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

Hey, good morning, and welcome, everyone, to the KeyBanc Technology Leadership Forum. I'm John Vinh. I cover semis here at KeyBanc Capital Markets. We're pleased to have Thurman Case, CFO; and Carl Alberty, VP of mixed-signal Products from Cirrus Logic joining us. The format of this session will be a Q&A fireside chat. If you have any questions, feel free to submit them online at the bottom of your web page, and I'll do my best to get these questions during the chat. Welcome, guys.

Maybe we could start with Thurman. Been getting just a lot of questions. Maybe what maybe surprised people a little bit is just some of the gross margin commentary that you talked about going into the next calendar year, that gross margins could be trending below your target model. Can you walk us through specifically what's driving these higher costs? Is it related to the wafer pricing agreement or expansion with GlobalFoundries that you had talked about? And then to what extent are you able to pass these higher input costs on to your customers at this point?

Sure, John. Well, I think what we said was that the current capacity constraints -- we expect those to continue through this year and into '23. And the result of the constraints, we're seeing increased pricing now, and we have seen it going up. And that includes higher wafer pricing beginning in Q4 FY '22, and that's when our normal price adjustments with our foundries normally occur, and that contributed to the timing that we gave when we answered the questions. And our long-term model is still 50%. So just based on the visibility that we have now, we expect gross margins to be slightly below that in FY '23, and this includes any thoughts we may have to pass on some of those costs to customers and other factors that are part of our normal process of managing the supply chain. So also, to your answer on really what drove that and noting that it was our foundries, it was across the board with our foundry. So this was not specific to the global agreement or specific to any one foundry partner.

I see. Thurman, just a follow-up on that. The outlook on gross margins is still kind of roughly 2 quarters out. Are there any sort of opportunities for you guys to drive any sort of operational cost improvements, better renegotiate some of the pricing related to your supply chains, the kind of get the gross margins a little bit higher? And when you talk about kind of gross margins kind of being below target for the year, is there an opportunity as we progress through the year for you guys to get back to target? Or are you likely going to stay below for the full year?

I think, again, there's a lot of things that we can do. I'm going to let Carl take the second half of the question, but I'll start off. I mean there's a lot of things, supply chain efficiency, product cycles, a lot of different things that can affect our margins. And we certainly have worked that always. So -- but when we came out and when we say that we will be working on those things, all of those were taken into account for us to come out and say publicly that we expect to be slightly below 50% in FY '23, at least based on our visibility now. So it isn't something that we aren't sure or you're never positive, but it's not our expectation that will be better than that or we likely wouldn't have talked about it. And I'll let kind of Carl talk about some of the challenges around customers and products and so forth with this.

Yes. Thanks, Thurman. And thanks, John, for hosting us today. I mean to Thurman's point, I mean these are unprecedented times, as we're all aware, in terms of the supply chains and just the staggering demand for products as it relates to capacity. So that's definitely across every facet of our supply chain, driving challenges relative to cost. But fundamentally, nothing has changed with our products or the competitive nature of our products. I mean we largely service consumer markets, in particular handset, which have and will remain to be super competitive. But there's nothing fundamentally that shifted in our product strategy or the pricing strategy for our products as it relates to how we differentiate and position and ultimately compete for sockets. It's just we've had some headwinds on the supply chain front in terms of just costs, and we're doing our best to manage that. And we will continue to optimize those margins to the extent we can across every angle that we can pursue to -- again, to try to optimize the profitability. But I think it's important to note that our -- the fundamental nature of our products and how we compete hasn't changed, so.

Great. Last gross margin question, I promise, and I'll move on and talk about the rest of your business. But just maybe this is more of a long-term question. I understand kind of the environment that we're in is unprecedented. But I think a lot of investors are extremely encouraged by kind of your increased focus on kind of the mixed-signal business. I think also just the view on mixed-signal, right, is it tends to be more analog, kind of lagging edge and there's less digital content. As a result of that, the view is that potentially, is there an opportunity for that to be a little bit more gross margin accretive versus your core audio business, which obviously is a little bit more focused on kind of leading edge and has more digital content there?

