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

Good morning, everyone. Welcome to day 1 of the Stifel 2023 Cross Sector Insight Conference. My name is Tore Svanberg. I'm a senior analyst covering the semiconductor sector with a focus on analog-mixed signal and connectivity. It's my pleasure to introduce Cirrus Logic management this morning. So with us from the company, we have John Forsyth, who's President and Chief Executive Officer. He's to my immediate left. And to his left, we have Venk Nathamuni, the company's Chief Financial Officer. We also have Chelsea Heffernan here in the front and she's Vice President of Investor Relations. The particular format for this session is the fireside chat. So with that, we're just going to get started. Thank you.

So thank you, John. Thank you, Venk. Thank you, Chelsea, for coming.

Thank you, Tore.

So John, let's just start with a very sort of easy question. Give us a 2- to 3-minute overview of Cirrus Logic, especially for those investors that are perhaps not as familiar with the company.

Right. Thanks. Yes, and I see some familiar faces and some new faces. So just to recap who we are. We've been developing mixed-signal products for a variety of markets for about 35 years. Most recently, over the last 1.5 decades, our business has been principally based around the smartphones and principally based around audio products, initially at codec, then boosted amplifiers. But the story beyond that that's been incredibly exciting is the continued expansion beyond audio within the smartphone market. So we branched out into other areas of -- what we call high-performance mixed signal. And those include camera control, haptics and then, more recently, power. So today, we're shipping in some leading smartphone devices up to 9 different pieces of content, and we see plenty of opportunity as we look forward for continued expansion in the high-performance mixed signal space. So our strategy as a whole going forward, has really 3 prongs to it. Number one is continue to lead in smartphone audio. We see opportunity -- we're really the leader in smartphone audio across all categories. So both the iOS side and the Android side. If you're making a flagship device or a high-performance smartphone device, it would be a big call to not use Cirrus Logic audio. And then -- so we see continued opportunity for growth in smartphone audio. But beyond that, the second prong of our strategy is to continue to expand the high-performance mixed signal in the smartphone space. So I mentioned haptics, power and we see -- cameras, and then we see other opportunities out into the future to continue to provide a basis for further revenue growth. And then thirdly, the third prong of our strategy is to take those technologies across audio and the increasing array of high-performance mixed-signal areas, and leverage those into growth in other new markets. So one we've talked about is the PC market, which is undergoing an architectural transition to become a lot more like smartphones. So it's a relatively close adjacency for us, and we see great opportunities in audio and high-performance mixed signal there. And then we'll increasingly look to other markets beyond that with this diverse portfolio of technology that we have.

Great. Thank you for that introduction. So let me start with perhaps a bit of a historical question, John. So I know Cirrus has always tried to diversify the revenue stream, obviously, because you have a very large customer. And there was a time, especially after the Wolfson acquisition, you tried to diversify, especially by customer. But I think since you've been CEO, I think the diversification has been a little bit more targeted at the technology side of things. So not only being focused on audio, but to your point, even you did the introduction, HPMS and so on and so forth. Where are we in that -- what inning are we in that strategy? Because I'm sure there's a lot of things you can do as a low-power mixed signal company, right? So how many more opportunities should we think about over the next few years as you continue that strategy?

Right. Yes, thanks. That's a great question. And yes, great observation about the nature of the business and the way we've been evolving. One of the views I've had over the past few years is that although we have this incredibly strong leadership and IP and product portfolio and audio, there simply isn't enough audio out there to serve our long-term growth ambitions. And I would say that's partly because of limitations in the audio market, partly because we focus on high-performance, power-efficient audio where you have to care about those things for us to get paid for it in the way that we want to. So from my perspective, it's very important to cultivate a wider range of technologies, wider range of products that could be applicable to other sectors as well as smartphones, and to grow our opportunity set that way. And you can see that -- if you look at what we anticipate to happen to our [indiscernible] SAM in this phase. So if you compare it in 2022, I think we talked about our total SAM as being about $3.4 billion, the majority of which was audio-based. In 2027, we think our SAM will be around 8.4 billion and the majority of that would be in the high performance mixed signal space. And certainly, the high-performance mixed-signal space represents the bulk of the growth of that SAM over time. And so that's a whole range of areas there from cameras, power, haptics and other areas beyond that, that we haven't necessarily spoken about yet. But a very significant broadening of the SAM that initially has relevance in the smartphone market. So our messaging has been more about the technological diversity and product diversity. But over time, we believe that gives us the platform to go and serve other markets and unlock much more growth than we would have been able to do with just audio.

