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

Good afternoon. I guess, on the West Coast, it's still morning, so good morning to the folks that are joining from out there. This is Matt Ramsay from the semis research team at Cowen. And thank you, everybody, all the investors, for participating in our TMT Conference. And obviously, thank you to all of the management teams that are giving time to meet with both the Cowen folks and our clients. Really, really happy in this session to be joined by John Forsyth, the CEO of Cirrus Logic from, looks like sunny Austin, Texas. And John, really appreciate you and the folks at Cirrus joining our conferences as you guys do every year. And maybe I'll just give you a couple of minutes to set the table for the conversation, and then my team has prepared some questions, and I'm sure we'll get some from investors as well. But thanks, John, for joining us.

Absolutely, Matt. Yes. Thanks very much for the invitation. I'm delighted to join you online. It is relatively sunny here in Austin. I've only lived in Austin for a couple of years, so I wasn't fully aware that May is actually monsoon month. So we've had all kinds of weather lately, but yes, it's beautiful just now. So thanks, everybody, for joining this. I think I've spoken a lot in our earnings calls about the path, I believe, Cirrus is on right now. And just to hit the high points on that, we are clearly, a very successful audio-focused company delivering mixed-signal solutions to some of the most demanding customers in the world in the audio space. But we're on a path, which is one of broadening the range of products we offer and the domains that we operate in, beyond audio to other areas of mixed-signal expertise, where we're able to bring our experience of solving really difficult signal-processing problems to other parts of the system, whether that's haptics or closed-loop controllers for cameras or power related, as I'm sure we'll get into. But that's become a really exciting vector for our business. It represents a lot of the additional growth that we see ahead of us this year and beyond. And it's an incredibly exciting time to be a part of Cirrus and serving the customers we're serving, where so many of our conversations are around taking our business in those new directions and expanding the way we serve our customers.

No. Yes. Thanks for that, John. I think one of the things I wanted to talk to you about specifically, as you mentioned, and the company has actually segmented out now revenue by audio products and advanced mixed-signal products and other domains, which I think is a fairly instructive signal on where you guys see the growth coming from. And you and I have had conversations in the past about working with your largest customer with others being -- having the reputation for technology leadership, delivering on time to some pretty severe hockey stick ramp seasonally in products that you have to produce and then just having that reputation. And I wonder, as you're thinking about these new domains in mixed-signal, is this a Cirrus strategy, team getting in a room and saying, hey, you know what, we're pretty darn good at these things. Maybe we should go pitch so that we can do these things to the customer? Or is it the customers looking and saying, you know what, we had these problems over here, the Cirrus guys were really good at solving those problems. Maybe we should pull them into problem XYZ that we have over here? Or is it some combination?

It's a combination of those. So I think you are dead as a company if you're not taking new innovations and new ideas to your customers. So we invest ourselves in a lot of new technology areas that we believe are addressing problems that we -- that our customers would like to solve, and we want to maintain a really healthy process and putting those in front of them. Now we have been steadily expanding the range of those so that they go beyond the audio space in really exciting ways. But at the same time, what happens as a consequence of that is you get engaged with a wide variety of people within your customer base and they start talking to you about, well, okay, that thing is interesting because I'm trying to solve this problem. And it's almost never what you actually thought the problem was, but the fact that you're then having that dialogue. And you have some technology, some shared view of the technology space that might address that problem is a great place to be. And one of our beliefs in the way we grow our business and the way we maintain a really, really strong customer focus at Cirrus Logic is cultivating really strong engineer-to-engineer relationships. We believe that's where most of the value is really created and where you can really zero in on what it is your customer is trying to do with that product. So we've seen it go both ways where innovations, which are really being grown in inside of Cirrus and then put on the table in our customers' labs have been really well received and that something comes out of that. But it's also increasingly the case, I would say, where we have this reputation within some of our largest customers for being very customer focused, very driven by reliable execution on some -- on hard problems, which is -- that's attractive. Most of the engineering teams we engage with have a brilliant idea for what it is they want to do. They just need the partners and the engineering resources who can -- who can show up and execute on that. So we're extremely protective of that reputation, as you would imagine. An enormous amount of care goes into everything we do with our largest customers because we -- that reputation takes a decade plus to build and could be lost very rapidly. So we just try not to get overextended, get in front of as broader range of teams as we can and make Cirrus committed proposals to solve their problems, where we believe we can do that and do it without missing a beat or causing them to miss bit.

