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

Good morning, and welcome to day 2 at the Stifel 2021 Virtual Cross Sector Insights Conference and the Cirrus Logic fireside chat. My name is Tore Svanberg, and I'm a Senior Analyst covering analog, connectivity and processor semiconductors at Stifel. It is my great pleasure to introduce Cirrus management, including John Forsyth, that is the company's President and Chief Executive Officer; Natasha Asar from Investor Relations is also with us. And the format for this particular session is a virtual fireside chat. [Operator Instructions] With that, let's just jump straight into it. And John and Natasha, thank you so much for joining us again at Stifel CSI this year, and welcome.

Thank you, Tore. It's great to be here. We always get a lot out of this event. So I'm even looking forward to doing it in person when we get the opportunity. But thank you, again, for having us here. We've had a good meeting so far today, and yes, I'm very happy to be here.

Excellent. Thank you, John. So there's a lot of detailed questions, but just to get warmed up. Why don't we just start with a bit of a simple one. So what makes Cirrus Logic such a unique investment? And why is Cirrus so different from a lot of your peers out there?

Thank you, Tore. Yes. So we specialize in solving really high-value problems in the mixed-signal domain for top-tier customers. And our goal is to be -- our vision is to be first choice for signal processing. We have focused mainly to date on the audio part of signal processing, though more recently, we're branching out beyond that. And what differentiates us from our peers in the eyes of our customers, which is, I think, what ultimately really matters is that our ability to execute to what we've committed to them on really challenging problems is unparalleled. So that is reflected, of course, in a lot of R&D investment on our side in very advanced engineering, but everything that goes along with that to ensure that when we give our customers a plan to go solve a really difficult novel problem that they can take that plan to the bank. And that's what we hear from our biggest customers again and again, is that we approach the challenges that they put in front of us in a way that they don't really see from anybody else, and that's where we get a lot of our value. Traditionally, that's been, as I said, in the audio domain, where really we've been addressing their audio needs and continuing to push the boundaries of what you can do performance-wise in a really low-power environment with really constrained amount of physical space for the devices. So we've been doing that very successfully, but increasingly we're moving beyond that into spaces such as cameras, power, haptics and so on. Always with this -- always focused on the sweet spot where there's -- whatever needs to be done is both difficult and very demanding in terms of power -- the power constraints, the physical size constraints and the latency attached to that piece of processing. That's where we target. They tend to be higher value sockets. They don't tend to be that many competitors who really want to play in that space or who can. And that's why our customer relationships last a long time, and they continue to build and grow and broaden over generations of products.

And maybe to follow-up on that, John. So historically, the company, obviously, has been very dominant in audio with your mixed single technology. But as you mentioned, you're starting to venture into some new applications and new functionalities. So where do you kind of draw the line there on what you're willing to go after and what you're not? Because obviously, there's a lot of other good setting the companies out there that have mixed-signal capabilities. So is it just simply, are you going to do -- you're going to go after some of the most challenging opportunities out there? Or do you drive the line somewhere else where you kind of say, "Hey, this is a big opportunity. We got the technology, why don't we just go after it?"

Right. I mean I think we always really want to be able to explain to ourselves why it's really compelling the idea that Cirrus would win this socket. And typically, that roots back to one or more -- ideally more than one of a number of things, okay? So number one, it's going to be a high-value socket with -- typically with a high-value or top-tier customer attached. We work best. We make a very sizable R&D investment in programs. Things tend to go best when customers are invested to where they -- there's a really strong dialogue around solving that problem. And it's not going to come down to like 3 guys who have the solution at the end of the program and it's whoever is like -- whoever is a couple of pennies cheaper. So we're very selective and targeted from that point of view. But at a technical level, it's also the need to be confident that we're leveraging our R&D strengths, which often are derived from having pushed the boundaries of where to do mixed-signal devices from a process perspective. So if something -- there are kinds of device and there are kinds of products and sockets that we could consider, but 180 nanometer looks like a real sweet spot for them, and there are loads of people on 180 nanometer. We've made a very sizable investment in 55 nanometer, high-voltage devices and then we've got investment in 22-nanometer and so on. And so areas where we can really leverage that investment, and it's really hard to compete if you're on some other -- some other process, and you have comparatively legacy IP. The advantages that we derive from that, in some cases that will just be about delivering a similar amount of processing in a smaller package. But in many cases, it's about being able to pack in a lot more processing alongside the analog circuits in the chip. And so when you look at -- to use an example, the closed-loop controller device that came to market recently, the benefit that we're providing there is a really small integrated device in one of the parts of the phone product that really has some incredible physical constraints around it, but which packs in tons of processing much more than they had previously, which means that when it comes to stabilization speed and so on, there's a real user experience advantage. And that's really only possible because of our advanced R&D investment. So we're always looking at, is there a compelling logic to where we are being the sweet spot for this kind of product. And if there isn't, then we'll typically shy away from it.

