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

Good afternoon, everybody, and thank you once again for joining us here at the Morgan Stanley Global Technology Media and Telecom Conference. Appreciate you attending. Before we start, I just wanted to highlight that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, I'm Mark Edelstone, I'm the Chairman of our Global Semiconductor Investment Banking practice, I've been at the firm for a long time, and I'm really pleased to have John Forsyth with us as the CEO of Cirrus Logic. Actually, the relatively new CEO of Cirrus, great company, and John is going to take it to very good places.

So maybe we could first start, John, with just providing a high-level overview. I think many investors are familiar with the company, but for those that may not be, perhaps you can just share your high-level perspective of the company, its products and overall strategy.

Yes, absolutely, Mark. And first of all, thanks very much for inviting us here to the conference. We're delighted to be here. Okay. So from the top, Cirrus Logic is a mixed-signal semiconductor company, $1.28 billion revenue in fiscal 2020. We're about 1,500 people, give or take, headquartered in Austin, Texas with other development sites in the U.K. and sites around the world. Our vision is to be first choice in signal processing and the kind of signal processing that we're best known for is audio, along the whole audio signal chain. And not to get too deeply into it, but basically, anything from the outside world needs converted from analog into digital, you're going to do some processing around that and then something else happens with it. Conversely going the other direction, you have some kind of signal processing and conversion from digital to analog and then playback of audio. Our focus around audio, in particular, is on very high-performance and low-power signal processing. So we tend to be found in devices like smartphones which are battery centric. So increasingly in wearables, hearables and other similar devices, but ones where customers really appreciate high precision, high performance at a very constrained power budget. So while we're leaders in audio, and we are still growing in audio, our emphasis increasingly recently has shifted towards growing in other mixed-signal domains as well. And so to give examples of that, we provide haptic solutions, which simulate the feel of mechanical controls, which has been a really great innovation for industrial designers who no longer need the space and the failure risk of having mechanical buttons. They're able to have virtual buttons instead and also various bits of feedback as you interact with the device. And increasingly, we're getting into other spaces as well. In the fall of last year, we had our first camera controller device hit the market, and we've also talked about other things we're doing in the power space. So having established the leadership that we've got in audio, we're increasingly bringing that mixed-signal expertise. Again, we're always with the focus on low power into these other spaces, which we believe can meaningfully drive growth for us.

Right. So that's a good overview. And maybe what you could do as well is just -- obviously, you've got a really accomplished team of mixed-signal designers, and you could target them in a lot of different ways. And so, there has been a great one. Haptics really is something new. How do you just think about -- when you think about kind of allocating resources and whatnot, how do you think about how you target your team to go after the various opportunities that are in front of you?

Yes, sure. That's a great question. We've looked at all the various growth avenues and growth opportunities for us. We're very interested, of course, in looking after our core business and continuing to have investment in that, so that our customers who rely on us for leadership in audio remain the leaders with their products. But we also need something broader than that. So, I talk about 3 main vectors for growth. One is continuing to win and find growth in smartphone audio; secondly, driving audio solutions into other categories of devices; and thirdly, expanding into other key fields of mixed-signal with a particular emphasis on smartphones. So, if you think about the first of those, there is growth there for us, but there's not an infinite amount of runway because we're in most of the sockets that you'd really want to be in, in smartphone audio today. So that gets a certain amount of our investment enough for us to stay ahead, but we're probably approaching the top of the S-curve in terms of the major heavy lifting IP investment in smartphone audio. Then we look at how we leverage audio expertise and audio IP into other device categories. And most of that will end up being derivative of our core IP in some way, but it may mean taking it into a new product, a new process or some additional signal processing around that. So, examples there, we've been very excited by the growth of the truly wireless category where we brought noise cancellation and a whole bunch of smart features to those devices and other wearables, watches, fitness devices, tablets and so on. So those get a chunk of our investment as well. But increasingly, our R&D dial has been turned towards the other new areas because they're completely new for us. In some cases, they're greenfields for everybody and therefore, require a lot of invention, a lot of new, both for us and our customers, but are very exciting in terms of growth trajectory and growth opportunities. So, the haptics area we've been investing in for a few years. We have great products in the market and some really interesting stuff in the pipeline and on the road map. And then cameras become at this point, a really substantial chunk of investment for us. And then over the past 1.5 years, really, we probably invested more in the power conversion opportunities than in any other part of our business.

Fantastic. Maybe just to step back for a moment, just because I don't want to lose the sight of you becoming CEO here in January. And you've been with the company for 7 years since you came in 2014 and obviously been pretty significant player on the management team. But -- and if you think back at Cirrus, this is actually a fairly old company. It's gone through a number of changes along the way. It's been pretty consistent strategy under Jason's leadership for a while now. But how should investors think about your perspective on the business and the longer-term opportunities and just kind of overall style versus that of Jason?

