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

Good morning, everybody. First session of the day. Everybody had coffee? Come on. My name is Matt Ramsay. I'm the semis analyst at Cowen, and welcome to the in-person, finally, 2022 Cowen TMT Conference. To kick off this morning. I'm really happy to be joined with John Forsyth, I think, from Cirrus Logic. And John, we've been working together for a long time. So good to see you again in-person. It's been a while.

It has been. Yes. Well, thanks very much. We're delighted to be here. It's great to see you in 3D.

Exactly. You guys -- you're not getting into video, are you? Like, 3D or something. No, I just wanted to give you an opportunity, John, to kick off. I know there's a lot of things cross-current, I would say, in the market right now. Your largest customer has been public about supply chain challenges that they've had. You guys have done pretty well in the supply side, but you're obviously governed by what's going on in the end market. So if you have any opening comments about how you're seeing the business right now and then we can get into some details and some questions and take some questions from the audience as well.

Yes, absolutely. Thanks. Thanks, Matt. Well, I think a big part of it for us is the big picture demand has remained very strong for us. That's partly, I think, due to the shape of our business where our general market exposure, Android exposure is a little smaller than some companies, as you may have noticed. But we've continued to see pretty strong demand signals through the past few months. We did note late last year that we were seeing softness in China, where we have a good amount of Android business that's been growing, but that slowed down a lot, as you know. And then, of course, this year, there's been both the demand side issues, but also the supply chain disruption. That is an area where I'm especially proud of what our team has been able to do, just being very creative regarding how we get material to customers. It generally hasn't impacted the actual production of silicon for the most part, a bit in the back end, but we've been able to work through that, reroute stuff and still get it to customers. Clearly, with CMs being impacted, there has potentially been downstream impacts for our customers, but we've managed to keep shipping to them, and the demand signals have remained very consistent, which I think is indicative that so far as they could, they're aiming to make up for lost time.

Got it. But just for your company specifically, do you have any like your list of things that you're sort of watching on the supply side? Any bottlenecks that we should all try to follow or be aware of? Or you feel like you're in a pretty good position, and it's really dictated by sort of customer pull at this point and all the other supply chain and logistics that go around the customers' business?

Had nothing in the supply chain. Since the beginning of last year, there really is nothing in the supply chain, it has been plain sailing. There's a huge variety of factors that take a lot more, day-to-day management and at times, creativity than previously. But I would say the character of our business as a whole is that we're still really wafer supply limited. So if we could increase supply there, we would be shipping more out to customers based on the demand signals that we continue to see from those customers. So that's really -- and the supply chain, after wafer production, there's been some disruptions there. But on the whole, we work with -- we make a principle of just working with top-tier partners across the entire supply chain, and our partners have been very responsive and very helpful on the whole through this kind of turbulent period.

You mentioned being wafer constrained and the fact that you -- if you had supply, could ship more. So just walk through, where would the upside come from? So I mean, some companies call it delinquencies. I don't know what vocabulary you guys use internally. But if you're -- if demand is more than supply, like where would the upside come from, the move into maybe new stuff in Android, new stuff in the PC market? There's lots of different end markets. The largest customer kind of is what it is, right? But like in the rest of the business, where is the demand more than supply?

Right. So if you think about our business as a whole and our strategies, and number one strategic priority is maintain our smartphone audio leadership. And then number two strategic priority is expand audio into other profitable segments beyond the smartphone. And number three is expand our mixed-signal content. The first two of those are both, in many ways, wafer supply limited. So for example -- and that's not that we are -- it's not a kind of month-to-month or quarter-to-quarter delinquency, as you would put it, or a shortfall to customers, it's typically that we haven't been able to address designs where customers would really like to design us into the socket, but we couldn't see our way to committing to supply. So the last thing you ever want is to leave the customer lying down or disappoint them in some way. So we've had to be very selective in the general market, both in the smartphone space and then also in the PC audio space about which designs we commit to. Outside of that, we have a kind of long-tail business based off of kind of mixed-signal catalog that spans the last kind of 10, 20 years of development. That's a very steady business for us with good gross margins. Demand there has kind of uniformly been higher than capacity to supply over the past 1.5 years.

So it sounds like the supply situation is really limiting socket growth and content growth that you could go after, and there's maybe -- as opposed to being a month-by-month kind of thing?