Got it. Got it. And on the same theme of sort of R&D priorities, there's no secret that you have a very large customer in Apple. And very often, investors are a bit bothered by that because of new customer concentration and so on and so forth. So how do you, as a CEO, think about that longer term as far as R&D prioritization? Because I'm sure there's always new opportunities with that particular customer, and I'm sure you got to do a lot of heavy lifting to, obviously, maintain that relationship. But do you have the opportunity to perhaps prioritize other things away from that particular customer?

Yes. I don't -- I mean, I don't think those things are -- live in an enormous amount of tension. In fact, I mean, first of all, they're a great customer. The products that we have with them are biology, incredibly successful. One thing which is hard to overstate, in fact, is that when they commit to something, it's going to ship. And that is a tremendous tailwind to have from an R&D perspective because we know that a couple of years out. So from that perspective as well, they're really exceptional customer to work with. It's -- and there is, of course, as we've been growing our business, there have been times and there are points when we can probably address more opportunities just with that customer than we can actually staff. But of course, they -- there is maybe more alignment of incentives than you might think here because, of course, they don't want us to get over a stretch, but also building a successful business in other markets and with other customers does absolutely undeniably fuel the amount of innovation that we are able to -- we get more insight. We invest in innovations and our largest customer becomes one of the beneficiaries of that. If we have some great new idea and some novel technology around that, they are absolutely the first company in the world, you would go to and try to sell it, right? So we've seen real examples of that whether it's in -- whether it's in the traditional audio space or the haptic space where we've made investments really and innovations driven by insights from our general market business, but our largest customer has also really -- been really excited by those. So that's the dynamics of how it works. I guess from a broader perspective, like looking forward, I think, we have a kind of a pretty simple first-order prioritization algorithm, which is profitable growth above all else. Sometimes that will take us closer to -- in the direction, more customer concentration, sometimes less, but it's founded on a belief that everything is easier to accomplish if you've got profitable growth. If we want to scale R&D and attack some other markets, if you want to take some longer bets on some more speculative R&D, all of that is much more achievable if you've got a really good tailwind of profitable growth. So first order of businesses look after that. But the second order of business, which I have been really excited about the progress we've been making in is that we can engage in development in new areas with our largest customers because they know our capabilities, which take us into new technology domains. And that's a great win-win for them and us, but it also gives us a huge step-up. So for example, we've been making a very significant investment in power conversion development. And that gives us a lot of IP, actually it will get us to revenue in an entirely new area. And that seems to me -- it doesn't happen overnight, but that sets us up very well for then building a strategy to attack other device types, other markets and so on.

Great. Thanks for that perspective. And we'll come back to some of the more specific dynamics with your largest customer. But just one last sort of general question, John. What would you say are 2 of the 3 things that have really changed for Cirrus since the pandemic? I don't know if you want to choose things that have changed with your customers, things that have changed with your inventory management, supply, things culturally at Cirrus, whatever you want to call out, but I'm sure things are quite different now than before the pandemic.

Wow. Yes, actually restricting it to 2 or 3 is the issue. I mean clearly -- and there are some -- undeniably, some real positives. I think you realize in these kind of strange situations, just how much the investment you've been making customer relationships really, really matters. We can carry on collaborating with them and supporting them very effectively. But I don't believe that would have been the case if we hadn't spent so much time in the same room over the years. So in many ways, it validates that, and it helps us -- well, it certainly makes us very eager to get back into face-to-face mode with customers. But that's been very kind of affirmatory about the way we work and the way we approach, as I said, being -- honestly, being selective about customers, we'd rather have a few really big customers that we're deeply entrenched with. I think also a positive is we have, out of necessity, had to leverage our field support more. And part of believing that engineering to -- engineer-to-engineer relationships are very important for us means that we do tend to fly people to see customers quite a lot. We've not been able to do that as much. But by contrast, we've had amazing benefits from our field teams in -- who generally are on the customer doorstep stepping up and actually finding -- being able to attack not just existing stuff, but finding and attacking and winning new opportunities, like we've had a meaningful amount of gathering momentum in the PC space. And literally, throughout all of that, not a single person has flown from HQ to do it. And yet the businesses has been continually growing. So that's quite remarkable as something to think about. The supply environment, by contrast, is, absolutely, a game changer for us in not such a positive way, obviously. So again, there's a relationship perspective on that, but it's, certainly, given us -- and we've won business, we've picked up business with the constraint supply but it has changed the dynamics. It's created, I guess, cost and margin pressure from the supply side. Now if you have to have margin pressure, I'd rather it was because of costs than because people don't want to buy our stuff. It's absolutely the former. But that is still a significant dynamic in the business, which even 12, 15 months ago just wasn't really -- has been operating as a pretty much a fixed function for the past 10 years. So that's a big, big change.