No, I mean it's very evident that -- and the closed-loop controller that's now shipping in pretty material revenue is the first step along that path. So some of the topics that we prepared to dig into with you today, you can hopefully help set the context for, where we are on this journey of growing the advanced mixed-signal business. In the last year or so, you started shipping the closed-loop controller, but at the same time, there was -- one of your large customers had taken a headset out of the box in the products that they were shipping and that masked some of the growth. If you do you have any context of like where we are among those 2 vectors that are kind of pushing and pulling against each other and what revenue growth you still expect from that closed-loop controller product, that would be great.

Right. Well, on the closed-loop controller itself, I mean, we still think there's meaningful revenue growth to come there. You're right, some of that momentum was masked by kind of legacy audio content disappearing, but there's still a lot that can be done there. Some of that continued growth is going to come on the back of the existing products. So what we would expect, obviously, as we get into a second cycle of our customers' products that incorporate that device. That means our device will just be across a broader range of the products that they sell, which is great for our revenue growth. But additionally, the functionality that our closed-loop controller enables is -- and I always put the caveat to this, I -- not only do I never want to disclose anything about our customers' products. I'm on very safe ground because I do not know what our customers will do with their products in relation to this functionality. But it would be unsurprising to see that cascade a waterfall into the premium features that we're enabling with closed-loop controller to see that cascade into more and more of the models and the SKUs. And so -- and therefore, the blended attach rate of that component to increase in future product cycles, which again is very exciting from a revenue point of view. But then, of course, this is -- like this is a first step. This is -- we want this product in a new area for us. So as you would expect, we, right now, in Cirrus, have engineering teams working on multiple future iterations of products in that space. Both to address future feature needs and then also just to fill out the portfolio and expand the reach of that kind of product as broadly as we can.

Is there an opportunity -- I mean we've had over the last, I don't know, 12, 18 months, this do-si-do around vocabulary around the closed-loop controllers. I'm just trying to -- is there -- do you see applications for your Android customers for similar types of products? Is there -- how would you gauge the level of interest? And that's maybe a delicate situation to try to, as you say, you don't know -- 100% know what the largest customer is doing with the product and what the road map is and that as you try to take that and apply that product line to a broader set of Android-based customers, is there a sufficient business there to make it worthwhile?

That's not a primary focus for us right now, no pun intended. That's -- and that's as much as anything, a function of our belief that with limited engineering resources, we just -- we have the simplest prioritization algorithm imaginable, prioritize profitable growth. And if that happens to be at times increasing customer concentration, then it's still the most profitable growth path. So that's where we'll focus our resources. It may be the case over time, when we work very closely with a customer on a custom chip, though, I mean you really want to be respectful and classy about that and not immediately turn around and be seen selling it to a whole bunch of other people. So there's also a lot of judgment about the relationship and that goes into that thinking as well. But fortunately, I mean, that's actually not -- the biggest consideration is just, well, if we've got 1 or 2 engineering teams to put on future iterations of that, let's put them on the things which are going to deliver the biggest and highest probability of the biggest growth, revenue-wise, and that's a fairly straightforward decision for us.

I guess the next phase of this content expansion and product expansion into mix is around the power IC domain. And over the last few quarters, a few bits of information have come out, and you guys have disclosed the content around the dollar in ASP for that product and have had made some commentary around the tax rates for that product into your customers' portfolio. You could just kind of recap where we are on that and your, I guess, confidence and visibility of that delivering sort of the next leg of growth for the company.