Yes. I mean, if we get upside within a month, we can always make use of it, but I'm talking more at a structural level.

Got it.

A significant increase in capacity would allow us to chase and secure more sockets where we've been -- we've had to, at times, be kind of gun shy and just selective with our customers just so we don't let anybody down.

In that gun shyness, is it in the smartphone arena? Is it mostly, I would assume? Is it audio, mixed signal? Where are those areas where you feel like you could grow more if you have more supply? And you know I'm going to the GlobalFoundries question next, but we'll get to that.

I'm sure we'll get to that. Yes. Well, so again, a great example. In the smartphone audio leadership and in smartphone haptics, where we've had great success in the flagship space, especially our latest generation haptics device started shipping in an Android flagship just earlier this year. There are more sockets out there we could be chasing if we have more supply in audio and haptics, in particular. I think it has been the case in the PC market. Everybody is aware the PC market is going through a little bit of a pause on the demand side. So I think it's less pronounced there right now, but it remains a kind of supply -- wafer supply remains a key consideration for our business in terms of planning how we grow.

I'll just add to that. I mean, just it's consistent with what you've heard from the entire semiconductor ecosystem, so to speak, where supply constraints are likely to persist for some time. And so we're also seeing the same phenomenon as any other companies are.

Yes, that makes sense. This kind of leads into a discussion around an agreement that you guys signed with GlobalFoundries, a fairly large one, around sort of securing strategic supply going forward. And I think there were some new -- relatively new disclosures about that recently that you guys put out. So if you could -- I get a lot of investor questions about what the supply is earmarked for, what you guys see coming down the pike. So if you could add any context around the deal that was struck and what it might mean for the company and the opportunities to go after some of these sockets that you might have been gun shy to go after before?

Right. I think the big picture, the GlobalFoundries supply agreement, I guess, there are a couple of important points to make. One is, it doesn't cover all of our wafer supply. We use for -- somewhere around 90% of our wafer supply, we use a couple of really big foundries. GlobalFoundries, one of them. They've been a great partner for us for many years now. And so the agreement was -- it wasn't news that we were doing business with GlobalFoundries nor is everything in the agreement incremental to what we've been shipping earlier. However, that -- the reason that agreement was strategically really important to us was to put in place some certainty and confidence around a growth in wafer supply across calendar '21, '22, '23. And that was specifically in support of sockets that we saw coming or had one or we're in the process of chasing and kind of anticipating having a very good shot at winning. So most of what we do with GlobalFoundries tends to be in the high-voltage domain. So our boosted amplifiers come out of there. Haptics stuff comes out of there. And most recently, our power conversion and control chip is fabbed there as well. So a lot of our latest power-related IP development has been in that space. I would say that the -- and the recent disclosures were really just about the shape of the agreement. I think it's important to -- there's -- I think when you look at it from the investor perspective, the scale of that agreement was kind of eye-opening for some of them in terms of the opportunity that we see ahead of us. We certainly weren't signing up for anything there where we felt like we're taking on a big liability without certainty of how we're going to sell it. In fact, if we could have secured more capacity, we would have, and we continue to look at that. That's one of the most active topics for management is how we secure more capacity based on other opportunities that we see out there.

Interesting. As you say, the feedback that I got from investors was that, wow, this is a big agreement. And it sounds like if you could have secured more, you would have.

Yes. That's it. Yes. That's absolutely the case.

Are you pursuing similar type of arrangements with other foundry partners? I mean, there's obviously Samsung, TSM, others that are out there in the space. Some may be a little bit more digitally-oriented than some of the stuff you guys do. But are you pursuing similar agreements with others to give more visibility and diversity or...

I think the nature of our relationship with every foundry is a little different. What we are continually doing is investigating and investing in working on processes that we believe can drive competitive advantage for us, whether those are with Global or TSMC or someone else. And that's both a function of capacity to service opportunities we see, but also the actual technology itself. So one of the things we've been able to benefit from in terms of our long partnership with Global has been a really, really close collaboration in the 55 BCD process, which has enabled, I think, us to do a lot of things that competitors can't do or find very difficult to match. But -- and we see in the future that's going to continue to drive a lot of products. We're going to have a lot of IP on that node in that process. But we also need to look beyond that, to see what's next, what's going to drive the next generation of competitive advantage for the company. So that's an active process of investigation and investment that we make there. You -- I mean we have mentioned at times, I think, that we've done test developments against -- on 22-nanometer, for example, as we see that being an important next strategic step for the company.

