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

Welcome back. I'm Blayne Curtis, semiconductor analyst. Very happy to have Cirrus Logic. With me from the company, John Forsyth, President and CEO, as well as Bank CFO.

John, you heard me last time, and I gave you a question asking you, you had fairly recently joined. I'm going to ask you a similar one. I mean, I guess, when I look at your story, sometimes it kind of gets reduced down to one socket unit, you're out of it, what's the content. And you're trying to paint this picture of multiple design wins content gains over multiple years. It has broadened out. So maybe you can just speak to that in terms of you once were one codec per phone, now you have up to 9 chips per phone. You have multiple road maps. How should people think about the story as they look out not just what's your chip next year, I'll ask you that later, but what is it over the next 3 to 5 years?

I have no idea why you'll ask me about that. Yes. Thanks, and it's fantastic to be here. So yes, I think really what's happened to our business is both an increase in bread in terms of the products that we're bringing to market in the range of technologies, but also longitudinally, greater visibility into what's coming down the pipe and what we have either baked in or as opportunities for a multiyear growth story. So in the first of those, when it comes to bread, back in the day when it was an audio codec and then amplifies and then gradually, that's built up, so at the top in the premium devices, as you say, there are 9 pieces of silicon in there and we see opportunities to expand that further. It's very reflective of our overall strategy, which really has kind of 3 prongs to it. Number one is continue our leadership in smartphone audio, that's where we're absolutely best-in-class, is the heart of our revenue. Number two is expand audio into other profitable markets, and number three is to expand into other areas of mixed signal, which are adjacent to us, in some way, initially in smartphones, but with a view ultimately that, that gives us a platform to enter other markets. And the view -- motivating that is for our long-term growth, there's good growth in audio, but not enough. We need to leverage our other mixed-signal capabilities or our fundamental engineering expertise into other mixed-signal domains. So one of the things that's really happened, as well as the continued expansion of content, we've gone from audio to haptics, to camera chips and most recently, power conversion and control. One of the things that's happened alongside that is that we have developed a much longer-term view of the road maps and the customer opportunities around each of those areas and in other areas of high-performance mixed-signal. And I think that's partly because this semiconductor crunch has made customers work much more closely with us. So you need to plan capacity, you need to plan everything from the process up through the products, and that's meant that we've got a lot of insight into multiple opportunities over multiple years to continue growing revenue.

And I asked you a similar question last year as well on this, but following up, and you said your mixed-signal capabilities. The company had kind of a converter IP base, but it's expanded. You've built IP in certain areas. But also I hear you talking more about just on maybe look to the finer geometries and analog. So maybe just kind of when people think about your capabilities and try to figure out where those could be, how would you describe where your core competencies are at this point?

Yes, and thank you. I appreciate that. As will many of our engineers, like I still think we're absolutely world-class data converters. And one of the things that we've done in the course of our audio development is, obviously, pushed the boundaries of the process and the geometry that we're developing our analog IP on. And part of the benefit of that is the ability to pack in a lot of digital processing with it, and that's really -- so for a company with a lot of analog and mixed-signal heritage, one of the big advantages we have is that is being heavily invested and pioneering in kind of leading-edge mixed-signal processes and geometries. The reason that matters so much, if you take, for example, our camera controller chip, is that -- in a very, very small package. So it's an incredibly space-sensitive part of the system, as you would imagine, we're able to pack a lot of A to D and D to A alongside digital processing, which is what allows us to deliver products with really high-performance stabilization and autofocus and enables things like light mode photography and so on. That's a really, really, really compelling part of the consumer experience.

Since you just ended on that and maybe I'll follow on the camera side because I think that's one where I think it's been -- as a content driver this year, it's actually over the last couple of years. And it actually kind of surprised me, there's a couple of angles there. I think we were counting cameras to start. And then it was OIS and then AutoFocus, and then maybe even have multiple chips per camera now. So you started to build up, I think, it's like 2 to 4 chips per phone potentially there. So maybe just walk us through this road map when we think of digging on that product line, how should we think about the opportunity? There's count cameras, chips per camera, then I'm sure you can do more per chip. There's probably more silicon around that. Walk us through a longer-term road map for cameras.

