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

Great. Good afternoon, everyone. Thanks for joining us. I'm Vivek Arya. I cover BFS securities and I'm really delighted to have Carl Alberty, who is the Vice President of Cirrus Logic, Mixed-Signal Products Group; and Thurman Case, the CFO of Cirrus Logic, joining us this afternoon to share their insights about the industry and Cirrus. So warm welcome to you both. And maybe let me write kind of throw you call to perhaps set the stage, give us a state of the union, right, what are the top 2 or 3 things that you're more excited about right now from a demand perspective and what you're watching out in terms of headwinds.

Sure, and good afternoon, Vivek. Thanks for hosting us. It's been a pleasure to participate in the conference thus far. So appreciate the time. And yes, so for those not familiar with Cirrus Logic, we are a company focused on audio and voice related signal processing components when you look in the rearview, have built up a strong business, supporting the biggest customers in the world, primarily in mobile devices. With a strong focus on execution and delivery of low power, small footprint related signal processing components. And as we look to the future and kind of chart out the next few chapters of the Cirrus Logic the Cirrus Logic history book. We're super excited about some of the adjacent market moves we've been making. So recently, in the haptic space an extension of our boosted amplifier business has allowed us to move into adjacent spaces like haptics and more recently, our closed-loop controller product, which ramped last fall, was another expansion into a market we've not participated in. And as we get ready to move into the back half of this year, we're certainly excited about our forthcoming power conversion and control products that we are expecting to deliver opportunities of revenue growth through the balance of this year and into next year. So we certainly are rather excited about our prospects for driving long-term growth opportunities with these new adjacent expansions of technology, opening up a bigger SAM and that's all happening in the midst of unprecedented industry conditions as it relates to coming out of the global pandemic from last year and demand that is continuing to push the envelope for what the kind of global supply chains get handled. So that definitely occupies a good bit of our time just trying to balance the supply of the demand of our customer base.

Excellent. Thank you, Carl, for that introduction. When I think of Cirrus, it's always a company with, right, a lot of innovative applications in the handset space and you're gradually diversifying your customer base. But where I think investors often -- what investors often want to understand as how does Cirrus identify the next area of content expansion, right? So you mentioned so many interesting areas, haptics closed-loop controllers, power management, trying to figure out content when it comes to other parts of the handset on the RF side or the modem side, it seems to be intuitively easier. But when we look at the kinds of areas that you are going after, right, sometimes right, they're harder to kind of visualize and project in the future. So maybe take a step back, give us a sense of what is the core I for Cirrus logic? And what is the process of identifying the next area of content expansion for you?

Sure. So I mean, clearly, we have spent the last 10 to 15 years, establishing relationship with our key customers of really -- establishing an identity really that's really centered on flawless execution. And obviously, we've built the company largely on the back of audio and voice related technologies over the years, being right on the boundary between the analog and the digital domain and trying to trying to thread that needle to -- on a continuous basis, improve performance and lower power and migrate. As it makes sense to process nodes that allow us to have digital functionality incorporated without compromising analog performance. And there's been a strong growth of demand for audio and voice related technologies that has served us really well. And a number of years ago, as we look at the portfolio of products and technologies we have, and look at it holistically from a system perspective and start identifying like where are other mixed-signal and signal processing related challenges that this combination of technology and IP around data conversion, interfaces, amplification, front end sensing components. So where do these mixed-signal technologies have the most relevance as it pertains to solving a customer's problem and having as much digital in an analog world as possible, and that has materialized through system-level analysis and a deep kind of connection or a partnership with our key customers to be able to identify, here's where these -- this broad set of IP and technology could be most relevant and that gets packaged up typically in advanced mixed-signal process technology that allows us to really optimize component sizing, total system size without compromising anything that customers have come to expect from us in terms of audio performance, capability, power consumption. And now we can layer on top of that new non-audio technologies that still rely on really good precision mixed-signal processing.

Got it. So when I look at call that the content that Cirrus has, right, on either side of mid-single digits or so, right, depending on the particular SKU that the customer has. Is there a way to envision what is your total addressable market, right, within a handset? Is it $10, $15, right? Just conceptually, how do you think about what is the level of penetration? And I understand that, look, every year, smartphone technology changes, right? It's not constant, where you can say, this is the size of the pie is fixed, right? It keeps on evolving. But is there a bigger pie that you have identified that gives you a sense for whether you're making progress, right, in terms of gaining more share of that.

