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

Okay. Good morning, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets. We're pleased to have Cirrus Logic with us this morning. We have Jeff Woolard, CFO; and Carl Alberty, VP of Mixed-Signal. Welcome, guys.

Thank you.

Thank you.

Thanks for having us.

Maybe the first thing we can just talk through is when you kind of reported your results, you talked about maybe seeing some pull forward of demand of smartphones and talked about how that kind of shaped kind of the back half of your fiscal year. I was just wondering if we could just kind of recap that and talk about kind of the dynamics that are driving that?

Yes. I think there were a couple of dynamics. We do think there was some pull-ins. It's hard for us in the value chain to know exactly how much. I think it's probably hard for anybody to know exactly how much. So that was certainly one factor. Another factor for our business that impacts what would be our seasonality is camera content. So as camera content becomes a bigger piece of the total revenue pie, that has to be shipped earlier. So it's -- there's another step in the manufacturing process. The camera content goes to a module maker and then goes to the end assembly. So as -- even if you remove any kind of pull-in impacts, that's just a structural difference as camera content becomes a bigger piece of the total revenue. You'll start to see that earlier -- in earlier quarters than when it was a smaller piece. And that was showing up this year that started to show up last year. But that was really one of the other driving pieces. So that was really impacting the timing versus our outlook for the year, which we think remains relatively the same.

Okay. Thanks for walking us through that, Jeff. Just a follow-up on that. You have been obviously shipping camera controller content for several generations right now. So if you've been shipping for several generations, why is it impacting the seasonality of this year versus previous years?

Yes. It's really -- it's a percentage of the total. So as we've generated more -- shipped more and more generations and those start to waterfall through different products, they just become a bigger piece of the total. And that's really what you're seeing. And that -- as it waterfalls through, that does take time for that to develop. And I said we started to see that last year, see it this year. So it's just more of a structural change as the camera content grows as a percentage of the total.

Okay. Carl, this question for you. Mixed-signal has been a truly success story for you guys. You've done extremely well. You've seen a lot of growth in camera controllers. It seems like historically, the drivers have been increasing attach rates, maybe higher ASPs as you migrate to latest generation camera controllers. When we think about growth going forward, do you still see growth driven in camera controllers? And what are the dynamics that you expect to drive that growth?

Yes. I mean I think we expect to see what's been happening since we started this business about 5 years ago, we expect to see that continue. We're shipping 3 different generations of products, the latest of which has higher functionality, higher performance, a 6x increase and processing capability and the customers continuing to take advantage of that. So I think we see that in the road map. So on a device-to-device basis, we see content expansion. And then obviously, we see the attach rate and the kind of flow down through the portfolio to be kind of drivers of growth. And the road map, like I said, is very robust. It's super exciting. And the customer is obviously still investing quite a bit in innovation in this particular application, which is good for us. And like that partnership is super strong, both on the hardware side as we, again, are developing multiple products that further performance capabilities, channel counts, processing, et cetera, coupled with the algorithmic kind of firmware work and kind of the partnership we've got working with them to ultimately net out to a slow and steady kind of expansion of the content opportunity and therefore, the revenue over time, very exciting.

Great. Can you talk about what your strategy to expand HPMS content beyond camera controllers and smartphones?

Yes, sure. So I mean, obviously, we started by moving into haptics and then camera control. Power conversion and control was another big thing. We're super excited about the road map for the power conversion and control IC, especially with AI use cases showing up more and more and that driving kind of peak power demands on the system. The function of that power conversion and control IC is really to be able to sit between the battery and the system and deal with peak power demand such that the downstream performance of the actual device is not compromised. Obviously, a brownout or the phone not being able to handle the power demands is not good for the user experience. And so we're trying to build on that capability, not just in terms of that like system-level know-how, but also application of that, including beyond the current application in phones. And then there's certainly a whole lot of know-how we've built up in terms of sitting between the battery and the system and looking at all the different requirements around safety for the battery, health of the battery, how you intelligently charge and discharge that battery and subsequently deliver power into the system. And that plays really well into our strengths around like ultra-low power sensing, the data conversion for, again, measuring and monitoring what's happening both with the battery and the downstream power delivery. And so much like a lot of the custom things we do, we have to build and prove that IP out in silicon before really engaging on a custom product. And so we've been working on that in a variety of areas in this kind of battery and power kind of compute space. And so it's definitely a long-term endeavor. And so we're still super excited with that content expansion opportunity in camera and then building beyond that with the kind of battery and power sensing and the battery kind of power conversion and control IC. So that strategy is deliberate. It's long term in nature because we do have to build out the IP ahead of time and build it in silicon to kind of prove it works to kind of derisk and kind of jointly tie up with the customer in terms of how we do a custom product. So that's something we're working on quite actively.