It's a great question. I think if you -- when it comes to management style, I mean, Jason and I once had a conversation where we sort of joked that we were both similar enough and different enough to make working together very interesting, which I think is fair. I mean, we certainly -- in terms of management style, I think one thing we share is a belief that there are probably 3 really important foundational elements of success, which really define the fabric of the company, I think, which is hiring the best talent we can find, giving them the environment and the challenges that enable them to do their best sort of work and keeping a really strong focus on the customer. I think those 3 things are very central to have Cirrus succeeds. I appreciate they might sound a little bit motherhood and apple pie, but myself and my executive team literally talk about those 3 things every day. So that, I think, Jason and I are very close on. There's not very much daylight between us. When it comes to perspectives on the business, I'm not sure there's a ton of sense to compare our perspectives because the environment changes so much from one year to the next. But I would say, in terms of my focus and emphasis, I'm very excited by where we can take Cirrus Logic given these opportunities to expand into other new mixed-signal domains. I mean I think Cirrus has shown such strong leadership in audio. And a lot of the core capabilities that have driven that, just the quality of the engineering, the degree of customer focus, the ability to execute on very high-pressure programs with extraordinary ramps to high-volume products, which you have to do without missing a beat and just that side of it is very, very nontrivial. All of those capabilities, I think, are incredibly applicable to other areas of technology. They are in no way bound to audio. So, I'm very excited about bringing those to other areas and growing our business in the camera space and the power space and other areas beyond.

Great. Maybe this is also a good plausible segue as well. Again, you've been around for a long time. But my sense is there's probably misperceptions about the company or things that people don't fully appreciate. So kind of in your view, especially you've had more interaction, I'm sure, as of late, with investors. What's kind of the one thing that you think that investors just either don't understand fully or don't appreciate properly about your company and capabilities?

I think probably -- sometimes when people view us from a distance, I think they see the customer concentration and don't really look behind that or beyond it. And it's a much more nuanced issue, I think, than people give us credit for at times. So I think concentration is one thing when most of your revenue is driven by a single product or socket. But there are 2 things that I think is worth taking the time to understand about Cirrus Logic in relation to customer concentration. The first is that our business with our largest customer is made up at this point of many products, across multiple generations and types of device and parts of the system. So, it's not that there isn't risk. Of course, there's risk, but any one architectural change isn't going to fundamentally change our business. And that product diversity and technological diversity has been growing over time. The second thing that I think is worth understanding is that when we do business with our largest customer, in particular, the planning horizons are long. And that customer makes a very significant investment in the programs that we are investing in. And there really aren't that many customers you can work with that have anything like their track record of getting to market from a concept and an idea, it's really extraordinary. And so while the -- of course, there's always some degree of risk attached to customer concentration, having the line of sight and the confidence in a pipeline of products that we have with a customer that has that kind of track record, I think, is also a huge asset to the business and enables us to plan strategically around R&D and growth and talent acquisition in a way that might not be possible otherwise.

Okay. That's a great segue. So maybe we can say within smartphones, you've already kind of highlighted some of the opportunities that you have in front of you to grow content. But to get there, what are the critical investments that you need to make? And then talk about kind of technology node transitions as well, as a part of that.

Yes, yes, of course. I mean, I may have -- I won't labor this because I may have touched on some of it already. I mean there's -- for our growth, there's evolutionary growth and there's revolutionary growth where we add whole new lines of content. The bulk of growth -- we happen to be going through a phase where we've got some -- a series of meaningful content additions. But in the long run, there's also a good amount of evolutionary growth. And that's really just core investment in our key IP. But periodically, we have fairly significant step changes in something we're doing on the IP side, for example, we're currently making multiyear investment in 22-nanometer IP, which is a pretty aggressive node for mixed-signal devices obviously. But if you're doing a pure digital chip, you want to be on 7 or 5 or whatever, but in the mixed-signal domain, analog doesn't scale in the same way. And the optimal node we want to choose very carefully. We tend to be at the leading edge or close to the leading edge of what people in our mixed-signal space are doing. And we're currently making a really significant investment in 22-nanometer where we have silicon today, which is performing really, really well. We'll see products in the future based off of that. It will enable us to bring a whole additional level of processing to our mixed-signal devices. It will enable us to make devices which have a smaller footprint, which may be incredibly valuable for wearables and discrete wireless IoT devices and so on. And then outside of that, of course, as you would expect, these new areas that I talked about, camera and power conversion and so on, those require the building up of entirely new skill sets or areas of focus within the company. So they've been a significant chunk of our investment recently.