It's a really good question, John. I mean I certainly see a lot of the expansion, the growth in our SAM and the growth in our kind of adjacent revenue areas of focus, and in particular, high performance mixed-signal. I mean, these are complex, really uniquely differentiated, innovative products. And we've been working closely hand-in-hand with our partners on the foundry side to develop the right process technology to ultimately build the right product with that balance of analog and digital circuits. So we've obviously been shipping a 55-nanometer with our amplifier products for quite some time. That is the baseline process technology fueling our power conversion and control, our more recent kind of battery-related technology investments. And so we're aggressive for analog and mixed-signal process technologies, but certainly on the trailing edge or the lagging edge of anything that's highly digital. So I think over time, we will certainly see things maybe shift back to a more kind of "normal" dynamic in the industry, where we can work closely hand-in-hand with our partners to position ourselves best to win for a given socket. I mean, obviously, right now, the market dynamics are just very different, and so we've got these headwinds on cost and cost increases. But I think over time, that will settle out, and I think our investments and our process technologies will coexist to be a really good, compelling advantage as they have been for us over the last few years.

Okay. Hey Carl, maybe we can switch and talk about Lion Semi, pretty interesting acquisition that you guys just recently announced. Maybe I was wondering if you could just talk about the technology and maybe what kind of drew you to kind of Lion Semi. And how does Lion Semi kind of fit into the rest of your mixed-signal businesses? And are there any sort of complementary fits with kind of what you're working on currently, especially around the power conversion IC?

Yes. I mean it's a super exciting time. I mean we were -- we've been talking a lot over the last couple of years about just growth and expansion into adjacent technology spaces. Obviously, that started with haptics and sensing more recently, last year, the closed-loop controllers. And now we're on the verge of generating revenue from the power conversion and control. And this last domain, this power and battery domain has been an important area for us for quite a bit of time, just as we've talked about in previous discussions, like needing to understand how to treat the battery well and the downstream effect that multiple audio amplifiers and haptic drivers have on the battery and the subsequent performance impacts downstream has helped us develop that scale. That positioned us really well to capitalize on the opportunity for power conversion and control. And so when we saw the Lion technology and their portfolio of products, it was instantly viewed as a really important piece of the overarching puzzle and a really complementary piece that would help accelerate our internal road maps. Obviously, we're -- as I mentioned, we're getting ready to ramp this new power conversion and control IC, and there's a robust road map of IP developments beyond that to fuel next-generation components for that line of products. And so the Lion technology is part of that puzzle. I mean it's not directly in the same exact function, as obviously the Lion technology is really related to fast charging in a really efficient, low heat kind of way, but it fits in really well. And just given my comment earlier on needing to really understand how haptics and audio amps impacts the battery and how they all kind of fit together in a power and battery architecture, it fits in really well and already seeing opportunities to see collaboration across the different product lines, to optimize solutions and chipsets that kind of, again, really deliver better end user features, be it audio experiences or faster charging times or more, kind of realistic tactile experiences with haptics. It all comes together really, really nicely and help supplement new SAM dollars for us to go target, in addition to the power conversion and control stuff we've already talked about. So yes, it's exciting times.

Great. One thing that I was curious about, Carl, is, as you know, labor market's pretty tight. And then if you look at kind of chip designers, it's even, more tighter. It's hard to really find really good kind of analog guys out there. But when you look at the skill sets of kind of the engineers and the designers that you're hiring at Lion Semi, is there an opportunity to apply those skill sets to other projects in the -- in your group?