Great. Maybe just related to that, I think it's the AI smartphone replacement opportunity, I think, has been a little bit underwhelming right now. But obviously, there are certain requirements around the concept of an AI smartphones. Is that something that you see kind of playing into kind of the increasing requirements around battery and power management and things like that?

Yes, certainly. I mean we think we're well positioned. I mean, obviously, we've launched and ramped new devices last fall, including a 22-nanometer codec, which brought incremental value and covers off not just audio and kind of voice input capabilities, but other sensor inputs as well. And we think that's positioned really well to capitalize on new use cases and interfaces as it relates to AI. So we're certainly excited to kind of support that and look forward to kind of those consumer experiences just getting better and better. And certainly, in the power and battery space, as I was just talking about, there's a lot of demands on the system and peak power. And just frankly, the amount of power consumed by doing these kind of on-device processing for AI kind of use cases, will just put more demands on battery life for the phone, which kind of plays again to our strengths around how do you optimize power delivery, how do you manage battery life efficiently. And I mean, for our low-power signal processing IP in that portfolio, it plays really well into our strengths to kind of continue to capitalize on that as AI grows.

That's great. Maybe we can talk about the PC opportunity. That's been another emerging success story for you guys. I think you've done tens of millions this year and are on track to kind of double it in the next year. It looks like if you look at the 2 platforms between mobile and PCs, you've been able to leverage the fact that you're selling similar products into both platforms, amplifiers, haptics, codecs. Can you just talk through what you see as maybe the obvious similarities and maybe what are some of the differences when you look at these 2 different platforms?

Well, certainly, the kind of design trends and form factors are common. So thinner, lighter form factors. I mean, laptops are -- have been going through that kind of thinner and lighter form factor and how do you do that without compromising battery life and user experiences. You could argue that the laptop OEMs have maybe been slightly slower to realize the importance of the audio and video or the audio and voice kind of user experiences. We've been shipping boosted amplifiers in smartphones for over a decade, and that's really just started in laptops. So for us, it's an exciting like greenfield opportunity, reinforced with like actual like OEM customers like pulling on we just need better audio and voice solutions. So there's a lot of similarity in terms of the underpinning kind of acoustic and audio challenges to deliver a really good audio experience. Laptop speakers are on the order of twice as big as a smartphone speaker. But there's still a whole host of design and systematic kind of challenges around how do you make what fundamentally really small speakers sound good. And frankly speaking, from our perspective, the solutions available to customers were just insufficient relative to delivering that experience. And we view that as like continuing to just move forward and customers won't go backwards, right? I mean, especially when they're all competing for market share and see other competitive brands doing certain things in audio and getting really favorable reviews and feedback based on technology we're enabling, we see that to just accelerate. And to the point on the last question around AI, like voice as an interface and like that context awareness and user experience with voice as an interface to -- as one alternative to a keyboard, we just think that accelerates and drives an expansion of content opportunity for Cirrus that's super exciting. So certainly, there's a lot of commonality from that perspective. The design process and the design kind of -- well, the design process is different just with ODMs and OEMs and the kind of reliance on Intel and AMD and chipset partners and the emergence of ARM. So there's definitely complexity in the ecosystem that's different from smartphones. But the underpinning technology kind of commonality is really strong, and the customer pull is great.

That's great. Maybe we could take a step back. As you know, if you look at the PC notebook opportunity, you kind of displaced kind of a long-time entrenched incumbent who's Taiwan company who's very focused on cost optimization. Maybe just talk about how you were able to kind of come in and displace such a well-entrenched incumbent there?

Yes. I mean, certainly, they are a well-entrenched incumbent shipping a variety of different technologies, of which audio is obviously one of them. To my point, I think the bar has been raised. And I think there are certain brands in the market that spend a lot on audio, and that shines through in that user experience. And a lot of customers were getting kind of left behind in terms of that benchmark for audio and voice, exacerbated by people working remotely in Zoom and Webex and kind of other things that we experienced during the pandemic. And again, there's really -- it's hard to go backwards. And so we look at it as not like what is your chip cost versus the incumbents, but what does the total cost of ownership look like for a company to do business with Cirrus. So it's the chip, but it's also the algorithms and the audio and voice software that we can embed on our chip that can eliminate royalties of software and other branded things. When you consider the quality, the reliability, the return rates and just what that means for OEMs dealing with returns on like bad quality or vibrations and mechanical rattle-induced kind of distortions and people just return them, like that total cost of ownership, coupled with our ability to enable customers to use cheaper transducers, cheaper speakers with our amplifiers, when you net all that out and look at the total cost of ownership, we actually think it's a win for customers. And with that, they also get premium audio and voice experiences that we feel are unmatched in the market.