Great. While you were kind of commenting on the manufacturing aspect of things, maybe it's worth lots to talk about how you see lead times these days? And just the industry is going through lots of growing pains with capacity constraints and whatnot. When you think about your business, both the broad business as well as to your kind of core customer out there, any constraints or issues that you're trying there to work through?

It's, for sure, tough. Yes. And there are definitely constraints that we are working through daily. We have a whole team of people who are very stressed at our end, talking to a whole team of very stressed people in OSATs and fabs at the other end as well. But regarding the overall impact on our business, we benefit again from long planning horizons and high confidence in the demand around the biggest products that we're in. So, that gives us a -- we have a long-running dialogue with our key foundry partners, where I think we're in good shape. But the shortage of wafers as a whole does mean that -- and the shortage of capacity more broadly in the industry does mean that when upside emerges, it's very difficult to service it. And it's -- a lot of that, obviously, is a function of demand having been turned off for a period last year. So, you have a spike in demand from the remote working and so on, but also just that period when a lot of people, whether it's in automotive or some of our customers, just kind of battened down the hatches and turned demand off last year. And we lost a lot of ground there. So we're doing our best to service our customers. I think at the big strategic level of customer, we hope we can minimize the impact of that. I have a major concern about the impact on much smaller people who -- if you've been working on an idea or being part of a start-up for 4 or 5 years and you have 1 product, and now you can't get some piece of silicon to make it. I mean, that's very different from diversified large companies. That's still bigger than your whole business. I think that's a very real cost that the industry is incurring right now. But we're certainly doing it best for our customers.

Great. Maybe just last question on smartphones. We obviously had China be a great opportunity, but also pretty challenging given the geopolitical issues that are out there. You guys certainly have a good opportunity with Xiaomi. Maybe just talk about your perspective of how you see the overall China marketplace aligning with your strengths and strategies?

Yes, sure. I mean, mostly, our experience in spite of -- well, the layer of geopolitical complexity, our experience of actually working with our Chinese customers is really pretty straightforward. They just want to make great phones. That's mostly the story. For what it's worth, that has been our experience with Huawei, actually pretty straightforward to work with. That holds true with our other Chinese customers as well. You mentioned Xiaomi, we've seen really significant opportunity and momentum there. I think one of the things that's been driving our business pretty aggressively, certainly increasing our momentum in -- amongst the Chinese OEMs is that audio there is, for sure, seen as a differentiator. The -- and so most of that business, of course, is on the Android side of our product portfolio and it tends to be focused on the boosted amplifiers. But the customers we have in China for our boosted amplifier are real heat seekers. They're taking our leading-edge flagship amplifiers, pushing the boundaries in terms of better and better transducers, large speakers in the devices, higher and higher excursion transducers, we call them, so they move more physically than previous generations of transducers. Those require better drivers, better amplifiers, higher voltage, all the stuff that we deliver. And they've been -- in our Chinese customer base, they're particularly conscious of -- many of them are very conscious of the audio DXOMARK, which is not so widely talked about in Western countries, I think. The DXOMARK for cameras is, but there's a DXOMARK for audio, where the rankings in China, that's a big deal. And if you're launching a product where you care about audio, you want that to go in high. So we're very proud that right now, the leaderboard for DXO is mostly populated with phones with Cirrus Logic audio. And that's certainly something that's been motivating a lot of customer adoption there.

Right. Okay. You talked about a lot of new areas of focus that you can kind of continue to expand into. Maybe just talk about the leverageability of your existing team capabilities, technologies and so on vis-à-vis R&D spend that you need to do to basically drive success in these applications and markets.

I think if I understand the question correctly, I mean, I think on the audio side, we have an amazing library of IP at this point and a lot of capability. There is always new stuff to do. As I said there. One of the things that those higher excursion transducers are pushing is higher voltage output amplifiers, which would be easy if space wasn't an issue and power wasn't an issue. It's much more of a challenge if you have to deliver something in a really tiny package that doesn't kill the battery, it doesn't burn out the system and so on. So, we are making more and more investments in those areas of it. It's not so much on the kind of the qualitative audio playback in the traditional sense, but it's managing the system and the power constraints around audio playback. But we have a lot to leverage there from our existing investments, and that goes beyond smartphones as well. So when we talk -- when I talk about the other areas such as hearables, wearables, tablets, PCs and so on, we've got -- if we don't have the right product, we very likely have the majority of the IP that we need to develop into a product to address those markets. So I think we're very well positioned there. As I said, that means that we're -- that enables us to focus the bulk of the new R&D on the genuinely new categories and new technology areas for us, which I think is a really solid position to be in.

Great. And obviously, as you kind of highlighted, the audio piece is just such a strong part of the company. But as you invest in these new areas and get traction, give us sense when you look out maybe 3 to 5 years from now, what you think split of the business could look like when you break it down into some of these different categories?