Anyway, folks in the audience, feel free to wave your arms and interrupt me at any point. I don't want to monopolize the conversation. But if you have questions, definitely let me know. I wanted to shift a little bit from the supply side to content and socket opportunities that you guys might have in front of you. It sounds like fiscal '23 is mostly going to be unit-driven and a little bit mix-driven around closed-loop controller getting a little bit better attached, some of the new power sockets getting better attached, but not any step functions or new sockets in terms of content. Hopefully, I characterized that right. But the signals that I've taken from your team is that fiscal '24, '25 could start to have some material content growth again. And I wonder if maybe you could contrast the model this year, and what's driving the revenue growth in terms of mix? And then what potential is coming down the pike that we should be looking for? And how do investors kind of gauge the progress towards some of these new content opportunities?

Right. Yes. And I think you've characterized it well. We've tried to be clear that '23 is not a big content step-up year for us in the way that fiscal '22 has been with the power conversion control chip, in particular, as well as the closed-loop controller attach rate increasing. I have said previously, I do believe the camera is an area where we can continue to incrementally grow value year-on-year for the foreseeable future. So we expect some of that and there's some favorable mix dynamics, I think, that give us a tailwind as well. But beyond that, as we get into fiscal '24 and beyond, yes, we have new sockets coming that we're not going to give specifics around, but they are consistent with -- going back to the 3 kind of strategic priorities that I talked about, number one being maintaining smartphone audio leadership; number two, driving audio into areas beyond smartphones that we believe can be profitable and meaningful for us; and then number three, the expansion into adjacent mixed-signal area. So really leveraging our mixed-signal engineering expertise into other areas, which would typically be centered in the phone. So we've talked -- we've done -- so far, we really got haptics, power and camera. We think all 3 of those areas can continue to drive value and continue to be areas where we grow and expand content. In particular, we're very excited about what we're doing in the power space right now. Now one of the things, obviously, about the nature of our business is that there's a lot of secrecy surrounding certain customers' products and a lot of what we do is custom silicon. So we're very limited in what we would ever want to say about it. The flip side of that is from where we are standing, we can see a great pipeline of growth and content expansion year-on-year as we get into fiscal '24 and beyond.

And I'll just add to what John said. I mean, that's one of the indications is what we've done with the supply agreements that we have with a lot of our wafer supply manufacturers. That just is an indication of the visibility that we see going beyond where we are in fiscal '23 to win some of the sockets in some of the new areas in high-performance, mixed signal, for example. And those are some of the opportunities that we see in front of us.

I mean, obviously, you guys resegmented the P&L to break out the mixed-signal stuff from the audio business. And it seems like we're on a path for those businesses to be relatively the same size or even the mixed-signal stuff to be the majority of the company going forward. Is that consistent with the pipeline you see?

Yes. And the reason we did that was to try to look -- we're constantly trying to figure out like how do we give some more transparency to investors whilst respecting the secrecy and confidentiality of our key customers and key sockets and so on. So actually, having to disclose certain things about wafer supply agreements, I think that was pretty helpful for investors in terms of seeing management's confidence about the business we have lined up. Similarly, I think if you see us expanding in R&D investment, we've got a very good track record over the years of that being very opportunity-led. Typically, when we're saying, we are expanding R&D, we need to expand R&D is because we see real concrete opportunities that we can attach themes to. Obviously, there's a latency before you see that in revenue, but we've got a good track record of that. But then this kind of resegmentation was another tool to just try to help increase transparency for investors. Previously, we were categorizing our revenue into portable and non-portable. I think portable was somewhere around 90%, saw huge leaps for investors at that point. Whereas there's a very clear kind of growth momentum in the high-performance mixed-signal area, and you can now see that momentum, I think, very clearly in the breakout. I've said I can see a path within our planning horizon of that reaching 50%. To your point, yes, it would be very weird if it reached 50% and then stopped dead. It's clearly got the -- it's got the momentum and it's got the tailwind. So yes, that can certainly continue to accelerate beyond that.