Right. And I know there's limitations on what you can say about your largest customer, but they did have a pretty big spectacular event yesterday with the introduction of new products. Is there anything that you could share with us -- again, not prenouncing your design wins or anything like that, but if you think about your largest customers vision of technology and what they're doing and how that could impact, so I'm thinking maybe about even some of these new iOS functionalities that they introduced, right? I mean is that something that could impact you? And of course, I am going to have to ask about the headset, too, because there's so much technology in there. And you've got spatial audio. I mean there's obviously tons of camera controllers and so on and so forth, right? So, yes, a bit of a rambling question, but anything that you can share with us.

I did not anticipate that you asked about the headset at all. Just straight off, I pretty much always say -- well, I'm not going to talk about our customers' products and so on, I'm not -- except I'm going to say that looks like a completely amazing product, actually. It was very, very exciting. From the perspective of opportunities for us to now not talking specifically about any product, that kind of platform, AR and VR, we are excited about. We have been in more or less every commercially available AR and VR kit to date. The units associated with those have obviously yet to move the needle, but we're still in such an early innings of that. The real use cases haven't been hit on yet. I think you need an attractive platform, you need to develop a community and you need that kind of flywheel of innovation to drive that. We absolutely want to be a part of it. So that track record we have of having been in so many of the headsets launched to date, we would want to continue that. And I think there's a lot of stuff going on in those headsets, that's very, very relevant, where our technologies and our strengths are extremely relevant. Because one of the things that drives our success in smartphones is the fact that we invest heavily in advanced geometries for mixed signal. It allows us to make things which are way smaller, more power efficient and to integrate other components that might be sitting on the board and save space. And if you think about those constraints on physical size and power consumption, which are already fairly extreme in smartphones, I think that just goes to a whole new level in something that you have to wear on your head. So every square millimeter of silicon, every jewel of energy you're using and every gram of weight counts enormously there. So I think that plays to our strengths very, very well.

Very good. And I don't like this question because we've been asking it for like the last, I don't know, 15 years, ever since you got into your largest customer. Don't quote me on the exact year there, but there's always this concern that you're going to get designed out, right? Because some of the other companies historically got designed out. But if you look at the technological evolution and you think about audio and especially HPMS, would you say like the risk of getting designed out is increasingly lower? Again, going back to what you said about advanced geometries, low power, small form factor, I mean, it's -- this is not very simple stuff.

It's really hard. And I think we are actually in an ever diminishing set of people who can do the kind of stuff that we do, and that puts us in a very strong position. I think beyond that, the technical side, which is that we continue to invest in really leading edge innovation in this really hard-to-do stuff. Beyond that, there's also the long-running relationship and the way that has developed and deepened over time. I think we're a really close innovation partner for our largest customer. There's a lot that's difficult to see from the outside about that. But I know that they turn to us when they have really hard problems to solve and they expect things to go well when they have really hard problems to solve that they ask us to work on. And we put an enormous amount of effort into ensuring we live up to that. And we serve them well. And our track record of execution is, I think, really second to none on those hard programs. So I think that risk has -- I mean, it's -- when you don't know as well and you don't know the dynamics, I can understand why people see that risk, to some degree it's always there. But I think the -- there is so much going on between the 2 companies and so -- such a long history of trust and execution that, that puts us in a very strong position. The other thing that I would say is that we've -- because we've broadened the number of products that we ship over time, the risk associated with any one socket has become far less significant. It's not that it's not significant because the number of units, that particular customer ships make virtually anything you do with them very significant. But it has meant -- we've gone from one piece of silicon in a device to 2 to 3. And now, as I mentioned, up to 9. And that, again, gives us some confidence around the kind of risks that you're talking about.

