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

Okay. Hi. Thanks, everybody, for joining our discussion today. I'm Rick Schafer, Oppenheimer's lead semiconductor analyst. And I'm joined today by Thurman Case, CFO of Cirrus Logic; and David Biven, Cirrus' Director of Corporate Development. David, I apologize. I don't know how long you've been at Cirrus. I know Thurman has been there, I think more than 20 years now, I believe. And I had a fact check because time flies, but it's 15 years as CFO. So anyway, thanks. Great to see you guys.

Well, crazy. I'm also a lifer. So I've been here. I got my 20th year anniversary plaque just earlier this year, or late last year, something like that. Yes, so I spent almost my entire career at Cirrus as well.

All right. Well, it's good living here. You're in Austin, Texas. There's a lot worse places to be.

That's correct.

Well, listen, let's go and get started if that's okay with you guys? I know we're a couple of minutes late on the start. But Thurman, maybe I'd get rid of some of the more boring stuff that we just have to cover with everybody right now with supply being what it is or lack thereof, I guess, lack of supply. It's just been such a key topic for everybody. You guys are no exception to supply challenges. I mean maybe you could talk for a second about what you're seeing on the supply front? What areas and where are you seeing sort of some of the worse constraints, whether it's front-end, back-end? You're probably going to say across the board, but I'd just be curious what kind of color you could give us?

You can guess on some of those answers because you're probably hearing them a lot. Yes, we are capacity constrained and those constraints are -- we just don't see them really changing much as we go through fiscal year '22 and even into '23. And yes, it is. I mean our major areas of constraints are their foundries, just simply because there's so many wafers that are needed in the volume of wafers. Although we -- it is across the board, as you noted. And with all these constraints, what we're seeing, which I think is not only us also is the increased cost. And that when we talk about increased costs, I mean that includes higher wafer pricing that we see beginning in Q4 FY '22. And that's really because that's when the normal price adjustments happen with our foundry partners. So based on that, while our long-term model for margins is still 50%, on the -- it's based on the current visibility that we have and in the information that we have, that we expect our margins to be slightly below that 50% in FY '23. And really, I guess that's where we stand at this point.

I know it's -- maybe this is an off-the-wall question, but you have a pretty big customer, your sort of lead customers probably carries a lot of weight more than most customers, most tech companies out there. So are you able to leverage that at all when it comes to talking to your foundries and trying to make sure you're -- or back in, implies both ways? I mean are you able to leverage any of that kind of -- to help get supply or help with supply?

Yes. I mean certainly having a customer of that size, they have influence. And so we wouldn't sit and say that isn't helpful. But we have other large customers also who have influence. So even though that is helpful for us, I mean, all you have to do is look around. We -- there are other suppliers to our largest customer and other large customers that are also finding constraints. So it's more about how much capacity there is. And yes, that doesn't hurt our case at all to secure capacity, but it doesn't -- it has not put us in a position where we could fill all the demand that we could fill this year if we had additional.

Got it. I'll probably beat this topic to death, but you guys did announce a new wafer supply agreement with GlobalFoundries and I didn't know if you could share anything about the sort of volumes or capacity which you expect to see from that arrangement. I know it probably doesn't just turn on like a light switch, but just over time, kind of how much -- any color you could give on how much incremental capacity -- I think people would be curious how much incremental capacity that would affords you?

Yes, Rick, I think just first off, at a high level, I mean, it's really good for us to get that in place to -- as Thurman pointed out, to alleviate some of the capacity constraints that we've been seeing. So as you know, we've been doing business with Global for a very long time, right, since 2009. And before that it is Chartered, and we see them as a very strategic partner for us moving forward. So at least for that piece of the business, it's been great to really get some capacity commitments, but not only their capacity commitments, but also some commitments on continuing to develop unique IP around the process nodes that we developed in today. So that's something that we've had a ton of success with historically is just working with them engineering team to engineering team to optimize technology in those process nodes and allow us to further differentiate. And so getting commitments as part of this agreement on the technology front is really going to set us up well for the future.

And maybe on that point, David or Thurman, gross margin, obviously, I think everybody understand input costs have gone up and maybe the ability, in some cases, right, to pass all that through isn't there. So you have a near term -- and again, it's not -- I don't know if you want to talk about that term, but like it's not a huge drag on gross margin, but it is a little bit of a negative. I'm curious, what gets gross margin sort of back up above 50 kind of where you've been running for actually a long time now? Is it -- to your point, David, is it that move to that next technology node -- process nodes, sorry? Or is it going to be a mixed thing as new products roll out and are adopted? Or I just didn't know how much color you could give us on maybe where that -- how we get back up there, I guess?