On the last call, you talked about kind of a milestone about being able to penetrate into the mainstream notebook market, right? Which you felt was a big win for you. Your gross margins continue to tick up. Can you just talk about the differences and what you did to kind of get to that next milestone of going mainstream versus high-performance, high end?

Yes. I mean, certainly, we've started at the top. And again, I think it is partly to do with customers wanting and needing that same level of experience and audio performance across their portfolio to not lose pace with other brands. And obviously, we've also purpose -- we've repurposed parts that were built for smartphones. And then we've also introduced multiple new families of codecs and amplifiers that are specifically built around laptops. And that obviously includes kind of broadening the portfolio to offer solutions that are more tailored for mainstream applications. So a slightly lower cost point, different configurations and different optionality for integrated amps versus external boosted amps. So again, I think it's a statement of broadening the portfolio of being mindful and super close and collaborative with customers on what they can afford and where they're willing to spend money and also contemplating the total cost of ownership, like, okay, we can build you this amplifier, you can use a cheaper speaker and like the total cost for the mainstream actually makes sense. And so we've been able to win on that. And then it's just close collaboration and close road mapping alignment with customers to really dial in budgets and functionality and capabilities again, with an aim to deliver really premium experiences, not just in the flagship, but also in kind of the mainstream commercial and consumer side of the notebook space.

Great. Are there any questions? Great. Maybe another question for you is if you think about the market for the PC notebook market, obviously, the entrenching comment, you're probably not going to want to go after the kind of low end of the market. So can you talk about just what percentage of the -- or what part of the PC note market is actually addressable for you guys?

Yes. I mean we view it as kind of the mainstream and app. So we don't really target the $600 kind of retail price point and below, which roughly is maybe 120 million laptops, give or take. And certainly, as I mentioned, we've been building a portfolio of products on codecs and amplifiers for audio and voice. We've been building out that portfolio to address a bigger part of the market. And again, we're seeing content expansion opportunities already in the mainstream, kind of building beyond the codec to include amplifiers. And so certainly, the baseline is audio and voice. But beyond that, we're shipping haptics drivers into really premium kind of flagship models. And we've got some power components as well for power delivery also in some of the AI models. So when you put that all together, it's like roughly 1 billion unit or $1 billion SAM for Cirrus. And so again, we started basically from [ 0 ]. So we're seeing a lot of good design momentum and like starting to get new products and filling out the portfolio to address these different technology areas, both audio and HPMS. So yes, I mean, $1 billion market in total for us, it's quite good.

Very nice. Can you talk about the Compal partnership and how that's helping you scale your business?

Yes. I mean, as I mentioned earlier, in terms of like cost of ownership of using a company like Cirrus, the Compal is a new collaboration really aiming to kind of to deal with systemic kind of challenges around audibility of distortion things induced typically by mechanical rattle. So there's a lot of moving pieces in a laptop, the keyboard and a variety of different subsystems. And those over time or even on the production line can introduce vibrations and that will distort the audio signal. And that will not only cause bad user experience, but it can be variable across the manufacturing line, which can result in the same product having a different user experience. And often, it's not really optimized. And so we've used machine learning techniques and AI to model and predict where these frequencies are going to be in terms of mechanical rattle distortion, and we can automatically kind of tune that out to, again, have a uniform and consistent user experience across the manufacturing process and kind of up and down the portfolio. And then over time, we expect to continue expanding on that. So it's still early in terms of that collaboration, really not about scaling the business. This message is about scaling and optimizing the user experience across the manufacturing process and ultimately kind of reducing the total cost of ownership and not compromise on audio.

Right. Jeff, your long-term gross margin target is 49% to 51%. You've been running meaningfully above it for several quarters now. Is this sustainable? What's been driving kind of that outperformance? And is there potentially an upward bias to your long-term gross margin targets?

Yes. I think a couple of things drive the gross margin as we have different product mix during the quarter, can be the timing of when we introduce new products and then also the timing of some of our supply chain cost reductions. And so that can cause us to move sort of quarter-to-quarter. I think the other thing we look at for long term, what would be some of the growth of other diversification efforts that would cause us to change that long-term goal. Those are sort of the elements we're looking at. But structurally, we're very comfortable with where we sit today with being able to sustain the gross margin target we've given.

Okay. Does HPMS just on average, have an accretive gross margin profile in general for your business?

It's difficult for us to say that. We don't necessarily look at it on an audio and HPMS from a gross margin target. We're more looking at the blended portfolio and making sure that the places we're at in the segments we're at are fitting in that long-term target.