When I get asked about growth of Cirrus, there's always this would investors prefer more growth at your largest customer and more diversity of that growth or actually diversification of customers, right? And there's been that battleground of conversation for a number of years, right? And so far, the growth has been predominantly with the largest customer. But there's been good progress in Android in a lot of these domains to -- there's always been this bundling, unbundling in the audio, just with the codec. But as you become a company that's much more in the mixed signal and power domains, do you have an easier path towards Android growth?

I would say maybe I would broaden that a little, Matt, towards growth into other applications, other markets. The -- and yes, of course, that balance or that consideration about growth at our largest customers versus growth in elsewhere in Android, for example, I mean, it's not for me to speak to how investors feel about it, some of them are fine, some of them less so, some of them happy. I will say from a management perspective, our business with our largest customer has tended to have an incredibly high hit rate. So once that customer commits to something, it's actually -- it's a pretty sizable commitment on both sides. There's a nontrivial amount of resource within our customer, seriously invested in bringing certain features to market. That means a very, very successful track record of things shipping, and then they typically ship for multiple generations. That's an incredible business, which, in actual fact, apart from being in phones, doesn't look anything like the Android smartphone business where it tends to be fighting for each generation, each socket, often much greater margin pressure and so on. So we're very, very happy with the progress we've been able to make in Android, particularly recently, fiscal '22 was a significant step-up relative to fiscal '21. Our goal is to maintain that audio leadership, as I said, and that's across smartphones. But when I look further out, I would be wanting to leverage our investment in high-performance mixed signal to grow in other categories, not just focusing on Android smartphones because I think that would bring more diversity to the business and diversity in terms of market exposure.

That makes sense. So PCs would be on that list, I assume?

Yes.

And then we've -- you and I have had conversations over the years about stuff in the auto market. And if you kind of rank order these new markets that you might grow into, any of them really stick out as in the next 2 or 3 years that could be meaningful?

So PCs are certainly a part of it for us. We believe there are opportunities there for both audio and high-performance mixed signal content. And really, I would separate that completely from the demand pause in the PC market that's currently going through, because what we saw was almost no matter what happens to that market within any reasonable envelope of expectation, our SAM will expand because there are architectural shifts going on in the PC market. We're going to favor boosted amplifiers, for example, where we've got best-in-class IP. There's going to be, on top of that, I think opportunities -- continued opportunities in haptics, but also in the power space, in particular, leveraging some of the investments that we made through the Lion acquisition targeting PCs. And in terms of other markets, we have a list -- we're not going to go into that in more detail right now, partly because these things take time to develop. We're excited about some of them, but I think we'll want to be talking about those to investors when we've got really clear milestones and line of sight of progress there that's going to be exciting to them.

No, that makes sense. Just wanted to shift gears a little bit and talk some financials since Venk is with us. So the first thing I wanted to ask, and I don't know how many in-person forums you guys have been in since you joined the company, but...

Not too many.

Not too many. We're all virtual?

Yes.

But it's the first time that we've been able to talk in person and maybe you could bear with the audience a little bit about your experience in joining Cirrus? How both sides came together? What you're excited about and what opportunities you see as you've landed, taken -- everybody has the sort of first 30, 60, 90 days of kind of planning and observing. Like what observations have you made? How did you come to join the company? What are you excited about with joining Cirrus?

Yes. Yes. Thanks for the question, Matt. So as you pointed out, I've been here for -- I think, this is week #6 for me. And what is really impressive about Cirrus is that you look at the track record of what the company has done in terms of not just technology excellence and building a really world-class and differentiated IP, but also the operational excellence in terms of delivering to those products, highest quality, on time, and satisfying arguably one of the marquee customers in the entire ecosystem. I think that's something that is really, really unique about Cirrus in terms of its execution excellence and the consistency of delivering the products and the features that the customers seek. And that's something that I think is probably a little less understood by the Street in our view, in the sense that the level of stickiness, the level of repeatability of those results has been quite phenomenal. And clearly, from the standpoint of the visibility that we see, and John alluded to this earlier, we see tremendous opportunity for diversification, both in terms of the product capabilities that we have as well as customer diversification and also market diversification, right? We've been obviously a big player in smartphones, but we see increasing opportunities in PCs, in AR, VR and so forth. And also from a product standpoint, while we've been really good at audio and we're committed to maintaining our position in audio, expanding audio into markets beyond smartphones, but also diversifying into these big high-performance mixed-signal opportunities. And the TAM expansion opportunities there are just really quite sizable going forward. And so those are all the specific things that I would point to in terms of what's ahead of us. And then over the long term, clearly, we're operating in an environment where we have certain supply constraints that we have to deal with. And so that obviously limits the size of the growth in the short term. But we do believe that, over the long term, we have tremendous visibility into products, into new areas, new customer opportunities and such. And there's also an opportunity for us to expand our profitability over time as we continue to leverage the business, growing the top line that will add some leverage to the operating margin over time. And that's something that we're all very excited about and totally committed to executing on.