I think you've just described the play. But yes, I would say, okay, big picture. That's -- we're on the third generation of customer products shipping with our camera controllers in there. The features that have been enabled have been very well received. We have very deep collaboration with the corresponding -- the camera team within our customer. And when we look out, we've seen value growth from cameras over those 3 generations. And I see that continuing, and we don't see within our planning horizon, the as an tote, we see lots of opportunity. That opportunity is driven by -- yes, by a handful of things. Firstly, there's attach rate, which has been the main driver to date. Secondly, there is the fact that we can expand and improve the functionality that's there in the chip. So if what we brought to the camera experience to begin with was a capable digital processor that allowed us to do stabilization, then can we improve that over time and deliver more features. Thirdly, if there are new things happening with the camera, that can create a need for various enhancements to our chips. But then beyond that, there's a kind of classic playbook for someone like us in the mixed-signal space, which is that we look at what's on the board around us. Can we integrate that to our customers' benefit and to our benefit? And are there other chips there in the camera system that we could potentially? If they're not integratable, can we be the supplier for those? And those -- I mean, that's a classic playbook. There's nothing unique to us about that, but I would argue that over the years we've been really good at it. And part of the reason for that is just a huge amount of customer focus and close collaboration with the engineering teams within those customers.

And I want to ask you to jump right on the cameras, but taking a little bit of a step back. When we talk about the cadence in your road map, I think you've been that there's only so much that you and/or your customer can do at one time. So I mean it's a good and bad problem, right? I mean it gets to the elongates your content path. But at the same time, you now have 3 or 4 products that you have road maps on. Do you have the scale to kind of have multiple products kind of refresh each year? Or is it like, should we always think about it as kind of one after the other or the other?

I mean there'll be years when there's more and years when they're slightly less, yes, and there's the kind of -- like what can the customer digest? What's on their road map and what can we execute? But I would maybe highlight that in some of our products, obviously, there are very new areas like the camera controllers, the power stuff, where the moment we finish a piece of silicon on that, we're straight on to the next one, and we are increasing the R&D. There are other products which are comparatively mature, I would say, likely amplified. The boosted amplifier and the codec where the lifespan of those has been elongating over time. And you can see like the current generation of boosted amplifier, for example, is in its fourth year. It's -- we're looking towards our next-generation boosted amplifier. But that implies a good solid half decade plus of shipping from one design. What that means is that as we develop those products, we will be able to get those R&D teams and focus on other products and other new developments elsewhere. I get a lot more R&D leverage because we'll be shipping those audio products for many years, but that helps us tackle the scale problem that you referred to or just the sheer number of things we have going in parallel. I think the fact that those products in the audio space need less frequent revision is an important part of the plan.

And just in terms of your visibility, I mean, you've talked about -- you, obviously, have this new chip next year that we'll get to. But then you talked about the next-gen Kodak and Busadam being the following year, you said that. So I think there's some cadence where you kind of is a year of design and a year of like getting it into the customer. It's like 2 years out. What kind of visibility do you have beyond that, like 25, 26? Is there stuff you've mapped out these road maps with the customer? Like how long does that extend out?

Yes, I mean, typically, we've got a pretty good view across maybe 5 years. Obviously, with more variability towards the other end of that, with something like the -- with any product, we're typically at the point where we -- with 2 years out from being in production, that's when we know, okay, this is going to market, right? This is -- it's now game time. But long before that, there's a process about where do the customer problems lie? What kind of innovations might they be interested in? And that begins in the very kind of fuzzy domain. But even 3, 4 years out, you've got to have a good idea of what it is, especially when some of those will require bringing up a new process, some of them will require migrating IP or all new IP, and that takes multiple years. So a good example would be the codec. So yes, what I've said is, I mean, of course, a lot could happen over a couple of years and customer plans can always change. But typically, when we say, "Hey, we're now honestly in design on this thing." That's typically a couple of years out from shipping. But that kind of like that slightly obscures the fact that we spent a couple of years making a test chip because that codec is migrating Kodak IP to 22-nanometer. So there was a 4-year cycle really to get to that. And when you look at our road maps now, it kind of looks like that. We can see where we need to be in 4 years. We're having active conversations with the customer about that. And in many cases, we need to get going on IP now on new processes to be ready in time for that. The kind of collective cumulative picture that we get as a consequence of that, given the number of product lines we have now is really incredible. We're just going through our annual kind of strategy planning process right now, and the picture of what we have on the table going out through the next 5 years is very, very exciting.