Sure. Well, I mean, certainly, we've seen continued growth in our audio and voice related technology space. And with these new adjacent technology areas we've been discussing. So haptic drivers and sensing, the closed-loop control as well as the more recent power conversion and control. I mean these are adding significant SAM dollars into the total pie that Cirrus can go and go focus on. And so longer term, we don't necessarily put a ceiling on the number of dollars we might target. But we're super excited about just the upside and new content expansion opportunities we've got with things like the closed-loop controller and the new power conversion and control that clearly makes us less dependent on unit growth and can focus on expanding the content and the footprint with technologies that could be rather relevant to any battery power kind of consumer device. And so our strategy, clearly, handsets will not grow forever as we've been experiencing. And so our job is to take that technology, maximize our footprint, and we see good amount of headroom in terms of our opportunities to kind of continue expanding content, growing attach rates and proliferating some of these new adjacent technologies in the handset, but also longer term, a vision for how do we take those core technologies and this expanded IP portfolio and move into other mobile and consumer-related battery power devices, which should help us drive longer-term opportunities for growth.

Got it. So for example, when we look at the power side of the business, which is an emerging area of content growth, what helped you win that opportunity because when we look at a number of companies who are involved in mobile chipsets they have power capability, the analog companies have power capability. So I understand you don't want to be specific about 1 customer per se, but what is your core differentiator when it comes to power management, what kind of applications is it serving that, and what kind of capability is it offering that I cannot get from, let's say, somebody uses supplying the modem or somebody who's supplying power management in other parts of the mobile defense?

Sure. Yes, it's a good question, Vivek. We certainly don't want to be in the business of predicting what one of our customers may or may not do with one of our components, but it is an exciting area; this new power conversion and control IC. For one, it's a new function that's not replacing another component within the system. So it is bringing new technology to the device, which we feel confident and good that the customer values that technology and that system-level capability. At the end of the day, what positioned us really well to be in the driver's seat on this particular development. It's rooted in a long-term execution history. So being a trusted supplier of signal processing components with a broad portfolio of capability and technology. So certain -- people don't necessarily think of Cirrus as a power supplier, that's not our track record, but we've been building up this capability and technology over the years as we've been shipping boosted amplifiers and more recently with haptic drivers with building basic building blocks of power circuits into some of our audio related components. And on that journey, we've had to get really intelligent at a system-level as to how our device interacts with the rest of the system, how it interfaces with the battery and just the current demands, in this case, for boosted amplifiers, what impact does that have on the battery and the downstream performance of the system. So over a decade or so of shipping those set of amplifiers, we've built up this capability of system-level know-how of IP. And that all came together in a process node that allowed us to build a really space efficient, optimized single chip solution to bring this to the customer with the combination of IP and a track record of executing on complex mixed-signal technology with all the right ingredients to move forward and bring value to their system and allow them to have a platform to really innovate on a sustained basis.

Got it. And on the component that is out already on the closed-loop controller side, we have seen some of the functionality on the camera side, so as the number of cameras perhaps starts to proliferate or the kinds of cameras proliferates in different SKUs, is that sort of the main application of that? Or are you able to take that capability and go outside of this customer and go after other applications also?

Yes. That's not our primary area of focus right now. It is really driving a roadmap, which is rather robust at this point on improvements. And as you can see, there is a lot of proliferation. Every kind of subassembly doesn't have the same set of requirements. So it's very typical to some of our previous kind of audio engagements in terms of -- let's look on the horizon. Let's like map out, of course, for a longer-term product roadmap where we're agreeing on the right problems to solve, and we're taking the core technology, and we're driving a product family out of that. So we certainly do see upside in both attach and the proliferation of that technology. It is not a focus for us right now to go beyond our big customer on the basis that we have plenty to do and do not want to compromise on any of our execution and the things we know we need to get done.

Got it. And yes. Carl, I was going to ask, if you kind of look back and in terms of the different capabilities, right, starting from the audio side and going to this closed-loop controller and then the power side how much of bills has been kind of a pull from the customer saying that, look, we have this board that they are designing, there are 2, 3 sockets that we would like you to work on. And how much of this is kind of a push from your side where you approach the customer and say, look, we have this great IP, how -- what is that collaborative process line?