Yes, certainly. I mean that -- the team in general. Obviously, it was a small start-up. So they will get to benefit from the scale that Cirrus Logic can bring. And we do view this as a very strategic investment area for us, both the organic efforts that we've had ongoing and now the acquisition of the Lion team. So being able to add more talent to those areas is important. And we've recently -- I mean, obviously, we've often been targeted to have designers in one location to the extent we can control that. And obviously, Lion brings an additional location for us. We've also recently staffed up a team in Arizona, which is a pretty good density of talent in that power and battery kind of domain. And so, to be clear, the Lion team has a set of strategic initiatives and product investments and customer engagements that they have to remain focused on in terms of execution, which is another encouraging thing to see in that team, like really customer focus, really technology and innovation-focused, but focused on keeping customers happy. And you do that in consumer markets by executing. So certainly, we don't want them to take their eye off the ball in terms of existing commitments and products. And over time, we'll start to overlay the 2 IP portfolios to figure out exactly how all those pieces come together to fundamentally just accelerate products and solutions into the hands of customers. So I certainly view it as an opportunity for us to look at the overall investment and the personnel involved. And by having additional locations and locations that have, in particular, talent in these domains, it bodes well for us in terms of adding that kind of specialty talent that's pretty hard to find. And it will be even harder if we were expecting them to all be in Austin. So yes, it's -- I think it's going to be a really big shot in the arm for us relative to just acceleration of IP and product road maps.

Great. Also wanted to clarify the fast-charging capabilities that you acquired, my understanding is that they build a DC to DC converter that goes into the phone. You talked about it's compatible with wireless and wired charging to support the fast charging capabilities. But we're also seeing a lot of these GaN fast-charging tubes kind of hit the market. And I just wanted to clarify, is the technology that Lion Semi has compatible with these GaN fast chargers that are hitting the market? Or is there some sort of compatibility that has to be built into the charger as well?

Yes. It's a good question. I mean our technology is going to be agnostic, whether it's a traditional wall war, a GaN, fast charger or a wireless charging infrastructure. I mean at the end of the day, they're going to work hand-in-hand with each other. And the power coming out of the wall or the voltage coming out of the wall or what's in the phone, either one of those could be a limiting factor. So with more proliferation of GaN-based chargers, we see that as an opportunity for more adoption and more proliferation of higher-voltage, fast-charging circuits. So we're certainly seeing those chargers pop up quite a bit with third-party accessory makers, but also some of the OEMs starting to look at those shipping as accessories or shipping in box. So ultimately, we see the proliferation of GaN-based chargers to be a good thing, to where we can work together at a system level to ultimately optimize efficiency and thermos relative to fast charging the battery. So yes, it's -- we're pretty agnostic, but it's a positive to be working with those kinds of technologies.

Great. On the revenue synergy side, maybe can you just talk about kind of the customer overlap that you have with Lion. And obviously, it sounds like Xiaomi is a kind of a key customer for them. But with your kind of much deeper and broader customer relationships, is there an opportunity, I would assume, to start cross-selling this technology? And are you able to share just kind of how some of the customer feedback and conversations have gone since you've acquired Lion?

Yes, sure. I mean there's certainly opportunistic for cross-selling, and in particular, as I mentioned earlier, there's opportunities on portfolio and road map planning for -- if we control these various pieces of the puzzle, how do we optimize them with one another? Yes, there's certainly overlap on the Android side of the customer base, and the feedback we've received from customers has been overwhelmingly encouraging and positive. Again, a small, really focused team focused on innovation, competing with really big incumbent suppliers but differentiating with efficiency and thermals, that matter a ton relative to the value and the marketability of these fast-charging circuits. So we're super encouraged by the feedback from customers and super encouraged by the Lion approach to just really caring about customers and that service piece and the execution portion. So we're obviously wanting to support that and help them execute on their existing initiatives and then also be able to take a step back, like I mentioned, and look at the road map for how we plan products because it's a lot of the same customers that we're selling amplifiers or haptics and sensing products to, that are certainly interested in these fast-charging circuits. So I think there will be a lot of benefit for us coming together and having that under one umbrella, no doubt.

Great. I thought it was interesting that you guys highlighted PCs on your last call. It sounds like this is kind of a really interesting emerging opportunity for you. Can you give us a sense of where this PC business is today and where this PC business could be 1 or 2 years from now? It sounds like it's something you're pretty excited about.