customers that have their own assets and their own chipsets. And some of those architectures evolve over time. And that certainly has created a headwind in terms of the codec SAM in the Android space. So that, combined with the COVID-19 kind of demand disruption for some period of time, certainly didn't help. And then there's a factor of unpredictable trade issues going on with some of the customers in China, which has made things massively unpredictable. But as we look forward, I think the codec headwinds are behind us for the most part. And our story in Android really is, as it has been for quite some time, which is about proliferation of the audio amplifiers and proliferation of stereo devices, penetrating the mid-tier. And then more recently, the haptics technology -- the haptics technology fundamentally is -- I think the innovation in that space is really rooted in virtual button and mechanical button replacement. That's still really early days, but represents a good opportunity for us in terms of, not just the haptic kind of tactile feedback piece of it, but also the input for sensing side of that equation. So we've got a couple of different investments in that technology, which we're excited about as we move forward.

Got it. Maybe just wanted to follow-up this and maybe ask just more of a kind of a strategic question longer-term in terms of how you guys are focusing your resources. If I go back, originally, you had a pretty significant customer concentration. Your big customer -- you obviously have spent a lot of time and resources in terms of diversifying your exposure away from that big customer, and maybe acquisition of Wolfson gave a focus on [indiscernible]. I think you're talking about having 7 out of the top 10 programs as customers in your -- and then obviously, you're seeing a little bit of volatility year for a number of different reasons, whereas kind of it sounds like the momentum at your largest customer is as good and as is strong as it's ever been. And if anything, it's been compared to Android, seemingly a much more stable, longer-term growth business for you. So does this kind of make you kind of rethink how much time you are investing in IOS versus Android going forward?

Yes. I mean, that's -- I mean, it's always a factor. I mean, obviously, what we try to do is, we try to align the resource deployment and R&D on the best opportunities. In terms of driving top line growth, ROI and ultimately providing value to shareholders, but ultimately to customers first. So it's a constant balancing act. I mean, clearly, we do have a pretty intense focus on broadening out our business and our technology reach outside of our biggest customer. But none of that focus is intended to derail or otherwise compromise the relationship we have with our biggest customer and servicing the needs that provide a lot of mutual benefit to both of us in terms of kind of these newer expansion areas. And again, just taking advantage of this broad IP portfolio we have and the process nodes we've got in place. So yes, it's definitely a balancing act. But at the end of the day, we're focused on delivering -- or deploying our resources on the best possible projects and product categories that drive that long-term value.

Okay. Thurman, maybe turning to gross margins. Historically, in the smartphone business, as you know, there's been a lot of pricing pressure there, right? It's constant, it's nothing new that you haven't dealt with before. But over the last several years, you've been able to firmly improve your gross margins pretty consistently sustain them a few hundred basis points above 50% despite the industry becoming more mature here. Can you discuss kind of the puts and takes, what's driven that margin expansion and kind of it sounds like your confidence in the sustainability going forward at these levels?

Well, analog mixed-signal technology is a very difficult technology to develop, and we're very good at it. We -- our product life cycles are long, 2 to 4 years, whether they be custom or even general market part. And so really, the R&D that we spend is on our nickel. But we have got a really great track record of execution. And we also have a really great track record of customer support. And all of those things are valued by our customers plus the innovation that we provide helps differentiate their products. So as we establish those relationships and are being able to expand our products, it's recognized that to get the kind of service that you get from us and the performance that you get from us, we really have to be, for what it cost us, to be above that 50%. And then there are lots of situations where we can save money for the customers by pulling in functionality and taking other functionality from the board and actually decreasing their overall costs. So those are all things on the customer side that has helped us manage and sustain our margins at a good level. And then when you add in that we have a really good supply chain, they're able to -- we, like everybody, have natural ASP erosion on a year-to-year basis. And so we're dependent on our supply chain to be able to manage that and maintain our margins. They're very experienced at that. The fabless business model certainly helps with that. So all of those factors has really helped us not only get to that point, but sustain it.

Great. And then maybe turning to OpEx. The expenses have come down quite a bit, which is to be expected in this sort of environment, right? There's nobody really traveling at this point. And I'm just wondering if we think about maybe the things normalizing, I don't know, over the next 6 to 9 months, how do we think about kind of the operating expense model coming back? What are the different puts and takes of the expenses that could come back versus some of the expenses, like, I would imagine a lot of your travel budget probably not going to come back into the model for quite some time?

Well, first of all, as we moved from our FY '20 to FY '21, you have to remember that we exited the MEMS business. And although we reallocated a lot of those R&D resources, we achieved some cost reductions on that. And those now will see a full year of that during this year. So that is part of it. And we also reallocated resources from some remote locations, which also does that. So once you get a full year, you're starting with a lower OpEx base. And in the first quarter, we saw a step down. That's where we saw the virus type of effects, which was, you saw a significant reduction in travel, in medical and even in some facilities costs. And so this quarter, our guide was up quite a bit. We saw a big drop from Q4 to Q1, and now we've seen an increase -- the good news on that is a lot of that is driven by tape-outs and other investments and product development. And so just in general, looking though, through the year, travel will likely be low for the time being. Medical, we'll see. That could possibly recover towards the end of the year or get a little larger again, but that's really associated when people can get back to a more normal situation there. So if you look at our run rate at the end of FY '20, the way to look at our expenses is, we expect expenses to be slightly down for the year. But in that light, R&D would be flat or slightly up for the year, and you'll see most of that in SG&A. And a good piece of that is associated with the pandemic.

Great. And then just last topic. I wanted to just touch base on M&A. It's been a while since you made a major acquisition. I know you've done some tuck-ins along the way. Wolfson looks like it was probably roughly 6 years ago. You are starting to see M&A start to eat up a little bit here. Just wondering if you could update us on your thoughts on what your appetite is currently and what your current framework for M&A is?

Well, our thoughts really haven't changed. We've said for a while now that M&A is a piece of our overall structure or focus. And we're not going to go out and do any M&A just purely for scale or something like that. It needs to be strategically viable, culturally viable and all of those things. So we'll continue to do that. Valuations over the last year or so have been very high. There's a lot of different things for a company our size. So we'll continue to reach out. We have people who are working on that. And if we find the right situation, we're certainly not opposed or afraid of doing M&A, and we would welcome that. We also -- there's a lot of larger companies out there that are now beginning to, from a strategic level of divest certain types of business units and so forth that may be more consumer-oriented, or mobile-oriented, or in areas that we actually might be interested in. That could provide us more opportunities to look at some expansion through M&A, and then we'll continue to do the small tuck-ins. So not a lot has changed, but we will -- we're focused on doing the right thing. After that, we are investing in R&D and other things like that on a regular basis. And share purchases are still a piece of our strategy in terms of a way to return value to shareholders. And the way we do that is we look at it on a quarterly basis. We didn't do a buyback last quarter, a lot of uncertainty, a lot of things going on and we passed for the quarter, but we'll continue to evaluate that quarterly. And if we feel that's the best way to return value, then we'll execute on that.

Great. Well, it looks like that's all we have time for. Thank you very much, Thurman. Thank you very much, Carl. Good to connect with you guys.

Thanks for having us.

Thanks, John. Appreciate the time. Take care.