Well, I mean it's a little early for us to talk about. We're already -- we've made a comment on FY '23 being slightly below 50%. I mean there are a lot of levers, there always has been, with gross margins. I mean there's product cycles and manufacturing efficiencies and certain product mix, which might fall into some of what you're talking about with the higher margins. And we wouldn't stop now and we continue to maximize our margins the best that we can. But the best we can say about that is that we would expect margins to be slightly low in FY '23. And we don't -- we're not to step out any further that or kind of give a time frame or anything specific on where we may end up besides that commentary, it's probably too early.

And I'll try one other way. And again, just is there any sort of normal -- is there any kind of normal plan or target for you guys internally in terms of moving to those next process nodes? I mean do you want to see yourselves every 2 or 3 years kind of jumping 1 or 2 nodes forward? Or is there any kind of rule of thumb that we could use?

Yes. I guess I should touch on that. So what I was talking about specifically was not necessarily jumping process nodes, but developing IP within 55-nanometer specifically, right? So developing unique IP for Cirrus Logic's use only within that process node. But to touch on kind of future-looking process nodes, yes, I mean 55 is a great home for us today in many of the product categories that we're shipping in. But we've been investing in 28 and 22 as a potential product technology -- or a potential technology for our products longer term. Historically, I think we've done a really good job of doing that advanced investment in new technologies so that we can be ready to kind of intersect that with real products when it's appropriate, and that could be footprint, power consumption, higher performance. I mean analogue doesn't scale as well as digital going from 55 to 22, but for a digital-heavy product like -- for instance, like a codec, we certainly foresee that making a shift to 22 sometime over the next few years.

Great. Appreciate it. And so speaking of product mix and sort of how things are changing and where you guys have been adding content over the last few years, again, you guys have done a great job there, especially with your biggest customer. I'm curious on the -- I look at the smartphone market is pretty mature. Not a lot of growth there in units, but certainly a lot of growth in terms of share and content. For you guys, I think you've proved that out. Historically, you've led with audio. But again, a lot of the big content games recently have been power and control and things like that. So I don't know how much you can talk about some of the opportunities you guys see out there. I know we -- certainly, you guys do a great job talking about haptics and things like that. But just in terms of future things that maybe you can integrate into a smart codec, or other areas that I'm not thinking of, I don't know, other areas you can expand to?

Yes. No, that's right. And I think we see the same thing that you are right. Smartphone volumes in our market continue to go up. So really what our goal is, is to increase our content within those devices as well as broadening out our reach into new devices and new markets. But yes, historically, we've built a fantastic business around the audio front. And we think that there's still some meaningful growth ahead of us in audio. But really, the last several quarters, I mean, we've seen a tremendous uptick in our potential SAM with the broader kind of high-performance mixed signal opportunity. And as you said, we talked about that with haptics initially, and then we started talking with the camera controller. And now this new IC that's ramping this year, with the power control conversion and control device, it's just really another statement about how we can leverage IP that we've developed for another kind of application and utilize that to service -- to grow our footprint within these devices. So within the high-performance mixed signal bit, power -- it seems like there's an enormous opportunity in front of us to continue to leverage mixed-signal IP that we've been developing in-house and bringing that forward to support more kind of power-related content expansions. And coupled that with the acquisition that we just made with Lion Semiconductor, also very complementary skill set and set of IP also in the power domain, I think that really gives us some good opportunities for growth in the future as well.

I want to jump to Lion just one second. I think just curious if there are any puts and takes or how that shakes out in terms of you guys increasingly -- and I know you have a lot of high-performance mixed signal IP. But obviously, power is a big market, but there's obviously -- I feel like you kind of -- I don't want to say you own audio, but you kind of do. You've got a huge presence there. So you're kind of getting out into maybe some deeper waters, but there's also some bigger sharks out there, so to speak. So what are the puts and takes? Like how do you go out and win against the -- I'm just going to throw TI, phone techs and other. But like how do you compete against the TI? Is it because you could do all this with integration? Is it because you've got all this digital stuff that you guys have developed? I'm curious. And maybe as part of that, I'm always curious about margin impact. So is -- what the puts and takes are there? Do you see more pricing pressure? Do you see less? Just any color there would be super.

