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

My name is John Vinh. I cover semis here at KeyBanc Capital Markets. We're pleased to have Venk Nathamuni, CFO; and Carl Alberty, VP of Mixed Signal Products at Cirrus Logic. Welcome, guys.

Thanks John.

Thank you.

Maybe, Venk, maybe we can just start with your results. Results in the quarter and the guidance was very solid, but it was kind of interesting that results from your largest customer was maybe on the lighter side. I'm just wondering if you could just help us reconcile your strong results versus kind of maybe what your largest customers are seeing.

Terrific. Thanks, John, and thanks for inviting us. And thanks to everybody who's here at the conference room and also everybody on the webcast. So to answer, John, your question about the results, so we announced our results last Thursday right after our top customer announced their results. So at a very high level, as John pointed out, we came in at very close to the high end of the guidance range. And that was driven primarily by 2 factors. One is as it relates to our top customers business. Obviously, the units came in better than we expected when we gave the guidance. But another aspect of it is also the fact that we've been increasing content in those phones. So even to the extent that a few million units are better than expected, that shows up in the results in a meaningful way. And then the other aspect of the business, which is essentially nonsmartphone-related that -- as I've stated in past quarters, that's gone through some sort of inventory correction and general weakness. Now we're not seeing major signs of it coming back yet, but it is at least stabilized. And so the combination of both the stabilization in the non-Apple business as well as what we did with the top customer, those were primary drivers of the upside in the quarter. And to your other question about what -- the -- somewhat of a disparity between what our customer reported and what we reported, I would say it's always difficult to have a one-to-one correlation because there's a lot of differences in terms of the timing. Clearly, there's a lot of lead time associated with when the customer places orders with us and when we ship those products. And I think if you look at it over a longer period of time, we'll see some good correlation. But any given quarter, there's lots of puts and takes in terms of the performance. But overall, we're very pleased with how we came in relative to our guidance. And obviously, from a guidance standpoint for the September quarter, we feel pretty good about it as well.

Great. The other thing I wanted to ask you, Venk, you talked about kind of an OpEx reduction in an 8-K that you had filed in mid-July that obviously, people were -- kind of fearing the worse there. Investors were fearing the worse, and your numbers came in quite strongly as we talked about. I'm wondering if you could just help us better understand this kind of OpEx reduction that you announced.

Yes, John, I'm happy to address the OpEx question in just a second. But I thought just for the benefit of everybody here, at a higher level, and if you look at the strategy for Cirrus, right, with 3 major pillars of the strategy: one is be a solid supplier in audio for smartphones, which we have done and demonstrated over the last 15, 20 years; second pillar of the strategy is to grow the content in smartphones with new technologies like high-performance mix signal; and then the third aspect of it is how do we take the audio and HPMS capabilities and spread it across new end markets and such, right, and new applications. And so from a strategy standpoint, we're absolutely clear in terms of what drives the growth of the company is the continued investment in R&D, both in terms of the doubling down in the positions where we're already strong, but also in investing in new areas. And so from that perspective, when you look at the action that we took and we announced a couple of weeks prior to the earnings call, we are obviously cognizant of the fact that with the particular change in our revenue picture in the short term that we had to make some changes that will align our cost structure with the revenue outlook that we have. But suffice it to say that we tried to be as thoughtful as possible in terms of how we implemented those actions. One of the things that came up on the earnings call last week, which I alluded to, is the fact that even though we had those reductions, the total R&D that we're going to spend in fiscal '24 compared to fiscal '23 is still pretty solid. We're continuing to add folks in the R&D team. And whatever those cuts will manifest primarily on the SG&A side, clearly, we want to improve our operational efficiency over time and structure the business such that we can continue to do a lot of good things in terms of investments, in terms of growing the top line over time but ensuring that we're also doing it in a profitable fashion.