And I just want to add to what John said, to your question about R&D dollars and the ability to invest in multiple products, I mean, this is one of the benefits of having the close collaboration with the customers. We get good visibility to not just what we have talked about in terms of coming out in the next year or 2, but also what's further ahead. And our ability to then prioritize our R&D investments such that we can deliver on some of those capabilities that our customers want us to work out.

So I'll ask you a hard question. So there's a lot of speculation with what's going on to your largest customer. I mean, there's been some well publicized issues in terms of what's happening at their factories. And I guess you're probably not prepared to tell us what's going on, but I want to understand, from your perspective, how you would see if something did happen? So are your parts on a hub so that you would be seeing what's pulled every day or week, and like if there really was some shutdown, you would see it right away? Or is it more like it goes in inventory and that you might have to wait for the customer to inform you, and can you speak to that.

Yes, I'll answer the first part, and then John can give more color on the contract manufacturing side of things. But at a very high level, if you look back at the earnings call that we had, the day prior is when the first news article came out. So clearly, when we gave guidance for the quarter, we took into account the potential vagaries of what could happen. And certainly, if you look at our guidance range, we expanded from what plus or minus $20 million, now to plus or minus $30 million. And I want to make it clear that we're not providing an updated guidance. But certainly, we took into account all the factors that were known to us at that time, and we're clearly monitoring the situation based on all the new studies that have come out since then. And maybe John can add more color to the contract manufacturing visibility?

Yes. I mean our visibility and how what we see lines up with the truth on the ground? I mean, it's actually -- it's quite difficult to tell, right? But I think the overall picture that we've seen is consistent with a strong consumer reception to the products. And obviously, I think the premium ones are really, really still have an imbalance where demand is exceeding supply, and everybody wants to be producing as many of those as possible and be ready if some facilities go off-line to be able to increase production elsewhere or turn it back on as effectively as possible when that comes viable. So what we've seen is like we certainly haven't seen any significant difference from what we'd normally expect in a situation like that, which is whatever material we have is getting taken and the demand signals kind of continue to look the way they do.

So then talking about next year, you -- can you maybe refresh the audience what you've said about the special chip in terms of functionality or anything to dial people in? And then, from a content perspective in terms of the ASPs, I think started to maybe sell people in a little bit better. I've obviously said what I think it might be.

Do you want me to refresh what I have said, not what you said that.

You can say that I'm right -- but right now?

Okay. So I got to give my -- 2 kind of standing caveats on this stuff. So I'm happy to talk about our expansion content value. I think it's very important for our shareholders to understand that we -- we're excited about that, and we have good visibility, but we don't talk about our customers' products, obviously. The second standing caveat, which -- I mean everybody takes that one as given. But the second one I think sometimes people find more surprising, which is like it's surprising how little we know sometimes about what's being done with our products. Every generation, of course, we tear down our customers' devices, and it is very rare that there aren't surprises in there for us about how our products are being used. So what we have said and what we're really excited about is that we have a new high-performance mixed-signal content coming next year. In the fall, we've been obviously in development for [indiscernible] on that. To date, the domain, since we have several things that fall under the HPMS umbrella, camera, power, haptics and so on, this is certainly a bit different from other stuff that we've done in that space. And value-wise, what I've said is think about it more in line with the power conversion and control chip rather than the camera controller in terms of those comparisons. A couple of the possesses within phones, but then also laptops.