Right. And maybe staying on the topic and a question for you, Venk, because I think you have a pretty difficult job, right, because I'm sure the largest customer, to John's point, there's so many things that they want you to work on, right? But you've got to manage that R&D budget, you've got to protect your operating margin, right? So how do you find that right balance, making sure that you spend enough but not too much, especially considering that perhaps not all these projects that they're working would eventually make it to the market?

Yes. Thanks for the question. And really good observation in terms of from an R&D and capital allocation standpoint, how do we determine what the right investment is and what the metrics are that we want to track on a regular basis is that, while we are continuing to invest in this key customer relationship and continue to expand the product portfolio, as John mentioned, where we were predominantly an audio supplier for the first several years and now we have a slew of high-performance mixed signal products. And to be honest, there are lots of things that are still in the pipeline in terms of our opportunity to work with that customer. But I think one of the things that you would have noticed is that we have taken some of those capabilities that we've built for this particular customer, and now we're expanding into other markets and other areas. John briefly alluded to the fact that we're now expanding to the PC space and such. But it's a constant evaluation in terms of what is the total opportunity set that we see in front of us and how do we apportion the R&D dollars between the opportunities with the key customer, but also in terms of product diversification, technology diversification and market diversification. And I think over the long haul, the way to think about it is we have been, from a gross margin standpoint, roughly 50% plus or minus. That's kind of our typical model in terms of how we want to balance between top line growth and profitability on the gross margin front. And on the op margin side, we do see an opportunity over time. Obviously, depending on where we are in the cycle and such, that I set in specifics around op margin that are pretty much fixed. But over the longer period, we think we have the opportunity to expand as we continue to leverage the IP, the portfolio that we've built. We continue to invest in not only existing products -- I mean, products with our existing customers, but also leveraging it across different end markets and different customers and such. So it's a process, and we constantly evaluate the opportunities in front of us and make sure that we, over the longer haul, are able to improve their operating profitably.

Got it. And maybe staying on that topic of R&D leverage. Because when I looked at that -- your largest customer announcement yesterday, I mean, there's definitely a convergence trend going on among all their devices, right? I mean we all know it's an ecosystem, right? But like there's a lot of convergence, like watch to phone. Obviously, now with the headset, the bigger displays, it's something like -- it's getting a little bit crazy, the amount of convergence that you could get. So maybe a question for both of you there, right? I mean on the one hand, that obviously means you can diversify it into more devices, including the laptops. But then to your point, Bank -- R&D dollars that perhaps were already going after one application, now you can leverage across all platforms. So maybe talk about the opportunities, but also the optimization of those opportunities.

Yes. I think you're absolutely right. And to the extent that, that customer wants to have consistency in the feature set and user experiences across a variety of devices, that creates opportunity for us to take IP. And in most cases, it would be IP rather than the silicon, I think it would typically need to be repackaged in some way. But the fundamental IP development would be highly relevant and apply that to new categories. I think we've seen that in the case where we had been shipping audio and haptics for some time before we then ship the combined audio and haptics device into the wearable, the watch. And then I think as you have more of these platforms or more of these devices with the kind of consistency and that user experience, that creates more opportunity for that over time.

Yes. And I think just to add to John's point, the fact that we're taking that IP not only leveraging it across products within the key customers' platforms, but also able to leverage it across other end markets, I think that's something that we're seeing more of, especially in the high-performance mixed-signal domain. And we see the ability to leverage the R&D investments not only across customers, but also across new product categories and such.