Yes. It's a good question. It's certainly a balance. We try to represent our capabilities and our portfolio of technologies as best we can to paint a picture around the things that we at Cirrus Logic can bring to the table that we think are of value with a position on problems that are worth solving and our contribution to those and certainly, we don't -- despite having a long-term relationship and history of executing a number of products over a long period of time. Obviously, we know what we know, and that's clearly not the full picture. And so it's certainly a balance of us providing information and the breadth of our product portfolio and technology, the customer clearly understanding what they want and need and articulating requirements based on those wants and needs and us responding to that and knowing that we got to put our best foot forward on every occasion. And it's really all about having compelling new technology to continue marching and staying ahead as a kind of supplier in this demanding space of consumer.

Got it. Perhaps a little bit of a delicate question in that. You know you heard a customer often has switch suppliers, right, or for different sockets on the phone. So for example, on the RF side, we often see a rotation between different suppliers, right? On the modem side, we have seen that. And publicly, we know that, right, they are very strong internal capability, right, from a design perspective. So how do you get the confidence and the visibility? How are you able to device a long-term road map for the company knowing that, right? It is so exposed to 1 large customer who has this internal capability and has often right switch to switch suppliers. What are kind of the pros and cons of this kind of customer exposure?

Well, from our perspective, the value alignment on the technology we bring to market is really strong with our biggest customer. And at the end of the day, our focus is to stay ahead, doing advanced R&D of -- as I mentioned previously, that represents itself as compelling technology that can add value and make our customers' products better. So our focus is wholly on that and alignment of these road maps and investments for new technologies and new to remain relevant and to remain in a position to make our customers' products better. Certainly, there is fierce competition, and there are all sorts of scenarios where sockets could be at risk to a competitor to in-sourcing or to a variety of factors. And at the end of the day, our belief is if we continue executing and continue bringing compelling new technology to the table that we will be considered. There are no shortage of opportunities and new advancements of technology and new -- just, there's always new. And so we have to stay on our game and invest in R&D at a pace that allows us to stay ahead and allows us to stay ahead of both competitors and the needs of our big customers before they've even thought it up. Not to suggest that, that is always the case, but we do feel like we compete really well and have a breadth of technology and a focus on R&D that will allow us to continue to stay ahead and ultimately return value to our shareholders.

Got it. No, very clear, Carl. Just technically, right, without being customer-specific, how easy or difficult is it for your audio capability to be integrated in some other silicon right now, right? So for example, when we look at the largest provider of Modem 5, they have decent audio capability, right, that it or other companies who provide audio capability. So what is the kind of the -- is there a risk of the audio being integrated in some other chip set?

We've certainly seen that risk come to bear over the last 10 to 15 years as smartphone architectures have evolved. I think there's less risk of that integration or that partitioning, just given the delta and requirements from a process technology perspective, to be really compelling products. So our boosted amplifier investments, just as an example, are upwards of 15 volts today. And so doing higher voltage design is especially tricky if you're contemplating integrating that into a really advanced kind of modem or processor kind of geometry. So we've seen a lot of that play out over time. There are certainly other ways you could instantiate audio circuits, but our closed-loop control, the new power stuff, our boosted amplifier and haptics products are really -- they're designed with requirements such that a separate component is often the right, the right answer for customers who really value performance and the kind of system-level attributes that a lot of our top customers do. There are certainly different chipsets and architectures that have different levels of audio capability integrated, but we've seen that for quite some time now and wouldn't be represented as a major risk to our kind of ongoing core business.

Got it. So your point is that when we look at kind of the main -- the big chips, that's right, whether it's the application processor on the modem, they are in a lot more advanced logic, right, a lot more advanced process node versus what you have to be, right, and there's a lot of capability you bring to the table that doesn't -- is not just process dependent. What role does process play in your design? Like what kind of geometries are you in right now? What kind of what geometries are you designing to?