So I guess I'll add that. Specifically on the Lion front, so we've known the Lion team for 4-plus years or so, and we've been kind of tracking them closely. And really, over the last 12, 18 months, they have made some tremendous progress in selling their chips into the Android market and competing with the likes of TI and winning sockets over TI. So for sure, competition, will still be there. TI is there. We've got some Chinese suppliers as well that are also in the mix, but they have developed some really unique IP and capabilities around maximizing efficiency for these devices. And for fast charging, which is what they're servicing today, efficiency is maybe the most important feature in these devices. The less efficient it is, the more thermal impact you have which caps how fast you can charge the battery at a very high level. And so stand-alone, I think they have an enormous opportunity in front of them. And we're hoping to just accelerate that, right? So our plan with Lion is to integrate them, but to keep -- just accelerate and augment what they're already doing really well. Now longer term, that's an interesting complement to what we're doing today with the power control conversion and control device, right? So that device is kind of downstream from the battery, like from the battery into the device, while the Lion device is more upstream on the battery charging front. So longer term, fast forward, we think there could be some interesting value that we could provide across our customer base, being able to own both sides of the battery and just do some interesting, create value by just having more control of more pieces of that overall puzzle.

And when you say on both sides of the battery, you're not talking about as far out as like the wall charger? So no need to add...

That's a great point. Right now, we have no need to look into the AC to DC front, the wall wart, brick. We're not looking into that.

Got it. Got it. That's super helpful.

I mean longer term that's something we're interested in, but right now, that is not a focus at all.

I mean it seems like everybody, especially in the mobile world is talking about fast charge, but maybe even in the EVs right, I mean, everywhere, right? Fast charge is kind of a hot topic. And so I guess I'm curious, I mean, it seems like actually lots of stuff I'd love to ask you about Lion. But like one of them, it just seems like given their relative size and balance sheet, it just seems like they -- I'm curious if there was customer pull, whether it's from the iOS side or from the Android side, but it just seems like a natural for a customer pull? If they've got -- they've obviously got neat tech to get your guys' interest. So is there sort of like this, what would you say, this sort of balance sheet risk maybe or perceived balance sheet risk that was there that since it's no longer there, now that they're part of Cirrus Logic, that there's almost like this pent-up demand that's going to -- that's sort of ready to go? Because I know Thurman's talked about what the revenue run rate is there. But that sort of pretty serious. So I'm looking to see if it accelerates?

Yes. From our side, I mean, I think the timing couldn't have been better, right? I mean like I said, they made tremendous progress with an incredibly small and efficient team, right? But they were starting to need some scale. I mean they were looking to really staff up, still a very lean team. And in addition to that, they were having very meaningful conversations with OEMs, specifically in the PC space, which we've started talking about more recently. Where the technology was great is perfect fit, but like it's still a start-up. So it's hard to commit to those products. So -- and couple that with our like investment in power and our general just trend be more interested in power, the combination of -- and the complementary natures of our 2 skill sets and capabilities, the timing was perfect, right? And so we were able to bring them in. We're able to help them scale, but like a best-in-class supply chain operation around a very nimble and very talented team. And so yes, our hope is that we're not going to slow them down, we're actually going to accelerate some of that activity, both in the Android space initially and also on the PC side as well.

Yes. So one of my questions there actually is because you guys are so strong in mobile, but it's typically handsets, right, and tablets, but it's things like that versus PC. So how long does it take -- I know things move quicker in consumer and PC, but how long does it take to develop that channel? Like the depth of channel and the strength of channel you have in mobile, meaning mobile devices versus -- so I'm just curious what -- how do you look at that?

Yes. Well, I mean one thing that's really nice about -- I mean their top customer is Xiaomi, right? I mean that's one of the customers that we felt a fantastic relationship with over the last couple of years. And so during due diligence, we're talking to the team that we're already talking to that know them quite well, right? And so it helps accelerate all of that integration, just getting them into the fold by having -- by knowing their customers, knowing what their customers value and just kind of plugging them right into our organization. So I think from that standpoint, that piece of it should be pretty clean, right? And so I don't see many hurdles there in terms of getting them up to speed very quickly, which is great for us to be because I mean those Android customers are very important to us. And this is a meaningful uptick in terms of overall dollar content for Cirrus. The devices that they're shipping, their simplest devices are kind of in the $0.50 range. But as these funds start raising the overall power to the battery or the charging speeds, that could go up to over $1 in content per device and $2 per device. So $2.50 of content for every phone in some models is a pretty significant uptick and opportunity for us. And it's with customers we're already servicing today with some of our audio and haptic products already.