Right. Yes. I mean -- and I think this is something where our picture of how that's going and how that's going to go through the next few quarters is kind of clarifying all the time. So I can probably color in a little more there. Yes. Just broadly, the power conversion IC that we talked about is a hugely exciting product for us in a whole number of ways. I mean, again, it's a new frontier for us in the high-performance mixed-signal space. Secondly, it's truly exciting functionally because it's not replacing anything. It's a brand new chip on the board, a brand new piece in the system that we and our customers believe is just going to be really valuable. And it's a very significant ASP increase for us. So you mentioned, as I said, like think of it as around $1 is -- and that's meaningfully more than we saw with the closed-loop controller adder, for example. I think as we've been getting into -- more into the ramp around that this year, it's given us more confidence about the attach rate -- the average attach rate. And I would, again, emphasize, not only -- I don't know, I mean, who knows exactly how it gets configured in our customers' devices or where in the portfolio it sits. What I would say is that broadly, what we are seeing in terms of our ramp would be consistent with a one-to-one attach rate on new devices. So if you put that together with the ASP value, we think that's an incredible tailwind for us to have from a revenue perspective through the rest of this fiscal year. And then again, keeping in mind that we have a kind of second tailwind going into future cycles when you've got new content that comes in and then as is in multiple generations of devices, that continues to give you a revenue bump from that perspective.

Well, that's very clear. And it's good to see as we would progress closer to the behind-the-scenes ramp that those comments that you make are pretty consistent with what you've communicated in the past. If we stay on this advanced mixed-signal growth path from closed-loop to the power IC, you guys haven't announced anything further than that, but I would imagine there are additional product developments and opportunities in that vein that are going on to maybe exist different parts of the system, different product opportunities. And if you could just step back and characterize just the number of things that you feel like you have in flight, do you feel like this is -- I mean, is this 2 opportunities out of 3? Is this 2 out of 20? Just how are you thinking about the growth and the product development cadence that you're making in this advanced mixed-signal section of the business now?

I think rather than kind of be numerical about how many opportunities we chase because that's -- I mean, there's a lot of gray area in that. There's plenty of things you investigate. There's plenty of things you put on the table with your customers, and they mentioned to you. And then some of them, you're a better fit; for another, you have to go a certain way down the track to go through that prioritization. I would say stepping back, though, I see the high-performance mixed-signal space as being our biggest growth engine as a whole for the company over the next few years. And that was the reason why we changed the way we break out our revenue in the last quarter, where we wanted our revenue buckets to be reflective, not just where we are now, but where we're going. Where audio, we believe, we can continue to grow that. But at the same time, just realistically, we are probably in most of the audio sockets or at least a very high proportion of them, where what we do really well will be sufficiently valued. So really high performance, great power efficiency and so on. So there's some opportunity to continue growing there. But really, the bulk of the growth or at least the bulk of the opportunity, we believe, is in the high-performance mixed-signal space. And that's something where, I think, over time, we can for sure see a path, without taking anything away from audio, continuing to progress that side of our business. But we can, for sure, see a path where the high-performance mixed-signal becomes half our business by revenue.

No, that's helpful. I mean, it's clearly not just this year and next that we're talking about. It's multiple years into the future. I think that was the point that I wanted to make sure got underscored.

Yes. Thanks. Yes, this is very much an important part of how I see the company's evolution and growth for the long term. So audio is clearly like that's been home turf. Really, our vision has always been to be the first choice for signal processing. So audio happened to be the domain where we were able to apply that expertise most profitably for the past decade or so. But we have grown a lot in audio and phones. We have expanded that beyond phones to adjacent categories where they are typically power and performance sensitive. There is only so much headroom for further growth there. The high-performance mixed-signal areas like power and the closed-loop control, we see a really good immediate opportunity to grow in those areas and phones because there's obvious adjacencies there. We're already engaged with those customers on those programs. It's a great place for us to expand our footprint. But those technology areas will also take us into other markets over time. And we just see -- when you start down a road of new things like the power conversion product that we're ramping. I think the team that did -- led the design work on that really got almost no downtime between completing the design work and the conversations about V2 and in fact, the design work on IP for V2, beginning with our customer because I think both ourselves and our customers there see a really, really rich path of innovation and value growth that we're excited about.

Nice. No, it's -- I just wanted to make sure that we talk about the longer-term opportunities in that space. It is interesting though that audio has, as you mentioned, been the application that built the company into what it is today. There's a few things that I wanted to ask about. One is there's a road map to take many of your main audio products down towards the 22-nanometer node. And if you could give us a little bit of an update on that program and your visibility to -- I would imagine, given the investment levels being made, there's a pretty high visibility to revenue in those programs. Where are we today on the 22 development?