We've -- so yes, I do. And we've shared some of that. We have an internal view and I'm super optimistic about it. I think Cirrus is an incredible company. I'd just say we can deliver this capability and set of expertise we have to more markets and more technology areas successfully. What we have said is that we're on a path right now where if you look back to fiscal '19, everything that wasn't audio for us was 10% to 12% of our revenue. I think it was 12% of our revenue. In fiscal '21, that's going to be 19%, around there. So almost 20%. I think that you can join those dots and draw a straight line, and I think that trend is going to continue. So we'll see -- this is without letting our foot off the gas in audio. I think we'll see that continued gradient of growth in all these other spaces beyond audio as well.

Yes. Could you ever envision a time when audio was just half the business?

Yes. Yes. I think so. And I think we can envisage that with audio being larger than it is today.

Yes. Fantastic. Maybe you talk about just the broader kind of competitive environment. And we've been in this world where because of cost complexity continuing to ramp up at pretty rapid rates, scale matters more than ever, we've seen a lot of consolidation happening. When you think about all the things that you guys could do in this massive sort of TAM and SAM in front of you, how do you think M&A sort of plays to your advantage, whether you participate in it or not? You obviously have some of your players out there that have similar capabilities that are going to get defocused for some period of time. How do you think about what's going on out there in the broader landscape relative to the opportunities that creates for you?

Yes, there's a big question. I mean, we have a very healthy balance sheet, as you pointed out, we have strong cash generation and no shortage of things to be doing. So we can identify many more projects and sockets than we can actually resource and execute on. So, you put all those things together, I think that very clearly indicates why our preferred use of cash would be M&A to help us accelerate. And yes, given the degree of consolidation and the shifts in strategic focus that sometimes come with that, we will, for sure, look at other carve-outs, other sections of businesses that are being consolidated, which no longer fit and would be a better addition and would help accelerate some part of our growth. I mean we're very keen to do that. It's there aren't loads and loads of those around. So there aren't -- we haven't done a lot recently, but we're very keen to find opportunities like that to help accelerate the business. Short of that, if we can't find great opportunities to do something like that, then we like buyback as a way of returning cash.

Yes. And is there some kind of metric or algorithm that you work through to try and think about whether you allocate dollars to M&A versus return of capital?

Well, it's -- I think as described, I mean, it's not that we'll do a bit of this and some of that. I mean, I genuinely think the best thing we could do to grow shareholder value would be resource more of the opportunities that we see and expand as rapidly as we can in these new areas where we're very excited about what we're currently bringing to market and see an opportunity for road map. So, the first order of business is find or try to find good M&A that's going to fit and it's going to genuinely accelerate us. But yes, beyond that, if we don't see an immediate opportunity, then we'll look at returning cash through buyback.

Okay. Great. It seems like we're in this incredible environment right now. Economy here in 2021 is going to be quite robust. Obviously, easy compares off of the COVID downturn in 2020, but lots of stimulus, technology demand is off the charts. So it seems like we've got the wind at our back. Things look really good. With that as kind of context, and you sort of as new into the CEO role, having to make a lot of the hard decisions, what are the things that you're worried about, concerned about, focused on to make sure that everything continues to move in the right direction for Cirrus?

Well, I think we've touched on a few of them. The supply chain crunch is, for sure, leaving money on the table. That may not be with our largest customers or the largest programs, but it's -- that's painful, right? That really hurts. And that hurts our customer businesses, which is never good. I think we still have this challenge of the fact that the bulk of our workforce is working remotely. And I think, long run, we've got to navigate that and get back to being close to our customers because that has really driven a lot of the best insights at Cirrus, just having really strong engineering-to-engineering relationships across our customer base and really understanding the problems that they're trying to solve. And then the other one that we've talked about last but was maybe implicit in what I was saying about M&A. I think we've got a great set of opportunities in front of us. But we have a very hard-to-find skill set in Cirrus. I mean, we ourselves are an incredible concentration of mixed-signal engineering expertise. There aren't many of those engineers around. So like whether that's hiring them or acquiring them, just finding the resources to execute on the opportunities that we have in front of us is that major ongoing concern and preoccupation of mind.

Fantastic. And I think that's a perfect way to kind of close out here. I think what Cirrus is delivering and what the semiconductor industry has in front of it is probably the best it's ever been, in my opinion. So the value-add here should continue to increase, and companies like Cirrus should be able to continue to have a very feature-rich future for all of the personal electronics and whatnot that we're going to be consuming out there in the marketplace. So John, thank you so much for joining us. Really appreciate it. Look forward to doing this in-person next time around in San Francisco and -- but I appreciate you spending the time with us here today.

Thanks a lot for having us, Mark. Appreciate it.