[indiscernible] has gone up, gone right? What's gone maybe a little bit south and then I'll dig into a couple of more questions, but maybe just frame the whole other part of the business.

Yes, thanks. Yes, I mean, I don't know if anybody has noticed that Android has had quite a tough quite a tough year. We have historically been in a lot of key sockets in Android. Typically if you're shipping a flagship Android device, we are pretty much the only choice for audio there. However, the Android market has been contracting. I think there may be challenges from a geopolitical perspective over time with parts of that market as well. So we feel very good about the leadership in flagship audio there, but it's been a tough year. I think it's probably a fairly challenging environment in the long run as well. So in addition to that, we really wanted to leverage our IP into other markets and to find other sources of growth outside of our largest customer. And the first of those is the PC laptop market, and part of the reason for that is a very accessible adjacency. I think laptops are architecturally trending towards looking more like smartphones. They also -- a lot of the challenges that they have from an engineering and industrial design point of view end up being quite like the challenges that actually a smartphone has already been through. Like, for example, you want to keep making it thinner, you're going to move from mechanical to haptic pads, et cetera. So we've -- so I would say, whereas Android has had a tough year, and I know the PC market itself has been soft. But in terms of where we're at in design momentum, we're very excited about that. So really, 1 year, 1.5 years ago, we were nowhere in that market. As of today, we have 60-plus designs in flight. And almost all of those are based on our existing IP from the smartphone space, existing products from the smartphone space. In addition to those, we have -- we've developed a boosted amplifier specifically for laptops and a codec, specifically for laptops, which we think will continue to propel that and grow that momentum. So -- and I think about 40 of those designs will be on the market by the end of fiscal '23. If I just widen the aperture a little, I think one of the things that's exciting for us about that market, and really no matter what happens to it in unit terms, it's a greenfield opportunity for us, and the SAM is expanding because we see audio opportunity with the transition to boosted amplifiers. So that could be to 4, 6 amplifiers paired device over time. This is the codec, which I mentioned. There'll be the transition towards haptics in the track bed space. And then beyond that, we also see opportunities for power conversion and charging products, which would be leveraging IP that we acquired through the Lion Semiconductor acquisition. You put all that together, and at the higher end of the laptop space, that's multiple dollars of content, for sure, $5 plus of content in the higher end. So that's a pretty significant SAM expansion that kind of takes it up to about $1 billion worth of SAM in 5 years, we believe.

Yes. So just to add to what John said. As you pointed out, obviously, we have about 20% to 25% of revenue from the general market. And we've continued to invest in some of the select categories there. John talked a lot about the laptop space and how we're pretty excited about the design wins that we've already won, but we are relatively well positioned for some of the other markets like gaming and AR/VR and even some of the newer opportunities that people talk about in terms of expanding into a more general purpose analog like market. And so that behaves fairly close to a general populous analog market. And to some extent, -- it is somewhat governed by what happens with the macro, but we are fairly well positioned for growth there as well. So -- it's not just a smartphone story. Even in the -- with our top customer, we have pretty good content in a lot of the access cities. And clearly, that's an area that we're pretty excited about. So it's a much more broadening story as opposed to just smartphone growth.

What are the challenges right here is to try to sort through who had kind of pandemic benefit and who has real specific drivers? I mean I know like in that -- the Android and PC markets, you had one customer or one other competitor had a fire. You had others were just clearly short. And I guess that opens the door for you. And I guess the question is like, will it stay open? And I think you'll explain why I think you'll have a premium solution. But just kind of curious how you view like anything that walks in the door during the pandemic, does it walk back out? Or can you retain these customers?