Okay. Maybe switching to operating margins. You've been running kind of in the mid-20s over the last several years. What's kind of the right target that you're looking at? And how do you kind of balance that against making the necessary investments in R&D to continue to drive growth?

Yes. When we look at that, we're obviously seeing where can we invest and some of these opportunities that Carl has talked about, how can we balance our resources internally to make sure that we are hitting the different development cycles we need for all of these different segments. Right now, we're comfortable with where our footprint is, but we will continue to look at different opportunities. And if we see something that is very attractive and requires us to increase investment, we'll do that. So we're really not necessarily looking at trying to hit a target as much as we're trying to make sure that we have real operational discipline into where we're investing our dollars and balancing that with the opportunities we see. But with the end goal of, hey, we're trying to grow the company, we're trying to grow revenue, we're trying to grow long-term profit. And if we have to balance that or invest more in a quarter, we're certainly willing to do that.

Great. Jeff, you come in with an extensive background in M&A I'm just wondering if you could just talk about kind of your framework in terms of how you're looking at targets at Cirrus Logic. Maybe talk about scale. Are you looking at tuck-ins or larger size deals? And is this something that you've been asked to maybe take a closer look at?

Yes. We are certainly looking at some M&A opportunities. So not necessarily trying to categorize that as a tuck-in or a larger size. We'll look at both. What we're really looking for are combinations where we think we can really grow value, right? Really have some value accretion. certainly, in the segments that we're going into, as we're trying to diversify away from mobile, those are more of a target of more of a focus of where we're looking, how can we accelerate that, but really looking at where can our IP, which we're very proud of, where can we get some synergies to accelerate that or where can our IP accelerate a potential acquisition.

Great. I get this question a lot. Just when you guys think strategically about customer concentration, how do you guys think about that? Is that a goal of yours to diversify away from that longer term? Or are you just focused on doing everything possible to grow revenues and to service that customer concentration to your best of your ability?

Well, we'd like to think those aren't mutually exclusive. So yes, I wouldn't call it necessarily thinking of it as customer concentration, maybe as mobile concentration. And yes, we are actively trying to diversify that away. I mean, Carl's talked about certainly the PC opportunity that's been exciting for us. We're not running away from that. And if we can grow the mobile market, we'll continue to do that. So it's not an and/or for us. It's both. But yes, diversification away from that segment is certainly a goal of ours.

Great. Maybe just to follow up on that. Historically, the Android markets, you've had kind of some fits and starts there. How are you looking at the Android market these days? Is that still going to be something you're going to be focusing on growing?

Yes. I think we've actually pulled back in terms of investments in Android for the purpose of it not really representing a good exciting growth market for us. Certainly, we've talked about PC. We've talked about incubating other businesses beyond smartphones as like really important, exciting long-term options for us. We certainly still have competitive products for audio and haptics in the Android space. But it's just -- as a total market, especially with a big chunk of the customers residing in China and that just having a bit of risk inherently with the geopolitical kind of climate as it is. We're opportunistically selling what we have, but not really focusing the R&D investments on Android so that we can invest in, again, just expanding the HPMS content, but also building businesses beyond smartphones, especially in markets that have a bigger growth factor that's exciting for us long term.

Great. Speaking about other markets, I think you recently talked about ramping some timing parts into the automotive market. That's a very kind of different animal compared to what you're shipping into. Just talk about the decision to kind of go after automotive and how big could that opportunity be over the next several years?

I mean Cirrus has actually shipped into automotive systems for the better part of 2 decades, primarily with kind of traditional data converter products for audio applications. We've also shipped timing products on Ethernet-based systems through collaboration with other chipset vendors. And certainly, the core of that being audio related. I think we have a lot of kind of brand permission, if you will, to kind of reengage. And we certainly see the in-cabin experience for entertainment tactile experiences. So audio, voice, kind of touch and sensing and haptic, all that part of the in-cabin experience as being pretty disrupted right now with the kind of transition over time to zonal architectures and basically having kind of smartphones on wheels as some people like to call it. So we think it's an interesting long-term option for us, and we think there's a lot of interesting technology in audio and voice and haptics and sensing similar to these other markets that are very relevant to the automotive space. The timing product, I think, is capitalizing on that as well. So it's replaced an older device that was built in a process node that has gone end of life. And so we've updated that product. We've added functionality to kind of increase the application of it. And we're now already shipping that device into multiple kind of OEMs in the kind of premium audio space, or the premium kind of car space. So again, it's definitely a long-term endeavor, but the underpinning technology we've got for the in-cabin experience and the timing stuff that will just get more prevalent as these zonal architectures take root is exciting kind of long-term option for us to build a new market.

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

Okay. Thanks, John.