Great. So moving on to some more specific topics and perhaps more near-term topics. So you've talked about some nice content growth opportunities going forward, not just with your success in closed-loop controller, but also on the power management side. So could you elaborate a little bit on that? And is this kind of like a onetime thing? Or could we perhaps see growing content over time? And the reason why I'm asking that question is because, what is it, 15 years ago when you had that codec not 50, maybe 11 years ago when you started shipping a codec. You started adding more and more functionality. And before you know it, the content was perhaps as much as $4, $5, $6, right? So yes. Pretty long with the question. But yes, if you could elaborate on that, please.

No, I think it's a great question. So just to -- for the benefit of people, getting everybody up to the same level on what we're talking about there. So we have talked about a new power conversion and control device coming in the back half of this year to market. We're very excited about that. It's been in development for a couple of years, but it's been on a very aggressive time line in collaboration with our -- with the customer for it, and it's been -- it's a product that includes a lot of news. So it's not replacing anything. It's a new device in the system, which itself is a very exciting attribute for us. Value-wise, I've said, like, think of it as about $1. That's a kind of safe spot to be. And in terms of units and attach rates and so on, because we, a, don't want to say any -- don't want to ever disclose anything about our customers' devices and also be no less than you would expect about our customers' devices. I've been very cagey about that. We're, obviously, getting into a build ramp where we can see what we're building. And I think to provide a little more color there, what we're seeing is, we believe, consistent with the 1:1 attach rate with -- in new phones, which, obviously, we're really excited about. But to the second part of your question, the further opportunities that we see there, are -- yes, are at least twofold. So one is growing the feature set and value of that particular piece of content over time. We already have a team working on the IP for the next portion of that. That was something where I -- and that's a priority for both ourselves and our customers there. I feel a little bit sorry for the development team because they could be one to bad kind of probably got about a weekend off. And then it really was back to, okay, well, here's the wish list for the next one of these. But you'd much rather it was that way. So it was -- that's really exciting. And then I think given what we believe are some of the benefits that the product is likely to enable in the system. I think over time, it's likely that we can branch out from this device to potentially other categories of beyond phones, which they may be smaller or they may have more features or fewer, but it's a new line of business for us and an opportunity to proliferate and expand from this initial win. So I think this is the -- clearly, the most exciting new thing that we have going on, and we can see a lot that can hang off it in the future.

Very good. And just to kind of ease investors' minds or expectations here because there are examples, of course, in the past, where your largest customer did actually start to integrate some power management technology onto their [indiscernible] processor. But you said that this is all new. So I mean, you're not replacing any content. So the chances of that happening, at least for the near future, seem to be pretty slow.

Yes. This is a brand-new thing on the Board. And so I don't see that it has an overhang from that perspective. I would also -- I mean, to that point, in general, we're very thoughtful about that stuff in general. There are a couple of reasons why things might get integrated with the SoC. But for example, in the case of power management, the sheer number of power domains or power islands on the SoC meant that when you look at other SoC, like it happened in x86, more of the power management logic got built into the SoC to help with that. Otherwise, you had a fantastically complex set of interactions, very, very costly and inefficient as well as complex between the main PMIC and the SoC itself. So there was a kind of compelling logic there. And there are times when you look at everything you do, if something is truly in -- really can live in the purely digital domain, you have to be very pragmatic about that because transistors are basically free on the SoC compared to wherever you are at as a mixed signal provider. That's why when it comes to the signal processing side of it, we're really thoughtful about targeting stuff which needs to be close to the analog circuits. So whether that's for latency reason, which is very often the case or some other reason, there's some stickiness to the digital processing that needs to take place that will keep it alongside the analog circuits it's rather than see it migrate. Now of course, at times, there are things which do land on your chip and you think, okay, over time, that might migrate. But as long as you're oriented very clearly to know where your value -- the long-term stickiness and value lives, then, I think, strategically, you'll make sound choices. So that's how we think about it. For example, the closed-loop controller being a good example, you're doing stuff in the digital domain and you're doing stuff, you got driving incensing going on in the analog domain, but in the digital domain, you're doing stuff which needs to happen so quickly. There's no way you are backing that out to the SoC and the software stack running there and then getting it back to do the number of corrections per second that you're trying to drive. And similarly, when we look at how the codec has evolved over time, that has actually gained more nonaudio mixed-signal content because there is stuff which doesn't naturally get integrated in the SoC because you're not going to prove it analog stuff onto that. But there is still a logic to having more integration on the Board. And so actually, the codec starts to serve as a good mixed-signal integration point -- mixed-signal hub, if you like.