No, no. Thank you for that. I think it's always stuck out to me to a company of Cirrus' size being able to take a new socket and ramp from 0 to tens of millions of units a month. I don't know that too many companies can do that. So it's certainly something not lost on us.

It's exactly right.

If you look at -- a couple of questions on financials real quick, one is on gross margin. Any -- it's always been an area where we kind of oscillated around a certain range. And me, from the outside, it wasn't always as predictable as which side of that range we're going to oscillate on in any given quarter. But any observations there or any forward forecast of the gross margin range that would be -- is it something you're examining closely and sort of looking at in your early time there, because I think that's an area where I get questions on sustainability of margins. Can they expand as mixed signal grows? And sort of what the drivers are there?

Yes, absolutely. So clearly, when we look at the long term, we think there's always the balance between top line growth and profitability such that we can continue to grow profitability over time. And when you look at the different aspects of the profitability, the most important thing from a gross margin standpoint is that clearly, we have customer mix issues as well as just the diversification of the portfolio over time. But from a profitability standpoint, we think the long-term model that we put out, 50% seems like it's a right range for us to pursue. Just given the nature of the markets that we target, especially in the consumer space and some of it in smartphones, and I should say a lot of it in smartphones, but also in PCs and AR/VR and so forth. We think that the 50% long-term gross margin is the appropriate range for us. Over time, we'll be looking into what we can do from the standpoint of improving the profitability. But I think at least in the near term, this is the right margin for us. As far as the operating margin is concerned, that's where we see a lot more opportunity for leverage over time, and they're driven primarily by improving R&D efficiencies as we scale up some of these new projects. How can we leverage the IP across the different product categories and such. But as John alluded to earlier, we see tremendous visibility in terms of the opportunity space in front of us, and so we want to continue to invest in R&D over the long haul. And where we can generate some leverage from a profitability standpoint is more on the SG&A line. As we increase the top line, we should be able to improve the SG&A performance over time. And that's what we're committed to. So what the company has stated in the past is that we've been operating around 25%, 26% op margin over the last couple of years. The longer term, we do see a path to get to the high 20s and possibly 30% op margin, and that's something that we're all working towards.

Got it. That's helpful. Just really quick. I think we only have a minute or so left. $14 a share in cash. You guys have done buy in, you've done some bigger things in the past. Is -- opportunity for -- I mean, I don't know, John, you're in the Board, priorities on tuck-in M&A, more capital returns, I mean, the market has been volatile. There's opportunities for buybacks and things. Just how are you thinking about that?

Yes. And I'll let Venk have a quick comment as well if we have time. For us, primarily organic growth of R&D where we can attach it to an opportunity, that's a great use of our financial strength. Secondly, we'll look at if we can find tuck-in M&As that will accelerate something on our road map or expand in an area where we see potential for growth, that would be great. And beyond that, yes, we look at continued return through share buyback.

Yes. I think you hit all the main points. So essentially, top priority for use of cash is to continue to invest in the business to grow the R&D pipeline. Clearly, we've been opportunistic about M&A, and we'll be very thoughtful about valuation. But if it fills a portfolio gap, especially from a strategic standpoint, we'll -- we have the balance sheet to be able to do that, and then we'll continue to return share to -- cash to shareholders in the form of buybacks over time.

Awesome. Well, I think that's the time that we've been allowed here today. Thank you, everybody, for joining and listening and for those listening on the web as well. Thank you for your time. Hopefully, you guys have a great day and thanks for coming.

Thank you.

Thanks a lot, Matt.

Thank you, Matt.