Yes. So our sweet spot for the mixed-signal products today is still 55-nanometer we made that transition a number of years ago, first in our codec lines and subsequently in our amplifiers. We've got products that run in more mature technologies than 55 nanometer, and we've got IP developed in 28- and 22-nanometer but that decision-making process for us really comes down to the type of component it is and the amount of digital versus analog circuitry in that device. Obviously, as you migrate down the process nodes, you don't get necessarily the benefit of shrinking all the analog circuitry at the same rate that you did the digital. And so the sizing, the concentration of digital and analog and ultimately the economics as you make your way down into more advanced process nodes become factors in deciding on which process nodes to develop a chip on. And to be clear, we don't change process nodes super frequently because of the investment that represents to build out the signal processing and analog circuits, where the customer expects you to not compromise on performance of the circuitry as you migrate down the nodes, which makes the design complexity and the design challenge significant. So again, it varies by product, and we still ship the bulk of our products today and 55-nanometer across our amps and products. Yes, we've got a roadmap for pushing that forward. And like I said, it's really based on how much digital circuitry we need and the corresponding requirements or goals around sizing and power consumption, which can obviously be improved quite a bit as you move through process nodes, typically.

Got it. Is there a certain content growth annually that the company tries to target? And I ask that because when I look at just taking consensus numbers, and I'm not asking you to endorse, right, consensus numbers 1 way or another. I'm just saying that when I look at consensus this fiscal year, right, 7%, 8% growth, next year, 5%, 6% growth, that seems to be more aligned to just kind of unit growth in smartphones and doesn't adequately show, right, your capability of expanding content. So if I had to model Cirrus Logic for the next 3, 4, 5 years, is there a certain content growth range that I should model over and above the unit growth of the smartphone industry?

We certainly don't set specific targets or would communicate specific targets on content expectations. Clearly, between last year and what we're planning for this year, we're really excited about the content opportunities we've seen that are expansion and growth of content, which certainly help to drive growth that we're talking about as accelerated revenue growth versus our FY '21, which has just ended, which was up roughly 7%. And so that is largely driven by this expansion of new content-driven by these adjacent moves, which we're excited about. And those are both the kind of more recent examples with the closed-loop control and the power conversion. Those are both really early days in the kind of beginnings of that product in those 2 product families. So again, we think they both provide good platforms for good innovation and good value to our customers over the coming few years, although we don't set a specific target or metric around content expansion expectations.

Got it. I think I kind of know the answer to this, but is there any part of your content expansion opportunity that has anything to do with the move to 5G as an example, right? Or those are -- that's completely different, right? I mean, they're just going to an next standard on the cellular side, that has nothing to do with your capability?

I mean, nothing directly tied to 5G. I mean, there are certainly dynamics.

Power side, maybe?

Yes, there are certainly dynamics that ultimately could impact the way we design architects things and then how requirements get set, but there's nothing specifically tied with Cirrus to 5G from a content perspective.

Got it. Right. Yes, exactly. What I was going with that is that just because you have 5G and there are so many more radios and bands, maybe it just complicates the power design, and maybe that puts added right, constraints on all the power design and your capability has a better chance to shine through. Talk to us about engagements on the Android side, like if you were to look at -- I know there were constraints on 1 large Android customer because of all the trade tensions and whatnot. But if you look out other than them, how would you kind of grade your engagements on the Android side? Has it been in line with your expectations? Has it been better or worse? And then more importantly, as we look out the next 3 to 4 years, how would you describe your engagements in the Android TAM?

Yes. So clearly, Android, I would say, has been an exciting market opportunity for us, especially in light of the comment you made on 1 particular smartphone OEM who had -- clearly had some struggles on the back of some trade challenges. Clearly, there are several smartphone OEMs trying to pick up that share. And I feel like we're we are positioned pretty well in terms of our incumbency with other smartphone makers who we feel good about picking up that share. Overall, I would say that our expectations, we're very pleased with where things have ended up over the last 12 months in the Android space. We've certainly seen more adoption of our boosted amplifier products, both in terms of more devices coming to market with stereo instantiations as well as some migration down out of the flagship and high tiers into the upper parts of the middle tier of the smartphone market. So yes, we're happy with the growth and the kind of focused customer success we've had in the Android space. That's largely with customers who really value a lot of the audio and related technologies we're bringing with the boosted amplifier products. We've also seen additional share and picked up in terms of the haptic drivers, and there's some exciting new technologies in both of those product areas that should lead to good conversations and growth opportunities as we look forward into the future with the Android space. It is tricky, just given the competition amongst android vendors and the fragmentation at any given account in terms of the number of SKUs and the amount of effort to go into a certain kind of -- certain design, if you will. But again, we've replicated that so many times on the audio side, and that is turning into kind of growth of market share. And as I mentioned, as we make our way into some of the more mid-tier products, we're seeing continued growth opportunities looking forward.