No, I think the key here is definitely the limitation of audio, but obviously, the applicability of HPMS in so many different things. So maybe we can move on to some tougher questions. Those were a lot of nice questions. So you recently, on your recent call, talked about your large customer canceling a project, if you will. Maybe not canceling it, maybe it's delayed, who knows, but this certainly impacted you from an inventory perspective. So I know there's been a bit of time now since that announcement. So anything you can share with us as far as how you're handicapping that particular situation?

I'll make a comment and then hand on to Venk to talk about inventory and any other aspects that I didn't cover. But Tore, you mentioned our last call. So that -- on that call, we talked about the fact that we had previously been signaling that we expected a new piece of high-performance mixed-signal content to ship this fall. The customer for that had to change a plan and we had no visibility on when that -- when there might be a replacement plan, and therefore, we've taken that out of our model. That remains to be the case -- remains the case today. We obviously feel very proud of the technology that we've developed there. We hit our milestones on the silicon. It's very cool technology, but we're obviously dependent on customer plans. So we continue to have dialogue with that -- with the customer around that. We'll continue to work on it. It's a work in progress. I think one important thing to stress there is that's an extremely rare event for us and it's an extremely rare event for the customer in question as well. In fact, literally over more than 1.5 decades working with that customer, neither us nor the customer have ever had a situation like that. And everyone is kind of scratching their heads to recall an equivalent event with that customer. So it's rare, it happens. I think it's kind of in the nature of trying to do really hard things on the innovation front. The relationship remains extremely strong and very broad. And so we continue to work with them very closely on how we can continue the underlying momentum around the HPMS expansion, which we still believe is a very, very solid set of opportunities for us.

Yes. And just to follow on John's comments. So from a model perspective, we obviously took the sort of both of our fiscal '24 and fiscal '25 model, it's still kind of a dynamic situation. And then, Tore, as it relates to your inventory question, multiple parts to it, right? So as I mentioned on the earnings call, if you look at our inventory position over the last couple of years, especially as we were constrained by what's happening in the overall environment, there was a lot of supply-demand imbalance and we were in a tremendously constrained environment for the last couple of years. So as a result, our days of inventory was substantially below what it normally should have been and needs to be going forward. So even prior to this particular chip not being part of the plan for this year, we had talked about building some inventory because we needed to be much more of a balance in terms of our ability to ship product to our end customers. So that aside, there is obviously some inventory associated with this particular part that's no longer going to ship. Now we have not quantified because we're still in active discussions with the customer in terms of how it gets dispositioned. But suffice it to say that there will be some elements of that inventory that's specific to that part, and we're dispositioning it. We will make the announcement whenever the time is right. And then outside of that, we do expect our overall inventory to go up over the next couple of quarters, primarily driven by the fact that, number one, as I said before, we're in a substantially lower inventory position today than we wanted to be. And number two, if you look at our capacity agreements with our wafer suppliers, we do want to be able to build inventory in a more linear fashion. So when you combine all of those factors, that's what's driving the inventory situation. And then typically, when the business picks up due to seasonality, you'll see the days of inventory come down. But you do see some inventory building up in the next couple of quarters, and that's part of the plan.

Got it. And as far as the capacity agreements, there's nothing there to be concerned about. My understanding is some of that inventory has pretty long shelf life. So it's mainly an inventory question at this point and not necessarily capacity.

Yes. Great point, Tore. So on the inventory front, and as it relates to the capacity agreement, especially with one of the suppliers that we have that we signed a long-term contract with, the process geometry that, that particular agreement entails is used for a multitude of for other products as well. And as you pointed out, Tore, a lot of those products have tremendously long lives. And so clearly, from a demand perspective, we're going to build ahead of the demand. But the stickiness of that product categories has been fairly long, and we see that runway extending. So the fact that we are able to repurpose the wafers that were intended for this other product into existing products that have longer lives, make us feel that it's a manageable situation going forward.