Yes. And just to emphasize what Venk's talking about from a -- like the principles that guide our product investments and our strategy, those are all unchanged. Obviously, we went into this process to evaluate any impacts on our ability to staff and execute the programs that we think will bring opportunity for us to grow over time. And we don't think there's going to be any sort of impact relative to the product strategy and what we're investing in from a growth perspective, not only in audio, but obviously the HPMS as well. And to Venk's point, I mean, as a company like Cirrus, being able to reinvest and kind of keep really driving innovation in R&D is critical. And we think we can keep doing that.

Great. I think there's also kind of a question of whether the OpEx reductions that you guys have announced are related to this HPMS feature that's not going to be in this year's kind of flagship phone. Is that kind of the right way to think about it that this is likely not going to come back at some point?

Yes. I'm actually glad you asked the question. So first of all, in terms of the cuts that we discussed, those were somewhat driven by the fact that we're not getting the revenue. And as we said on the earnings call, we've taken it out of the model from a revenue perspective. But in terms of the cuts, the way to think about it is we're continuing to invest in R&D and the product lines. It's -- we don't have perfect visibility into what our customers' plans are. But suffice it to say that the IP that we built there is absolutely highly differentiated and very unique. And we do see down the road the opportunity to implement that IP in other applications as well over time. But in terms of the specific timing of this, we're not in a position to talk about what our customers' plans are. And we're not perfect -- to be honest, we're not privy to what those customer plans are.

Yes. That's right.

Yes. Just also just following up to this, Venk, I thought it was pretty interesting that you had talked about that you had come to a resolution on your wafer commitments as well as your in-process wafers. It sounds like there was kind of a resolution with your customers as well as with GlobalFoundries. It sounded like part of the resolution was that you were able to then repurpose this capacity to other HPMS components at 55 nanometers. I think you mentioned, Amps, haptics, battery and power ICs. So what I really want to understand here is what you're talking about is because these analog parts have long lives that you feel that you're basically going to be able to just build inventory to kind of honor these wafer commitments? Or have you actually negotiated with some of your foundry partners to kind of push out the timing of those wafer commitments?

Well, that's a multifaceted question. So I'll start with some of the high-level stuff, and Carl can add a lot more specifics to it, both on the customer side as well as on the foundry side. So first thing I want to make an observation is regardless of what happened with this particular product, our relationship with this customer is top-notch. I mean, we have such a collaborative agreement with this customer. If you look at the history of what we have done with that customer and what the customer has done for us in terms of the content growth over time, I've mentioned this on previous calls, where we've gone from maybe 3, 4 components in their flagship phones to some -- close to 8 or 9 in some of the high-end phones, right? So that's -- that collaboration and cooperation and customer intimacy is absolutely intact because that's the first thing to keep in mind. And as it relates to the supplier agreement, again, we have a really strong relationship with this particular supplier, and we've had -- we've signed a 5-year contract with them, and we're working collaboratively with them as well. As it relates to this particular component that is no longer going to ship in fall as we originally hoped, what's transpired in the last few months is we have worked in conjunction with both the customer as well as the supplier in dispositioning those wafers such that there won't be a financial -- material financial impact to our reporting, right? So I think that's an indication, again, of the nature of our engagement with the customer as well as with the supplier in being able to disposition those wafers. Now it's not -- nothing is cast in stone, but the information that we have and with the engagement that we've had, we feel comfortable that we don't expect a material financial impact on those wafers. Now as it relates to your other question about overall inventory situation, you might recall that over the last couple of years, we've been living in a hand-to-mouth existence as it relates to inventory. It's been unusually low. I mean, some quarters, we're down to like 45 days, 50 days of inventory, but what's more typical is in 100-plus days, right? So even a couple of quarters ago, we talked on the earnings call that our plan is to increase our inventory for those products because, to your point, John, they are all products that have very long lives, very sticky. They've been selling for multiple generations of our end customers' products. And the fact that we want to be able to service a customer more promptly with -- started down this path of increasing the inventory for those parts. With this HPMS component, clearly, there is now some inventory that is in excess of what we had originally planned. But again, to the fact that these are long-lived products and we have good visibility on those products, we feel comfortable that we can manage the inventory through the coming quarters. And as we mentioned in the earnings call, the current quarter for us will be the high point in terms of dollars of inventory. But from a days perspective, it will start declining because obviously, our revenue line is substantially higher this quarter than last quarter, and the COGS is higher and so forth. And so you'll see that the days of inventory will come down meaningfully over the remainder of the fiscal year. And I'll turn to Carl to give some more color on our engagement with the wafer supplier and also with the customer here.