Got it. I had 2 questions, one on supply shortages and then one on gross margins. How are you being impacted by these ongoing supply shortages? Are you impacted at all? Are you impacted modestly or to a great extent? What are you doing to kind of alleviate those shortages? And when do you expect to cutback to trend as far as your supply situation is concerned? And I guess part B of that is that are you impacted because your customer might -- or customers might have supply shortages in other areas that could impact your ability to drive sales?

Yes. We're certainly seeing supply challenges across most facets of our supply chain. And in some regard, touching most of our products from current day products to more mature devices. What I'll say is we feel really good. Our outlook for this year and our story about accelerated revenue growth takes all of that into consideration such that we feel good about ramping new products and supporting our customers in the way that we've planned out for this year. It's hard to predict when some of this kind of shortage will ease up. We certainly see a continuous challenge as we look out to the back half of the year and work with our vendors as they try to bring up new capacity and just deal with an entire industry. That is going through unprecedented times. So at Cirrus, the supply chain has always been a really strong attribute of the company and really a differentiator in terms of how we manage and drive the supply chain. And so it's times like this, but I feel like it really is a strong capability of the company to navigate these tricky times. In terms of the relationships that we've really put a lot of energy into over the years to deal with kind of challenges of this nature. So certainly not out of the woods yet, but we're doing everything we can to continue supporting our customers and certainly support all the new ramps we've got in the plan for this fiscal year.

Got it. Maybe instead of gross margin, let me ask you a more excited question, right? Very strong balance sheet, I think $10-plus cash per share. What do you intend to do with it? Are there M&A targets that you have in mind that can help you diversify your customer base or give you more growth opportunity. How do you think about M&A overall?

Well, we certainly will continue to generate cash, and we'll continue to invest in R&D internally for organic growth. That is one of the things that we'll continue to be focused on. M&A is high on our list or at the top of the list, a way to return value to shareholders, but finding the right type of opportunity in this environment, a company of our size and size of a transformative acquisition, those types of companies, there are fewer of out there. We continue to look for those opportunities as well as expanding our vision into looking at some of the larger companies are moving away from consumer or moving away from the phone market or maybe changing their strategic view in areas that we wouldn't be moving away from, and we would look for opportunities there also to step in and participate in a deal like that. Beyond that then for use of cash, we'll continue to look at share repurchases on an opportunistic basis, and that is another way for us to return value to the shareholders.

So Thurman, would you consider the current stock price and opportunistic place to look at share repurchases?

As we talk about, we don't -- we don't get into it, but there are a lot of factors that fall into opportunistic besides the soft price. So we evaluate all of those when we make those decisions.

Got it. Let me ask this last question. How do you think about taking your portfolio and going outside the smartphone market? Is there part of the consumer electronics market, which you think provides similar levels of profitability and the right levels of profitability and growth for you to make a bigger push into?

Well, certainly, smartphone remains to be the bigger portion of the pie for consumer electronics. We do see a lot of excitement and a lot of really relevant areas for our technology, both in audio and voice as well as these new dimensions of kind of high-performance mix signal that we've been talking about. We see a number of relevant applications for that in more emerging applications, like wearables, headsets, AR, VR, things of that nature that have a lot of similar properties of being space constrained, battery constrained, so we do see a lot of excitement around that. Clearly, those markets are not nearly the size of a smartphone market, and we've got a lot to do in terms of executing roadmaps and development plans and our core audio space as well as these new emerging opportunities for content expansion and phone, and again, we're super excited about the opportunities those represent, and certainly, keep a very close eye on how we, over time, can leverage our technology into non-smartphone markets, but that's a continuous balance of our R&D and making sure we don't take our eye off the ball as it relates to our opportunities in front of us.

Absolutely. So on that encouraging, very forward-looking note, we are at the end of our time. I really want to thank Carl and Thurman for joining us this afternoon, sharing your views about the industry and about Cirrus Logic. Look forward to hosting you again, and thanks, everyone, for joining us on this call. We can wrap it up now. Thank you so much.

Thank you. Appreciate it.

Thank you.