Understood. So back to the content growth. So obviously, this was an expected country growth that's not going to happen. But John, can you talk about any other things that we should look out for, not necessarily just for this year because, obviously, I know a lot of things are already in place for this year, but especially the next 24, 36 months, as far as other content possibilities that could be on the bucket?

Yes, of course. So one of the areas of -- actually, I'll talk about audio first as maintaining the audio leadership is kind of pillar 1 of our strategy. We've indicated publicly that we have a couple of major developments in a fairly advanced stage in the audio front right now. One of those is a new generation codec, which represents our first 22-nanometer product as well. Moving to 22-nanometer is, again, kind of pushing the boundary of what people are doing in the mixed signal space for this kind of product, but gives us the ability to embed a lot more processing there. Again, deliver greater power efficiency, shrink the board space and deliver all those benefits I referred to at the top of this chat. So we're very excited about that. We anticipate that shipping -- I know I said within a couple of years a call or 2 ago, and you pulled me up on that. So we anticipate that shipping in the back half next year. And running on the same kind of time line, we've also -- we're also at an advanced stage of developing a new generation boosted amplifier. And again, the boosted amplifier development that we're engaged in will deliver significant efficiency and cost and size reduction for the customer. And again, it looks like it will cement our leadership in that category and run for a considerable amount of time after we introduce it. On the HPMS side, we have significant developments -- investments across multiple areas of HPMS, as I indicated. One of the consistent areas of growth for us has been cameras, camera controllers in particular. We have seen the total value of our camera content steadily increase with each cycle. We anticipate that continuing. So as we look this year, next year, the year beyond, we see a very positive path there, and we continue to believe that, that's an area with a very rich road map and lots of opportunity for us, especially given how important that is as a competitive differentiator and a marquee feature in the product launch. And then beyond that, we continue to make significant investment in power. So we have a number of research and development programs underway in relation to power. I'm not going to say any more about that right now, but we continue to believe that represents a great opportunity set for us as we go forward.

And I know you can't talk about specifics in power, John, but there are a lot of power management companies out there. So I assume, again, the differentiation is going to be mixed signal, low power efficiency, small form factor. And will it be a bit more of a customized business? Because, again, there's a lot of good companies out there that know how to do...

That's a great question. I'm really glad you asked that because we do not want to ship vanilla power management stuff. And our first power product, which we call the power conversion control, IC was -- it really didn't replace anything. It was the first product of its kind that sat and managed the system power being drawn from the battery and managed the health of the battery over time. And our advantage in power as we see it or at least part of the advantage, as we see it, is, given our investment in advanced geometries, we can integrate far more digital alongside the analog circuits associated with power control and power conversion and power management. What that enables us to do is drive efficiency, integrate algorithms, which are far more intelligent. So when it came to analyzing and monitoring and controlling what's going on in the battery, there was really something which wouldn't have been possible without a lot of digital processing sitting alongside. So I believe, generally, power is going to become more digital. It's going to have more digital control in a lot of applications. And we will see some of the more conventional power companies needing to migrate to more advanced geometries to address that because the only alternative would be sitting another digital chip alongside whereas we feel we're already there, and we have a great advantage. And so those are the sweet spots that we're especially interested in.

Right. Yes, and not to -- I'm not trying to pre-announce anything, but when I saw that headset yesterday, it looks great. I mean it looks weird, right, because when I used it, but still looks great. And then I saw that cord with a little power pack that you put in your pocket, I was like, oh, no, that doesn't look so great. So I'm sure there's still a lot of innovation to be made on that front.

I assure you, there's plenty of headroom for continuing to push the boundaries and improve efficiency.

Yes. Right. Exactly. Any questions from the audience before we wrap up, we have about a minute left here? No? All right. Well, thank you so much, John, Venk and Chelsea for coming.

Thank you, Tore.

And thank you to all of you for coming to the Cirrus Logic session, and enjoy the rest of your day. Thank you.

Thank you.