Yes, John, it's probably worth just remembering that the agreement we have with Global is technology-specific, not product-specific. So yes, as we talked, we built a number of products from our audio amplifiers line, our haptic drivers, the power conversion. Just there's a pretty broad section of products that we ship out of that technology node. So we do have the flexibility to build up a particular mix based on demand. So obviously, there's some flexibility built into that, given the nature of the agreement. You also might recall that, that agreement tapers down over time. So we're obviously working closely with the customer and the supplier to kind of look at the shape and the timing for what we need and when we need it. And we feel good about how those conversations are moving at the moment. Obviously, we've got new products in development that will spur growth in the future. And with the way we structured that deal, meaning it tapers down over time, there will clearly be need for us to secure more capacity. And obviously, with each supplier, there are different types of agreements and arrangements by which we get comfortable with the capacity and manage that risk. But I think thus far, we're pretty happy with where things have gotten to in terms of that flexibility and kind of reshaping the needs of the business with new products and having that flexibility to kind of look across products in terms of how we build, which obviously having some products that have run for years and have a strong outlook to run for multiple cycles gives us the opportunity and that flexibility to kind of build up certain things that will run for a long period of time. But again, just the overall shape for the coming few years is something that we feel is moving at the right direction.

Great. I'm wondering if you guys could maybe talk about how we think about growth for you guys next year, right? I think you've talked about that you've taped out and started sampling a 22-nanometer codec. -- next-gen codec. I think you also talked about sampling next-gen amplifiers. Are those going to be the 2 primary key drivers of growth for you next year? Because I know the HPMS feature was expected to be kind of a key growth driver this year. And obviously, let's just assume that it's just out of the model. So it's not going to come in next year. Are those going to be the building blocks of growth? Or are there other kind of growth vectors that we should be thinking about for next year?

Yes. I mean, obviously, we give guidance 1 quarter at a time. So I'll just give you more color around what we think would be some of the key drivers longer term. And I think you hit a lot of the key points there. So we've talked in prior quarters about introducing new products or I should say, next-generation components of existing products, in some cases at more advanced nodes, in some cases in the same node, 2 of those that you alluded to, one is a codec, the 22-nanometer codec, which we've been shipping for multiple years. And now we're expecting to go to the next generation of that product to be introduced sometime next calendar year. And that should -- think of it as an incremental uplift in terms of ASP because it's on a higher process node, more value and such. And then if you look at the amplifier products, that's also going to the next generation. And that is actually there are 3 [ instantiations ] of those amplifiers and expected to happen in the next generation phones as well. So those are the 2 primary categories. In addition, we've talked -- in this calendar year, we do expect to have a next-generation camera controller as well. And so you'll see some linear progression of camera controllers being implemented in our customers' products over time. So those are at a very high level what should be driving our growth. And longer term, we also have the opportunity. We've talked about this on the calls where we've got maybe 70 design wins in fiscal '23 in the PC/laptop market. And we obviously announced another 45 design wins so far in this fiscal year. So we have a lot of growth ahead of us in terms of the opportunities, both within the smartphone market as well as expansion in laptops. Now obviously, the laptop space will take longer to materialize in terms of meaningful revenue. But the design wins are there. Whenever the laptop market comes back, we will participate meaningfully in that opportunity.