Right. Almost like a mix in a coprocessor.

Right.

So -- [nd by the way, just to remind everyone, if you do have any questions, feel free to type us into the chat function, but I'll keep going here. So just sticking with power because I'm very fascinated about this topic. In the past, you've been able to win content in a mobile device like a phone and then getting it perhaps designed into tablets and other things like that. I think your amplifiers is a great example and even vice versa, right? So could maybe power also have a similar cadence where initially you're in the phone, but then maybe some of this circuitry can venture into other applications as well?

I think that's certainly possible. I don't think it will apply to everything. So we think there is certain characteristics of the device that will lend themselves to be where this might be more applicable. So places where there's some level of constraint on the battery size, so you're not carrying a ton of headroom where you get a big -- kind of pretty significant dynamic range in the power consumption. So big peaks and then they stand by. And obviously, we've been -- that was one of our entry routes into that. This is that with the boosted amplifiers in the phone, we're kind of responsible for a lot of peak current events in the system, and that was part of how we kind of developed a lot of insight in IP around managing that. But for sure, we believe -- so it's not every device. It's a short answer, but for sure, we believe there are other categories of products where this could be very applicable and very relevant, yes, and very beneficial to the these.

Got it. Well, we'll keep an eye on the teardowns in the fall and see if can figure things out. So I do have more product questions. But before I go there, I do want to make sure I address the biggest question that probably you get right now from your customer, which is supply. You talked quite a bit about this on the earnings call. There's no secrets that supply is exceptionally tight, your largest foundry is TSMC. So help us understand a little bit where the bottlenecks are right now. And what are you doing to overcome those? And when do you think supply and demand will just be back in balance?

Okay. I think it will be a while before it's in balance. I mean, certainly, for us, I can only speak to what we see and where our pinch points are. But I think we're still going to have a lot of challenges for as much of calendar '22 that -- as I can see, I think, it's still going to be a constrained environment. For us, we had -- we've, obviously, had a lot of constraints on some of our older products, which are in TSMC, there are a variety of older foundries. But capacity is pretty low there anyway. And then various parts of the market, which use our devices like automotive kind of turned off for a while last year, and this is a pretty well understood story. But -- so that we're just managing week to week. I would say, the environment there still seems to be very constrained but there have been more surprised, small upsides over the past kind of month or 2. There was nothing like that in the front quarter of the year. So I think things are slowly correcting, it's just going to take a while. In the case of our largest -- the largest part of our business with our major foundry partners, yes, it's a couple of things. I mean we have very good relationships with them. We have big customers who they don't want to disappoint. But we also really want them to invest in capacity and expand capacity because we have no intention of standing still. We can foresee real opportunity to grow our business if we can get the wafers. So we're working with our largest foundry partners, which are TSMC and global on getting assurances and long-term commitments around that capacity, which, I think, for us, is -- when we get designed into sockets, most of our sockets do not -- they last a while. And that is a big advantage for us. It's -- there are parts of our business, when you win an Android amplifier socket, you may be back there in 6 months trying to win the next one. But there are big parts of our business where when you win a socket, you've got several years of that. And to the extent that, that seems to be beneficial to both us and our foundry partners as something to plan around and say, "Look, we can see years of demand like this." So we're working very hard on getting those commitments as well. In the near term, it's more kind of block and tackle week by week. And I think, again, with our largest foundries, we've seen a similar story of everything went down and then gradually just little small incremental improvements over time, which are slowly relieving the pressure, but it's still going to take some time.

Got it. Got it. So we're running out of time, but there's a good question from the audience here. Test and packaging have been one of your key competitive advantages in audio. Is this something that you've been able to carry over to your newer technologies, including closed-loop controller and power?

Yes, that's a great question. Absolutely, it is. And in fact, yes, a lot of the problems are very, very similar. A lot of the challenges that we're dealing with are very similar, being able to leverage that, the teams and the capability and the investments we've made in that and some of the partnerships are absolutely central to us having been able to win the business that we've won in the high-performance mixed-signal space and what we're shooting at going forward, yes.

Very good. So with that, we're actually running out of time. So I want to thank you, John, so much for participating again. Thank you also to...

Yes. Thank you.

Natasha, and we hope to see you in person very soon. For everyone on the line. Thank you so much for joining us on the Cirrus Logic session. If you do have any follow-up questions, you can e-mail me at [email protected] and, obviously, reach out to Cirrus Logic for questions you may have directly to them. So with that, that ends our session. Thank you, again, John, and have a good rest of the day, everyone. Take care. Thank you, buh-bye.

Tore, thank you so much for having us here today. Appreciate it.

Thanks. Buh-bye.