Yes, it's a very reasonable question. I mean I would point to 2 separate parts of our business. One competitor who had a fire led to us picking up that. It's really kind of in our long tail business. We've got -- I mean most of our revenue is driven by relatively recent products, which run a huge volume, but we have a very large catalog of products, which -- many of which are 10 years or older. They got a significant boost during COVID, partly just from COVID, partly from people in search of supplier post that fire. And some of that may be challenging to retain. But I would say, like generally speaking, we're hard to dislodge once we're there. I think that's a characteristic of Cirrus as a whole. Part of our ethos is to build very strong engineer-to-engineer relationships and understand what the real customer needs are. So getting in the door and market is really just the beginning, and then you can grow and expand value over time. So there are actually cases within Cirrus where we've picked up business through kind of future series of events, as you say, and being able to supply that, but then got engaged with the customers and say, "Well, how about if we did this? " And had a very, very positive response. And then that gives you much more runway. That has changed it from being a kind of lucky break to -- well, now we're going to be the supplier to these customers for the next 5 to 10 years. So we've been taking advantage of that as best we can. I think the other thing I would say, and in the case of the laptops business, we, for sure, got kind of some windfall opportunities entirely separate from the sort of secular drivers that I'm talking about, kind of windfall opportunities as a consequence of other suppliers letting people down. That's a remarkably concentrated market. The top 5 customers in that market, they didn't really appreciate being let down. So I -- and they have been incredibly happy and satisfied with the way that we've served them. So I'm sure everybody is thinking about resilience and not being beholden to one supplier. I get that. So there's a certain amount of reality that will kick in, but I think it means that a substantial amount of that opportunity is going to be resilient and is going to be there to stay.

I wanted to ask you, you mentioned some maybe power opportunities in laptops. But maybe just talk about the line acquisition, obviously, unfortunate timing that Android fell apart fairly soon after, right? But I mean, at one point, they were going to do 90 million-ish trains, I forgot what you said allowed, but a larger number than they ultimately did, right? So I think the market had a big part of that. But in terms of the pipeline, do you still see opportunities with Android handsets with that asset? And obviously, we now wait for Android market to maybe get a little bit better, but is that something we could think about next year?

Right. Yes. I mean, I think one of the real positives there is if Android itself isn't growing, then it's great to have a really strong reason for growing your content within Android devices, which I think Lion does is very complementary to having audio solutions. Clearly, to your point, yes, I mean, Lion was entirely focused on a very, very small customer base in China who's demand went through the floor. And that affected not only the absolute units, but also the desire to push the boundaries on specs just because of the eBOM implications of that. So that was, for sure, a headwind. But the idea of being entirely focused on Chinese Android phones with that team and that technology, that would never have been a good punchline for that acquisition. The point there was to get the team and the IP and to be able to leverage that into other opportunities in other markets. So subsequent to that, we've got some business outside of China in Android phones, which we feel good about. We want to cultivate that and try to continue to grow that. And then beyond that, the team is -- has a very, very relevant technology in the laptop space, which, I think, is going to be a very attractive market for us, as I've said.

I want to ask you on supply. So I won't get into the GlobalFoundries math. We've already been through that. But I think -- I'm curious, you have 2 foundries today. Supply has been a big challenge for most people. You, obviously, signed a pretty big agreement with GlobalFoundries. But I think you've also been talking about maybe bringing in a third path. So how do you think about your supply equation? Are you getting everything you need now? Obviously, with end markets saying weakening it's getting better, but people still talk about the trailing edge still tight. So where are you today and kind of what's the rationale bringing maybe another [indiscernible]?

Yes. I think we've seen some improvements here and there. And our major partners, TSMC and GlobalFoundries, are great partners to us. Neither of them can give us everything we need over time, and that may be capacity or maybe process technology. And so for us we see a need for us to find solutions because, obviously, we are supply constrained today in the sense that supply constraints meant that we had to be very selective about what we chased over the past year, 1.5 years that can -- so it can affect how we expand our business, it can affect attach rate of products, it can affect our ability to bid for new sockets if we can't give confidence to our customers and supply. And that's been one of the most dominant themes over the past year is that the customers need to know for sure that you will be there able to meet their demand. Even if you can execute technically on the product, you need to have a supply piece of the jigsaw really firmly locked in. So to the extent that if we see constraints within our existing suppliers, which we've seen limit our ability to win new sockets, then it's absolutely the right thing for us to do is to bring up another partner so that we're not held back in that way.

We're out of time. Thank you.

Thank you so much.

Thank you.