Yes. And just to follow on, I mean, as Venk pointed out, we're -- it gets harder and harder to look at overall attach rates and mix and just given the kind of scope of where we ship. And obviously, as you introduce new products or in a percentage of total units and as you go into the subsequent year, you get the kind of tailwind associated with that. And obviously, we're excited to be in the process of ramping our third generation, closed-loop controller and obviously, feel good about the value that both the next-generation codec and amplifier bring to the customer in terms of performance, efficiency, system solution, sizing and attributes that they care quite a bit about. And obviously, long term, the -- again, like the product strategy that's driving our kind of growth opportunities is really as it was. Obviously, there's been a bit of a setback relative to the new HPMS component we've talked about. But that being an anomaly, we feel really good about the opportunities in front of us for growing and expanding the HPMS content in a way that it kind of offsets the dependency on units in the market, which obviously applies both to handsets and to laptops. And then obviously, the longer-term view is this diversification effort to really grow and introduce not only audio but HPMS components into markets beyond smartphones and mobile devices.

Got it.

And John, if I could, just one other thing. We spend a lot of time talking about our smartphone business and now increasingly laptops. But another element of our business, which actually is pretty solid from the standpoint of both stickiness as well as offering long-term growth opportunity for us, is in the general purpose market. We have a catalog business where, again, we've talked in the last couple of quarters about refreshing parts of that portfolio. So we have much more of a platform approach. And that's an opportunity for us to expand our footprint and our SAM in areas like prosumer, in industrial and automotive and such. Clearly, they're not at a point where we can break out the revenue contribution, but suffice it to say, it's a great area of focus for us from a standpoint of long-term growth and also from a standpoint of expanding profitability over time.

Right. Carl, one thing I wanted to clarify when you think about kind of the longer-term growth opportunities around HPMS, right, you've got kind of 3 major subsegments. There's haptics drivers, haptics drivers, amplifiers, closed-loop controllers, camera controllers and then you've got power conversion ICs. When you think about the growth prospects of that longer term, is it primarily outside of mobile? Or do you still see kind of medium- to longer-term growth opportunities within mobile? And if there are, can you just at a high level just talk about what's driving kind of those opportunities?

Yes. I mean, certainly, we see the growth opportunities in HPMS to be both mobile and kind of consumer-related, so mobile, laptops and things of that nature as well as moving beyond smartphones into other applications that Venk touched on a little bit. Obviously, we have a core kind of foundational technology footprint with audio and more and more with things like haptics and sensing and then obviously, further out in time for somebody like Cirrus, we don't have a huge business for the power and battery-related technologies outside of what we've talked about with our biggest customer. But certainly, the opportunity for us to leverage some of the IP we've developed into new applications as part of the long-term plan. But no doubt the near-term opportunities for us to expand and grow are still rather attractive and meaningful from a customer pull perspective in the kind of 3 categories that you mentioned, in particular, the closed-loop controllers that robust -- that road map is quite robust. And there's still a great amount of collaboration around the road map. And clearly, there are good valuable problems to be solving in that space. And again, the power battery stuff for us is fairly small in terms of our footprint and the reach. But there's a lot of activity and a lot of really interesting drivers for long-term growth prospecting that we feel really good about. But it obviously builds beyond smartphones. So that's exciting for us.

Great. Yes, maybe we can talk a little bit about some of these nonsmartphone opportunities. I think you've increasingly been focused on kind of the PC market. I think at a high level, you've articulated that PC looks in many ways like a smartphone that has some of the same building blocks that you're supplying into mobile. Maybe can you talk about what the potential content opportunity for that is and maybe what the TAM is associated with the PC notebook market?

Yes. I mean, you're right to kind of characterize some of the challenges in PC. They look a lot like problems that we've experienced and kind of built really great solutions around for handsets. With respect to thinning form factors, less physical space to move speakers and coupled with the strong pull for much better audio and video kind of voice-related experiences for users kind of positions us really well to capitalize on the knowledge and the capabilities we've built in phones over the last decade with a stronger demand for better audio and better user experiences driven and fueled by people remote working and just that experience being a much more prevalent use case. But I would say we think it extends beyond that, just the opportunities for much more efficient power design, system design and just how things deal with thinning form factors and just more constraint around the battery itself. So yes.

What -- can you talk about what's kind of the potential content opportunity for you in PCs? And then I just wanted to clarify, is the market that you're focused on within PCs, is it kind of more the high-end segment of the PC notebook market?

Yes. Obviously, we're working closely with customers to align on mutual value, which we do see in the kind of middle parts of the market and upward. I mean, certainly, there won't be a great fit for some of the really more cost-sensitive, lower-end applications. But we're working closely with customers to kind of balance and offset or to balance the way in which we go approach solving some of these problems together. But certainly, there's a range of models where you could see anywhere from 2 to 6 channels of kind of output drivers just depending on the configuration. And certainly, there are voice and other codec-related functionality that we see in a lot of those markets as well or a lot of those models. And then longer term, the move to less mechanical switches presents opportunities for sensing and haptic-related products. And then beyond that is some of the more power-efficient point of load and other kind of battery and power-related opportunities that we think could layer on top of the audio over time. So we see dollars of content cutting across our existing products that we think will serve as a pretty good part of that market. And for us, starting from basically 0, it represents a great opportunity for us to go drive kind of near and midterm opportunities with products that have been kind of repurposed from mobile and then obviously, some application-specific products we've just started sampling and introducing. And that, coupled with some of the really great collaboration with some of the industry platform partners as we talked about in our most recent press announcement, just kind of developing that ecosystem of partnership around some of these new components and the new interfaces combined with the pull for better solutions, both from a power and audio perspective, make that a pretty attractive space for us.

Great. Maybe we can switch to Android. What are you kind of focusing on in terms of growing content on Android? What are going to be the key drivers of growth in the Android space over the next couple of years?

I mean really, our Android position is largely as it has been. We're really focused on the high tier parts of that market with the top customers, so more of flagship focus. And there's certainly some headwinds in the Android market for sure. So it doesn't represent a really material investment area for us as a company. But obviously, we have really well-established customers and really good technology to service the high-end parts of the market. But the kind of other parts of that market are not super attractive for us from an overall revenue perspective and investment perspective. But certainly, the audio and haptics-related components and technology we do have for the high-end parts of that market remain kind of best-in-class. So we remain super collaborative with key customers in that space to kind of maintain those sockets.

Yes. And just to add to Carl's point, so we will continue to service those customers best way possible and continue to make those investments. But going to the lower end of the market, it's not something that we're too excited about.

Great. Any questions? Venk, maybe we can just talk about gross margins. Just how are you thinking about kind of gross margins longer term? I would imagine that as you increasingly focus on HPMS and start to diversify outside of maybe iOS, are there opportunities for your gross margins to kind of trend higher here? Or what are the puts and takes here?

Yes, great question. I'd say, John, as you can tell, we've been fairly efficient in terms of operating at the, call it, 50% plus or minus over the last several years. And just given the long-term nature of our engagement, both with our customer -- our key customer as well as with the foundry suppliers, I think you can think of gross margin being fairly stable at these levels for some time. However, having said that, we are continuing to expand into other markets. We are diversifying into kind of the general purpose catalog business that I alluded to earlier. And those typically tend to be higher profitability than corporate average. And that's kind of a typical analog mixed single end market exposure like industrial and automotive and such. And that's an area that we're making significant investments into. Obviously, it takes a while for that to materialize. But the good news about that particular market is it's very sticky. You can get revenue for multiple years, in some cases, 10-plus years, and on top of it, the profitability is where we want it to be long term. So longer-term horizon, we do see the opportunity as we expand into other markets to improve the gross margins. But in the short term, think of it being the 50% plus or minus.

Great Thanks guys. It looks like we're out of time. Appreciate it.

Thank you so much.